1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1999
REGISTRATION NO. 333-77499
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARTER COMMUNICATIONS HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
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
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED OFFER TO THE PUBLIC EXCHANGE
OFFER: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
SUBJECT TO COMPLETION, DATED JUNE 21, 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
-------------------------
The notes being offered by this prospectus are being issued in exchange for
notes sold by us in a private placement in March 1999. The new notes will be
governed by the same indentures governing the original notes. The new notes will
be substantially identical to the original notes except that you will not have
any exchange or registration rights in connection with the new notes.
- The exchange offer expires at 5:00 p.m., New York City time, on
, 1999, unless extended.
- No public market exists for the original notes or the new notes. We do
not intend to list the new notes on any securities exchange or to seek
approval for quotation through any automated quotation system.
-------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR ORIGINAL NOTES IN THE
EXCHANGE OFFER AND BY PURCHASERS OF THE NOTES FROM PERSONS ELIGIBLE TO USE THIS
PROSPECTUS FOR RESALES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state in which the offer or sale would be unlawful.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-b OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-b IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
The date of this prospectus is , 1999.
3
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 18
Forward-Looking Statements.................................. 29
Use of Proceeds............................................. 30
Capitalization.............................................. 31
Unaudited Pro Forma Financial Statements.................... 32
Unaudited Selected Historical Combined Financial and
Operating Data............................................ 47
Selected Historical Financial Data.......................... 49
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 50
The Exchange Offer.......................................... 69
Business.................................................... 79
Regulation and Legislation.................................. 107
Management.................................................. 115
Principal Equity Holders.................................... 121
Certain Relationships and Related Transactions.............. 122
Description of the Credit Facilities........................ 127
Description of Notes........................................ 129
Certain Federal Tax Considerations.......................... 174
Plan of Distribution........................................ 181
Legal Matters............................................... 181
Index to Financial Statements............................... F-1
i
4
SUMMARY
The following summary contains a general discussion of our business, the
exchange offer and summary financial information. It likely does not contain all
the information that is important to you in making a decision to tender 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 offer a full range of cable television services. Our service offerings
include the following programming packages:
- basic programming, which generally includes a variety of entertainment
programming, locally originated programming and the retransmission of
local broadcast stations;
- expanded basic programming, known in the cable industry as cable
programming service tier, or CPST, which offers more services than basic
programming;
- premium channels, which provide unedited, commercial-free movies, sports
and other special event entertainment programming; and
- pay-per-view television programming, where customers are charged a fee
for individual programs.
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, including high-speed Internet access.
In addition, we are currently upgrading our cable systems to offer services
which will allow our customers to interact with the programming we provide. Such
services are referred to as interactive services. As of March 31, 1999, we
served approximately 2.4 million cable television service customers in 22
states. We have entered into agreements to acquire additional cable systems that
would have increased the number of our customers to 3.7 million as of that date.
For the three months ended March 31, 1999, pro forma for the acquisitions
we completed during 1999, our revenues were approximately $311 million and our
EBITDA was approximately $143 million. For the year ended December 31, 1998, pro
forma for the acquisitions and a merger we completed during 1999, our revenues
were approximately $1.2 billion and our earnings before interest, taxes,
depreciation and amortization, or EBITDA, was approximately $532 million.
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. Without giving effect to the cable systems we acquired in
1998, we increased our customer base by 4.8%, revenues by 9.5% and EBITDA by 11%
during that year. This customer growth was more than twice the national average
of 1.7% for 1998. In 1997, our customer growth was 3.5%, significantly higher
than the national average of 2.0% for 1997.
In addition to growing our customer base internally, we have grown
significantly through acquisitions. Over the past five years, our management
team has successfully completed 22 acquisitions, including two acquisitions in
1999. We have also entered into six agreements to acquire additional cable
systems. These recent and pending acquisitions serve a total of approximately
1.3 million customers.
1
5
Our principal executive offices are located at 12444 Powerscourt Drive, St.
Louis, Missouri 63131. Our telephone number is (314)965-0555 and our e-mail
address is www.chartercom.com.
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.
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 200,000 customers in
four states. The total purchase price for these acquisitions was approximately
$699 million. For the three months ended March 31, 1999, these systems had
revenues of approximately $24.4 million and EBITDA of approximately $12.6
million. For the year ended December 31, 1998, these systems had revenues of
approximately $57.2 million and EBITDA of approximately $28.4 million.
PENDING ACQUISITIONS
In addition to the recent acquisitions described above, since the beginning
of 1999, we have entered into six agreements to acquire additional cable
systems. The total purchase price for these acquisitions will be approximately
$3.9 billion. This includes the exchange with another cable service provider of
certain of our cable television systems with a fair market value of $0.4 billion
for cable systems that we can operate more efficiently because of their
geographic proximity to our other systems. As of March 31, 1999, the systems to
be acquired by us served, in the aggregate, approximately 1.1 million customers
in 18 states. For the three months ended March 31, 1999, these systems had
revenues of approximately $144.2 million, and EBITDA of approximately $59.0
million. For the year ended December 31, 1998, such systems had revenues of
approximately $464.0 million and EBITDA of approximately $271.6 million. We
expect to finance these pending acquisitions with additional borrowings under
our credit facilities and with additional equity.
2
6
ORGANIZATION
The chart below sets forth our corporate structure.
[CHARTER COMMUNICATIONS ORGANIZATION CHART]
EXPLANATORY NOTE: Prior to our acquisition by Paul G. Allen, Charter
Communications, Inc. managed three groups of systems. Since Charter
Communications, Inc. held only a minority interest in two of these groups, their
financial statements were not consolidated with those of Charter Communications,
Inc. or with each other. In connection with our acquisition by Mr. Allen on
December 23, 1998:
- Charter Communications, Inc. became the owner of all of the interests in
all three groups;
- we changed our corporate structure by converting certain corporations and
partnerships into limited liability companies; and
- we merged certain subsidiaries.
3
7
In February 1999, Charter Communications Holdings, LLC, or Charter
Holdings, was formed as a wholly owned subsidiary of Charter Communications,
Inc. and Charter Communications Operating LLC, or Charter Operating, was formed
as a wholly owned subsidiary of Charter Holdings. All of Charter Communications,
Inc.'s equity interests in all of its subsidiaries were transferred to Charter
Operating. In May 1999, Charter Communications Holding Company, LLC was formed
as a wholly owned subsidiary of Charter Communications, Inc. All of Charter
Communications, Inc.'s equity interests in Charter Holdings were transferred to
Charter Communications Holding Company.
The following is a breakdown of the three groups of systems and where they
are today:
(1) Charter Communications Properties Holdings LLC, which is now Charter
Communications Properties, LLC.
(2) The CCA Group, which consisted of three sister companies,
(a) CCT Holdings, LLC,
(b) CCA Holdings, LLC, and
(c) Charter Communications Long Beach, LLC.
These three companies were merged out of existence and their operating
companies renamed.
(3) CharterComm Holdings, LLC, which is now Charter Communications, LLC.
Mr. Allen acquired Marcus Cable Company, L.L.C., or Marcus Cable, and all
of its operating subsidiaries. In February 1999, Marcus Holdings Company, LLC or
Marcus Holdings was formed and all of Mr. Allen's interests in Marcus Cable
Company, L.L.C. or Marcus Cable were transferred to Marcus Holdings. In April
1999, Marcus Holdings was merged into Charter Holdings. The operating
subsidiaries of Marcus Holdings became subsidiaries of Charter Holdings.
All of the recent and pending acquisitions described in this prospectus
were or will be acquired by Charter Holdings or one or more of its subsidiaries.
4
8
THE EXCHANGE OFFER
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.
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 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.
5
9
Procedures for Tendering
Original Notes.................. Each holder of original notes wishing to
accept the exchange offer must:
- complete, sign and date the letter of
transmittal, or a facsimile of the letter
of transmittal; or
- arrange for the Depository Trust Company
to transmit certain required information
to the exchange agent in connection with a
book-entry transfer.
You must mail or otherwise deliver such
documentation together with the original
notes to the exchange agent.
Special Procedures for
Beneficial Holders.............. If you beneficially own original notes
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and you wish to tender your original
notes in the exchange offer, you should
contact such registered holder promptly and
instruct them to tender on your behalf. If
you wish to tender on your own behalf, you
must, before completing and executing the
letter of transmittal for the exchange offer
and delivering your original notes, either
arrange to have your original notes
registered in your name or obtain a properly
completed bond power from the registered
holder. The transfer of registered ownership
may take considerable time.
Guaranteed Delivery
Procedures...................... You must comply with the applicable
procedures for tendering if you wish to
tender your original notes and:
- time will not permit your required
documents to reach the exchange agent by
the expiration date of the exchange offer;
or
- you cannot complete the procedure for
book-entry transfer on time; or
- your original notes are not immediately
available.
Withdrawal Rights............... You may withdraw your tender of original
notes at any time prior to 5:00 p.m., New
York City time, on the date the exchange
offer expires.
Failure to Exchange Will Affect
You Adversely................... If you are eligible to participate in the
exchange offer and you do not tender your
original notes, you
6
10
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.
Use of Proceeds................. We will not receive any proceeds from the
exchange offer.
7
11
SUMMARY TERMS OF NEW NOTES
Issuers......................... Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation.
Notes Offered................... $600 million in principal amount of 8.250%
Senior Notes due 2007.
$1.5 billion in principal amount of 8.625%
Senior Notes due 2009.
$1.475 billion 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. They will be entitled to
the benefits of the indentures governing the
original notes and will be treated under the
indentures as a single class with the
original notes.
8
12
MATURITY
DATE ISSUE PRICE INTEREST
------------- --------------------- ---------------------
8.250% notes......... April 1, 2007 99.233% plus accrued 8.250% per annum,
interest, if any, payable every six
from March 17, 1999 months on April 1 and
October 1, beginning
October 1, 1999
8.625% notes......... April 1, 2009 99.695%, plus accrued 8.625% per annum,
interest, if any, payable every six
from March 17, 1999 months on April 1,
and October 1,
beginning October 1,
1999
9.920% notes......... April 1, 2011 61.394% Interest to accrete
at a rate of 9.920%
per annum through
April 1, 2004; cash
interest every six
months on April 1 and
October 1 at the rate
of 9.920% per annum,
beginning 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 Holdings, 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 rank below all existing and
future liabilities, including trade
payables, of its subsidiaries. As of March
31, 1999, all of our outstanding
indebtedness, other than the notes but
including our credit facilities, was
incurred by our subsidiaries. As of that
date, our subsidiaries' liabilities, on a
pro forma basis giving effect for our recent
and pending acquisitions, totaled $4
billion. All such liabilities would have
ranked senior to the new notes.
Optional Redemption............. We will not have the right to redeem the
8.250% notes prior to their maturity date on
April 1, 2007.
Before April 1, 2002, we may redeem up to
35% of the 8.625% notes and the 9.920% notes
with the proceeds of certain offerings of
equity securities. On or after April 1,
2004, we may redeem some or all of the
8.625% notes and the 9.920% notes at any
time.
9
13
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.
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.
10
14
UNAUDITED SUMMARY PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Summary Pro Forma Financial Statements are based on
the financial statements of Charter Holdings, CCA Group, and CharterComm
Holdings, LLC, as adjusted to illustrate the estimated effects of our recent
acquisitions and pending acquisitions, as if such acquisitions, had occurred on
March 31, 1999 for the Balance Sheet Data and Operating Data and for the
estimated effects of the following transactions, as if such transactions had
occurred on January 1, 1998 for the Statements of Operations and Other Financial
Data:
(1) the acquisition of us on December 23, 1998 by Paul G. Allen;
(2) the acquisition of Sonic Communications, Inc. on May 20, 1998 by
us;
(3) the acquisition of Marcus Cable on April 23, 1998 by Mr. Allen;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) our merger with Marcus Holdings;
(6) our recent acquisitions and pending acquisitions; and
(7) the refinancing of all our debt through the issuance of the
original notes and funding under our current credit facilities.
The Unaudited Summary Pro Forma Financial Statements reflect the
application of the principles of purchase accounting to the transactions listed
in items (1) through (4) and (6) of the preceding sentence. In purchase
accounting, all separately identifiable assets and liabilities are recorded at
fair value with the excess purchase price recorded as franchises. The allocation
of the purchase price is based, in part, on preliminary information, which is
subject to adjustment upon obtaining complete valuation information of
intangible assets. The valuation information is expected to be finalized in the
third quarter of 1999. However, no significant adjustments are anticipated.
11
15
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
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues.................... $ 286,135 $ 24,483 $ 310,618 $ 134,653 $ -- $ 445,271
---------- ---------- ---------- ---------- -------- -----------
Operating expenses:
Operating, general and
administrative.......... 152,075 10,881 162,956 73,342 -- 236,298
Corporate expense
charges(a).............. 5,323 724 6,047 1,033 -- 7,080
Depreciation and
amortization............ 153,747 26,098 179,845 79,856 -- 259,701
Management fees........... -- 275 275 2,507 -- 2,782
---------- ---------- ---------- ---------- -------- -----------
Total operating
expenses.............. 311,145 37,978 349,123 156,738 -- 505,861
---------- ---------- ---------- ---------- -------- -----------
Loss from operations........ (25,010) (13,495) (38,505) (22,085) -- (60,590)
Interest expense............ (71,591) (14,586) (86,177) (38,514) (13,550) (138,241)
Interest income............. 1,733 108 1,841 151 -- 1,992
Other income (expense)...... 15 -- 15 (137) -- (122)
---------- ---------- ---------- ---------- -------- -----------
Net loss.................... $ (94,853) $ (27,973) $ (122,826) $ (60,585) $(13,550) $ (196,961)
========== ========== ========== ========== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)................... $ 130,485 $ 12,711 $ 143,196 $ 57,785 $ 200,981
EBITDA margin(c)............ 45.6% 51.9% 46.1% 42.9% 45.1%
Adjusted EBITDA(d).......... 134,060 13,602 147,662 61,311 208,973
Cash flows from operating
activities................ 45,824 5,390 51,214 31,790 83,004
Cash interest expense....... 109,186
Capital expenditures........ $ 109,629 $ 3,653 $ 113,282 $ 39,815 $ 153,097
Total debt to annualized
EBITDA.................... 8.2x
Total debt to annualized
Adjusted EBITDA........... 7.9
EBITDA to cash interest
expense................... 1.8
EBITDA to interest
expense................... 1.5
Deficiency of earnings to
cover fixed charges(e).... $ 196,961
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets................ $8,357,282 $ 12,027 $8,369,309 $3,271,029 $ -- $11,640,338
Total debt.................. 4,754,018 -- 4,754,018 1,869,158 -- 6,623,176
Members' equity............. 3,326,142 -- 3,326,142 1,325,000 -- 4,651,142
12
16
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR
AVERAGES):
Homes passed................ 4,161,000 293,000 4,454,000 1,622,000 6,076,000
Basic customers............. 2,364,000 200,000 2,564,000 1,111,000 3,675,000
Basic penetration(f)........ 56.8% 68.3% 57.6% 68.5% 60.5%
Premium units............... 1,347,000 83,000 1,430,000 671,000 2,101,000
Premium penetration(g)...... 57.0% 41.5% 55.8% 60.4% 57.2%
Average monthly revenue per
basic customer(h)......... $ 40.35 $ 40.81 $ 40.38 $ 40.40 $ 40.39
13
17
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues.............. $ 611,690 $ 448,192 $ 93,316 $1,153,198 $ 504,125 $ -- $ 1,657,323
---------- ---------- ---------- ---------- ---------- -------- -----------
Operating expenses:
Operating, general
and
administrative.... 310,100 231,050 43,357 584,507 262,852 -- 847,359
Corporate expenses
charges(a)........ 16,493 17,042 2,786 36,321 3,973 -- 40,294
Depreciation and
amortization...... 375,899 252,855 53,004 681,758 274,727 -- 956,485
Management fees..... -- -- 1,077 1,077 13,595 -- 14,672
---------- ---------- ---------- ---------- ---------- -------- -----------
Total operating
expenses........ 702,492 500,947 100,224 1,303,663 555,147 -- 1,858,810
---------- ---------- ---------- ---------- ---------- -------- -----------
Loss from
operations.......... (90,802) (52,755) (6,908) (150,465) (51,022) -- (201,487)
Interest expense...... (207,468) (137,953) (61,757) (407,178) (150,243) 4,400 (553,021)
Other income
(expense)........... 518 -- 437 955 (6,299) -- (5,344)
---------- ---------- ---------- ---------- ---------- -------- -----------
Net loss.............. $(297,752) $(190,708) $ (68,228) $ (556,688) $ (207,564) $ 4,400 $ (759,852)
========== ========== ========== ========== ========== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)............. $ 285,615 $ 200,100 $ 46,533 $ 532,248 $ 217,406 $ 749,654
EBITDA margin(c)...... 46.7% 44.6% 49.9% 46.2% 43.1% 45.2%
Adjusted EBITDA(d).... 301,590 217,142 49,959 568,691 241,273 809,964
Cash flows from
operating
activities.......... 137,160 139,908 12,399 289,467 61,995 351,462
Cash interest
expense............. 436,432
Capital
expenditures........ $ 213,353 $ 224,723 $ 5,001 $ 443,077 $ 86,106 $ 529,183
Total debt to
EBITDA.............. 8.8x
Total debt to Adjusted
EBITDA.............. 8.1
EBITDA to cash
interest expense.... 1.7
EBITDA to interest
expense............. 1.4
Deficiency of earnings
to cover fixed
charges(e).......... $ 759,852
BALANCE SHEET DATA (AT
END OF PERIOD):
Total assets.......... $7,235,656 $ -- $ 716,060 $7,951,716 $3,634,684 $125,000 $11,711,400
Total debt............ 3,523,201 -- 703,000 4,226,201 2,204,821 128,602 6,559,624
Members' equity....... 3,429,291 -- -- 3,429,291 1,325,000 (3,602) 4,750,689
14
18
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR
AVERAGES):
Homes passed................ 2,149,000 1,743,000 289,000 4,181,000 1,506,000 5,687,000
Basic customers............. 1,255,000 1,062,000 195,000 2,512,000 1,105,000 3,617,000
Basic penetration(f)........ 58.4% 60.9% 67.5% 60.1% 73.4% 63.6%
Premium units............... 845,000 411,000 87,000 1,343,000 724,000 2,067,000
Premium penetration(g)...... 67.3% 38.7% 44.6% 53.5% 65.5% 57.1%
Average monthly revenue per
basic customer(h)......... NM NM $ 39.88 $ 32.26 $ 38.02 $ 38.18
- -------------------------
(a) Charter Communications, Inc. provided corporate management and consulting
services to Charter Holdings during 1998 and 1999, and to Marcus Holdings
beginning in October 1998. See "Certain Relationships and Related
Transactions."
(b) EBITDA represents earnings (loss) before interest expense, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating,
investing or financing activities, as determined in accordance with
generally accepted accounting principles. EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. Management's discretionary use of funds depicted by
EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
(c) EBITDA margin represents EBITDA as a percentage of revenues.
(d) Adjusted EBITDA means EBITDA before corporate expenses, management fees and
other income (expense) in accordance with the term "Consolidated EBITDA"
used in the indentures governing the notes. See "Description of Notes" for a
complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted
financial indicator of a cable company's ability to meet its debt payments
and because it is used in the indentures to determine compliance with
certain covenants. However, Adjusted EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating,
investing or financing activities, as determined in accordance with
generally accepted accounting principles. Adjusted EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because Adjusted EBITDA is not calculated
identically by all companies, the presentation here may not be comparable to
other similarly titled measures of other companies. Management's
discretionary use of funds depicted by Adjusted EBITDA may be limited by
working capital, debt service and capital expenditure requirements and by
restrictions related to legal requirements, commitments and uncertainties.
(e) Earnings include net income (loss) plus fixed charges. Fixed charges consist
of interest expense and an estimated interest component of rent expense.
(f) Basic penetration represents basic customers as a percentage of homes
passed. Homes passed are the number of single residence homes, apartments
and condominium units passed by the cable distribution network in a given
cable system service area.
(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 period end.
See "Notes to the Unaudited Pro Forma Financial Statements."
15
19
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 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 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 the acquisition of us by Paul G. Allen, we have applied
purchase accounting, whereby all separately identifiable assets and liabilities
are recorded at fair value with the excess purchase price recorded as
franchises, 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 for the period from December 24, 1998 through December 31, 1998, and the
balance sheet of Marcus Cable as of December 31, 1998. As a result of our
acquisition by Mr. Allen and our merger with Marcus Holdings, we believe that
the periods on or prior to December 23, 1998 are not comparable to the periods
after December 23, 1998.
16
20
CHARTER HOLDINGS, CCA GROUP,
AND CHARTERCOMM HOLDINGS
-----------------------------------------------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT CUSTOMER DATA)
COMBINED STATEMENT OF OPERATIONS:
Revenues.................................. $ 368,553 $ 484,155 $570,964 $ 23,450
---------- ---------- -------- ----------
Operating expenses:
Operating, general and administrative... 190,084 249,419 288,428 12,679
Depreciation and amortization........... 154,273 198,718 240,294 13,811
Management fees/corporate expense
charges(a)........................... 15,094 20,759 38,348 766
---------- ---------- -------- ----------
Total operating expenses............. 359,451 468,896 567,070 27,256
---------- ---------- -------- ----------
Income (loss) from operations............. $ 9,102 $ 15,259 $ 3,894 $ (3,806)
========== ========== ======== ==========
CAPITAL EXPENDITURES...................... $ 110,291 $ 162,607 $195,468 $ 13,672
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
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(b)...................... 58.3% 56.7% 59.5%
Premium units............................. 517,000 629,000 1,256,000
Premium penetration(c).................... 57.3% 57.9% 54.2%
- -------------------------
(a) Charter Communications, Inc. provided corporate management and consulting
services to us. CCA Group, and CharterComm Holdings paid fees to Charter
Communications, Inc. as compensation for such services and recorded such
fees as expense. See "Certain Relationships and Related Transactions."
Charter Holdings recorded charges for actual corporate expenses incurred by
Charter Communications, Inc. on behalf of Charter Holdings. Management
fees/corporate expense charges for the year ended December 31, 1998 include
$14.4 million of change of control payments under the terms of then-existing
equity appreciation rights plans. Such payments were triggered by the
acquisition of us by Paul G. Allen. Such payments were made by Charter
Communications, Inc. and were not subject to reimbursement by us but were
allocated to us for financial reporting purposes. The equity appreciation
rights plans were terminated in connection with our acquisition by Mr.
Allen, and these costs will not recur.
(b) Basic penetration represents basic customers as a percentage of homes
passed.
(c) Premium penetration represents premium units as a percentage of basic
customers.
17
21
RISK FACTORS
The new notes, like the old notes, entail the following risks. You should
carefully consider these risk factors, as well as the other information in this
prospectus, before tendering original notes in exchange for new notes.
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 March 31, 1999, pro forma for
our recent and pending acquisitions, our total indebtedness would have been
approximately $6.6 billion, our total members' equity would have been
approximately $4.7 billion, and the deficiency of our earnings available to
cover fixed charges would have been approximately $197 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 them, 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.
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
our planned capital expenditures for upgrading our cable systems and for other
purposes 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 available to us under our
18
22
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.
THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND
LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT OUR ABILITY TO OPERATE OUR BUSINESS
AND REPAY THE NOTES.
Our credit facilities and the indentures governing the notes contain a
number of significant covenants that, among other things, restrict the ability
of our subsidiaries to:
- 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:
- covenants, such as financial maintenance ratios, which may restrict the
ability of our subsidiaries to distribute funds to service principal and
interest payments on the notes; and
- requirements that Charter Operating, 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 the applicable debt agreement or instrument. 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 and in any event when a default exists under our credit facilities,
funds may not be distributed by Charter Operating to Charter Holdings to pay
interest or principal on the notes. 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% notes are not refinanced at least six months prior to
the date of their maturity, the entire amount due under our credit facilities
will become due and payable and we may not have the ability to make such
payment.
WE HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT
SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE.
We commenced active operations in 1995 and have grown rapidly since then
through acquisitions of cable systems. Our merger with Marcus Holdings on April
7, 1999 nearly doubled the number of customers we serve. Additionally, our
recent and pending acquisitions will increase the number of customers served by
our systems by approximately 55%. As a result, historical financial information
about us may not be indicative of the future or of results that can be achieved
by us with the cable systems which will be under our control. Although we have
experienced internal customer growth, recent growth in
19
23
revenue, and growth in EBITDA, there can be no assurance that growth or positive
cash flow will continue to be achieved within the combined systems or other
systems we may acquire in the future.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES.
CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE OUR FUTURE OPERATIONS.
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 for 1997 and $200
million for 1998. The companies we acquired through our merger with Marcus
Holdings reported net losses from continuing operations, before extraordinary
items, of $109 million for 1997 and $248 million for 1998. We cannot predict
what impact, if any, continued losses will have on our ability to finance our
operations in the future.
IF OUR CAPITAL INVESTMENT PROGRAM DOES NOT RESULT IN SUFFICIENTLY INCREASED
REVENUES, WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR PLANNED
UPGRADES AND OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY
TO OFFER NEW SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, OUR FINANCIAL
CONDITION AND OUR RESULTS OF OPERATIONS.
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 including
our recent 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 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. If we cannot obtain the funds we need, we
may not be able to fund these planned upgrades and other capital expenditures.
Consequently, our growth, our financial condition and the results of our
operations could suffer materially.
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 our future growth will be achieved
through revenues from new and enhanced 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, we cannot predict the success of our acquisition
strategy. Recently, the cable television industry has undergone significant
consolidation which has reduced the number of future acquisition prospects for
us. Additionally, those acquisitions we do complete are not likely to have a
positive net impact on our operating results in the near future. If we are
unable to grow our cash flow sufficiently, we may be unable to fulfill our
obligations to you under the notes or obtain alternative financing.
WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW SYSTEMS THAT WE ACQUIRE AND THE
CUSTOMERS THEY SERVE WITH OUR EXISTING SYSTEMS. THIS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS AS WELL AS OUR GROWTH STRATEGY.
Upon the completion of our recent and pending acquisitions, we will own and
operate cable systems serving approximately 3.7 million customers, as compared
to the cable
20
24
systems we currently own which serve approximately 2.4 million customers as of
March 31, 1999. 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 initially may 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. The fact that we are aggressively seeking and attempting to
complete acquisitions enhances these risks.
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 where relevant. No assurance can be given that the
necessary approvals will be received. These pending acquisitions are also
subject to certain other closing conditions. 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
could require us to abandon an otherwise attractive opportunity and possible
forfeit earnest money.
THE NOTES ARE THE OBLIGATIONS OF A HOLDING COMPANY WHICH HAS NO OPERATIONS AND
DEPENDS ON ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED
IN THEIR ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF AMOUNTS DUE UNDER
THE NOTES.
As a holding company, Charter Holdings 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 operations and
own substantially all of our assets. As a result, our cash flow and our ability
to meet our debt payment 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. In addition,
our subsidiaries' ability to make any such loans, equity distributions or other
payments to us will depend on their earnings, the terms of their indebtedness,
business and tax considerations and legal restrictions.
Because of our holding company structure, the notes will be subordinate to
all liabilities of our subsidiaries. Under our credit facilities Charter
Operating is the borrower, and our other subsidiaries are guarantors. The
lenders under our credit facilities will have the right to be paid before you
from any of our subsidiaries' assets. In the event of
21
25
bankruptcy, liquidation or dissolution of a subsidiary, following payment by
such subsidiary of its liabilities, such subsidiary may not have sufficient
assets remaining to make payments to us as a shareholder or otherwise.
OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE
INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR PROFITABILITY
AND CASH FLOW.
Programming has been and is expected to continue to be our largest single
expense item. The combined programming costs of Charter Holdings, CCA Group, and
CharterComm Holdings were equal to approximately 21% of revenues in 1998. In
recent years the cable industry has experienced a rapid escalation in the cost
of programming, in particular, sports programming. Our programming costs for the
services carried on our 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 expanded basic tiers, and reposition premium
services to the basic tier, we may face additional market constraints on our
ability to pass programming costs on to our customers. The inability to pass
these increases on to our customers will affect our profitability and cash flow.
OUR PRINCIPAL EQUITY HOLDER MAY HAVE INTERESTS ADVERSE TO YOUR INTERESTS.
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.
OUR MANAGEMENT WILL BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND WILL
NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD IMPAIR OUR OPERATING
RESULTS AND GIVE RISE TO CONFLICTS OF INTEREST.
Mr. Allen has agreed to acquire and may, from time to time in the future,
acquire cable systems in addition to those owned or acquired by us. To date,
affiliates of Mr. Allen have signed agreements to purchase cable systems with a
total of approximately 1.8 million customers. Charter Communications, Inc., of
which Mr. Allen is the majority owner, as well as some of the officers of
Charter Communications, Inc. who currently manage our cable systems, will 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, when such persons begin to manage outside cable
systems as well, the time they devote to managing our systems will be
correspondingly reduced. This 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.
22
26
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 adversely affect our ability to manage our business which, in turn,
could adversely affect our financial condition and results of operations.
THERE IS NO PUBLIC MARKET FOR THE NOTES. AN ACTIVE MARKET MAY NOT DEVELOP
CAUSING DIFFICULTIES FOR YOU IF YOU TRY TO RESELL THE NOTES.
The new notes will be new securities for which there is currently no public
market. We do not intend to list the new notes on any national securities
exchange or quotation system. There can be no assurance as to the development of
any market or liquidity of any market that may develop for the new notes. If a
trading market does not develop or is not maintained, you may experience
difficulty in reselling new notes, or you may be unable to sell them at all.
IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES FOR NEW NOTES, SUCH ORIGINAL NOTES
WILL REMAIN SUBJECT TO RESTRICTIONS ON TRANSFER. ACCORDINGLY, THE LIQUIDITY OF
THE MARKET FOR THE ORIGINAL NOTES COULD BE ADVERSELY AFFECTED.
Holders of original notes who do not exchange their original notes for new
notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the original notes set forth in the legend on the
original notes. This is a consequence of the issuance of the original notes
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act. In general, original notes may
not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. If we complete the exchange
offer, we will not be required to register the original notes, and we do not
anticipate that we will register the original notes, under the Securities Act.
Additionally, to the extent that original notes are tendered and accepted in the
exchange offer, the aggregate principal amount of original notes outstanding
will decrease, with a resulting decrease in the liquidity of the market for the
original notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FULFILL OUR
OBLIGATIONS UNDER THE NOTES FOLLOWING A CHANGE OF CONTROL OFFER. THIS WOULD
PLACE US IN DEFAULT UNDER THE INDENTURES GOVERNING THE NOTES.
Under the indentures governing the notes, upon the occurrence of specified
change of control events, we will be required to offer to repurchase all
outstanding notes. However, we may not have sufficient funds at the time of the
change of control event to make the required repurchase of the notes. In
addition, a change of control would require the repayment of borrowings under
our credit facilities. Because the credit facilities are obligations of our
subsidiaries, the credit facilities would have to be repaid by our subsidiaries
before their assets could be used to repurchase the notes. Our failure to make
or complete an offer to repurchase the notes would place us in default under the
indentures.
23
27
THE 9.920% NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT. CONSEQUENTLY,
HOLDERS OF 9.920% NOTES WILL GENERALLY BE REQUIRED TO INCLUDE AMOUNTS IN GROSS
INCOME FOR FEDERAL INCOME TAX PURPOSES IN ADVANCE OF RECEIVING CASH.
The 9.920% notes will be issued at a substantial discount from their stated
principal amount. As a result, purchasers of such notes 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.
IF A BANKRUPTCY PETITION WERE FILED BY OR AGAINST US, YOU MAY RECEIVE A LESSER
AMOUNT FOR YOUR CLAIM THAN YOU WOULD BE ENTITLED TO RECEIVE UNDER THE INDENTURE
GOVERNING THE 9.920% NOTES, AND YOU MAY REALIZE TAXABLE GAIN OR LOSS UPON
PAYMENT OF YOUR CLAIM.
If a bankruptcy petition were filed by or against us under the U.S.
Bankruptcy Code after the issuance of the 9.920% notes, the claim by a holder of
such notes for the principal amount of such notes may be limited to an amount
equal to the sum of:
(1) the initial offering price for such notes; and
(2) that portion of the original issue discount that does not constitute
"unmatured interest" for purposes of the U.S. Bankruptcy Code.
Any original issue discount that was not amortized as of the date of the
bankruptcy filing would constitute unmatured interest. Accordingly, holders of
9.920% notes under these circumstances may receive a lesser amount than they
would be entitled to receive under the terms of the indenture governing the
9.920% notes, even if sufficient funds are available. In addition, to the extent
that the U.S. Bankruptcy Code differs from the Internal Revenue Code in
determining the method of amortization of original issue discount, a holder of
9.920% notes may realize taxable gain or loss upon payment of that holder's
claim in bankruptcy.
IF WE DO NOT FULFILL OUR OBLIGATIONS TO YOU UNDER THE NOTES, YOU WILL NOT HAVE
ANY RECOURSE AGAINST OUR EQUITY HOLDERS OR THEIR AFFILIATES.
The notes will be issued solely by Charter Holdings and Charter Capital.
None of our equity holders, directors, officers, employees or affiliates,
including Paul G. Allen, will be an obligor or guarantor under the notes.
Furthermore, the indentures governing the notes expressly provide that these
parties will not have any liability for our obligations under the notes or the
indentures. By accepting the notes, you waive and release all such liability as
consideration for issuance of the notes. Consequently, if we do not fulfill our
obligations to you under the notes, you will have no recourse against any of
these parties.
Additionally, our equity holders, including Mr. Allen, will be free to
manage other entities, including other cable companies. If we do not fulfill our
obligations to you under the notes, you will have no recourse against those
other entities or their assets. There should be no expectation that Mr. Allen or
our other equity holders will fund our operations or obligations in the future.
WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN AFFECT OUR
BUSINESS AND OPERATIONS.
The industry in which we operate is highly competitive. 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
24
28
with regulatory authorities. Mergers, joint ventures and alliances among cable
television operators, regional telephone companies, long distance telephone
service providers, competitive local exchange carriers, providers of cellular
and other wireless communications services 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 the U.S. 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.
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 transmit signals via
satellite;
- multichannel multipoint distribution systems, or wireless cable, which
distributes cable television signals through microwave signals; and
- operators of satellite master antenna television systems, a distribution
system that feeds satellite signals, usually to multiple dwelling units
such as hotels and apartments.
Electric utilities also have the potential to become significant
competitors in the video marketplace, as many of them already possess fiber
optic transmission lines, which are capable of transmitting signals over long
distances with minimum signal loss or distortion, in certain of the areas they
serve. We also 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.
We hope that upgrading our cable systems will give us an advantage over our
competitors, although we cannot assure you that such upgrades will allow us to
compete effectively. Additionally, as we expand and introduce new and enhanced
services, including additional telecommunications services, we will be subject
to competition from other telecommunications providers. 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.
WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION
IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
Our cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, such
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which we hold franchises. The existence of more than one cable system
operating in the same territory is referred to as an overbuild. Overbuilds can
affect our ability to compete. We are currently aware of
25
29
overbuild situations in six of our systems and potential overbuild situations in
another four of our systems, together representing a total of approximately
89,000 customers. Although these overbuild situations are relatively uncommon,
they may occur in additional systems.
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.
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION.
THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY
AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses of cable systems and has resulted in additional oversight
by the Federal Communications Commission and state local franchising
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.
Additionally, many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Among these is
a proposal which would require cable operators to provide access to their cable
networks to other Internet service providers such as telephone companies. There
are also ongoing efforts to amend or expand the state and local regulation of
some of our cable systems, which may compound the regulatory risks we already
face. We expect further such efforts, but cannot predict whether any of the
states or localities in which we now operate will expand regulation of our cable
systems in the future or how they will do so. 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.
OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH SUBJECTS US TO REGULATION
BY LOCAL FRANCHISING AUTHORITIES. THIS FURTHER INCREASES OUR EXPENSES.
Our cable systems generally operate pursuant to non-exclusive franchises,
permits or licenses typically granted by a municipality or other state or local
government controlling the public rights-of-way. Franchises are generally
granted for fixed terms and must be periodically renewed. Local franchising
authorities may resist granting a renewal if either past performance or the
prospective operating proposal is considered inadequate. In many cases,
franchises are terminable if the franchisee fails to comply with material
provisions
26
30
set forth in the franchise agreement governing system operations. Many
franchises establish specific customer service standards and establish monetary
penalties for non-compliance. In addition to the franchise document, cable
authorities have also adopted in some jurisdictions cable regulatory ordinances
that further regulate the operation of cable systems. This additional regulation
increases our expenses in operating our business. We cannot assure you that the
local franchising authorities will not impose new and more restrictive
requirements.
Local franchising authorities also have the power to 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 March 31, 1999, we have refunded an
aggregate amount of approximately $453,000 since our inception. We may be
required to refund additional amounts in the future.
DESPITE THE CURRENT DEREGULATION OF PRICING GUIDELINES, CONCERNS OVER CABLE RATE
INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS COULD IMPAIR OUR ABILITY
TO RAISE RATES TO COVER OUR INCREASING COSTS.
As of March 31, 1999, the pricing guidelines of cable programming packages
for all cable operators was deregulated. This affords cable operators
substantially more flexibility in implementing rate changes. However, the
Federal Communications Commission and the U.S. Congress continue to be concerned
that rates for cable services are rising at a rate exceeding inflation. It is
therefore possible that either the U.S. Congress or the Federal Communications
Commission will further restrict the ability of cable television operators to
implement desired rate increases. Should this occur, it could impede our ability
to raise rates to cover increased costs.
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 attaching cable wires to poles, known in the cable industry as 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. Such 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.
OUR FRANCHISES ARE SUBJECT TO NON-RENEWAL OR TERMINATION. AUTHORITIES MAY
REQUIRE COSTLY CONCESSIONS AS A CONDITION TO RENEWING A FRANCHISE. THE FAILURE
TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR BUSINESS IN A KEY MARKET.
Our business is dependent on our ability to obtain and renew our
franchises. Our franchises are subject to non-renewal or termination. In
addition, the franchise authorities often demand concessions or other
commitments as a condition to renewal, which have been and may continue to be
costly to us. In certain cases, franchises have not been
27
31
renewed at expiration, and we have operated under either temporary operating
agreements or without a license while negotiating renewal terms with the local
franchising authorities. 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.
DATA PROCESSING FAILURES AFTER DECEMBER 31, 1999 COULD SIGNIFICANTLY DISRUPT OUR
OPERATIONS, CAUSING A DECLINE IN CASH FLOW AND REVENUES AND OTHER DIFFICULTIES.
Many existing computer systems and applications, and other control devices
and embedded computer chips use only two chips rather than four to identify a
year, without considering 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. In addition, two interacting systems,
applications, devices or chips, each of which has been individually fixed so
that it will properly handle this year 2000 problem, could nonetheless suffer a
failure to integrate because their method of dealing with the problem is not
compatible.
This year 2000 problem impacts our owned or licensed computer systems and
equipment used in connection with internal operations. It also impacts our
non-information technology systems, including embedded systems in our buildings
and other infrastructure. Additionally, since we 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.
We are addressing the year 2000 problem with respect to our internal
operations. Much of our assessment efforts has involved, and depends on,
inquiries to third party service providers. Certain of these third parties that
have certified the readiness of their products will not certify that such
products have operating compatibility within our systems. If we, or a
significant third party with whom we interact with by computers, fails to become
year 2000 ready, or if the year 2000 problem causes our systems to become
internally incompatible or incompatible with key 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.
28
32
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, and
include, but are not limited to:
- our plans to achieve growth by offering new and enhanced services and
through acquisitions;
- our anticipated capital expenditures for our planned upgrades, and the
ability to fund such upgrades;
- our beliefs regarding the affects of governmental regulation on our
business;
- our ability to effectively compete in a highly competitive environment;
and
- our expectations to be ready for any year 2000 problem.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by those cautionary statements.
29
33
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
the exchange and registration rights agreements entered into in connection with
the offering of the original notes. We will not receive any proceeds from the
exchange offer. In consideration for issuing the new notes, we will receive
original notes with like original principal amount at maturity. The form and
terms of the original notes are the same as the form and terms of the new notes,
except as otherwise described in this prospectus. The original notes surrendered
in exchange for new notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the new notes will not result in any increase in
our outstanding debt.
We received net proceeds totaling approximately $2.92 billion from the
private placement of the original notes. Discounts and commissions and other
expenses payable by us totaled approximately $125 million. Some of the net
proceeds were used to complete the cash tender offers in an amount of
approximately $1.0 billion for certain then-outstanding notes of our
subsidiaries. Some of the net proceeds totalling approximately $1.3 billion were
also used to pay-off a portion of our previous credit facilities, including
accrued interest.
30
34
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 as
adjusted to give effect to additional borrowings under our credit facilities and
an additional equity contribution in connection with our recent acquisitions and
pending acquisitions, as if such transactions had occurred on March 31, 1999.
This table should be read in conjunction with the Unaudited Pro Forma
Financial Statements and the accompanying notes included elsewhere in this
prospectus.
AS OF MARCH 31, 1999
-------------------------
AS
HISTORICAL ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
CHARTER HOLDINGS:
Cash and cash equivalents(a).............................. $1,038,360 $ 30,464
========== ===========
Long-term debt:
Credit facilities......................................... $1,750,000 $ 3,507,789
8.250% senior notes....................................... 598,398 598,398
8.625% senior notes....................................... 1,495,480 1,495,480
9.920% senior discount notes.............................. 909,055 909,055
Other(b).................................................. 1,085 1,085
10% senior discount notes -- Renaissance(c)............... -- 111,369
---------- -----------
Total long-term debt................................... 4,754,018 6,623,176
Members' equity(d)........................................ 3,326,142 4,651,142
---------- -----------
Total capitalization................................... $8,080,160 $11,274,318
========== ===========
- -------------------------
(a) We presented cash and cash equivalents historical of $1 billion since we
were required to draw the full amount of the Tranche B term loan under our
credit facilities pursuant to the terms of the credit facilities. Therefore,
Charter Holdings will have cash available pending application of such
amounts to future acquisitions, capital expenditures and other working
capital purposes.
(b) Represents the notes of certain subsidiaries not tendered in connection with
the tender offers.
(c) Represents debt of Renaissance Media Group LLC.
(d) Members' equity, as adjusted, is increased by $1.325 billion, the additional
equity that is expected in connection with our recent and pending
acquisitions.
31
35
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements are based on the
financial statements of Charter Holdings, CCA Group, and CharterComm Holdings,
LLC. They are adjusted to illustrate the estimated effects of our recent
acquisitions and pending acquisitions, as if such acquisitions had occurred on
March 31, 1999 for the Balance Sheet Data and Operating Data and for the
estimated effects of the following transactions as if they had occurred on
January 1, 1998 for the Statement of Operations and Other Financial Data:
(1) the acquisition of us on December 23, 1998 by Paul G. Allen;
(2) the acquisition of Sonic on May 20, 1998 by us;
(3) the acquisition of Marcus Cable on April 23, 1998 by Paul G. Allen;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) our merger with Marcus Holdings;
(6) our recent acquisitions and pending acquisitions; and
(7) the refinancing of all the debt of our subsidiaries 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 (1)
through (4) and (6). The allocation of purchase price is based, in part, on
preliminary information which is subject to adjustment upon obtaining complete
valuation information of intangible assets. The valuation information is
expected to be finalized in the third quarter of 1999. However, no significant
adjustments are anticipated.
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."
32
36
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 above been completed on the dates
indicated or to project our results of operations for any future date.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------------------------------------------
RECENT PENDING REFINANCING
CHARTER ACQUISITIONS ACQUISITIONS ADJUSTMENTS
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL
---------- ------------ ---------- ---------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues........................ $ 286,135 $ 24,483 $ 310,618 $ 134,653 $ -- $ 445,271
---------- -------- ---------- ---------- ---------- ----------
Operating expenses:
Operating, general and
administrative.............. 152,075 10,881 162,956 73,342 -- 236,298
Corporate expense charges
(Note C).................... 5,323 724 6,047 1,033 -- 7,080
Depreciation and
amortization................ 153,747 26,098 179,845 79,856 -- 259,701
Management fees............... -- 275 275 2,507 -- 2,782
---------- -------- ---------- ---------- ---------- ----------
Total operating expenses.... 311,145 37,978 349,123 156,738 -- 505,861
---------- -------- ---------- ---------- ---------- ----------
Loss from operations............ (25,010) (13,495) (38,505) (22,085) -- (60,590)
Interest expense................ (71,591) (14,586) (86,177) (38,514) (13,550) (138,241)
Interest income................. 1,733 108 1,841 151 -- 1,992
Other income (expense).......... 15 -- 15 (137) -- (122)
---------- -------- ---------- ---------- ---------- ----------
Net income (loss)............... $ (94,853) $(27,973) $ (122,826) $ (60,585) $ (13,550) $ (196,961)
========== ======== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA (Note D)................. $ 130,485 $ 12,711 $ 143,196 $ 57,785 $ 200,981
EBITDA margin (Note E).......... 45.6% 51.9% 46.1% 42.9% 45.1%
Adjusted EBITDA (Note F)........ 134,060 13,602 147,662 61,311 208,973
Cash flows from operating
activities.................... 45,824 5,390 51,214 31,790 83,004
Cash interest expense........... 109,186
Capital expenditures............ $ 109,629 $ 3,653 $ 113,282 $ 39,815 $ 153,097
Total debt to annualized
EBITDA........................ 8.2x
Total debt to annualized
Adjusted EBITDA............... 7.9
EBITDA to cash interest
expense....................... 1.8
EBITDA to interest expense...... 1.5
Deficiency of earnings to cover
fixed charges (Note G)........ $ 196,961
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR AVERAGES):
Homes passed.................... 4,161,000 293,000 4,454,000 1,622,000 6,076,000
Basic customers................. 2,364,000 200,000 2,564,000 1,111,000 3,675,000
Basic penetration (Note H)...... 56.8% 68.3% 57.6% 68.5% 60.5%
Premium units................... 1,347,000 83,000 1,430,000 671,000 2,101,000
Premium penetration (Note I).... 57.0% 41.5% 55.8% 60.4% 57.2%
Average monthly revenue per
basic customer (Note J)....... $ 40.35 $ 40.81 $ 40.38 $ 40.40 $ 40.39
33
37
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for our recent acquisitions and
pending acquisitions consist of the following (dollars in thousands):
THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------------------------------------------
PENDING ACQUISITIONS -- HISTORICAL
RECENT ACQUISITIONS -- HISTORICAL --------------------------------------------------------------
----------------------------------- GREATER
AMERICAN TOTAL MEDIA INTERMEDIA TOTAL
RENAISSANCE CABLE RECENT SYSTEMS SYSTEMS HELICON RIFKIN(a) OTHER PENDING
------------ --------- -------- ------- ---------- ------- --------- ------ --------
Revenues................... $15,254 $ 9,151 $24,405 $20,394 $ 48,288 $21,252 $ 50,914 $3,354 $144,202
Operating expenses:
Operating, general and
administrative......... 6,889 4,681 11,570 12,757 26,080 11,277 27,028 1,594 78,736
Depreciation and
amortization........... 6,655 5,536 12,191 2,425 26,100 6,828 26,187 938 62,478
Management fees.......... -- 275 275 -- 781 1,063 841 -- 2,685
------- ------- ------- ------- -------- ------- -------- ------ --------
Total operating
expenses............. 13,544 10,492 24,036 15,182 52,961 19,168 54,056 2,532 143,899
Income (loss) from
operations............... 1,710 (1,341) 369 5,212 (4,673) 2,084 (3,142) 822 303
Interest expense........... (4,797) (2,450) (7,247) (157) (5,778) (7,821) (11,414) (758) (25,928)
Interest income............ 90 18 108 -- 77 51 -- -- 128
Other income (expense)..... -- -- -- (16) -- -- (3,851) -- (3,867)
------- ------- ------- ------- -------- ------- -------- ------ --------
Income (loss) before income
tax expense (benefit).... (2,997) (3,773) (6,770) 5,039 (10,374) (5,686) (18,407) 64 (29,364)
Income tax (benefit)
expense.................. 58 -- 58 2,088 (1,396) -- (537) -- 155
------- ------- ------- ------- -------- ------- -------- ------ --------
Income (loss) before
extraordinary item....... $(3,055) $(3,773) $(6,828) $ 2,951 $ (8,978) $(5,686) $(17,870) $ 64 $(29,519)
======= ======= ======= ======= ======== ======= ======== ====== ========
34
38
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------------
RECENT ACQUISITIONS PENDING ACQUISITIONS
------------------------------------------------------ ----------------------------
PRO FORMA PRO FORMA
----------------------------------------- ---------------
HISTORICAL ACQUISITIONS(b) ADJUSTMENTS TOTAL HISTORICAL ACQUISITIONS(b)
---------- --------------- ----------- -------- ---------- ---------------
Revenues.............. $24,405 $ 78 $ -- $ 24,483 $144,202 $ 6,400
Operating expenses:
Operating, general
and
administrative.... 11,570 35 (724)(d) 10,881 78,736 3,541
Corporate expense
charges........... -- -- 724(d) 724 -- --
Depreciation and
amortization...... 12,191 34 13,873(e) 26,098 62,478 1,376
Management fees..... 275 -- -- 275 2,685 280
------- ---- -------- -------- -------- -------
Total operating
expenses.......... 24,036 69 13,873 37,978 143,899 5,197
Income (loss) from
operations.......... 369 9 (13,873) (13,495) 303 1,203
Interest expense...... (7,247) (25) (7,314)(f) (14,586) (25,928) (1,309)
Interest income....... 108 -- -- 108 128 23
Other income
(expense)........... -- -- -- -- (3,867) (44)
------- ---- -------- -------- -------- -------
Income (loss) before
income tax expense
(benefit)........... (6,770) (16) (21,187) (27,973) (29,364) (127)
Income tax (benefit)
expense............. 58 -- (58)(h) -- 155 (114)
------- ---- -------- -------- -------- -------
Income (loss) before
extraordinary
item................ $(6,828) $(16) $(21,129) $(27,973) $(29,519) $ (13)
======= ==== ======== ======== ======== =======
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------
PENDING ACQUISITIONS
------------------------------------------
PRO FORMA
------------------------------------------
DISPOSITIONS(c) ADJUSTMENTS TOTAL
--------------- ----------- ---------
Revenues.............. $(15,949) $ -- $ 134,653
Operating expenses:
Operating, general
and
administrative.... (7,902) (1,033)(d) 73,342
Corporate expense
charges........... -- 1,033(d) 1,033
Depreciation and
amortization...... (6,883) 22,885(e) 79,856
Management fees..... (458) -- 2,507
-------- --------- ---------
Total operating
expenses.......... (15,243) 22,885 156,738
Income (loss) from
operations.......... (706) (22,885) (22,085)
Interest expense...... (4) (11,273)(f) (38,514)
Interest income....... -- -- 151
Other income
(expense)........... -- 3,774(g) (137)
-------- --------- ---------
Income (loss) before
income tax expense
(benefit)........... (710) (30,384) (60,585)
Income tax (benefit)
expense............. -- (41)(h) --
-------- --------- ---------
Income (loss) before
extraordinary
item................ $ (710) $ (30,343) $ (60,585)
======== ========= =========
(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, 1999 through the date of acquisition for acquisitions completed by
Renaissance, the InterMedia systems, Helicon and Rifkin, and for the period
from January 1, 1999 through March 31, 1999 for acquisitions to be completed
subsequent to March 31, 1999.
(c) Represents the elimination of the operating results primarily related to the
cable systems to be transferred to the InterMedia systems.
(d) Reflects a reclassification of expenses representing corporate expenses that
would have occurred at Charter Communications, Inc.
(e) Represents additional amortization of franchises as a result of our recent
and pending acquisitions. The excess of purchase price over the net tangible
assets acquired, $3.6 billion, is expected to be recorded in franchises and
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 sale of assets.
(h) Reflects the elimination of income tax expense as a result of being acquired
by a limited liability company.
35
39
NOTE B: We have extinguished substantially all of our long-term debt, excluding
borrowings of our previous credit facilities, and refinanced all previous credit
facilities, and have incurred 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%)............................. $67,250
Credit facilities (at blended rate of 7.4%)................. 63,750
Amortization of debt issuance costs......................... 3,900
Commitment fee on unused portion of our credit facilities
($652,000 at 0.375%)...................................... 600
10% senior discount notes -- Renaissance.................... 2,750
-------
Total pro forma interest expense.......................... 138,250
Less -- interest expense (including our recent and pending
acquisitions).......................................... 124,700
-------
Adjustment............................................. $13,550
=======
NOTE C: Charter Communications, Inc. provides corporate management and
consulting services to us. See "Certain Relationships and Related Transactions."
NOTE D: EBITDA represents earnings (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television company's ability to service
indebtedness. However, EBITDA should not be considered as an alternative to
income from operations or to cash flows from operating, investing or financing
activities, as determined in accordance with generally accepted accounting
principles. EBITDA should also not be construed as an indication of a company's
operating performance or as a measure of liquidity. Management's discretionary
use of funds depicted by EBITDA may be limited by working capital, debt service
and capital expenditure requirements and by restrictions related to legal
requirements, commitments and uncertainties.
NOTE E: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE F: Adjusted EBITDA means EBITDA before corporate expenses, management fees
and other income (expense) in accordance with the term "Consolidated EBITDA"
used in the indentures governing the notes. See "Description of Notes" for a
complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial
indicator of a cable company's ability to service indebtedness and because it is
used in the indentures to determine compliance with certain covenants. However,
Adjusted EBITDA should not be considered as an alternative to income from
operations or to cash flows from operating, investing or financing activities,
as determined in accordance with generally accepted accounting principles.
Adjusted EBITDA should also not be construed as an indication of a company's
operating performance or as a measure of liquidity. In addition, because
Adjusted EBITDA is not calculated identically by all companies, the presentation
here may not be comparable to other similarly titled measures of other
companies. Management's discretionary use of funds depicted by Adjusted EBITDA
may be limited by working capital, debt service and capital expenditure
requirements and by restrictions related to legal requirements, commitments and
uncertainties.
NOTE G: Earnings include net income (loss) plus fixed charges. Fixed charges
consist of interest expense and an estimated interest component of rent expense.
NOTE H: Basic penetration represents basic customers as a percentage of homes
passed. Homes passed are the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a given cable
system service area.
NOTE I: Premium penetration represents premium units as a percentage of basic
customers.
NOTE J: 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 March 31, 1999.
36
40
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS ACQUISITIONS ADJUSTMENTS
(NOTE A) (NOTE B) (NOTE C) SUBTOTAL (NOTE C) (NOTE D) TOTAL
--------- --------- ------------ ---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues........................ $ 611,690 $ 448,192 $ 93,316 $1,153,198 $ 504,125 $ -- $1,657,323
--------- --------- -------- ---------- --------- ------ ----------
Operating expenses:
Operating, general and
administrative.............. 310,100 231,050 43,357 584,507 262,852 -- 847,359
Corporate expense charges
(Note E).................... 16,493 17,042 2,786 36,321 3,973 -- 40,294
Depreciation and
amortization................ 375,899 252,855 53,004 681,758 274,727 -- 956,485
Management fees............... -- -- 1,077 1,077 13,595 -- 14,672
--------- --------- -------- ---------- --------- ------ ----------
Total operating expenses.... 702,492 500,947 100,224 1,303,663 555,147 -- 1,858,810
--------- --------- -------- ---------- --------- ------ ----------
Loss from operations............ (90,802) (52,755) (6,908) (150,465) (51,022) -- (201,487)
Interest (expense) benefit...... (207,468) (137,953) (61,757) (407,178) (150,243) 4,400 (553,021)
Other income (expense).......... 518 -- 437 955 (6,299) -- (5,344)
--------- --------- -------- ---------- --------- ------ ----------
Net income (loss)............... $(297,752) $(190,708) $(68,228) $ (556,688) $(207,564) $4,400 $ (759,852)
========= ========= ======== ========== ========= ====== ==========
OTHER FINANCIAL DATA:
EBITDA (Note F)................. $ 285,615 $ 200,100 $ 46,533 $ 532,248 $ 217,406 $ 749,654
EBITDA margin (Note G).......... 46.7% 44.6% 49.9% 46.2% 43.1% 45.2%
Adjusted EBITDA (Note H)........ 301,590 217,142 49,959 568,691 241,273 809,964
Cash flows from operating
activities.................... 137,160 139,908 12,399 289,467 61,995 351,462
Cash interest expense........... 436,432
Capital expenditures............ $ 213,353 $ 224,723 $ 5,001 $ 443,077 $ 86,106 $ 529,183
Total debt to EBITDA............ 8.8x
Total debt to Adjusted EBITDA... 8.1
EBITDA to cash interest
expense....................... 1.7
EBITDA to interest expense...... 1.4
Deficiency of earnings to cover
fixed charges (Note I)........ $ 759,852
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR AVERAGES):
Homes passed.................... 2,149,000 1,743,000 289,000 4,181,000 1,506,000 5,687,000
Basic customers................. 1,255,000 1,062,000 195,000 2,512,000 1,105,000 3,617,000
Basic penetration (Note J)...... 58.4% 60.9% 67.5% 60.1% 73.4% 63.6%
Premium units................... 845,000 411,000 87,000 1,343,000 724,000 2,067,000
Premium penetration (Note K).... 67.3% 38.7% 44.6% 53.5% 65.5% 57.1%
Average monthly revenue per
basic customer (Note L)....... NM NM $ 39.88 $ 38.26 $ 38.02 $ 38.18
See "Notes to the Unaudited Pro Forma Financial Statements."
37
41
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Holdings, including the
acquisition of us on December 23, 1998 by Paul G. Allen and the acquisition of
Sonic, 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 CHARTER HOLDINGS SONIC ELIMINATIONS SUBTOTAL
--------- ----------- ------------------- ------- ------------ ---------
Revenues...................... $ 324,432 $196,801 $ 49,731 $23,450 $17,276 $ -- $ 611,690
--------- -------- -------- ------- ------- --------- ---------
Operating expenses:
Operating, general and
administrative............ 164,145 98,331 25,952 12,679 8,993 -- 310,100
Depreciation and
amortization.............. 136,689 86,741 16,864 13,811 2,279 -- 256,384
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 11,272 -- 605,598
--------- -------- -------- ------- ------- --------- ---------
Income (loss) from
operations.................. 6,206 (3,051) 739 (3,806) 6,004 -- 6,092
Interest expense.............. (113,824) (66,121) (17,277) (5,051) (2,624) 1,900 (202,997)(c)
Other income (expense)........ 4,668 (1,684) (684) 133 (15) (1,900) 518(c)
--------- -------- -------- ------- ------- --------- ---------
Income (loss) before income
taxes....................... (102,950) (70,856) (17,222) (8,724) 3,365 -- (196,387)
Provision for income taxes.... -- -- -- -- 1,346 -- 1,346
--------- -------- -------- ------- ------- --------- ---------
Income (loss) before
extraordinary item.......... $(102,950) $(70,856) $(17,222) $(8,724) $ 2,019 $ -- $(197,733)
========= ======== ======== ======= ======= ========= =========
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
acquisition of us by Mr. Allen. 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. at that time exceeded the allocated costs incurred by
Charter Communications, Inc. on behalf of those companies by $8.2 million.
Also reflects the elimination of approximately $14.4 million of change of
control payments under the terms of then-existing equity appreciation rights
plans. Such payments were triggered by the acquisition of us by Mr. Allen.
Such payments were made by Charter Communications, Inc. and were not subject
to reimbursement by us, but were allocated to us for financial reporting
purposes. The equity appreciation rights plans were terminated in connection
with the acquisition of us by Mr. Allen, and these costs will not recur.
(c) Represents the elimination of intercompany interest on a note payable from
Charter Holdings to CCA Group.
(d) Reflects additional interest expense on borrowings used to finance the
acquisition by us of Sonic, 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.
38
42
NOTE B: Pro forma operating results for Marcus Cable 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) benefit......... (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 Cable.
(b) Represents the elimination of the operating results and corresponding gain
on sale of cable systems sold by Marcus Cable 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 Charter
Communications, Inc. on behalf of Marcus Cable. Management fees charged to
Marcus Cable exceeded the costs incurred by Charter Communications, Inc. by
$1.3 million.
(d) As a result of the acquisition of Marcus Cable 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 23, 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 23, 1998.
(e) As a result of the acquisition of Marcus Cable by Mr. Allen, Marcus Cable
recorded transaction costs of approximately $114.2 million. These costs
comprised of approximately $90.2 million paid to employees of Marcus Cable
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 Cable recorded costs related to
employee and officer stay-bonus and severance arrangements of approximately
$16 million.
39
43
NOTE C: Pro forma operating results for our recent and pending
acquisitions consist of the following (dollars in thousands):
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------
RECENT ACQUISITIONS -- HISTORICAL PENDING ACQUISITIONS -- HISTORICAL
----------------------------------- -------------------------------------------
TOTAL GMI INTERMEDIA
RENAISSANCE ACE RECENT SYSTEMS SYSTEMS HELICON RIFKIN(a)
------------ -------- --------- ------- ---------- -------- ---------
Revenues................ $ 41,524 $15,685 $ 57,209 $78,635 $176,062 $ 75,577 $124,382
-------- ------- -------- ------- -------- -------- --------
Operating expenses:
Operating, general and
administrative...... 21,037 7,441 28,478 48,852 86,753 40,179 63,815
Corporate expense
charges............. -- -- -- -- -- -- --
Depreciation and
amortization........ 19,107 6,784 25,891 8,612 85,982 24,290 47,657
Management fees....... -- 471 471 -- 3,147 3,496 4,106
-------- ------- -------- ------- -------- -------- --------
Total operating
expenses.......... 40,144 14,696 54,840 57,464 175,882 67,965 115,578
-------- ------- -------- ------- -------- -------- --------
Income from
operations............ 1,380 989 2,369 21,171 180 7,612 8,804
Interest expense........ (14,358) (4,501) (18,859) (535) (25,449) (27,634) (30,482)
Interest income......... 158 122 280 -- 341 93 --
Other income
(expense)............. -- -- -- (493) 23,030 -- 44,959
-------- ------- -------- ------- -------- -------- --------
Income (loss) before
income tax expense
(benefit)............. (12,820) (3,390) (16,210) 20,143 (1,898) (19,929) 23,281
Income tax (benefit)
expense............... 135 -- 135 7,956 1,623 -- (4,178)
-------- ------- -------- ------- -------- -------- --------
Income (loss) before
extraordinary item.... $(12,955) $(3,390) $(16,345) $12,187 $ (3,521) $(19,929) $ 27,459
======== ======= ======== ======= ======== ======== ========
YEAR ENDED DECEMBER 31, 1998
-----------------------
PENDING ACQUISITIONS -- HISTORICAL
-----------------------
OTHER TOTAL
ACQUISITIONS PENDING
------------ --------
Revenues................ $ 9,336 $463,992
------- --------
Operating expenses:
Operating, general and
administrative...... 4,618 244,217
Corporate expense
charges............. -- --
Depreciation and
amortization........ 2,794 169,335
Management fees....... -- 10,749
------- --------
Total operating
expenses.......... 7,412 424,301
------- --------
Income from
operations............ 1,924 39,691
Interest expense........ (2,375) (86,475)
Interest income......... -- 434
Other income
(expense)............. 3 67,499
------- --------
Income (loss) before
income tax expense
(benefit)............. (448) 21,149
Income tax (benefit)
expense............... -- 5,401
------- --------
Income (loss) before
extraordinary item.... $ (448) $ 15,748
======= ========
40
44
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------
RECENT ACQUISITIONS PENDING ACQUISITIONS
------------------------------------------------------ ----------------------------
PRO FORMA PRO FORMA
----------------------------------------- ---------------
TOTAL
HISTORICAL ACQUISITIONS(b) ADJUSTMENTS RECENT HISTORICAL ACQUISITIONS(b)
---------- --------------- ----------- -------- ---------- ---------------
Revenues............... $ 57,209 $36,107 $ -- $ 93,316 $463,992 $109,841
Operating expenses:
Operating, general
and
administrative..... 28,478 17,665 (2,786)(d) 43,357 244,217 58,180
Corporate expense
charges............ -- -- 2,786(d) 2,786 -- --
Depreciation and
amortization....... 25,891 13,987 13,126(e) 53,004 169,335 24,526
Management fees...... 471 606 -- 1,077 10,749 3,783
-------- ------- -------- -------- -------- --------
Total operating
expenses......... 54,840 32,258 13,126 100,224 424,301 86,489
Income (loss) from
operations........... 2,369 3,849 (!3,126) (6,908) 39,691 23,352
Interest expense....... (18,859) (5,787) (37,111)(f) (61,757) (86,475) (28,859)
Interest income........ 280 157 -- 437 434 175
Other income
(expense)............ -- 96 (96)(g) -- 67,499 307
-------- ------- -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit)............ (16,210) (1,685) (50,333) (68,228) 21,149 (5,025)
Income tax expense
(benefit)............ 135 1,191 (1,326)(h) -- 5,401 927
-------- ------- -------- -------- -------- --------
Income (loss) before
extraordinary item... $(16,345) $(2,876) $(49,007) $(68,228) $ 15,748 $ (5,952)
======== ======= ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1998
------------------------------------------
PENDING ACQUISITIONS
------------------------------------------
PRO FORMA
------------------------------------------
TOTAL
DISPOSITIONS(c) ADJUSTMENTS PENDING
--------------- ----------- ---------
Revenues............... $(69,708) $ -- $ 504,125
Operating expenses:
Operating, general
and
administrative..... (35,572) (3,973)(d) 262,852
Corporate expense
charges............ -- 3,973(d) 3,973
Depreciation and
amortization....... (40,811) 121,677(e) 274,727
Management fees...... (937) -- 13,595
-------- --------- ---------
Total operating
expenses......... (77,320) 121,677 555,147
Income (loss) from
operations........... 7,612 (121,677) (51,022)
Interest expense....... 19,543 (54,452)(f) (150,243)
Interest income........ (10) -- 599
Other income
(expense)............ (380) (74,324)(g) (6,898)
-------- --------- ---------
Income (loss) before
income tax expense
(benefit)............ 26,765 (250,453) (207,564)
Income tax expense
(benefit)............ 310 (6,638)(h) --
-------- --------- ---------
Income (loss) before
extraordinary item... $ 26,455 $(243,815) $(207,564)
======== ========= =========
- -------------------------
(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, the InterMedia systems, Helicon and Rifkin, 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 to the sale of several smaller cable systems.
(d) Reflects a reclassification of expenses representing corporate expenses that
would have occurred at Charter Communications, Inc.
(e) Represents additional amortization of franchises as a result of our recent
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 company.
41
45
NOTE D: We have extinguished substantially all of our long-term debt,
excluding borrowings of our previous credit facilities, and refinanced all
previous credit facilities, and have incurred 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%)................. 255,000
Amortization of debt issuance costs......................... 15,600
Commitment fee on unused portion of credit facilities
($652,000 at 0.375%)...................................... 2,400
10% senior discount notes -- Renaissance.................... 11,000
---------
Total pro forma interest expense.......................... 553,000
Less -- interest expense (including Marcus Cable and
recent acquisitions and pending acquisitions).......... (557,400)
---------
Adjustment............................................. $ (4,400)
=========
NOTE E: Charter Communications, Inc. provided corporate management and
consulting services to Charter Holdings in 1998 and to Marcus Cable beginning in
October 1998. See "Certain Relationships and Related Transactions."
NOTE F: EBITDA represents earnings (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television company's ability to service
indebtedness. However, EBITDA should not be considered as an alternative to
income from operations or to cash flows from operating, investing or financing
activities, as determined in accordance with generally accepted accounting
principles. EBITDA should also not be construed as an indication of a company's
operating performance or as a measure of liquidity. Management's discretionary
use of funds depicted by EBITDA may be limited by working capital, debt service
and capital expenditure requirements and by restrictions related to legal
requirements, commitments and uncertainties.
NOTE G: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE H: Adjusted EBITDA means EBITDA before corporate expenses, management
fees and other income (expense) in accordance with the term "Consolidated
EBITDA" used in the indentures governing the notes. See "Description of Notes"
for a complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial
indicator of a cable company's ability to service indebtedness and because it is
used in the indentures to determine compliance with certain covenants. However,
Adjusted EBITDA should not be considered as an alternative to income from
operations or to cash flows from operating, investing or financing activities,
as determined in accordance with generally accepted accounting principles.
Adjusted EBITDA should also not be construed as an indication of a company's
operating performance or as a measure of liquidity. In addition, because
Adjusted EBITDA is not calculated identically by all companies, the presentation
here may not be comparable to other similarly titled measures of other
companies. Management's discretionary use of funds depicted by Adjusted EBITDA
may be limited by working capital, debt service and capital expenditure
requirements and by restrictions related to legal requirements, commitments and
uncertainties.
NOTE I: Earnings include net income (loss) plus fixed charges. Fixed
charges consist of interest expense and an estimated interest component of rent
expense.
NOTE J: Basic penetration represents basic customers as a percentage of
homes passed. Homes passed are the number of single residence homes, apartments
and condominium units passed by the cable distribution network in a given cable
system service area.
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.
42
46
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1999
-------------------------------------------------------------------
RECENT PENDING
CHARTER ACQUISITIONS ACQUISITIONS PRO FORMA
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) TOTAL
---------- ------------ ---------- ------------ -----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET
Cash and cash equivalents................ $1,038,360 $(692,594) $ 345,766 $ (315,302) $ 30,464
Accounts receivable, net................. 30,314 1,903 32,217 21,942 54,159
Prepaid expenses and other............... 15,882 1,817 17,699 10,297 27,996
---------- --------- ---------- ---------- -----------
Total current assets................ 1,084,556 (688,874) 395,682 (283,063) 112,619
Property, plant and equipment............ 1,533,197 79,921 1,613,118 600,691 2,213,809
Franchises............................... 5,607,539 620,980 6,228,519 2,866,476 9,094,995
Other assets............................. 131,990 -- 131,990 86,925 218,915
---------- --------- ---------- ---------- -----------
Total assets........................ $8,357,282 $ 12,027 $8,369,309 $3,271,029 $11,640,338
========== ========= ========== ========== ===========
Accounts payable and accrued expenses.... 216,397 11,272 227,669 73,594 301,263
Payables to manager of cable television
systems................................ 12,554 -- 12,554 -- 12,554
Other current liabilities................ -- 755 755 -- 755
---------- --------- ---------- ---------- -----------
Total current liabilities........... 228,951 12,027 240,978 73,594 314,572
Long-term debt........................... 4,754,018 -- 4,754,018 1,869,158 6,623,176
Other long-term liabilities.............. 48,171 -- 48,171 3,277 51,448
Members' equity.......................... 3,326,142 -- 3,326,142 1,325,000 4,651,142
---------- --------- ---------- ---------- -----------
Total liabilities and equity........ $8,357,282 $ 12,027 $8,369,309 $3,271,029 $11,640,338
========== ========= ========== ========== ===========
43
47
NOTE A: Pro forma balance sheet for our recent acquisitions and pending
acquisitions consists of the following (dollars in thousands):
AS OF MARCH 31, 1999
------------------------------------------------------------------------------------------------------
RECENT ACQUISITIONS -- HISTORICAL PENDING ACQUISITIONS -- HISTORICAL
--------------------------------- ------------------------------------------------------------------
GREATER
AMERICAN TOTAL MEDIA INTERMEDIA TOTAL
RENAISSANCE CABLE RECENT SYSTEMS SYSTEMS HELICON RIFKIN OTHER PENDING
----------- -------- -------- ------- ---------- --------- -------- ------- ----------
Cash and cash
equivalents.............. $ 8,901 $ 1,201 $ 10,102 $ 2,440 $ -- $ 11,464 $ 7,580 $ 585 $ 22,069
Accounts receivable, net... 1,283 620 1,903 2,577 13,949 1,619 12,009 1,450 31,604
Receivable from related
party.................... -- -- -- -- 5,038 -- -- -- 5,038
Prepaid expenses and
other.................... 381 1,436 1,817 3,052 1,053 2,867 2,789 110 9,871
Deferred income tax
asset.................... -- -- -- -- -- -- -- -- --
-------- -------- -------- ------- -------- --------- -------- ------- ----------
Total current assets..... 10,565 3,257 13,822 8,069 20,040 15,950 22,378 2,145 68,582
Receivable from related
party.................... -- -- -- -- -- -- -- -- --
Property, plant and
equipment................ 64,594 15,327 79,921 58,196 225,682 88,723 283,208 9,934 665,743
Franchises................. 222,971 143,546 366,517 2,653 240,567 12,096 456,523 55,452 767,291
Deferred income tax
assets................... -- -- -- -- 13,994 -- -- -- 13,994
Other assets............... 16,129 2,334 18,463 80 3,697 83,546 72,148 205 159,676
-------- -------- -------- ------- -------- --------- -------- ------- ----------
Total assets............. $314,259 $164,464 $478,723 $68,998 $503,980 $ 200,315 $834,257 $67,736 $1,675,286
======== ======== ======== ======= ======== ========= ======== ======= ==========
Accounts payable and
accrued expenses......... $ 7,649 $ 3,623 $ 11,272 $ 6,022 $ 19,030 $ 16,496 $ 34,486 $ 1,899 $ 77,933
Current deferred revenue... -- -- -- 1,904 11,944 -- 2,092 1,207 17,147
Note payable to related
party.................... 135 -- 135 -- 3,057 -- -- -- 3,057
Other current
liabilities.............. 1,406 -- 1,406 -- -- -- -- -- --
-------- -------- -------- ------- -------- --------- -------- ------- ----------
Total current
liabilities............ 9,190 3,623 12,813 7,926 34,031 16,496 36,578 3,106 98,137
Deferred revenue........... -- -- -- -- 3,900 -- -- -- 3,900
Deferred income taxes...... -- -- -- -- -- -- 7,405 -- 7,405
Long-term debt............. 212,503 118,000 330,503 -- -- 295,345 541,575 38,914 875,834
Note payable to related
party, including accrued
interest................. -- -- -- -- 412,436 5,137 -- -- 417,573
Other long-term
liabilities, including
redeemable preferred
shares................... -- -- -- 3,618 14,430 18,708 -- -- 36,756
Equity..................... 92,566 42,841 135,407 57,454 39,183 (135,371) 248,699 25,716 235,681
-------- -------- -------- ------- -------- --------- -------- ------- ----------
Total liabilities and
equity................. $314,259 $164,464 $478,723 $68,998 $503,980 $ 200,315 $834,257 $67,736 $1,675,286
======== ======== ======== ======= ======== ========= ======== ======= ==========
44
48
AS OF MARCH 31, 1999
-----------------------------------------------------------------------------------------
RECENT ACQUISITIONS PENDING ACQUISITIONS
---------------------------------------- ----------------------------------------------
PRO FORMA PRO FORMA
---------------------------------------- ----------------------------------------------
HISTORICAL ADJUSTMENTS TOTAL HISTORICAL ACQUISITIONS(A) DISPOSITIONS(B)
---------- -------------- --------- ---------- --------------- ---------------
Cash and cash equivalents... $ 10,102 $(702,696)(c) $(692,594) $ 22,069 $ 90 $ (1,797)
Accounts receivable, net.... 1,903 -- 1,903 31,604 54 (1,671)
Receivable from related
party..................... -- -- -- 5,038 -- --
Prepaid expenses and
other..................... 1,817 -- 1,817 9,871 713 (287)
-------- --------- --------- ---------- ------- ---------
Total current assets...... 13,822 (702,696) (688,874) 68,582 857 (3,755)
Property, plant and
equipment................. 79,921 -- 79,921 665,743 12,975 (78,027)
Franchises.................. 366,517 254,463(f) 620,980 767,291 98 (342,844)
Deferred income tax
assets.................... -- -- -- 13,994 -- --
Other assets................ 18,463 (18,463)(h) -- 159,676 -- (523)
-------- --------- --------- ---------- ------- ---------
Total assets.............. $478,723 $(466,696) $ 12,027 $1,675,286 $13,930 $(425,149)
======== ========= ========= ========== ======= =========
Accounts payable and accrued
expenses.................. $ 11,272 $ -- $ 11,272 $ 77,933 $ 896 $ (4,280)
Current deferred revenue.... -- -- -- 17,147 -- --
Note payable to related
party..................... 135 (135)(i) -- 3,057 -- --
Other current liabilities... 1,406 (651)(d) 755 -- -- --
-------- --------- --------- ---------- ------- ---------
Total current
liabilities............. 12,813 (786) 12,027 98,137 896 (4,280)
Deferred revenue............ -- -- -- 3,900 173 --
Deferred income taxes....... -- -- -- 7,405 -- --
Long-term debt.............. 330,503 (330,503) (j) -- 875,834 1,260 (420,528)
Note payable to related
party, including accrued
interest.................. -- -- 417,573 -- --
Other long-term
liabilities............... -- -- -- 36,756 -- (341)
Equity...................... 135,407 (135,407)(k) -- 235,681 11,601 --
-------- --------- --------- ---------- ------- ---------
Total liabilities and
equity.................. $478,723 $(466,696) $ 12,027 $1,675,286 $13,930 $(425,149)
======== ========= ========= ========== ======= =========
AS OF MARCH 31, 1999
-------------------------
PENDING ACQUISITIONS
-------------------------
PRO FORMA
-------------------------
ADJUSTMENTS TOTAL
----------- ----------
Cash and cash equivalents... $ (335,664)(c) $ (315,302)
Accounts receivable, net.... (8,045)(d) 21,942
Receivable from related
party..................... (5,038)(e) --
Prepaid expenses and
other..................... -- 10,297
---------- ----------
Total current assets...... (348,747) (283,063)
Property, plant and
equipment................. -- 600,691
Franchises.................. 2,441,931(f) 2,866,476
Deferred income tax
assets.................... (13,994)(g) --
Other assets................ (72,228)(h) 86,925
---------- ----------
Total assets.............. $2,006,962 $3,271,029
========== ==========
Accounts payable and accrued
expenses.................. $ (955) $ 73,594
Current deferred revenue.... (17,147)(d) --
Note payable to related
party..................... (3,057)(i) --
Other current liabilities... -- --
---------- ----------
Total current
liabilities............. (21,159) 73,594
Deferred revenue............ (4,073)(d) --
Deferred income taxes....... (7,405)(g) --
Long-term debt.............. 1,412,592(j) 1,869,158
Note payable to related
party, including accrued
interest.................. (417,573)(i) --
Other long-term
liabilities............... (33,138)(j) 3,277
Equity...................... 1,077,718(k) 1,325,000
---------- ----------
Total liabilities and
equity.................. $2,006,962 $3,271,029
========== ==========
- -------------------------
(a) Represents the historical balance sheets as of March 31, 1999, of our recent
and pending acquisitions.
(b) Represents the historical assets and liabilities as of March 31, 1999, of
the cable systems to be transferred to the InterMedia systems as part of a
swap of cable systems.
(c) Represents the use of Charter Holdings cash for the recent and pending
acquisitions.
(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) Reflects assets retained by the seller.
(f) Reflects the excess purchase price over the amounts assigned to net tangible
assets, amortized over 15 years.
(g) Represents the elimination of deferred income tax assets and liabilities.
(h) 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.
45
49
(i) Represents liabilities retained by the seller.
(j) Represents the following:
Long-term debt not assumed.................................. (675,700)
Additional borrowings under our credit facilities........... 1,757,789
----------
$1,082,089
==========
(k) Represents the following:
Elimination of historical equity............................ $ (382,689)
Additional contributions.................................... 1,325,000
----------
$ 942,311
==========
46
50
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, 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
then-existing subsidiaries prior to our merger with Marcus Holdings and our
recent acquisitions. Each such subsidiary was managed by Charter Communications,
Inc. in accordance with its respective management agreement during the presented
periods. Since these subsidiaries were under common management, we believe
presenting combined financial information of these companies is informative.
As a result of the acquisition of us by Paul G. Allen, we have applied the
purchase accounting method 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 for the period from December 24, 1998, through
December 31, 1998, and the balance sheet of Marcus Cable as of December 31,
1998. As a result of the acquisition of us by Mr. Allen and our merger with
Marcus Holdings, we believe that the periods on or prior to December 23, 1998
are not comparable to the periods after December 23, 1998.
CHARTER HOLDINGS, CCA GROUP AND CHARTERCOMM
HOLDINGS
-----------------------------------------------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
COMBINED STATEMENT OF OPERATIONS:
Revenues............................ $ 368,553 $ 484,155 $570,964 $ 23,450
---------- ---------- -------- ----------
Operating expenses:
Operating, general and
administrative................. 190,084 249,419 288,428 12,679
Depreciation and amortization..... 154,273 198,718 240,294 13,811
Management fees/corporate expense
charges(a)..................... 15,094 20,759 38,348 766
---------- ---------- -------- ----------
Total operating expenses....... 359,451 468,896 567,070 27,256
---------- ---------- -------- ----------
Income (loss) from operations....... $ 9,102 $ 15,259 $ 3,894 $ (3,806)
========== ========== ======== ==========
CAPITAL EXPENDITURES................ $ 110,291 $ 162,607 $195,468 $ 13,672
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
47
51
CHARTER HOLDINGS, CCA GROUP AND
CHARTERCOMM HOLDINGS
-----------------------------------------------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(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(b)................ 58.3% 56.7% 59.5%
Premium units....................... 517,000 629,000 1,256,000
Premium penetration(c).............. 57.3% 57.9% 54.2%
- -------------------------
(a) Charter Communications, Inc. provided corporate management and consulting
services to us. CCA Group and CharterComm Holdings paid fees to Charter
Communications, Inc. 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 Charter Communications, Inc. on our subsidiaries' behalf.
Management fees and corporate expenses for the year ended December 31, 1998
include $14.4 million of change of control payments under the terms of
then-existing equity appreciation rights plans. Such payments were triggered
by the acquisition of us by Paul G. Allen. Such payments were made by
Charter Communications, Inc. and were not subject to reimbursement by us,
but were allocated to us for financial reporting purposes. The equity
appreciation rights plans were terminated in connection with the acquisition
of us Mr. Allen, and these costs will not recur.
(b) Basic penetration represents basic customers as a percentage of homes
passed.
(c) Premium penetration represents premium units as a percentage of basic
customers.
48
52
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data below for the years ended December
31, 1996 and 1997, for the periods from January 1, 1998, through December 23,
1998, and from December 24, 1998 through December 31, 1998, are derived from the
consolidated financial statements of Charter Holdings. They 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, are derived from the predecessor of
Charter Holdings' unaudited financial statements and are not included elsewhere
in this prospectus. 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 Holdings'
predecessor business and are not included elsewhere in this prospectus. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of Charter Holdings and related notes
included elsewhere in this prospectus.
PREDECESSOR OF
CHARTER HOLDINGS CHARTER HOLDINGS
---------------------- ----------------------------------------------------
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)
======== ======= ======= ======= ======= ======== ==========
Ratio of Earnings to Fixed
Charges...................... 45.14 34.00 -- -- -- -- --
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.
Earnings for the period from October 1, 1995 through December 31, 1995,
years ended December 31, 1996 and 1997, periods from January 1, 1998 through
December 23, 1998, and the period from December 24, 1998 through December
31, 1998 were inadequate to cover fixed charges by $531, $2,723, $4,623,
$17,222 and $8,724, respectively.
49
53
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to the "Certain Trends and Uncertainties" section below
in this Management's Discussion and Analysis for discussion of important factors
that could cause actual results to differ from expectations and non-historical
information contained herein.
INTRODUCTION
Because of recently purchased and pending significant events, including the
acquisition of us by Paul G. Allen, our merger with Marcus Holdings, recent and
pending acquisitions and the refinancing of our previous credit facilities and
the purchase of publicly held notes that had been issued by several of our
subsidiaries, 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
(1) the operation and development of the Charter Companies prior to the
acquisition of us by Mr. Allen,
(2) the acquisition of us by Mr. Allen,
(3) our merger with Marcus Holdings, and
(4) our recent acquisitions and pending acquisitions.
Charter Holdings was formed in February 1999 as a wholly owned subsidiary
of Charter Communication, Inc. through its wholly owned cable television
operating subsidiary, Charter Communications Properties, LLC, or Charter
Properties, commenced operations with the acquisition of cable television
systems on September 30, 1995.
Prior to the Charter Acquisition, Charter Communication, Inc. owned a
minority interest in, and managed the CCA Group and CharterComm Holdings.
Through Charter Properties, CCI pursued and executed a strategy of operating,
developing, acquiring and consolidating cable systems, including the Sonic
acquisition for approximately $228.4 million. Because Charter Communication,
Inc. was only a minority equity holder in the CCA Group and CharterComm
Holdings, the financial statements of these entities were not consolidated with
those of Charter Communication, Inc.
Our acquisition by Paul G. Allen became effective on December 23, 1998
through a series of transactions in which Mr. Allen acquired approximately 94%
of the equity interests of Charter Communication, Inc. for an aggregate purchase
price of $2.2 billion, excluding $2.0 billion in debt we assumed. Subsequently,
Charter Properties was contributed to Charter Operating a direct wholly owned
subsidiary of Charter Holdings. The 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
Charter Properties. In conjunction with our acquisition, Charter Communication,
Inc. 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 Charter
Properties, the CCA Group and CharterComm Holdings.
In April 1998, Paul G. Allen purchased substantially all of the outstanding
equity interests in Marcus Holdings. In April, 1999, Marcus Holdings merged with
Charter
50
54
Holdings, with Charter Holdings as the serving entity. Beginning in October
1998, Charter Communication, Inc. began to manage the cable operations of Marcus
Holdings. Immediately prior to the closing of our merger with Marcus Holdings,
Mr. Allen purchased the remaining minority interest in Marcus Holdings. Our
merger with Marcus Holding was accounted for as a reorganization under common
control similar to a pooling of interests because of Mr. Allen's controlling
interests in Marcus Holdings and Charter Holdings. As such, the accounts of
Charter Holdings and Marcus Holdings have been consolidated since December 23,
1998.
In the second quarter of 1999, we, acquired American Cable and Renaissance.
In addition to these acquisitions, since the beginning of 1999, we have entered
into definitive agreements to acquire the Greater Media Systems, Helicon, the
InterMedia Systems, Rifkin and certain cable assets of Cable Satellite, all as
forth on the table below.
AS OF AND FOR THE THREE MONTHS ENDED
3/31/99
----------------------------------------
(DOLLARS IN THOUSANDS)
PURCHASE BASIC -------------------------
ACQUISITION DATE(A) PRICE SUBSCRIBERS REVENUE EBITDA
- ----------- ------- -------- ----------- ------- ------
American Cable................. 4/99 $240 million 68,000 $ 9,151 $ 4,213
Renaissance.................... 4/99 459 million 132,000 15,254 8,455
Greater Media Systems.......... 2nd Quarter 1999 500 million 174,000 20,394 7,621
Helicon........................ 3rd Quarter 1999 550 million 171,000 21,252 8,963
InterMedia Systems............. 3rd or 4th Quarter 872.7 million -- 408,000 48,288 21,504
1999 systems' swap (142,000)
--------
266,000
Rifkin......................... 3rd or 4th Quarter 1,460 million 463,000 50,914 19,194
1999
Other.......................... 2nd Quarter 148 million 37,000 3,354 1,760
------------------ -------- -------- -------
Total....................... $4,229.7 million 1,311,000 $169,124 $75,622
================== ======== ======== =======
(a) Total represents closing date for recent acquisitions and anticipated
closing date for pending acquisitions.
The systems acquired pursuant to these recent acquisitions and the pending
acquisitions serve, in the aggregate, approximately 1.3 million customers. In
addition, we are negotiating with several other potential acquisition candidates
whose systems would further complement our regional operating clusters. We
expect to finance our pending acquisitions and any other future acquisitions
with additional borrowings under our credit facilities and with additional
equity.
OVERVIEW
Our revenues are primarily attributable to monthly subscription fees
charged to customers for our basic, expanded basic and premium cable television
programming services, equipment rental and ancillary services provided by our
cable television systems. In addition, we derive other revenues from
installation and reconnection fees charged to customers to commence or reinstate
service, pay-per-view programming, advertising revenues and commissions related
to the sale of merchandise by home shopping services. We have generated
increases in revenues in each of the past three fiscal years, primarily through
internal customer growth, basic and expanded tier rate increases and
acquisitions as well as innovative marketing such as our MVP package of premium
services. This entitles customers to receive a substantial discount on bundled
premium services of HBO, Showtime, Cinemax and The Movie Channel. The MVP
package has increased premium household penetration, premium revenue and cash
flow.
51
55
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and amortization expense and management
fees/corporate expense charges. Operating costs primarily include programming
costs, cable service related expenses, marketing and advertising costs,
franchise fees and expenses related to customer billings. Programming costs
account for approximately 50 percent of our operating costs. Programming costs
have increased in recent years and are expected to continue to increase due to
additional programming being provided to customers, increased cost to produce or
purchase cable programming, inflation and other factors affecting the cable
television industry. In each year we have operated, our costs to acquire
programming have exceeded customary inflationary increases. 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. We have benefited in the past from our membership in an industry
cooperative that provides members with volume discounts from programming
networks. We believe our membership has minimized increases to our programming
costs relative to what the increases would otherwise have been. We also believe
that we should derive additional discounts from programming networks due to our
increased size. Finally, we were able to negotiate favorable terms with premium
networks in conjunction with the premium packages, which minimized the impact on
margins and provided substantial volume incentives to grow the premium category.
Although we believe that we will be able to pass future increases in programming
costs through to customers, there can be no assurance that we will be able to do
so.
General and administrative expenses primarily include accounting and
administrative personnel and professional fees. Depreciation and amortization
expense relates to the depreciation of our tangible assets and the amortization
of our franchise costs. Management fees/corporate expense charges are fees paid
to or charges from CCI for corporate management and consulting services. Charter
Holdings records actual corporate expense charges incurred by CCI on behalf of
Charter Holdings. Prior to the Charter Acquisition, the CCA Group and
CharterComm Holdings recorded management fees payable to CCI equal to 3.0% to
5.0% of gross revenues plus certain expenses. In October 1998, CCI began
managing the cable operations of Marcus Holdings under a management fee
arrangement. The Credit Facilities limit management fees to 3.5% of gross
revenues.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include 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.
52
56
RESULTS OF OPERATIONS
The following discussion concerns the financial condition and results of
operations for
(1) Charter Holdings (comprised of Charter Properties only) for the period
from January 1, 1998 through December 23, 1998, for the period from
January 1, 1998 through March 31, 1998 and for the years ended December
31, 1997 and 1996 and
(2) Charter Holdings (comprised of Charter Properties, CCA Group,
CharterComm Holdings and Marcus Holdings) for the period from January
1, 1999 through March 31, 1999 and for the period from December 24,
1998 through December 31, 1998.
The following table sets forth the percentages that items in the statements
of income bear to operating revenues for the indicated periods.
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------- 1/1/98 THROUGH
1996 1997 12/23/98
----------------------------- ----------------------------- -------------------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
Revenues.............. $ 14,881 100.0% $ 18,867 100.0% $ 49,731 100.0%
Operating expenses
Operating costs..... 5,888 39.6% 9,157 48.5% 18,751 37.7%
General and
administrative
costs............. 2,235 15.0% 2,610 13.8% 7,201 14.5%
Depreciation and
amortization...... 4,593 30.9% 6,103 32.3% 16,864 33.9%
Management fees/
corporate expense
charges........... 446 3.0% 566 3.0% 6,176 12.4%
------------- ------------- ------------- ------------- --------------- -------------
Total operating
expenses.......... 13,162 88.4% 18,436 97.7% 48,992 98.5%
------------- ------------- ------------- ------------- --------------- -------------
Income (loss) from
operations.......... 1,719 11.6% 431 2.3% 739 1.5%
Interest income....... 20 0.1% 41 0.2% 44 0.1%
Interest expense...... (4,415) (29.7%) (5,120) (27.1%) (17,277) (34.7%)
Other income
(expense)........... (47) (0.3%) 25 0.1% (728) (1.5%)
------------- ------------- ------------- ------------- --------------- -------------
Net loss.............. $ (2,723) (18.3%) $ (4,623) (24.5%) $ (17,222) (34.6%)
============= ============= ============= ============= =============== =============
THREE MONTHS ENDED
12/24/98 THROUGH ---------------------------------------------------------------
12/31/98 3/31/99 3/31/98
----------------------------- ------------------------------- -----------------------------
STATEMENT OF OPERATION
Revenues.............. $ 23,450 100.0% $ 286,135 100.0% $ 4,782 100.00%
Operating expenses
Operating costs..... 9,957 42.5% 86,650 30.3% 1,583 33.1%
General and
administrative
costs............. 2,722 11.6% 65,425 22.9% 1,055 22.1%
Depreciation and
amortization...... 13,811 58.9% 153,747 53.7% 1,605 33.6%
Management fees/
corporate expense
charges........... 766 3.3% 5,323 1.9% 143 3.0%
------------- ------------- --------------- ------------- ------------- -------------
Total operating
expenses.......... 27,256 116.2% 311,145 108.7% 4,386 91.7%
------------- ------------- --------------- ------------- ------------- -------------
Income (loss) from
operations.......... (3,806) (16.2%) (25,010) (8.7%) 396 8.3%
Interest income....... 133 0.6% 1,733 0.6% 8 0.2%
Interest expense...... (5,051) (21.5%) (71,591) (25.0%) (1,329) (27.8%)
Other income
(expense)........... -- -- 3,619 1.3% 2 0.0%
------------- ------------- --------------- ------------- ------------- -------------
Net loss.............. $ (8,724) (37.2%) $ (91,249) (31.9%) $ (923) (19.3%)
============= ============= =============== ============= ============= =============
53
57
PERIOD FROM JANUARY 1, 1999 THROUGH MARCH 31, 1999
COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH MARCH 31, 1998
REVENUES. Revenues increased by $281.1 million, or 5,883.6%, from $4.8
million for the period from January 1, 1998 through March 31, 1998 to $286.1
million for the period from January 1, 1999 through March 31, 1999. The increase
in revenues primarily resulted from the acquisitions of the CCA Group,
CharterComm Holdings and Sonic Communication, Inc. (Sonic) and our merger with
Marcus Holdings. The revenues of these entities for the three months ended March
31, 1999 were $89.4 million, $53.4 million, $13.1 million and $125.2 million,
respectively.
OPERATING EXPENSES. Operating expenses increased by $85.1 million, or
5,373.8%, from $1.6 million for the period from January 1, 1998 through March
31, 1998 to $86.7 million for the period from January 1, 1999 through March 31,
1999. This increase was due primarily to the acquisitions of the CCA Group,
CharterComm Holdings and Sonic and our merger with Marcus Holdings whose
operating expenses were $24.6 million, $16.6 million, $3.8 million and $39.9
million for the three months ended March 31, 1999, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $64.4 million, or 6,101.4%, from $1.1 million for the period from
January 1, 1998 through March 31, 1998 to $65.4 million for the period from
January 1, 1999 through March 31, 1999. This increase was due primarily to the
acquisitions of the CCA Group, CharterComm Holdings and Sonic and our merger
with Marcus Holdings whose incremental general and administrative expenses were
$21.9 million, $10.3 million, $3.1 million and $29.1 million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $152.1 million, or 9,479.3%, from $1.6 million for the period from
January 1, 1998 through March 31, 1998 to $153.7 million for the period from
January 1, 1999 through March 31, 1999. There was a significant increase in
amortization resulting from the acquisitions of the CCA Group, CharterComm
Holdings and Sonic and our merger with Marcus Holdings whose incremental
amortization expenses for the three months ended March 31, 1999 were $49.1
million, $32.6 million, $4.3 million and $63.7 million for the three months
ended March 31, 1999, respectively.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $5.2 million, or 6,849.7% from $0.1 million for the
period from January 1, 1998 through March 31, 1998 to $5.3 million for the
period from January 1, 1999 through March 31, 1999. The increase from the period
from January 1, 1998 through March 31, 1998 compared to the period from January
1, 1999 through March 31, 1999 was the result of the acquisitions of the CCA
Group, CharterComm Holdings and Sonic and our merger with Marcus Holdings.
INTEREST EXPENSE. Interest expense increased by $70.2 million, or
5,286.8%, from $1.3 million for the period from January 1, 1998 through March
31, 1998 to $71.6 million for the period from January 1, 1999 through March 31,
1999. This increase resulted primarily from the financing of the acquisitions of
the CCA Group and CharterComm Holdings and our merger with Marcus Holdings. The
interest expenses resulting from each of these transactions were $14.4 million,
$12.0 million, and $26.1 million, respectively.
54
58
NET LOSS. Net loss increased by $97.5 million, or 10,567.1%, from $0.9
million for the period from January 1, 1998 through March 31, 1998 to $98.5
million for the period from January 1, 1999 through March 31, 1999.
The increase in revenues that resulted from the acquisitions of the CCA
Group, CharterComm Holdings and Sonic and our merger with Marcus Holdings was
not sufficient to offset the significant costs related to the acquisitions.
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 Charter Properties, but also the results of operations
of those entities purchased in the acquisition of us and our merger with Marcus
Holdings. 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
acquisition of Sonic whose revenues for that period were $30.5 million.
OPERATING EXPENSES. Operating expenses increased by $9.6 million, or
104.8%, from $9.2 million in 1997 to $18.8 million for the period from January
1, 1998 through December 23, 1998. This increase was due primarily to the
acquisition of Sonic, whose operating expenses for that period were $11.5,
partially offset by the loss of $1.4 million on the sale of a cable system in
1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $4.6 million, or 175.9%, from $2.6 million in 1997 to $7.2 million
for the period from January 1, 1998 through December 23, 1998. This increase was
due primarily to the acquisition of Sonic whose general and administrative
expenses for that period were $4.4 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $10.8 million, or 176.3%, from $6.1 million in 1997 to $16.9
million for the period from January 1, 1998 through December 23, 1998. There was
a significant increase in amortization resulting from the acquisition of Sonic.
Incremental depreciation and amortization expenses of the acquisition of Sonic
were $10.3 million.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $5.6 million, or 991.2% from $0.6 million in 1997 to $6.2 million
for the period from January 1, 1998 through December 23, 1998. The increase from
1997 compared to the period from January 1, 1998 through December 23, 1998 was
the result of additional Charter Communications, Inc. charges related to equity
appreciation rights plans of $3.8 million for the period from January 1, 1998
through December 23, 1998 and an increase of $1.5 million in management services
provided by Charter Communications, Inc. as a result of the acquisition of
Sonic.
INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%,
from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998
through December 23, 1998. This increase resulted primarily from the
indebtedness of $220.6 million, including a note payable for $60.7 million,
incurred in connection with the acquisition of Sonic resulting in $12.1 million
of additional interest expense.
55
59
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
acquisition of Sonic.
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. The primary reason for this increase is due to
the acquisition of 5 cable systems in 1996 that increased customers by 58.9%.
Revenues of Charter Properties, 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 EXPENSES. Operating expenses increased by $3.3 million, or
55.5%, from $5.9 million in 1996 to $9.2 million in 1997. This increase was
primarily due to the acquisitions of the cable systems in 1996 and the loss of
$1.4 million on the sale of a cable system in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $0.4 million, or 16.8%, from $2.2 million in 1996 to $2.6 million
in 1997. This increase was primarily due to the acquisitions of the cable
systems in 1996.
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 the cable systems in 1996.
MANAGEMENT FEES/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 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.
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
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 and for the period January 1, 1998 through December 23, 1998 and for
the period December 24, 1998 through December 31, 1998. The combined revenues
and expenses represent the sum of the revenues and expenses of each of the
companies managed by Charter Communications, Inc. during all periods presented.
Since the companies in these groups were under common management, we believe
presenting combined financial information of those companies is informative.
Other expenses, including 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
56
60
made by the companies in these groups or related to the acquisition of us. The
combined revenues and expenses for the period December 24, 1998 through December
31, 1998 include the revenues and expenses for Marcus Holdings.
YEAR ENDED
DECEMBER 31,
---------------------------------------------------- 1/1/98 THROUGH
1996 1997 12/23/98
------------------------ ------------------------ ------------------------
STATEMENT OF OPERATIONS
Revenues................................... $ 368,553 100.0% $ 484,155 100.0% $ 570,964 100.0%
--------------- ------ --------------- ------ --------------- ------
Operating expenses:
Operating costs........................... 159,835 43.4% 207,802 42.9% 238,201 41.7%
General and administrative costs.......... 30,249 8.2% 41,617 8.6% 50,227 8.8%
Depreciation and amortization............. 154,273 41.9% 198,718 41.0% 240,294 42.1%
Management fees/corporate expense
charges................................. 15,094 4.1% 20,759 4.3% 38,348 6.7%
--------------- ------ --------------- ------ --------------- ------
Total operating expenses............ 359,451 97.5% 468,896 96.8% 567,070 99.3%
--------------- ------ --------------- ------ --------------- ------
Income (loss) from operations.............. $ 9,102 2.5% $ 15,259 3.2% $ 3,894 0.7%
=============== ====== =============== ====== =============== ======
12/24/98 THROUGH
12/31/98
------------------------
STATEMENT OF OPERATIONS
Revenues................................... $ 23,450 100.0%
--------------- ------
Operating expenses:
Operating costs........................... 12,679 54.1%
General and administrative costs.......... -- 0.0%
Depreciation and amortization............. 13,811 58.9%
Management fees/corporate expense
charges................................. 766 3.3%
--------------- ------
Total operating expenses............ 27,256 116.2%
--------------- ------
Income (loss) from operations.............. $ (3,806) -16.2%
=============== ======
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 of the companies owned by us and
Marcus Holdings on a new basis to reflect the push-down of the purchase price in
the acquisition of us by Paul G. Allen and the inclusion of Marcus Holdings. The
period from January 1, 1998 through December 23, 1998 represents 357 days of
operations of the companies owned by us and Marcus Holdings. 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 $86.8 million, or 17.9%, from $484.2
million in 1997 to $571.0 million for the period from January 1, 1998 through
December 23, 1998. Increase in revenues of $30.5 million and $16.8 million
resulted from the acquisitions of Sonic in 1998 and Long Beach Acquisition Corp.
in 1997, respectively. The remaining increase in revenues is primarily related
to internally generated increases in basic subscribers and increases 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 our systems.
Premium subscriptions have increased as a result of the acquisition of
Sonic and our marketing efforts.
OPERATING EXPENSES. Operating expenses increased by $30.4 million, or
14.6%, from $207.8 million in 1997 to $238.2 million for the period from January
1, 1998 through December 23, 1998. Increases in operating expenses of $11.5
million and $6.0 million resulted from acquisitions of Sonic in 1998 and Long
Beach Acquisition Corp. in 1997, respectively. The remaining difference is
primarily related to increased programming cost.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $8.6 million, or 20.7%, from $41.6 million in 1997 to $50.2 million
for the period from January 1, 1998 through December 23, 1998. Increases in
general and administrative
57
61
expenses of $4.4 million and $1.6 million resulted from acquisitions of Sonic in
1998 and Long Beach Acquisition Corp. in 1997, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$41.6 million, or 20.9% from $198.7 million in 1997 to $240.3 million for the
period from January 1, 1998 through December 23, 1998. Increases in depreciation
and amortization of $10.3 million and $8.4 million resulted from acquisitions of
Sonic in 1998 and Long Beach Acquisition Corp. in 1997, respectively. The
increase is also attributed to capital expenditures of $195.5 million for the
period from January 1, 1998 through December 23, 1998 and $162.6 million during
1997.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $17.6 million, or 84.7% from $20.8 million in 1997
to $38.3 million for the period from January 1, 1998 through December 23, 1998.
The increase from 1997 compared to 1998 was primarily the result of additional
Charter Communications, Inc. charges related to the equity appreciation rights
plans of $14.4 million for fiscal 1998 and the additional management fees as a
result of the Sonic and Long Beach acquisitions of $1.5 million and $0.5
million, respectively.
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 several
acquisitions of cable systems in 1996 and 1997, including the acquisition of
Long Beach Acquisition Corp. whose incremental revenues were $23.7 million, as
well as an increase in the average monthly revenue per basic customer from
$34.05 in 1996 to $37.15 in 1997.
OPERATING EXPENSES. Operating expenses increased by $48.0 million, or
30.0%, from $159.8 million in 1996 to $207.8 million in 1997. This increase was
primarily due to the acquisitions in 1996 and 1997, most significant being the
acquisition of Long Beach Acquisition Corp. whose operating expenses were $10.9
million.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $11.4 million, or 37.6%, from $30.2 million in 1996 to $41.6
million in 1997. This increase was primarily due to the acquisitions acquired in
1996 and 1997, most significant being the acquisition of Long Beach Acquisition
Corp. whose general and administrative expenses were $1.9 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$44.4 million, or 28.8%, from $154.3 million in 1996 to $198.7 million 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 capital expenditures of $162.6 million in 1997 and $110.3 million in 1996.
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 Charter
Communications, Inc. to provide the management services.
58
62
OUTLOOK
Our business strategy emphasizes the growth of our customer base and the
increase of our operating cash flow by pursuing strategic acquisitions and
upgrading our systems to enable us to offer new products and services. 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;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
We seek to "cluster" cable systems in suburban and ex-urban areas
surrounding selected metropolitan markets. We believe that such "clustering"
offers significant opportunities to increase operating efficiencies and to
improve operating margins and cash flow by spreading fixed costs over an
expanding subscriber base. In addition, we believe that by concentrating
"clusters" in markets, we will be able to generate higher growth in revenues and
operating cash flow. Through strategic acquisitions and "swaps" of cable
systems, we seek to enlarge the coverage of our current areas of operations,
and, if feasible develop "clusters" in new geographic areas within existing
regions. Swapping of cable systems allows us to trade systems that do not
coincide with our operating strategy while gaining systems that meet our
objectives. In developing and enhancing cable system "clusters", our acquisition
strategy is opportunistic and depends in part upon cable systems becoming
available in the marketplace. Because many of our operating areas include other
significant cable operators with nearby systems, marketplace availability and
pricing may be heavily influenced by interest level of other potential
purchasers. The changing competitive telecommunications market also impacts this
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.
The success of this strategy will be based on our ability to continue to
acquire cable systems, which meet our business strategy, obtain financing,
maintain cash flows and manage growth.
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
59
63
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 credit facilities.
Upgrading our existing plants 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
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.
We also believe our upgraded systems will provide enhanced picture quality
and system reliability.
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 megahertz or greater so that we may offer
advanced service, and the remaining $900 million will be used for plant
extensions, new services, converters and system maintenance. Capital
expenditures for 1999, 2000 and 2001 are expected to be approximately $600
million, $650 million, and $550 million, respectively. If our recent pending
acquisitions are completed over the next three years, we plan to spend an
additional $700 million for capital bandwidth capacity of 550 megahertz or
greater so that we may offer advanced cable services and $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 our credit facilities.
For the three months ended March 31, 1999, Charter Holdings made capital
expenditures, excluding the acquisitions of cable television systems, of $109.6
million and $29.0 million for all of 1998.
On March 17, 1999, Charter Holdings issued $600 million in principal amount
of 8.250% notes, $1.5 billion in principal amount of 8.625% notes and $1.475
billion outstanding under 9.920% notes. The net proceeds of approximately $3.0
billion, combined with the borrowings under our credit facilities, were used to
consummate the tender offers for publicly held debt of several of our
subsidiaries, as described below, refinance borrowings under our previous credit
facilities and for working capital purposes. Semi-annual interest payments with
respect to the 8.250% and 8.625% notes will be approximately $89.4 million,
commencing on October 1, 1999. No interest on the 9.920% notes will be payable
prior to April 1, 2004. Thereafter, semiannual interest payments will be
approximately $162.6 million in the aggregate, commencing on October 1, 2004.
60
64
Concurrent with the issuance of the notes, Charter Holdings refinanced
substantially all existing credit facilities of its subsidiaries with new credit
facilities entered into by Charter Operating. In February and March 1999, we
commenced cash tender offers to purchase 14% senior discount notes issued by
Charter Communications Southeast Holdings, LLC, the 11.25% senior notes issued
by Charter Communications Southeast, LLC, the 13.50% senior subordinated
discount notes issued by Marcus Operating Cable Company, L.L.C., and the 14.25%
senior discount notes issued by Marcus Cable. All notes except for $1.1 million
were paid off.
The Charter Operating 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 Charter Operating Credit Agreement also provides for a
$1.25 billion revolving credit facility with a maturity date of September 2008.
After giving effect to the pending acquisitions, we have approximately $791
million of borrowing availability under our 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. Amounts under credit facilities bear interest at the Base Rate
or the Eurodollar Rate, as defined in the credit facilities, plus a margin up to
2.75%. A quarterly commitment fee of between 0.25% and 0.375% per annum is
payable on the unborrowed balance of Term A and the revolving credit facility.
The weighted average interest rate for outstanding debt on March 31, 1999 was
7.44%.
We acquired Renaissance in April, 1999. Renaissance has outstanding
publicly held debt comprised of 10% senior discount notes due 2008 with a $163.2
million principal amount at maturity and $100.0 million accreted value. The
Renaissance notes pay no interest until April 15, 2003. From and after April 15,
2003, the Renaissance notes will bear interest, payable semi-annually in cash,
on each April 15 and October 15, commencing October 15, 2003. The Renaissance
notes are due on April 15, 2008.
CERTAIN TRENDS AND UNCERTAINTIES
SUBSTANTIAL LEVERAGE. As of March 31, 1999, pro forma for our recent
acquisitions and pending acquisitions, our total indebtedness would have been
approximately $6.6 billion, our total members' equity would have been
approximately $4.7 billion, and the deficiency of our earnings available to
cover fixed charges would have been approximately $197 million. 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 face could intensify.
Our ability to make payments on our debt, including the notes and to fund
planned capital expenditures for upgrading our cable systems 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. Based upon the current
levels of operations, we believe that cash flow from operations and available
cash, together with available borrowings under our credit facilities, will be
adequate to meet our liquidity and capital needs for at least the next several
years. However, there can be no assurance our business will generate sufficient
cash flow from operations, or that future borrowings will be available to us
under our credit facilities or
61
65
from other sources of financing in an amount sufficient to enable us to repay
our indebtedness, to grow our business or to fund our other liquidity and
capital needs.
The degree to which we are leveraged could have material consequences to us
and our business, including, but not limited to:
- making it more difficult for us to satisfy our obligations with respect
to the notes and to satisfy our obligations under our credit facilities;
- increasing our vulnerability to general adverse economic and cable
industry conditions, including interest rate fluctuations;
- requiring 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;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the cable industry;
- placing us at a competitive disadvantage compared to our competitors that
have proportionately less debt; and
- limiting our ability to borrow additional funds, due to applicable
financial and restrictive covenants in such indebtedness.
VARIABLE INTEREST RATES. A significant portion of our indebtedness bears
interest at variable rates that are linked to short-term interest rates. If
interest rates rise, our costs relative to those obligations would also rise.
RESTRICTIVE COVENANTS. Our credit facilities contain a number of
significant covenants that, among other things, restrict the ability of our
subsidiaries to:
- 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 Operating, 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 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, it would
be an event of default under and we may not be able to repay such amounts or the
notes. If the 8.250% notes are not refinanced at least six months prior to the
date of their maturity, the entire
62
66
amount due under our credit facilities shall become due and payable. As of March
31, 1999, we are in compliance with the covenants of our credit facilities.
IMPORTANCE OF GROWTH STRATEGY AND RELATED RISKS. We expect that a
substantial portion of any of our future growth will be achieved through
revenues from additional services and the acquisition of additional cable
systems. We cannot assure you that we will be able to offer new services
successfully to our customers or that those new services will generate revenues.
In addition, the acquisition of additional cable systems may not have a positive
net impact on our operating results. Acquisitions involve a number of special
risks, including diversion of management's attention, failure to retain key
acquired personnel, risks associated with unanticipated events or liabilities
and difficulties in assimilation of the operations of the acquired companies,
some or all of which could have a material adverse effect on our business,
results of operations and financial condition. If we are unable to grow our cash
flow sufficiently, we may be unable to fulfill our obligations or obtain
alternative financing.
MANAGEMENT OF GROWTH. As a result of the acquisition of us by Paul G.
Allen, our merger with Marcus Holdings and our recent and pending acquisitions,
we have experienced and will continue to experience rapid growth that has placed
and is expected to continue to place a significant strain on our management,
operations and other resources. Our future success will depend in part on our
ability to successfully integrate the operations acquired and to be acquired and
to attract and retain qualified personnel. The ability to retain key acquired
personnel may require additional cost for such things as severance packages or
other employee benefits. However, acquisitions historically have had minimal
employee benefit related cost and all benefit plans have been terminated with
acquired employees transferring to the Charter 401(k) Plan. The failure to
retain or obtain needed personnel or to implement management, operating or
financial systems necessary to successfully integrate acquired operations or
otherwise manage growth when and as needed could have a material adverse effect
on our business, results of operations and financial condition.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. Rate regulation of cable systems has been in
place since passage of the 1992 Cable Act, although the scope of this regulation
recently was sharply contracted. Since March 31, 1999, rate regulation exists
only with respect to the lowest level of basic cable service and associated
equipment. This change affords cable operators much greater pricing flexibility,
although Congress could revisit this issue if confronted with substantial rate
increases.
Cable operators also face significant regulation of their channel capacity.
They currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access users, and
unaffiliated commercial leased access programmers. This carriage burden could
increase in the future, particularly if the Federal Communications Commission
were to require cable systems to carry both the analog and digital versions of
local broadcast signals or if it were to allow unaffiliated internet service
providers seeking direct cable access to invoke commercial leased access rights
originally devised for video programmers. The Federal Communications Commission
is currently conducting proceedings in which it is considering both of these
channel usage possibilities.
The 1992 Cable Act and the Federal Communications Commission'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
63
67
Federal Communications Commission and local or state franchise authorities. The
Cable Acts and the corresponding Federal Communications Commission regulations
have established must carry/retransmission consent and rate regulations.
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 our business. The burden associated with "must carry" may
increase substantially if broadcasters proceed with planned conversion to
digital transmission and the Federal Communications Commission determines that
cable systems must carry all analog and digital broadcasts in their entirety. A
rulemaking is now pending at the Federal Communications Commission regarding the
imposition of dual digital and analog must carry.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service 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 us has been insignificant. We may be required to
refund additional amounts in the future.
We believe that we have complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the Federal Communications Commission. However, in jurisdictions
that have chosen not to certify, refunds covering the previous twelve-month
period may be ordered upon certification if we are unable to justify its basic
rates. We are unable to estimate at this time the amount of refunds, if any,
that may be payable by us in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the Federal
Communications Commission. We do not believe that the amount of any such refunds
would have a material adverse effect on our financial position or results of
operations.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier. This allows us more flexibility in implementing rate
changes. 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. Should this occur, it
could impede our ability to raise rates to cover increased costs.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements, is required under the terms of our credit facilities. Our policy is
to manage interest costs using a mix of fixed and variable rate debt. Using
interest rate swap agreements, we agree to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated
64
68
by reference to an agreed-upon notional principal amount. Interest rate cap
agreements are used to lock in a maximum interest rate should variable rates
rise, but enable us to otherwise pay lower market rates. Collars limit our
exposure to and benefits from interest rate fluctuations on variable rate debt
to within a certain range of rates.
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
---------------------------------------------------- DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
-------- -------- -------- -------- -------- ---------- ---------- -------------
DEBT
Fixed Rate............... -- -- -- -- -- $ 984,509 $ 984,509 $ 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%
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.
In March 1999, substantially all existing long-term debt, excluding
borrowings of our previous credit facilities was extinguished, and all existing
previous credit facilities were refinanced with the credit facilities. The
following table set forth the fair values and contract terms of the long-term
debt maintained by us as of March 31, 1999:
EXPECTED MATURITY DATE FAIR VALUE AT
-------------------------------------------------- MARCH 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999
-------- -------- -------- ------- ------- ---------- ---------- -------------
DEBT
Fixed Rate................. -- -- -- -- -- $3,575,000 $3,575,000 $3,004,023
Average Interest Rate..... -- -- -- -- -- 9.0% 9.0%
Variable Rate.............. -- -- -- $13,125 $17,500 $1,719,375 $1,750,000 $1,750,000
Average Interest Rate..... -- -- -- 5.9% 6.0% 6.4% 6.4%
65
69
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 March 31, 1998 plus the borrowing margin in effect for each credit facility
at March 31, 1999.
YEAR 2000 ISSUES
GENERAL. Many existing computer systems and applications, and other
control devices and embedded computer chips use only two digits, rather than
four, to identify a year in the date field, failing to consider the impact of
the upcoming change in the century. As a result, such systems, applications,
devices, and chips could create erroneous results or might fail altogether
unless corrected to properly interpret data related to the year 2000 and beyond.
These errors and failures may result, not only from a date recognition problem
in the particular part of a system failing, but may also result as systems,
applications, devices and chips receive erroneous or improper data from
third-parties suffering from the year 2000 problem. In addition, two interacting
systems, applications, devices or chips, each of which has individually been
fixed so that it will properly handle the year 2000 problem, could nonetheless
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.
THIRD PARTIES. We also rely directly and indirectly, in the regular course
of business, on the proper operation and compatibility of third party systems.
The year 2000 problem could cause these systems to fail, err, or become
incompatible with our systems.
If we or a significant third party on which we rely fails to become year
2000 ready, or if the year 2000 problem causes our systems to become internally
incompatible or incompatible with such third party systems, our business could
suffer from material disruptions, including the inability to process
transactions, send invoices, accept customer orders or provide customers with
our cable services. We could also face similar disruptions if the year 2000
problem causes general widespread problems or an economic crisis. We cannot now
estimate the extent of these potential disruptions.
STATE OF READINESS. We 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 conducted in stage two. We
plan to complete all stages for our existing systems by August 1999. We
are monitoring
66
70
the remediation process for systems we are acquiring in 1999 to ensure
completion of remediation before or as we acquire these systems.
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. However, we are utilizing a third party, in cooperation
with other cable operators, to test a "mock-up" of our major billing and plant
components, including pay-per-view systems, as an integrated system. We are also
evaluating the potential impact of third party failure and integration failure
on our systems.
RISKS AND REASONABLY LIKELY WORST CASE SCENARIOS. The failure to correct a
material year 2000 problem could result in system failures leading to a
disruption in, or failure of certain normal business activities or operations.
Such failures could materially and adversely affect our results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the year 2000 problem, resulting in part from the uncertainty of the year 2000
readiness of third-party suppliers and customers, we are unable to determine at
this time whether the consequences of year 2000 failures will have a material
impact on our results of operations, liquidity or financial condition. The year
2000 taskforce is expected to significantly reduce our level of uncertainty
about the year 2000 problem and, in particular, about the year 2000 compliance
and readiness of our material vendors.
We are in the process of acquiring certain cable televisions systems, and
have negotiated certain contractual rights in the acquisition agreements
relating to the year 2000. However, we cannot determine at this time the
materiality of information technology and non-information technology issues, if
any, relating to the year 2000 problem affecting those cable television systems.
We have included the acquired cable television systems in our year 2000
taskforce's plan and we are not currently aware of any likely material system
failures relating to the year 2000 affecting the acquired systems.
CONTINGENCY AND BUSINESS CONTINUATION PLAN. The year 2000 plan calls for
suitable contingency planning for our at-risk business functions. We normally
make contingency plans in order to avoid interrupted service providing video,
voice and data products to our customers. The normal contingency planning is
being reviewed and will be revised by August 1999, where appropriate, to
specifically address year 2000 exposure with respect to service to customers.
COST. We have incurred $4.9 million in costs to date directly related to
addressing the year 2000 problem. We have redeployed internal resources and have
selectively engaged outside vendors to meet the goals of our year 2000 program.
We currently estimate the total cost of our year 2000 remediation program to be
approximately $7 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.
67
71
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, 2000. We have not yet
quantified the impacts of adopting SFAS No. 133 on our consolidated financial
statements nor have we determined the timing or method of our adoption of SFAS
No. 133. However, SFAS No. 133 could increase volatility in earnings (loss).
68
72
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
We sold the original notes on March 17, 1999 in a transaction exempt from
the registration requirements of the Securities Act of 1933. The initial
purchasers of the notes subsequently resold the original notes to qualified
institutional buyers in reliance on Rule 144A and under Regulation S under the
Securities Act of 1933.
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., 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.
Under the registration rights agreements, the issuers became obligated to
file a registration statement in connection with an exchange offer within 90
days after the issue date and cause the exchange offer registration statement to
become effective within 150 days after the issue date. The exchange offer being
made by this prospectus, if consummated within the required time periods, will
satisfy our obligations under the registration rights agreements. This
prospectus, together with the letter of transmittal, is being sent to all
beneficial holders known to the issuers.
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, the issuers will accept all
original notes properly tendered and not withdrawn prior to the expiration date.
The issuers will issue $1,000 principal amount of new notes in exchange for each
$1,000 principal amount of outstanding original notes accepted in the exchange
offer. Holders may tender some or all of their original notes pursuant to the
exchange offer.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties we believe that holders of the new notes
issued in exchange for original notes may offer for resale, resell and otherwise
transfer the new notes, other than any holder that is an affiliate of ours
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act of
1933. This is true as long as the new notes are acquired in the ordinary course
of the holder's business, the holder has no arrangement or understanding with
any person to participate in the distribution of the new notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the new notes. A broker-dealer that acquired original notes
directly from the issuers cannot exchange the original notes in the exchange
offer. Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the new notes cannot rely on the no-action
letters of the staff of the Securities and Exchange Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for original notes, where original notes were acquired by such broker-dealer as
a result of
69
73
market-making or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such new notes. See "Plan of
Distribution" for additional information.
We shall be deemed to have accepted validly tendered original notes when,
as and if we have given oral or written notice of the acceptance of such notes
to the exchange agent. The exchange agent will act as agent for the tendering
holders of original notes for the purposes of receiving the new notes from the
issuers and delivering new notes to such holders.
If any tendered original notes are not accepted for exchange because of an
invalid tender or the occurrence of the conditions set forth under
"-- Conditions" without waiver by us, certificates for any such unaccepted
original notes will be returned, without expense, to the tendering holder of any
such original notes as promptly as practicable after the expiration date.
Holders of original notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
original notes, pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes in connection with the exchange
offer. See "-- Fees and Expenses."
SHELF REGISTRATION STATEMENT
If applicable law or interpretations of the staff of the Securities and
Exchange Commission are changed so that the new notes received by holders who
make all of the necessary representations in the letter of transmittal are not
or would not be, upon receipt, transferrable by each such holder without
restriction under the Securities Act of 1933, 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 of 1933 at the earliest
possible time, but no later than 90 days after the time such obligation
to file arises, and
- use our reasonable best efforts to keep effective the shelf registration
statement until the earlier of two years after the date as of which the
Securities and Exchange Commission declares such shelf registration
statement effective or the shelf registration otherwise becomes
effective, or the time when all of the applicable original notes are no
longer outstanding.
We will, if and when we file the shelf registration statement, provide to
each holder of the original notes copies of the prospectus which is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take other actions as are required to permit
unrestricted resales of the original notes. A holder that sells original notes
pursuant to the shelf registration statement generally must be named as a
selling security-holder in the related prospectus and must deliver a prospectus
to purchasers, a seller will be subject to civil liability provisions under the
Securities Act in connection with these sales. A seller of the original notes
also will be bound by applicable provisions of the registration rights
agreements, including indemnification obligations. In addition, each holder of
original notes must deliver information to be used in connection with the shelf
registration statement and provide comments on the shelf registration statement
in order to have its original notes included in
70
74
the shelf registration statement and benefit from the provisions regarding any
liquidated damages in the registration rights agreement.
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% per annum 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% per annum.
The sole remedy available to the holders of the original notes will be the
immediate increase in the interest rate on the original notes as described
above. Any amounts of additional interest due as described above will be payable
in cash on the same interest payments dates as the original notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENT
We will keep the exchange offer open for not less than 30 days, or longer
if required by applicable law, after the date on which notice of the exchange
offer is mailed to the holders of the old notes. The term "expiration date"
means the expiration date set forth on the cover page of this prospectus, unless
we extend the exchange offer, in which case the term "expiration date" means the
latest date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange agent
of any extension by oral or written notice and will issue a public announcement
of the extension, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
We reserve the right
(a) to delay accepting any original notes, to extend the exchange
offer or to terminate the exchange offer and not accept original notes not
previously accepted if any of the conditions set forth under
"-- Conditions" shall have occurred and shall not have been waived by us,
if permitted to be waived by us, by giving oral or written notice of such
delay, extension or termination to the exchange agent, or
(b) to amend the terms of the exchange offer in any manner deemed by
us to be advantageous to the holders of the original notes.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice. If the exchange
offer is amended in a manner determined by us to constitute a material change,
we promptly will disclose such amendment in a manner reasonably calculated to
inform the holders of the original notes of such amendment. Depending upon the
significance of the amendment, we may extend the exchange offer if it otherwise
would expire during such extension period.
71
75
Without limiting the manner in which we may choose to make a public
announcement of any extension, amendment or termination of the exchange offer,
we will not be obligated to publish, advertise, or otherwise communicate any
such announcement, other than by making a timely release to an appropriate news
agency.
PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, have the
signatures on the letter of transmittal guaranteed if required by instruction 2
of the letter of transmittal, and mail or otherwise deliver such letter of
transmittal or such facsimile or an agent's message in connection with a book
entry transfer, together with the original notes and any other required
documents. To be validly tendered, such documents must reach the exchange agent
before 5:00 p.m., New York City time, on the expiration date. Delivery of the
original notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the exchange agent prior to the expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent, forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant in
such book-entry transfer facility tendering the original notes that such
participant has received and agrees to be bound by the terms of the letter of
transmittal and that we may enforce such agreement against such participant.
The tender by a holder of original notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M. NEW
YORK CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL
NOTES SHOULD BE SENT TO US.
Only a holder of original notes may tender original notes in the exchange
offer. The term "holder" with respect to the exchange offer means any person in
whose name original notes are registered on our books or any other person who
has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose original notes are registered in the name of
its broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on its behalf. If such beneficial holder wishes
to tender on its own behalf, such registered holder must, prior to completing
and executing the letter of transmittal and delivering its original notes,
either make appropriate 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.
72
76
Signatures on a letter of transmittal or a notice of withdrawal, must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States referred to
as an "eligible institution", unless the original notes are tendered
(a) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal or
(b) for the account of an eligible institution. In the event that
signatures on a letter of transmittal or a notice of withdrawal, are
required to be guaranteed, such guarantee must be by an eligible
institution.
If the letter of transmittal is signed by a person other than the
registered holder of any original notes listed therein, such original notes must
be endorsed or accompanied by appropriate bond powers and a proxy which
authorizes such person to tender the original notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the original notes.
If the letter of transmittal or any original notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by us,
evidence satisfactory to us of their authority so to act must be submitted with
the letter of transmittal.
All questions as to the validity, form, eligibility, including time of
receipt, and withdrawal of the tendered original notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all original notes not properly
tendered or any original notes our acceptance of which, in the opinion of
counsel for us, would be unlawful. We also reserve the right to waive any
irregularities or conditions of tender as to particular original notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of original notes must be cured within such time as we shall determine. None of
us, the exchange agent or any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of original
notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of original notes will not be deemed to have been made
until such irregularities have been cured or waived. Any original notes received
by the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the exchange agent to the tendering holders of original notes,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In addition, we reserve the right in our sole discretion to
(a) purchase or make offers for any original notes that remain outstanding
subsequent to the expiration date or, as set forth under
"-- Conditions," to terminate the exchange offer in accordance with the
terms of the registration rights agreements and
(b) to the extent permitted by applicable law, purchase original notes in
the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the
exchange offer.
73
77
By tendering, each holder will represent to us that, among other things,
(a) the new notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of such holder or other
person,
(b) neither such holder nor such other person is engaged in or intends to
engage in a distribution of the new notes,
(c) neither such holder or other person has any arrangement or
understanding with any person to participate in the distribution of
such new notes, and
(d) such holder or other person is not our "affiliate," as defined under
Rule 405 of the Securities Act, or, if such holder or other person is
such an affiliate, will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the original
notes at the Depository Trust Company for the purpose of facilitating the
exchange offer, and subject to the establishment of such accounts, any financial
institution that is a participant in the Depository Trust Company's system may
make book-entry delivery of original notes by causing the Depository Trust
Company to transfer such original notes into the exchange agent's account with
respect to the original notes in accordance with the Depository Trust Company's
procedures for such transfer. Although delivery of the original notes may be
effected through book-entry transfer into the exchange agent's account at the
Depository Trust Company, an appropriate letter of transmittal properly
completed and duly executed with any required signature guarantee, or an agent's
message in lieu of the letter of transmittal, and all other required documents
must in each case be transmitted to and received or confirmed by the exchange
agent at its address set forth below on or prior to the expiration date, or, if
the guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to Depository
Trust Company does not constitute delivery to the exchange agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their original notes and
(a) whose original notes are not immediately available or
(b) who cannot deliver their original notes, the letter of transmittal
or any other required documents to the exchange agent prior to the
expiration date, may effect a tender if:
(1) the tender is made through an eligible institution;
(2) prior to the expiration date, the exchange agent receives from
such eligible institution a properly completed and duly executed Notice
of Guaranteed Delivery, by facsimile transmission, mail or hand
delivery, setting forth the name and address of the holder of the
original notes, the certificate number or numbers of such original notes
and the principal amount of original notes tendered, stating that the
tender is being made thereby, and guaranteeing that, within three
business days after the expiration date, the letter of transmittal, or
facsimile thereof or agent's message in lieu of the letter of
transmittal, together with the certificate(s) representing the original
notes to be tendered in proper form for transfer and any other documents
required by the letter of transmittal will be deposited by the eligible
institution with the exchange agent; and
74
78
(3) such properly completed and executed letter of transmittal (or
facsimile thereof) together with the certificate(s) representing all
tendered original notes in proper form for transfer and all other
documents required by the letter of transmittal are received by the
exchange agent within three business days after the expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date, 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 in this prospectus prior to 5:00 p.m., New York
City time, on the expiration date. Any such notice of withdrawal must
(a) specify the name of the depositor, who is the person having
deposited the original notes to be withdrawn,
(b) identify the original notes to be withdrawn, including the
certificate number or numbers and principal amount of such original notes
or, in the case of original notes transferred by book-entry transfer, the
name and number of the account at Depository Trust Company to be credited,
(c) be signed by the depositor in the same manner as the original
signature on the letter of transmittal by which such original notes were
tendered, including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
original notes register the transfer of such original notes into the name
of the depositor withdrawing the tender and
(d) specify the name in which any such original notes are to be
registered, if different from that of the depositor. All questions as to
the validity, form and eligibility, including time of receipt, of such
withdrawal notices will be determined by us, and our determination shall be
final and binding on all parties. Any original notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer
and no new notes will be issued with respect to the original notes
withdrawn unless the original notes so withdrawn are validly retendered.
Any original notes which have been tendered but which are not accepted for
exchange will be returned to its holder without cost to such holder as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn original notes may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange, any new notes for any original
notes, and may terminate or amend the exchange offer before the expiration date,
if the exchange offer violates any applicable law or interpretation by the staff
of the Commission.
If we determine in our reasonable discretion that the foregoing condition
exists, we may (1) refuse to accept any original notes and return all tendered
original notes to the
75
79
tendering holders, (2) extend the exchange offer and retain all original notes
tendered prior to the expiration of the exchange offer, subject, however, to the
rights of holders who tendered such original notes to withdraw their tendered
original notes, or (3) waive such condition, if permissible, with respect to the
exchange offer and accept all properly tendered original notes which have not
been withdrawn. If such waiver constitutes a material change to the exchange
offer, we will promptly disclose such waiver by means of a prospectus supplement
that will be distributed to the holders, and we will extend the exchange offer
as required by applicable law.
Pursuant to the registration rights agreements, if the exchange offer is
not be consummated prior to the exchange offer termination date, as defined
below, we are required to cause to be filed with the Securities and Exchange
Commission a 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 Securities and
Exchange Commission do not permit us to effect the exchange offer,
(b) any holder of notes notifies us that either
(1) such holder is not eligible to participate in the exchange
offer or
(2) such holder participates in the exchange offer and does not
receive freely transferable new notes in exchange for tendered original
notes or
(c) the exchange offer is not consummated within 180 days after the
Issue Date.
If any of the events described in the definition of "exchange offer
termination date" occurs, we will refuse to accept any original notes and will
return all tendered original notes.
76
80
EXCHANGE AGENT
Harris Trust Company of New York has been appointed as exchange agent for
the exchange offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to Harris Trust 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 have agreed to bear the expenses of the exchange offer pursuant to the
exchange and registration rights agreements. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the exchange
offer. We, however, will pay the exchange agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of Harris Trust 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
77
81
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 of 1933, to a person inside the United
States whom the seller reasonably believes is a qualified institutional
buyer within the meaning of Rule 144A in a transaction meeting the
requirements of Rule 144A;
- in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act of
1933, 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 of 1933; or
- under an effective registration statement under the Securities Act of
1933;
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 of 1933.
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.
78
82
BUSINESS
GENERAL
We offer a full range of cable television services. Our service offerings
include the following programming packages:
- basic programming, which generally includes a variety of entertainment
programming, locally originated programming and the retransmission of
local broadcast stations;
- expanded basic programming, known in the cable industry as cable
programming service tier, or CPST, which offers more services than basic
programming;
- premium channels, which provide unedited, commercial-free movies, sports
and other special event entertainment programming, and
- pay-per-view television programming, where customers are charged a fee
for individual programs.
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, including high-speed Internet access. These new
services will take advantage of the significant bandwidth of our cable systems.
In addition, we are currently upgrading our cable systems to offer services
which will allow our customers to interact with the programming we provide. Such
services are referred to as interactive services. As of March 31, 1999, we
served approximately 2.4 million cable television service customers in 22
states. We have entered into agreements to acquire additional cable systems that
would have increased the number of our customers to 3.7 million as of that date
For the three months ended March 31, 1999, pro forma for the acquisitions
and the merger with Marcus Holdings we completed during 1999, our revenues were
approximately $311 million and our EBITDA was approximately $143 million. For
the year ended December 31, 1998, pro forma for the acquisitions and the merger
with Marcus Holdings we completed during 1998, our revenues were approximately
$1.1 billion and our EBITDA was approximately $486 million.
Approximately 97% 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.
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. Without giving effect to the cable systems we acquired in
1998, we increased our customer base by 4.8%, revenues by 9.5% and EBITDA by 11%
during that year. This customer growth was more than twice the national average
of 1.7% for 1998. In 1997, our customer growth was 3.5%, significantly higher
than the national average of 2.0% for 1997.
In addition to growing our customer base internally, we have grown
significantly through acquisitions. Over the past five years, our management
team has successfully completed 22 acquisitions, including two acquisitions in
1999. We also 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.
79
83
Pro forma for our recent acquisitions and pending acquisitions, our
revenues for the three months ended March 31, 1999 would have been $445 million
and our EBITDA would have been $201 million. Pro forma for the merger with
Marcus Holdings and our recent acquisitions and pending acquisitions, for the
year ended December 31, 1998 our revenues would have been approximately $1.7
billion and our EBITDA would have been $750 million. Pro forma for our recent
and pending acquisitions we serve approximately 3.7 million customers. As we
acquire and integrate these and other cable systems in the future, we believe
that the implementation 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. These services include digital video programming, high-speed Internet
access, Internet protocol telephony, which can connect communications with
different platforms, 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 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 the
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;
80
84
- 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 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.
We believe the benefits associated with "swapping" cable systems with other
cable operators helps reinforce the advantages inherent in our "clustering"
strategy. We seek to "cluster" cable systems in suburban and ex-urban areas
surrounding selected metropolitan markets. We believe that such "clustering"
offers significant opportunities to increase operating efficiencies and to
improve operating margins and cash flow by spreading fixed costs over an
expanding subscriber base. In addition, we believe that by concentrating
"clusters" in markets, we will be able to generate higher growth in revenues and
operating cash flow. Through strategic acquisitions and "swaps" of cable
systems, we seek to enlarge the coverage of our current areas of operation and,
if feasible, develop "clusters" in new geographic areas within existing regions.
In developing and enhancing cable system "clusters," our acquisition strategy is
opportunistic and depends in part upon cable systems becoming available in the
marketplace. Because many of our operating areas include other significant cable
operators with nearby systems, marketplace availability and pricing may
81
85
be heavily influenced by interest levels of other potential purchasers. The
changing competitive telecommunications market also impacts this strategy.
UPGRADING OUR SYSTEMS. Over the next three years, we plan to spend
approximately $900 million, or $1.2 billion pro forma for our recent and pending
acquisitions, to upgrade our systems' bandwidth capacity to 550 megahertz or
greater. Upgrading to at least 550 megahertz of bandwidth capacity will allow us
to:
- offer advanced cable services, such as digital television, Internet
access and other interactive services;
- increase program offerings; and
- permit two-way communication, which will give our customers the ability
to send and receive signals over one cable system with high speed cable
access, as opposed to using a separate telephone line to send signals.
For example, having a bandwidth capacity of 550 megahertz enables us to
offer our customers up to 82 channels of analog service while also providing our
customers with advanced cable services. In addition, we intend to use some of
this bandwidth for digital service. If bandwidth is used for digital service as
opposed to analog service, customers get even more channels and advanced cable
services at competitive rates.
We believe our planned upgrade will also reduce the number of headends. A
headend is the control center of a cable television system, where incoming
signals are amplified, converted, processed and combined for transmission to
customers. Reducing the number of headends will reduce headend and maintenance
expenditures and, together with other upgrades, will provide enhanced picture
quality and system reliability. Since we expect that a portion of our future
growth will be achieved through revenues from additional and enhanced services,
our strategy to upgrade our systems becomes a vital component for us to achieve
such expectations. Additionally, by upgrading our systems, we attempt to gain an
advantage over our competitors.
Today, approximately 57% of our customers are served by cable systems with
at least 550 megahertz bandwidth capacity, and approximately 35% 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 megahertz bandwidth capacity and two-way communication capability.
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 Charter systems. The Marcus
systems came under common management with us in
82
86
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
AMERICAN CABLE. In April 1999, we purchased American Cable Entertainment,
LLC. for approximately $240 million. American Cable owns cable systems located
in California serving approximately 68,000 customers and is being operated as
part of our Western Region. For the three months ended March 31, 1999, American
Cable had revenues of approximately $9.2 million and EBITDA of approximately
$4.2 million. For the year ended December 31, 1998, American Cable had revenues
of approximately $15.7 million and EBITDA of approximately $7.9 million. At year
end 1998, none of the American Cable system's customers were served by systems
with 550 megahertz bandwidth capacity or greater.
RENAISSANCE. In May 1999, we purchased Renaissance Media Group LLC 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 132,000 customers and is being
operated as part of our Southern Region. For the three months ended March 31,
1999, Renaissance had revenues of approximately $15.3 million and EBITDA of
approximately $8.4 million. For the year ended December 31, 1998, Renaissance
had revenues of approximately $41.5 million and EBITDA of approximately $20.6
million. At year end 1998, approximately 36% of Renaissance's customers were
served by systems with at least 550 megahertz bandwidth capacity.
GREATER MEDIA SYSTEMS. In February 1999, Charter Communications, Inc.
entered into an agreement to purchase certain cable systems of Greater Media
Cablevision Inc. for approximately $500 million. Charter Communications, Inc.
assigned its rights under this agreement to one of our subsidiaries. The Greater
Media systems are located in Massachusetts, have approximately 174,000 customers
and will be operated as part of our Northeast Region. For the three months ended
March 31, 1999, the Greater Media systems had revenues of approximately $20.4
million and EBITDA of approximately $7.6 million. For the year ended December
31, 1998, the Greater Media systems had revenues of approximately $78.6 million
and EBITDA of approximately $29.3 million. At year end 1998, approximately 75%
of the Greater Media systems customers were served by systems with at least 550
megahertz 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 Partners I, L.P. for approximately $550 million, of which $25
million will be payable in the form of preferred limited liability company
interests in one of the
83
87
subsidiaries. Helicon owns cable systems located in Alabama, Georgia, New
Hampshire, North Carolina, West Virginia, South Carolina, Tennessee,
Pennsylvania, Louisiana and Vermont, has approximately 174,000 customers and
will be operated as part of our Southeast, Southern and Northeast regions. For
the three months ended March 31, 1999, Helicon had revenues of approximately
$21.3 million and EBITDA of approximately $8.9 million. For the year ended
December 31, 1998, Helicon had revenues of approximately $75.6 million and
EBITDA of approximately $32.0 million. At year end 1998, approximately 69% of
Helicon's customers were served by systems with at least 550 megahertz bandwidth
capacity. We anticipate that this transaction will close during the third
quarter of 1999.
INTERMEDIA SYSTEMS. In April 1999, we entered into agreements to purchase
certain cable systems of InterMedia Capital Partners IV, L.P., InterMedia
Partners and their affiliates in exchange for cash and certain of our cable
systems. The InterMedia systems serve approximately 408,000 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
142,000 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 three
months ended March 31, 1999, the InterMedia Systems had revenues of
approximately $48.3 million and EBITDA of approximately $21.4 million. For the
year ended December 31, 1998, the InterMedia systems had revenues of
approximately $176.1 million and EBITDA of approximately $86.2 million,
respectively. At year end 1998, approximately 79% of these customers were served
by systems with at least 550 megahertz bandwidth capacity. We anticipate that
acquisition of the InterMedia Systems will close during the third or fourth
quarter of 1999.
RIFKIN. In April 1999, Charter Communications, Inc. entered into
agreements to purchase Rifkin Acquisition Partners, L.L.L.P. for a purchase
price of approximately $1.46 billion. Charter Communications, Inc. has assigned
its rights under such agreements to us. Certain sellers under the agreements
could elect to receive some or all of their pro rata portion of the purchase
price in the form of preferred or common equity of Charter Holdings or, if
mutually agreed to by the parties, of a parent of Charter Holdings. The terms of
such election are being negotiated with the sellers' representative. Depending
on the level of seller interest, this equity, if issued, would be valued between
approximately $25 million and $240 million. The cash portion of the purchase
price would be reduced accordingly. However, because such terms have not been
finalized, and seller participation has not been determined, we cannot be
certain that any such equity will be issued or that the cash portion of the
purchase price will be reduced below $1.46 billion. Rifkin owns cable systems
primarily in Florida, Georgia, Illinois, Indiana, Tennessee, Virginia and West
Virginia serving approximately 463,000 customers. These systems will primarily
be operated as part of our Central, Southern and Southeast regions. For the
three months ended March 31, 1999, Rifkin had revenues of approximately $50.9
million and EBITDA of approximately $23.0 million. For the year ended December
31, 1998, Rifkin had revenues of approximately $124.4 million and EBITDA of
approximately $101.4 million. At year end 1998, approximately 36% of Rifkin's
customers were served by systems with at least 550 megahertz 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,
Charter Communications, Inc. and a subsidiary of Charter Communications, Inc.
have entered into
84
88
definitive agreements for such subsidiary to purchase Vista Broadband
Communications, LLC and certain cable assets of Cable Satellite of South Miami,
Inc. By these other acquisitions, we plan to acquire cable systems located in
southern California, Georgia and southern Florida, have a total of approximately
37,000 customers and will be operated as part of our Southern and Southeast
regions. The total purchase price for these other acquisitions is approximately
$148 million. For the three months ended March 31, 1999, these systems to be
acquired had revenues of approximately $4.4 million and EBITDA of approximately
$2.0 million. For the year ended December 31, 1998, the cable systems to be
acquired in connection with these other acquisitions had revenues of $9.3
million and EBITDA of approximately $4.7 million.
MARCUS MERGER. On April 7, 1999, Marcus Holdings, merged with Charter
Holdings, the surviving entity and an issuer of the notes. As a result of this
merger, the subsidiaries of Marcus Holdings became our subsidiaries.
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 4.2
million households and serving approximately 2.4 million customers. As of March
31, 1999, approximately 60% of our customers are served by systems with at least
550 megahertz bandwidth capacity, approximately 40% have at least 750 megahertz
bandwidth capacity and approximately 35% are served by systems capable of
providing two-way interactive communication capability, such as two-way Internet
connections, Wink services and interactive program guides.
CORPORATE MANAGEMENT. We are managed from our corporate offices in Dallas,
Texas and St. Louis, Missouri. The senior management of Charter Communications,
Inc. at these offices consist of approximately 175 people led by Jerald L. Kent.
They are responsible for coordinating and overseeing our operations, including
certain critical functions such as marketing and engineering, that are conducted
by personnel at the regional and local system level. The corporate office also
performs certain financial control functions such as accounting, finance and
acquisitions, payroll and benefit administration, internal audit, purchasing and
programming contract administration on a centralized basis.
OPERATING REGIONS. To manage and operate our systems, we have established
two divisions that contain a total of 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
Mr. Kent 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.
85
89
The following table provides an overview of selected technical, operating
and financial data for each of our operating regions for the three months ended
March 31, 1999. Unless otherwise indicated, the following table does not reflect
the impact of our recent or pending acquisitions. Upon completion of our recent
and pending acquisitions, our systems will pass approximately 6.1 million homes
serving approximately 3.7 million customers.
SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA BY OPERATING REGION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
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 megahertz or less......... 21.9% 53.7% 28.0% 41.9% 51.2% 37.9% 58.2% 42.7%
550 megahertz................. 8.0% 10.2% 14.4% 12.9% 33.5% 25.6% 13.8% 16.9%
750 megahertz or greater...... 70.1% 36.1% 57.6% 45.2% 15.4% 36.5% 28.0% 40.4%
Two-way capability............ 55.6% 45.5% 62.2% 56.2% 15.4% 15.5% 19.8% 35.1%
OPERATING DATA:
Homes passed.................. 997,000 595,000 486,000 603,000 160,000 748,000 572,000 4,161,000
Basic customers............... 502,000 365,000 186,000 399,000 124,000 439,000 349,000 2,364,000
Basic penetration(c).......... 50.4% 61.3% 38.3% 66.2% 77.5% 58.7% 61.0% 56.8%
Premium units................. 318,000 206,000 135,000 148,000 120,000 252,000 168,000 1,347,000
Premium penetration(d)........ 63.3% 56.4% 74.9% 37.1% 96.8% 57.4% 48.1% 57.0%
FINANCIAL DATA:
Revenues, in millions(e)...... $65.7 $45.5 $25.6 $44.6 $15.9 $49.2 $39.3 $285.8
Average monthly total revenue
per customer(f)............. $43.63 $41.55 $45.88 $37.26 $42.74 $37.36 $37.54 $40.30
- -------------------------
(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, 1999. See
"Unaudited Pro Forma Financial Statement and Operating Data."
(f) Represents total revenues divided by three divided by the number of
customers at period end.
86
90
WESTERN REGION. The Western Region consists of cable systems serving
approximately 502,000 customers located entirely in the state of California,
with approximately 401,000 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 101,000 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 American Cable and 4,000 customers associated with the pending
acquisition of Rifkin. According to National Decision Systems, 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 78% of the region's customers served by cable systems with at
least 550 megahertz bandwidth capacity as of March 31, 1999. 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 this
region's customers will be served by systems with at least 550 megahertz
bandwidth capacity with two-way communication capability.
CENTRAL REGION. The Central Region consists of cable systems serving
approximately 365,000 customers of which approximately 247,000 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 117,000 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 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
National Decision Systems, 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 March 31, 1999, approximately 46% of the Central Region's customers were
served by cable systems with at least 550 megahertz bandwidth capacity. The
majority of the cable plants in the Illinois systems have been upgraded to 750
megahertz 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 megahertz bandwidth capability. We expect that by December 31, 2001,
approximately 89% of this region's customers will be served by cable systems
with at least 550 megahertz bandwidth capacity with two-way communication
capability.
METROPLEX REGION. The MetroPlex Region consists of cable systems serving
approximately 186,000 customers of which approximately 129,000 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 National Decision Systems, the projected median
household growth in the counties served by the
87
91
region's systems is 8.4% 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 72% of the region's customers served by cable systems with at
least 550 megahertz bandwidth capacity as of March 31, 1999. In 1997, we began
to upgrade the Ft. Worth system to 870 megahertz 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 this region's customers will be served by cable systems with at least 550
megahertz bandwidth capacity with two-way communication capability.
NORTH CENTRAL REGION. The North Central Region consists of cable systems
serving approximately 399,000 customers. These customers are primarily located
throughout the state of Wisconsin, along with a small system of approximately
27,000 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 National
Decision Systems, 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 March 31, 1999, approximately 31.8% of the North Central Region's
customers were served by cable systems with at least 550 megahertz 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 this region's customers will be served by cable systems
with capacity between 550 megahertz and 750 megahertz 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 National Decision Systems, 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 March 31, 1999, approximately 49% of the Northeast Region's customers
were served by cable systems with at least 550 megahertz of bandwidth capacity.
We have begun to rebuild this region's cable plant, and expect that by December
31, 2001, all of this region's customers will be served by cable systems with at
least 750 megahertz bandwidth capacity with two-way communication capability.
SOUTHEAST REGION. The Southeast Region consists of cable systems serving
approximately 439,000 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
88
92
of Atlanta; and Johnson City, Tennessee. These areas have experienced rapid
population growth over the past few years, contributing to the high rate of
internal customer growth for these systems. According to National Decision
Systems, 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, InterMedia, Rifkin, Vista and Cable Satellite
acquisitions.
At March 31, 1998, approximately 62% of the Southeast Region's customers
were served by cable systems with at least 550 megahertz 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 this region's customer
base being served by December 31, 2001 served by cable systems with at least 550
megahertz bandwidth capacity with two-way communication capability.
SOUTHERN REGION. The Southern Region consists of cable systems serving
approximately 349,000 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 National Decision Systems, 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, InterMedia and
Rifkin acquisitions.
At March 31, 1999, approximately 42% of the Southern Region's customers
were served by cable systems with at least 550 megahertz 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 this region's customer
base being served by December 31, 2001 by cable systems with at least 550
megahertz 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.
89
93
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 MEGAHERTZ TWO-WAY
550 MEGAHERTZ 550 MEGAHERTZ OR GREATER CAPABILITY
------------- ------------- ------------- ----------
March 31, 1999.............. 42.7% 16.9% 40.4% 35.1%
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%
We have adopted the hybrid fiber optic/coaxial architecture, referred to as
the HFC architecture, as the standard for our ongoing systems upgrades. The HFC
architecture combines the use of fiber optic cable, which can carry hundreds of
video, data and voice channels over extended distances, with coaxial cable,
which requires a more extensive signal amplification in order to obtain the
desired transmission levels for delivering channels. In most systems, we connect
fiber optic cable to individual nodes serving an average of 800 homes or
commercial buildings. A node is a single connection to a cable system's main,
high-capacity fiber optic cable that is shared by a number of customers. Coaxial
cable is then connected from each node to the 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, which are needed to increase
signal capacity, from the headend to the home, resulting in improved
signal quality and reliability;
- reduced number of homes that need to be connected to an individual node,
improving the capacity of the network to provide high-speed Internet
service and reducing the number of households affected by disruptions in
the network; and
- sufficient dedicated bandwidth for two-way services, which avoids reverse
signal interference problems that can otherwise occur when you have
two-way communication capability.
The HFC architecture will enable us to offer new and enhanced services,
including additional channels and tiers, expanded pay-per-view options,
high-speed Internet access, wide area network, which permits a network of
computers to be connected together beyond an area, point-to-point data services,
which can switch data links from one point to another, and digital advertising
insertion. 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
90
94
services, such as an interactive program guide, impulse pay-per-view, video-on-
demand and Wink, that cannot be offered without upgrading the bandwidth capacity
of our systems.
This HFC architecture will also position us to offer cable telephony
services in the future, using either Internet protocol technology or
switch-based technology, another method of linking communications.
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 88% 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 29% 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 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 March 31, 1999, the average monthly fee was
$11.16 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. As of March 31, 1999, the average monthly fee was $18.90 for
expanded basic service.
- PREMIUM CHANNELS. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. Home
Box Office, Cinemax and Showtime are typical examples. We offer
subscriptions to these channels either individually or in premium channel
packages. As of March 31, 1999, the average monthly fee was $6.68 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
91
95
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 personal computers and traditional telephone
Internet access,
- interactive services, such as Wink, and
- Internet protocol 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 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, such as more pay-per-view options
and/or frequent showings of the most popular films to provide near
video-on-demand, which are more heavily marketed in systems primarily
serving both rural and urban communities.
As part of our 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
92
96
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. As of 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:
(1) through television access, using a service such as WorldGate, and
(2) through cable modems attached to personal computers, 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 High Speed Access. 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 kilobits per second telephone modem. Furthermore, a
two-way communication cable system using the HFC architecture 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 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. 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.
We currently offer cable modem-based 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. As
of March 31, 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. These numbers reflect the number
93
97
of our customers who have access to these services provided through us. The
percentage of these customers who actually use these services is currently a
small percentage.
BASIC CUSTOMERS WITH ADVANCED
SERVICES AVAILABLE AS OF
----------------------------------
MARCH 31, 1999 DECEMBER 31, 1999
-------------- -----------------
High-Speed Internet Access via Cable Modems:
EarthLink/Charter Pipeline..................... 413,000 740,000
High Speed Access.............................. 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 personal computer 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
megahertz bandwidth capacity.
We have an agreement with EarthLink, an independent Internet service
provider, to provide as a private label service Charter Pipeline(TM), which is a
cable modem-based, high-speed Internet access service we offer. 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. As of 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 High Speed Access to offer Internet access in
some of our smaller systems. High Speed Access also provides Internet access
services to our customers under the Charter Pipeline(TM) brand name. Although
the Internet access service is provided by High Speed Access, the Internet
"domain name" of our customer's e-mail address and web site, if any, is
"Charter.net," allowing the customer to switch or expand to our other Internet
services without a change of e-mail address. High Speed Access provides turnkey
service, bears all capital, operating and marketing costs of providing the
service, and seeks to build economies of scale in our smaller systems that we
cannot efficiently build ourselves by simultaneously contracting to provide the
same services to other small geographically contiguous systems. We receive 50%
of the monthly $39.95 service fee. As of March 31, 1999, High Speed Access
offers Internet access to approximately 225,000 of our homes passed and
approximately 3,000 customers have signed up for the service. During 1999, High
Speed Access plans to launch this service in an additional 29 systems, covering
approximately 415,000 additional homes passed. Vulcan Ventures, Inc., a company
controlled by Paul G. Allen, has an equity investment in High Speed Access. See
"Certain Relationships and Related Transactions."
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.
94
98
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 local area
networks, which permit networks of computers to be connected within an area,
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 kilobits per second. 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, that is 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 Logan, Utah, Maryville, Illinois and Newtown, Connecticut, and
plan to introduce it in eight additional systems by December 31, 1999. Charter
Communications, Inc. owns a minority interest in WorldGate. See "Certain
Relationships and Related Transactions." As of 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."
95
99
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 Internet protocol
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 Internet protocol technology. For the last two years, we have sold
telephony services as a competitive access provider in the state of Wisconsin
through Marcus FiberLink LLC, one of our subsidiaries, and are currently looking
to expand our services as a competitive access provider 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. Our
on-time service call rate was 99.8% in 1997, and 99.7% in 1998.
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.
96
100
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 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 1998, we were chosen by Claritas Corporation, sponsor of
a national marketing competition across all industries, as the first place
winner in their media division, which includes cable systems operations,
telecommunications and newspapers, for our national segmenting and targeted
marketing program.
97
101
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, we introduced the MVP package of premium services. Customers
receive a substantial discount on bundled premium services of HBO, Showtime,
Cinemax and The Movie Channel. We were able to negotiate favorable terms with
premium networks, which allowed minimal impact on margins and provided
substantial volume incentives to grow the premium category. The MVP package has
increased premium household penetration, premium revenue and cash flow. As a
result of this package, HBO recognized us as a top performing customer. We are
currently introducing this same premium strategy in the systems we have recently
acquired.
We expect to continue to invest significant amounts of time, effort and
financial resources in the marketing and promotion of new and existing services.
To increase customer penetration and increase the level of services used by our
customers, we 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.
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."
PROGRAMMING SOURCES. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. We obtain approximately
50% of our programming through contracts entered into directly with a
programming supplier. We obtain the rest of our programming through TeleSynergy,
Inc. which offers its partners contract benefits in buying programming by virtue
of volume discounts available to a larger buying base. Programming tends to be
made available to us for a flat fee per customer. However, some channels are
available without cost to us. In connection with the launch of a new channel, we
may receive a distribution fee to support the channel launch, a portion of which
is applied to marketing expenses associated with the channel launch. The amounts
we receive in distribution fees are not significant. For home shopping channels,
we may receive a percentage of the amount spent in home shopping purchases by
our customers on channels we carry. In 1998, pro forma for our merger with
Marcus Holdings such revenues totalled approximately $5 million.
Our programming contracts generally continue for a fixed period of time,
usually 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 new channels as they become available. Some
program suppliers offer marketing support or volume discount pricing structures.
Some of our programming agreements with premium service suppliers offer cost
incentives under which premium service unit prices decline as certain premium
service growth thresholds are met.
98
102
PROGRAMMING COSTS. Our cable programming costs have increased in recent
years and are expected to continue to increase due to factors including:
- system acquisitions,
- additional programming being provided to customers,
- increased cost to produce or purchase cable programming,
- inflationary increases, and
- other factors affecting the cable television industry generally.
The combined programming cost of Charter Holdings, CCA Group and CharterComm
Holdings were equal to approximately 21% of revenues in 1998. In every year we
have operated, our costs to acquire programming have exceeded customary
inflationary and cost-of-living type increases. Sports programming costs have
increased significantly over the past several years. In addition, contracts to
purchase sports programming sometimes contain built-in cost increases for
programming added during the term of the contract which we may or may not have
the option to add to our service offerings.
Under rate regulation of the Federal Communications Commission, cable
operators may increase their rates to customers to cover increased costs for
programming, subject to certain limitations. See "Regulation and Legislation."
We now contract through TeleSynergy for more approximately 50% of our
programming. We believe our partnership in TeleSynergy limits increases in our
programming costs relative to what the increases would otherwise be, although
given our increased size and purchasing ability following our merger with Marcus
Holdings, the effect may not be material. This is because some programming
suppliers offer advantageous pricing terms to cable operators whose number of
customers exceeds threshholds established by such programming suppliers. Our
increase in size following our merger with Marcus Holdings should provide
increased bargaining power resulting in an ability to limit increases in
programming costs. Management 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,
such as converter boxes and remote control devices, and installation services
based upon actual costs plus a 11.25% rate of return 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, and are typically adjusted on an annual basis. As of March 31, 1999,
the average monthly fee was $11.16 for basic service and $18.90 for expanded
basic service. Regulation of the expanded basic service was eliminated by
federal law as of March 31, 1999 and such rates are now based on market
conditions. A one-time installation fee, which may be waived in part during
certain promotional periods, is charged to new customers. We believe our rate
practices are in accordance with Federal Communications Commission Guidelines
and are consistent with those prevailing in the industry generally. See
"Regulation and Legislation."
99
103
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 March 31, 1999, our systems operated pursuant to an aggregate of
1,158 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
100
104
of the Cable Industry." The following table summarizes our systems' franchises
by year of expiration, and approximate number of basic customers as of March 31,
1999.
PERCENTAGE PERCENTAGE
NUMBER OF OF TOTAL TOTAL BASIC OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS CUSTOMERS
- ---------------------------- ---------- ---------- ----------- ----------
Prior to December 31, 1999...... 127 11% 328,000 14%
2000 to 2002.................... 214 18% 513,000 22%
2003 to 2005.................... 239 21% 456,000 19%
2006 or after................... 578 50% 1,067,000 45%
Total...................... 1,158 100% 2,364,000 100%
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
We face competition in the areas of price, service offerings, and service
reliability. We compete with other providers of television signals and other
sources of home entertainment. In addition, as we expand into additional
services such as digital television, Internet access, interactive services and
Internet protocol telephony, we face competition from other cable systems
operators providing such services as well as from other providers of each type
of service we will provide.
To date, we believe that we have not lost a significant number of
customers, or a significant amount of revenue, to our competitors' systems.
However, competition from other providers of the technologies we expect to offer
in the future may have a negative impact on our business in the future.
Through mergers such as the recent merger of Tele-Communications, Inc. and
AT&T, customers will come to expect a variety of services from a single
provider. While the TCI/AT&T merger has no direct or immediate impact on our
business, it encourages providers of cable and telecommunications services to
expand their service offerings. It also encourages consolidation in the cable
industry as cable operators recognize the competitive benefits of a large
customer base and expanded financial resources.
Key competitors today include:
- BROADCAST TELEVISION. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using 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
101
105
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 Federal Communications Commission to establish, and the Federal
Communications Commission has adopted, regulations and policies for the issuance
of licenses for digital television, known as 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, known as DBS, has emerged as
significant competition to cable systems. The DBS industry has grown rapidly
over the last several years, far exceeding the growth rate of the cable
television industry, and now serves 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,
however, is limited in the local programming it can provide because of the
current capacity limitations of satellite technology. In addition, existing
copyright rules restrict the ability of DBS providers to offer local broadcast
programming. At least one DBS provider is now attempting to provide this
programming in certain major markets. Congress is now considering legal action
that would remove these legal obstacles. After recent mergers, the two primary
DBS providers are DirecTV, Inc., and EchoStar Communications Corporation. In
addition, there are several companies licensed to operate a DBS system who have
yet to begin service.
- 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 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
102
106
approximately 1.9% 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 megahertz two-way HFC architecture, with the exceptions of our
systems in Columbus, Georgia, and Willimantic, Connecticut. Upgrades to at least
750 megahertz 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. The competitive environment has been significantly
affected both by technological developments and regulatory changes enacted in
The Telecommunications Act of 1996 which were designed to enhance competition in
the cable television and local telephone markets. Federal cross-ownership
restrictions historically limited entry by local telephone companies into the
cable television business. The 1996 Telecom Act modified this cross-ownership
restriction, making it possible for local exchange carriers who have
considerable resources to provide a wide variety of video services competitive
with services offered by cable systems.
As we expand our offerings to include telecommunications services, we will
be subject to competition from other telecommunications providers. The
telecommunications industry is highly competitive and includes competitors with
greater financial and personnel resources, who have brand name recognition and
long-standing relationships with regulatory authorities. Moreover, mergers,
joint ventures and alliances among franchise, wireless or private cable
television operators, local exchange carriers and others may result in providers
capable of offering cable television and telecommunications services in direct
competition with us.
Several telephone companies have obtained or are seeking cable television
franchises from local governmental authorities and are constructing cable
systems. SNET PersonalVision, Inc. 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 local exchange
carriers of video and telephony services poses a strategic advantage over cable
operators seeking to compete with local exchange carriers that provide video
services. In addition, local exchange carriers provide facilities for the
transmission and distribution of voice and data services, including Internet
services, in competition with our existing or potential interactive services
ventures and businesses, including Internet service, as well as data and other
non-video services. We cannot predict the likelihood of success of the broadband
services offered by our competitors or the impact on us of such competitive
ventures. The entry of telephone companies as direct competitors in the video
marketplace, however, 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 systems known as "SMATV systems" serving multiple dwelling units,
referred to in the cable industry as "MDU's" such as condominiums, apartment
complexes, and private residential communities. These private cable systems may
enter into exclusive agreements with such MDUs, which may preclude operators of
franchise systems from serving residents of such private complexes, 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 operating advantages not available
to franchised cable systems, including fewer regulatory burdens and no
requirement to
103
107
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, as amended. 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", known as MMDS. MMDS uses low-power
microwave frequencies to transmit television programming over-the-air to paying
customers. Wireless distribution services generally provide many of the
programming services provided by cable systems, and digital compression
technology is likely to increase significantly the channel capacity of their
systems. 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, known as "OVS," as a new legal framework for the delivery of video
programming. Under the statute and the Federal Communication Commission's rules,
a local exchange carrier 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
Federal Communications Commission 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 Federal
Communication Commission's OVS rules, including the Federal Communication
Commission'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 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
104
108
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.
We own the real property housing our 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 Charter Capital has any employees. As of March
31, 1999, we had approximately 4,770 full-time equivalent employees of which 265
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.
ADDITIONAL 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
105
109
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.
106
110
REGULATION AND LEGISLATION
The following summary addresses the key regulatory developments and
legislation affecting the cable television industry.
The operation of a cable system is extensively regulated by the Federal
Communications Commission, some state governments and most local governments.
The 1996 Telecom Act has altered the regulatory structure governing the nation's
communications providers. It removes barriers to competition in both the cable
television market and the local telephone market. Among other things, it also
reduces the scope of cable rate regulation and encourages additional competition
in the video programming industry by allowing local telephone companies to
provide video programming in their own telephone service areas.
The 1996 Telecom Act requires the Federal Communications Commission to
undertake a host of implementing rulemakings. Moreover, Congress and the Federal
Communications Commission have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect our
operations, and there have been calls in Congress and at the Federal
Communications Commission to maintain or even tighten cable regulation in the
absence of widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which limited the ability of
cable companies to increase subscriber fees. Under that regime, all cable
systems 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;
(3) a municipally-affiliated multichannel video provider offering
service to 50% of the community; or
(4) a competing multichannel video provider affiliated with a local
telephone company offering service to the community.
Although the Federal Communications Commission has established the
underlying regulatory scheme, local government units, commonly referred to as
local franchising authorities, are primarily responsible for administering the
regulation of the lowest level of cable -- the basic service tier, which
typically contains local broadcast stations and public, educational, and
government access channels. Before a local franchising authority begins basic
service rate regulation, it must certify to the Federal Communications
Commission that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
The Federal Communications Commission itself directly administers rate
regulation of any cable programming service tier which typically contains
satellite-delivered programming. Under the 1996 Telecom Act, the Federal
Communications Commission can regulate cable programming service tier rates only
if a local franchising authority first receives at least two rate complaints
from local subscribers and then files a formal
107
111
complaint with the Federal Communications Commission. When new cable programming
service tier rate complaints are filed, the Federal Communications Commission
considers only whether the incremental increase is justified and it will not
reduce the previously established cable programming service tier rate. We
currently have 45 rate complaints relating to approximately 400,000 subscribers
pending at the Federal Communications Commission. Significantly, the Federal
Communications Commission's authority to regulate cable programming service tier
rates expired on March 31, 1999. The Federal Communications Commission has taken
the position that it will still adjudicate cable programming service tier
complaints filed after this sunset date, but no later than 180 days after the
last cable programming service tier rate increase imposed prior to March 31,
1999, and will strictly limit its review, and possibly refund orders, to the
time period predating the sunset date. We do not believe any adjudications
regarding these pre-sunset complaints will have a material adverse effect on our
business. The elimination of cable programming service tier regulation in a
prospective basis affords us substantially greater pricing flexibility.
Under the FCC's rate regulations, most cable systems were required to
reduce their basic service tier and cable programming service tier rates in 1993
and 1994, and have since had their rate increases governed by a complicated
price cap scheme that allows for the recovery of inflation and certain increased
costs, as well as providing some incentive for expanding channel carriage. The
Federal Communications Commission has modified its rate adjustment regulations
to allow for annual rate increases and to minimize previous problems associated
with regulatory lag. Operators also have the opportunity to bypass this
"benchmark" regulatory scheme in favor of traditional "cost-of-service"
regulation in cases where the latter methodology appears favorable. 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 basic service tier be offered to
all cable subscribers and limits the ability of operators to require purchase of
any cable programming service tier if a customer seeks to purchase premium
services offered on a per-channel or per-program basis, subject to a technology
exception which sunsets in 2002.
As of March 31, 1999, local franchising authorities covering approximately
42% of our 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 Federal Communications Commission 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 cable programming service tier rates entirely.
Under Federal Communications Commission 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 cable programming service tier rates of
cable systems serving communities with fewer than 50,000 subscribers, which are
owned by or affiliated with entities serving, in the aggregate,
108
112
no more than one percent of the nation's cable customers and having no more than
$250 million in annual revenues.
As noted above, FCC regulation of cable programming service tier 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 Federal Communications
Commission.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more
favorable environment for us to provide telecommunication services beyond
traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. A cable
operator is authorized under the 1996 Telecom Act to provide telecommunication
services without obtaining a separate local franchise. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles, beginning in 2001, if the operator provides telecommunications
service, as well as cable service, over its plant. The Federal Communications
Commission 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 developed by the Federal Communications Commission and state
regulators. One critical component of the 1996 Telecom Act to facilitate the
entry of new telecommunications providers, including cable operators, is the
interconnection obligation imposed on all telecommunications carriers. In July
1997, the Eighth Circuit Court of Appeals vacated certain aspects of the Federal
Communications Commission 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 Federal Communications Commission
interconnection regulations. Although these regulations should enable new
telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including whether the Federal Communications
Commission ultimately can mandate that incumbent carriers make available
specific network elements, remains subject to further Federal Communications
Commission review. Aggressive regulation by the Federal Communications
Commission in this area, if upheld by the courts, would make it easier for us to
provide telecommunications service.
INTERNET SERVICE. Although there is at present no significant federal
regulation of cable system delivery of Internet services, and the Federal
Communications Commission recently issued 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 Federal Communications Commission and
Congress that would require cable operators to provide access to unaffiliated
Internet service providers and online service providers. Certain Internet
service
109
113
providers also are attempting to use existing commercial leased access
provisions to gain access to cable system delivery. A petition on this issue is
now pending before the Federal Communications Commission. Finally, some local
franchising authorities are considering the imposition of mandatory Internet
access requirements as part of cable franchise renewals or transfers. A federal
district court in Oregon recently upheld the legal ability of local franchising
authority to impose such conditions, but an appeal is anticipated. These
developments could broaden the capacity of cable systems and complicate our own
plans for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers,
including the regional telephone companies, can now compete with cable operators
both inside and outside their telephone service areas with certain regulatory
safeguards. Because of their resources, local exchange carriers could be
formidable competitors to traditional cable operators, and certain local
exchange carriers have begun offering cable service. As described above, we are
now witnessing the beginning of local exchange carrier competition in certain
metropolitan areas.
Various local exchange carriers 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 transmission. In Connecticut, the Department of Public
Utility Control granted Southern New England Telephone, or 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, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals recently reversed
certain of the Federal Communications Commission's open video system rules,
including its 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 open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts that is, any ownership interest exceeding 10
percent, of co-located cable systems, cable operator buyouts of co-located local
exchange carrier systems, and joint ventures between cable operators and local
exchange carriers 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 Federal
Communications Commission with the limited authority to grant waivers of the
buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility
110
114
Holding Company Act. Electric utilities must establish separate subsidiaries,
known as "exempt telecommunications companies" and must apply to the Federal
Communications Commission for operating authority. Like telephone companies,
electric utilities have substantial resources at their disposal, and could be
formidable competitors to traditional cable systems. Several such utilities have
been granted broad authority by the Federal Communications Commission to engage
in activities which could include the provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing Federal Communications
Commission regulations prohibiting local cross-ownership between co-located
television stations and cable systems.
Pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules precluding a cable system from devoting more than 40% of its
activated channel capacity to the carriage of affiliated national video program
services. 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 Federal Communications
Commission 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 a "must
carry" requirement, which requires a cable system to carry the station, or a
"retransmission consent," where such stations negotiate for payments for
granting permission to the cable operator to carry the station. 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
our business. The burden associated with must carry may increase substantially
if broadcasters proceed with planned conversion to digital transmission and the
Federal Communications Commission determines that cable systems must carry all
analog and digital broadcasts in their entirety. This burden would reduce
capacity available for more popular video programming and new internet and
telecommunication offerings. A rulemaking is now pending at the Federal
Communications Commission regarding the imposition of dual digital and analog
must carry.
ACCESS CHANNELS. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for public,
educational and governmental access programming. Federal law also requires cable
systems to designate a portion of their channel capacity, up to 15% in some
cases, for commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted rules regulating the terms, conditions and
maximum rates a cable operator may charge for commercial leased access use. We
believe that requests for commercial leased access carriages have been
relatively limited. A new request has been forwarded to the Federal
Communications Commission, however, noting that unaffiliated Internet service
providers be found eligible for commercial leased access. Although we do not
believe such use is in accord with the governing statute, a contrary ruling
could lead to substantial leased activity by Internet service providers and
disrupt our own plans for Internet service.
111
115
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. These
changes should not have a dramatic impact on us, but would limit potential
competitive advantages we now enjoy.
INSIDE WIRING; SUBSCRIBER ACCESS. In a 1997 Order, the Federal
Communications Commission established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the cable operator in
a multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers who are willing to pay the building owner a
higher fee, where such a fee is permissible. The Federal Communications
Commission has also proposed abrogating all exclusive multiple dwelling unit
service agreements held by incumbent operators, but allowing such contracts when
held by new entrants. In another proceeding, the Federal Communications
Commission has preempted restrictions on the deployment of private antenna on
rental property within the exclusive use of a tenant, such as balconies and
patios. This Federal Communications Commission ruling may limit the extent to
which we along with multiple dwelling unit owners may enforce certain aspects of
multiple dwelling unit agreements which otherwise prohibit, for example,
placement of digital broadcast satellite receiver antennae in multiple dwelling
unit areas under the exclusive occupancy of a renter. These developments may
make it even more difficult for us to provide service in multiple dwelling unit
complexes.
OTHER FCC REGULATIONS. In addition to the Federal Communications
Commission 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,
112
116
- consumer electronics equipment compatibility, and
- emergency alert systems.
The Federal Communications Commission recently ruled that cable customers
must be allowed to purchase cable converters from third parties and established
a multi-year phase-in during which security functions, which would remain in the
operator's exclusive control, would be unbundled from basic converter functions,
which could then be satisfied by third party vendors. The Federal Communications
Commission has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of Federal
Communications Commission licenses needed to operate certain transmission
facilities used in connection with cable operations.
COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system, cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The possible
modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect our ability to
obtain desired broadcast programming. We cannot predict the outcome of this
legislative activity. Copyright clearances for nonbroadcast programming services
are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the Association of Songwriters, Composers, Artists and Producers
and Broadcast Music, Inc.. The cable industry and Broadcast Music have reached a
standard licensing agreement, and negotiations with the Association of
Songwriters are ongoing. Although we cannot predict the ultimate outcome of
these industry negotiations or the amount of any license fees we may be required
to pay for past and future use of association-controlled music, we do not
believe such license fees will be significant to our business and operations.
STATE AND LOCAL REGULATION. Cable 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 local franchising authorities from granting exclusive
franchises or from unreasonably refusing to award additional franchises. Cable
franchises generally are granted for fixed terms and in many cases include
monetary penalties for non-compliance and may be terminable if the franchisee
failed to comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states,
including Connecticut, subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by
113
117
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 local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, most franchises have been renewed for and consents
granted to cable operators that have provided satisfactory services and have
complied with the terms of their franchise.
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises for the provision of telecommunications services, and local
franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of such services. In addition, local franchising
authorities may not require a cable operator to provide any telecommunications
service or facilities, other than institutional networks under certain
circumstances, as a condition of an initial franchise grant, a franchise
renewal, or a franchise transfer. The 1996 Telecom Act also provides that
franchising fees are limited to an operator's cable-related revenues and do not
apply to revenues that a cable operator derives from providing new
telecommunications services.
114
118
MANAGEMENT
Charter Holdings is a holding company with no operations. Charter Capital
is a direct wholly owned finance subsidiary of Charter Holdings that exists
solely for the purpose of serving as co-obligor of the notes and has no
operations. Neither Charter Holdings nor Charter Capital has any employees. We
are managed by Charter Communications, Inc. pursuant to a management agreement
between Charter Communications, Inc. and Charter Operating, 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............................. 46 Chairman of the Board of Charter Communications,
Inc.
William D. Savoy.......................... 34 Director of Charter Holdings and Charter
Communications, Inc.
Jerald L. Kent............................ 42 President, Chief Executive Officer and Director
of Charter Holdings, Charter Capital and Charter
Communications, Inc.
Barry L. Babcock.......................... 52 Vice Chairman of Charter Communications, Inc.
Howard L. Wood............................ 60 Vice Chairman of Charter Communications, Inc.
David G. Barford.......................... 40 Senior Vice President Operations of Charter
Communications, Inc. -- Western Division
Mary Pat Blake............................ 43 Senior Vice President -- Marketing and
Programming of Charter Communications, Inc.
Eric A. Freesmeier........................ 46 Senior Vice President -- Administration of
Charter Communications, Inc.
Thomas R. Jokerst......................... 49 Senior Vice President -- Advanced Technology
Development of Charter Communications, Inc.
Kent D. Kalkwarf.......................... 39 Senior Vice President and Chief Financial Officer
of Charter Holdings, Charter Capital and Charter
Communications, Inc.
Ralph G. Kelly............................ 42 Senior Vice President -- Treasurer of Charter
Holdings, Charter Capital and Charter
Communications, Inc.
David L. McCall........................... 43 Senior Vice President Operations of Charter
Communications, Inc. -- Eastern Division
John C. Pietri............................ 49 Senior Vice President -- Engineering of Charter
Communications, Inc.
Steven A. Schumm.......................... 46 Executive Vice President, Assistant to the
President of Charter Holdings, Charter Capital
and Charter Communications, Inc.
Curtis S. Shaw............................ 50 Senior Vice President, General Counsel and
Secretary of Charter Holdings, Charter Capital
and Charter Communications, Inc.
115
119
The following sets forth certain biographical information with respect to
the individuals named in the chart above.
PAUL G. ALLEN is the Chairman of the Board of Directors of Charter
Communications, Inc. 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 Charter
Communications, Inc. 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,
High Speed Access Corp., 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 Charter Communications, Inc., and
President and Chief Executive Officer and director of Charter Holdings, Charter
Capital and Charter Communications, Inc. and has previously held the position of
Chief Financial Officer of Charter Communications, Inc. Prior to co-founding
Charter Communications, Inc., Mr. Kent was associated with Cencom Cable
Associates, Inc., 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 High Speed Access Corp.
and Cable Television Laboratories. Prior to that time, Mr. Kent was employed by
Arthur Andersen 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 Charter Communications, Inc. and Vice
Chairman of Charter Communications, Inc. and has been involved in the cable
industry since 1979. Prior to founding Charter Communications, Inc. 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 the founders of Cencom Cable
Associates, Inc. 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 Charter Communications, Inc. and Vice
Chairman of Charter Communications, Inc. Prior to founding Charter
Communications,
116
120
Inc., 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 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 Charter
Communications, Inc. -- Western Division, where he has primary responsibility
for all cable operations in the Central, Western, North Central and MetroPlex
Regions. Prior to joining Charter Communications, Inc., 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
Charter Communications, Inc. 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 Charter Communications, Inc. 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 Charter Communications, Inc., 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 Charter Communications, Inc. 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
CableTelevision Laboratories 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 Cable Television Laboratories. Mr. Jokerst is a graduate of Ranken
117
121
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, Charter Capital and Charter Communications, Inc. Prior to
joining Charter Communications, Inc., 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.
RALPH G. KELLY is Senior Vice President -- Treasurer of Charter Holdings,
Charter Capital and Charter Communications, Inc. Mr. Kelly joined Charter
Communications, Inc. 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 Charter
Communications, Inc. 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 Charter
Communications, Inc. -- Eastern Division. Mr. McCall joined Charter
Communications, Inc. in January 1995 as Regional Vice President Operations and
he has primary responsibility for all cable system operations managed by Charter
Communications, Inc. in the Southeast, Southern and Northeast Regions of the
United States. Prior to joining Charter Communications, Inc., 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 Charter Communications, Inc. in November 1998 as
Senior Vice President -- Engineering. Prior to joining Charter Communications,
Inc., 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, Charter Capital and Charter Communications, Inc. Mr. Schumm
joined Charter Communications, Inc. in December 1998 and currently directs the
MIS Regulatory and Financial Controls Groups. Prior to joining Charter
Communications, Inc., 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
118
122
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, Charter Capital and Charter Communications, Inc. and is
responsible for all legal aspects of their business, government relations and
the duties of the corporate secretary. Mr. Shaw joined Charter Communications,
Inc. in February 1997. Prior to joining Charter Communications, Inc., 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.
DIRECTOR COMPENSATION
The directors of Charter Holdings and Charter Capital 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 Charter Capital, nor do such individuals
expect to receive compensation from Charter Holdings or Charter Capital at any
time in the future. Such Executive Officers receive their compensation from
Charter Communications, Inc., except for Mr. McCall, who is compensated by an
operating subsidiary. Charter Communications, Inc. is entitled to receive
management fees from us for providing its management and consulting services.
See "Certain Relationships and Related Transactions."
OPTION PLAN
Charter Operating has adopted a plan providing for the grant of options to
purchase up to an aggregate of 10% of the equity value of Charter Operating. The
plan provides for grants of options to employees, officers, directors and
consultants of Charter Operating and its affiliates. The plan is intended to
promote the long-term financial interest of Charter Operating and its affiliates
by encouraging eligible individuals to acquire an ownership position in Charter
Operating and its affiliates and provides incentives for performance. The plan
was originally adopted by us and was assumed by Charter Operating. Options
granted under the plan will vest one-fourth on the 15-month anniversary of the
date of grant. One forty-fifth of the remaining options vest each month after
the initial vesting. However, if there have not been a public offering of the
equity interests of Charter Operating or an affiliate, vesting will occur only
upon termination of employment for any reason other than for cause or
disability. The options expire after ten years from the date of grant.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
The Limited Liability Company Agreement of Charter Holdings and the
Certificate of Incorporation of Charter Capital limit the liability of their
respective directors to the maximum extent permitted by Delaware law. The
Delaware General Corporation Law
119
123
provides that a limited liability company and a corporation may eliminate or
limit the personal liability of a director for monetary damages for breach of
fiduciary duty as a director, except for liability for:
(1) any breach of the director's duty of loyalty to the corporation
and its stockholders;
(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) unlawful payments of dividends or unlawful stock purchases or
redemptions; or
(4) any transaction from which the director derived an improper
personal benefit.
The Limited Liability Company Agreement of Charter Holdings and the Bylaws
of Charter Capital provide that directors and officers shall be indemnified for
acts or omissions performed or omitted that are determined, in good faith, to be
in our best interest. No such indemnification is available for actions
constituting bad faith, willful misconduct or fraud.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Charter Holdings
and Charter Capital pursuant to the foregoing provisions, we have been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
120
124
PRINCIPAL EQUITY HOLDERS
Charter Holdings is a direct, wholly owned subsidiary of Charter
Communications Holding Company, LLC which, in turn, is a direct, wholly owned
subsidiary of Charter Communications, Inc. The beneficial ownership of the
equity of Charter Communications, Inc. is as set forth in the table below.
Charter Capital is a direct wholly owned finance subsidiary of Charter Holdings.
NAME AND ADDRESS CLASS HELD AMOUNT HELD PERCENTAGE HELD
- ---------------- ------------ ----------- ---------------
Paul G. Allen..................... Common Stock 165,347.9488 96.06%
110 110th Street, N.E
Suite 500
Bellevue, WA 98004
Jerald L. Kent.................... Common Stock 4,029.4359(1) 2.34%
c/o Charter Communications, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
Barry L. Babcock.................. Common Stock 1,962.9574 1.14%
c/o Charter Communications, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
Howard L. Wood.................... Common Stock 785.1830 0.46%
c/o Charter Communications, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
- ---------------
(1) Includes 1,281.3315 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
121
125
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth certain transactions that we and our directors,
executive officers and affiliates are involved in. We believe that each of the
transactions described below was on terms no less favorable to us than could
have been obtained from independent third parties.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
MERGER WITH MARCUS
On April 23, 1998, Paul G. Allen acquired approximately 99% of the
non-voting economic interests in Marcus, and agreed to acquire the remaining
interests in Marcus Cable and assume voting control. The aggregate purchase
price was approximately $1.4 billion, excluding $1.8 billion in debt assumed. On
March 31, 1999, Mr. Allen did acquire such remaining interests and assumed
voting control of Marcus Cable. On February 22, 1999, Marcus Holdings was formed
and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus
Holdings.
On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of
Charter Communications, Inc. for an aggregate purchase price of approximately
$2.2 billion, excluding $2.0 billion in debt assumed. On February 9, 1999,
Charter Holdings was formed as a wholly owned subsidiary of Charter
Communications, Inc. On February 10, 1999, Charter Operating was formed as a
wholly owned subsidiary of Charter Holdings. All of Charter Communications,
Inc.'s equity interests in its operating subsidiaries were transferred to
Charter Operating. On May 25, 1999, Charter Communications Holding Company, LLC
was formed as a wholly owned subsidiary of Charter Communications, Inc. All of
Charter Communications, Inc.'s equity interests in Charter Holdings were
transferred to Charter Communications Holding Company, LLC.
In March 1999, we paid an affiliate of Mr. Allen $20,000,000 for
reimbursement of direct costs incurred in connection with his acquisition of
Marcus Cable. Such costs were principally comprised of financial, advisory,
legal and accounting fees.
On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings.
Charter Holdings survived the merger, and the operating subsidiaries of Marcus
Holdings became subsidiaries of Charter Holdings.
At the time we issued the original notes, this merger had not yet occurred.
Consequently, Marcus Holdings was a party to the indentures governing the notes
as a guarantor of our obligations. Charter Holdings loaned some of the proceeds
from the sale of the original notes to Marcus Holdings, which amounts were used
to complete the cash tender offers for certain outstanding notes of subsidiaries
of Marcus Holdings. Marcus Holdings issued a promissory note in favor of Charter
Holdings, secured by a pledge of the equity interests in Marcus Cable as
collateral. Charter Holdings pledged this promissory note to the trustee under
the indentures as collateral for the equal and ratable benefit of the holders of
the notes. Upon the closing of the merger, and in accordance with the terms of
the notes and the indentures:
- the guarantee issued by Marcus Holdings was automatically terminated;
- the promissory note issued by Marcus Holdings was automatically
extinguished; and
- the pledge in favor of Charter Holdings of the equity interests in Marcus
Cable as collateral under the promissory note and the pledge in favor of
the trustee of the promissory note as collateral for the notes were
automatically released.
122
126
MANAGEMENT AGREEMENTS
PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a
series of management agreements with certain of our subsidiaries, Charter
Communications, Inc. provided management and consulting services to us. In
exchange for these services, Charter Communications, Inc. was entitled to
receive management fees of 3% to 5% of the gross revenues of all of our systems
plus reimbursement of expenses. However, our previous credit facilities limited
such management fees to 3% of gross revenues. The balance of management fees
payable under the previous management agreements were accrued. Following the
closing of our current credit facilities, the previous management agreements
were replaced by a new management agreement. The other material terms of our
previous management agreements are substantially similar to the material terms
of the new management agreement.
The total management fees, including expenses, earned by Charter
Communications, Inc. under the previous management agreements during the last
three years were as follows:
TOTAL FEES
YEAR FEES PAID EARNED
- ---- --------- ----------
(IN THOUSANDS)
March 31, 1999................................... $ 5,323 $10,015
1998............................................. $17,073 $24,159
1997............................................. 14,772 20,290
1996............................................. 11,792 15,443
Deferred portions of certain management fees bore interest at the rate of
10% per annum.
PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus
entered into a Management Consulting Agreement with Charter Communications, Inc.
pursuant to which Charter Communications, Inc. agreed to provide certain
management and consulting services to Marcus Cable and its subsidiaries, in
exchange for a fee equal to 3% of the gross revenues of Marcus Cable's systems
plus reimbursement of expenses. Management fees expensed by Marcus Cable during
the period from October 1998 to December 31, 1998 were approximately $3.3
million, which were accrued and unpaid at December 31, 1998. Management fees
paid to Charter Communications, Inc. for the three months ended March 31, 1999
totaled approximately $5,323. Upon our merger with Marcus Holdings and the
closing of our current credit facilities, this agreement was terminated and the
subsidiaries of Marcus Cable now receive management and consulting services from
Charter Communications, Inc. under the new management agreement.
THE NEW MANAGEMENT AGREEMENT. On February 23, 1999, Charter
Communications, Inc. entered into a new management agreement with Charter
Operating, which was amended and restated as of March 17, 1999. Upon the closing
of our current credit facilities on March 18, 1999, our previous management
agreements and the Management Consulting Agreement with Marcus Cable terminated
and the new management agreement became operative. Pursuant to the new
management agreement, Charter Communications, Inc. has agreed to manage and
operate the cable television systems owned by our subsidiaries, as well as any
cable television systems we may subsequently acquire in the future. The term of
the new management agreement is ten years.
123
127
The new management agreement provides that we will reimburse Charter
Communications, Inc. for all expenses, costs, losses, liabilities or damages
incurred by it in connection with our ownership or operation of our cable
television systems. If Charter Communications, Inc. pays or incurs any such
expenses, costs, losses, liabilities or damages, it will be reimbursed. In
addition to any reimbursement of expenses, Charter Communications, Inc. is paid
a yearly management fee equal to 3.5% of our gross revenues. Gross revenues
include all revenues from the operation of our cable systems, including, without
limitation, subscriber payments, advertising revenues, and revenues from other
services provided by our cable systems. Gross revenues do not include interest
income or income from investments unrelated to our cable systems.
Payment of the management fee to Charter Communications, Inc. is permitted
under our current credit facilities, but ranks below our payment obligations
under our current credit facilities. In the event any portion of the management
fee due and payable is not paid by us, it is deferred and accrued as a
liability. Any deferred amount of the management fee will bear interest at the
rate of 10% per annum, compounded annually, from the date it was due and payable
until the date it is paid.
The management fee is payable to Charter Communications, Inc. quarterly in
arrears. If the current management agreement is terminated, Charter
Communications, Inc. is entitled to receive the fee payable for an entire
quarter, even if termination occurred before the end of that quarter.
Additionally, Charter Communications, Inc. is entitled to receive payment of any
deferred amount. The accrual of such management fee commenced on February 23,
1999.
Pursuant to the terms of the new management agreement, we have agreed to
indemnify and hold harmless Charter Communications, Inc. and its shareholders,
directors, officers and employees. This indemnity extends to any and all claims
or expenses, including reasonable attorneys' fees, incurred by them in
connection with any action not constituting gross negligence or willful
misconduct taken by them in good faith in the discharge of their duties to us.
BUSINESS RELATIONSHIPS
Paul G. Allen or certain affiliates of Mr. Allen, own equity interests or
warrants to purchase equity interests in various entities which provide us with
services or programming. Among these entities are High Speed Access, WorldGate,
Wink, ZDTV, LLC, USA Networks and Oxygen Media, Inc. These affiliates include
Charter Communications, Inc. and Vulcan Ventures, Inc., a company founded by Mr.
Allen in 1986 to research and implement his investments. Mr. Allen owns 100% of
the equity of Vulcan Ventures, and is the President, Chief Executive Officer and
Chairman of the Board. William B. Savoy, another of our directors, is also a
Vice President and a director of Vulcan Ventures.
HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet
access over cable modems. In November 1998, Charter Communications, Inc. entered
into a Systems Access and Investment Agreement with Vulcan Ventures and High
Speed Access and a related Network Services Agreement with High Speed Access.
Additionally, Vulcan Ventures and High Speed Access entered into a Programming
Content Agreement. Under these agreements, we committed to provide High Speed
Access exclusive access to at least 750,000 homes passed. We can terminate our
exclusivity rights, on a system-by-system basis, if High Speed Access fails to
meet performance benchmarks or otherwise breaches the agreements including their
commitment to provide content designated by Vulcan Ventures. During the term of
the agreements, High Speed Access has agreed not to deploy
124
128
WorldGate, Web TV, digital television or related products in the market areas of
any committed system or in any area in which we operate a cable system. The
agreements will continue until High Speed Access ceases to provide services to
an end user residing in a home passed in a committed system.
Concurrently with entering into these agreements, High Speed Access issued
8 million shares of Series B convertible preferred stock to Vulcan Ventures at a
purchase price of $2.50 per share, which it acquired for $20 million in cash.
Vulcan Ventures also subscribed to purchase 2.5 million shares of Series C
convertible preferred stock at a purchase price of $5.00 per share on or before
November 25, 2000, and received an option to purchase an additional 2.5 million
shares of Series C convertible preferred stock at a purchase price of $5.00 per
share on or before November 25, 2000. In April 1999, Vulcan Ventures purchased
the entire 5 million shares of Series C convertible preferred stock for $25
million in cash. The shares of Series B and Series C convertible preferred stock
issued to Vulcan Ventures automatically converted at a price of $3.23 per share
into 20.15 million shares of common stock upon completion of High Speed Access'
initial public offering in June 1999. Additionally, High Speed Access granted
Vulcan Ventures warrants to purchase up to 5 million shares of common stock at a
purchase price of $5.00 per share. Vulcan Ventures subsequently assigned the
warrants to Charter Communications, Inc.
In addition, Jerald L. Kent, our President and Chief Executive Officer and
a director of Charter Holdings, Mr. Savoy and another individual, who performs
management services for the issuers, are also directors of High Speed Access
Corp.
WORLDGATE. WorldGate is a provider of Internet access through cable
television systems. On November 24, 1997, Charter Communications, Inc. signed an
Affiliation Agreement with WorldGate pursuant to which we will offer the
WorldGate service to our customers. Pursuant to the agreement, we have agreed to
use our reasonable best efforts to deploy the WorldGate Internet access service
within our cable television systems and to install the appropriate headend
equipment in all of our major markets. Major markets for purposes of this
agreement include those in which we have more than 25,000 customers. In
addition, we have agreed to use our reasonable best efforts to deploy such
service in all non-major markets that are technically capable of providing
interactive pay-per-view service, to the extent we determine that it is
economically practical. When WorldGate has a telephone return path service
available, we will, if economically practical, use all reasonable efforts to
install the appropriate headend equipment and deploy the WorldGate service in
our remaining markets. We have also agreed to market the WorldGate service
within our market areas.
On November 24, 1997, Charter Communications, Inc. acquired 70,423 shares
of WorldGate's Series B Preferred Stock at a purchase price of $7.10 per share.
On February 3, 1999, a subsidiary of Charter Holdings acquired 90,909 shares of
Series C Preferred Stock at a purchase price of $11.00 per share.
WINK. Wink offers an enhanced broadcasting system that adds interactivity
and electronic commerce opportunities to traditional programming and
advertising. Viewers can, among other things, find news, weather and sports
information on-demand and order products through use of a remote control. On
October 8, 1997, Charter Communications, Inc. signed a Cable Affiliation
Agreement with Wink to deploy this enhanced broadcasting technology in our
systems. Pursuant to the agreement, Wink granted us the non-exclusive license to
use their software to deliver the enhanced broadcasting to all of our cable
systems. We agreed to promote and market the Wink service to our customers
within the area of each system in which such service is being provided. The term
of the agreement is
125
129
three years. Either party has the right to terminate the agreement for the other
party's failure to comply with any of its respective material obligations under
the agreement.
On November 30, 1998, Vulcan Ventures acquired 1,162,500 shares of Wink's
Series C Preferred Stock for approximately $9.3 million. Additionally, Microsoft
Corporation, of which Mr. Allen is a director, also owns an equity interest in
Wink.
ZDTV. ZDTV operates a cable television channel which broadcasts shows
about technology and the Internet. Pursuant to a programming agreement with
Charter Communication, Inc., ZDTV has agreed to provide us with their
programming for broadcast via our cable television systems. On February 5, 1999,
Vulcan Programming, Inc., another affiliate of Mr. Allen, acquired an
approximate one-third interest in ZDTV. The remaining approximate two-thirds is
owned by Ziff-Davis Inc. Vulcan Ventures acquired approximately 3% of the
interests in Ziff-Davis. The total investment made by Vulcan Programming and
Vulcan Ventures was $54 million.
USA NETWORKS. USA Networks operates USA Network and The Sci-Fi Channel,
which are cable television networks. USA Networks also operates Home Shopping
Network, which is a retail sales program available via cable television systems.
Pursuant to a programming agreement with Charter Communications, Inc., USA
Networks has agreed to provide their programming for broadcast via our cable
television systems. Mr. Allen and Mr. Savoy are also directors of USA Networks.
OXYGEN MEDIA, INC. Oxygen expects to begin providing content aimed at the
female audience for distribution over the Internet and cable television systems.
Vulcan Ventures has agreed to invest up to $100 million in Oxygen. In addition,
Charter Communications, Inc. has agreed to enter into a carriage agreement with
Oxygen pursuant to which we intend to carry Oxygen programming content on our
cable systems.
126
130
DESCRIPTION OF THE CREDIT FACILITIES
On March 18, 1999, all of our then-existing senior indebtedness, consisting
of seven separate credit facilities, was refinanced with proceeds of the sale of
the original notes and proceeds of our initial senior secured credit facilities.
The borrower under our initial senior secured credit facilities is Charter
Operating. The initial senior secured credit facilities were arranged by The
Chase Manhattan Bank, NationsBank, N.A., Toronto Dominion (Texas), Inc., Fleet
Bank, N.A. and Credit Lyonnais New York Branch. The initial senior secured
credit facilities provided for borrowings of up to $2.75 billion.
The initial senior secured credit facilities were increased on April 30,
1999 by $1.35 billion of additional senior secured credit facilities.
Obligations under the credit facilities are guaranteed by Charter Operating's
parent, Charter Holdings, and by Charter Operatings' subsidiaries. The
obligations under the credit facilities are secured by pledges by Charter
Operating of inter-company obligations and the ownership interests of Charter
Operating in its subsidiaries, but are not secured by the other assets of
Charter Operating or its subsidiaries. The guarantees are secured by pledges of
inter-company obligations and the ownership interests of Charter Holdings in
Charter Operating, but are not secured by the other assets of Charter Holdings
or Charter Operating.
The initial senior secured credit facilities of $4.1 billion consist of:
- an eight and one-half year reducing revolving loan in the amount of $1.25
billion;
- an eight and one-half year Tranche A term loan in the amount of $1.0
billion; and
- a nine-year Tranche B term loan in the amount of $1.85 billion.
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 beginning on June 30, 2002 with respect to the Tranche A term loan and
on March 31, 2004 with respect to the revolving credit facility, with a final
maturity date of September 18, 2007. 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. The credit
facilities also provide for an incremental term facility, which is conditioned
upon receipt of additional new commitments from lenders. If the incremental term
facility becomes available, 50% of the borrowings under it will be repaid on
terms substantially similar to that of the Tranche A term loan and 50% on terms
substantially similar to the Tranche B term loan. After an initial period in
which interest rate margins will be fixed, interest rates for the credit
facilities will depend upon performance measured by a "leverage ratio," or, the
ratio of indebtedness to annualized operating cash flow. Annualized operating
cash flow is defined as the immediately preceding quarter's operating cash flow,
before management fees, multiplied by four. This leverage ratio is based on the
indebtedness of Charter Operating and its subsidiaries, exclusive of the
outstanding notes and other indebtedness for money borrowed, including
guarantees by Charter Operating and its subsidiaries by Charter Holdings.
The credit facilities provide Charter Operating with two interest rate
options, to which a margin is added: a base rate, generally, the "prime rate" of
interest option and an interest rate option based on the London InterBank
Offered Rate. The credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The financial covenants, which are generally tested on
a quarterly basis, measure performance against standards set for leverage, debt
service coverage, and operating cash flow coverage of cash interest expense.
127
131
Under most circumstances, acquisitions and investments may be made without
the consent of the lenders as long as our operating cash flow for the four
complete quarters preceding the acquisition or investment equals or exceeds 1.75
times the sum of our cash interest expense plus any restricted payments, on a
pro forma basis after giving effect to the acquisition or investment.
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:
(1) Paul G. Allen, including his estate, heirs and certain other related
entities, fails to maintain a 51% direct or indirect voting and economic
interest in Charter Operating, provided that after the consummation of an
initial public offering by Charter Holdings or an affiliate of Charter Holdings,
the economic interest percentage may be reduced to 35%, or
(2) 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 Charter Operating 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% notes 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 and the related documents pertaining to the credit facilities.
128
132
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions."
The original notes were issued and the new notes will be issued under three
separate indentures, each dated as of March 17, 1999, among the issuers, Marcus
Cable Operating, LLC, Marcus Holdings, as guarantor and Harris Trust and Savings
Bank, as trustee. The terms of the notes include those stated in the indentures
and those made part of the indentures by reference to the Trust Indenture Act of
1939, as amended.
The form and terms of the new notes are the same in all material respects
to the form and terms of the original notes, except that the new notes will have
been registered under the Securities Act of 1933 and, therefore, will not bear
legends restricting the transfer thereof. The original notes have not been
registered under the Securities Act of 1933 and are subject to certain transfer
restrictions.
The original notes were sold prior to our merger with Marcus Holdings. At
the sale of the original notes, Marcus Holdings guaranteed the notes and issued
a promissory note to Charter Holdings for certain amounts loaned by Charter
Holdings to subsidiaries of Marcus Holdings. When we merged with Marcus Holdings
both the guarantee and the promissory note issued 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 promissory 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 "Business -- Additional Information."
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are general unsecured obligations of the issuers;
- are effectively subordinated in right of payment to all existing and
future secured Indebtedness of the issuers to the extent of the value of
the assets securing such Indebtedness and to all liabilities, including
trade payables, of Charter Holdings' Subsidiaries, other than Charter
Capital;
- are equal in right of payment to all existing and future unsubordinated,
unsecured Indebtedness of the issuers; and
- are senior in right of payment to any future subordinated Indebtedness of
the issuers.
PRINCIPAL, MATURITY AND INTEREST OF NOTES
8.250% NOTES
The 8.250% 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 8.250% notes will mature on April 1, 2007.
129
133
Interest on the 8.250% 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 8.250% notes on the immediately preceding March
15 and September 15.
Interest on the 8.250% 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.
8.625% NOTES
The 8.625% 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 8.625% notes will mature on April 1, 2009.
Interest on the 8.625% 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 8.625% notes on the immediately preceding March
15 and September 15.
Interest on the 8.625% 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.
9.920% NOTES
The 9.920% notes are limited in aggregate principal amount at maturity to
$1.475 billion and originally were 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 9.920% notes, in denominations of $1,000 principal
amount at maturity and integral multiples of $1,000 principal amount at
maturity. The 9.920% notes will mature on April 1, 2011.
Cash interest on the 9.920% notes will not accrue prior to April 1, 2004.
Thereafter, cash interest on the 9.920% 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 9.920% 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.
The 9.920% notes will accrete at a rate of 9.920% per year to an aggregate
amount of $1.475 billion as of April 1, 2004. For United States federal income
tax purposes, holders of the 9.920% 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."
RANKING
As a holding company, Charter Holdings does not hold substantial assets
other than its direct or indirect investments in and advances to its operating
subsidiaries. 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
130
134
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. 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. Our credit facilities place limitations on the ability of our
subsidiaries to pay dividends and enter into certain transactions with
affiliates. Our credit facilities also contain financial covenants that could
limit the payment of dividends. However distributions generally will be
permitted by the credit facilities to pay interest on the notes except during
the existence of a default under the credit facilities.
Because of our holding company structure, the notes will be subordinate to
all liabilities of our subsidiaries. Creditors of our subsidiaries will have the
right to be paid before holders of the notes from any assets of our
subsidiaries. At March 31, 1999, on a pro forma basis giving effect to the
acquisitions and our credit facilities, all of our outstanding indebtedness,
including our credit facilities, was incurred by our subsidiaries. At that date,
our subsidiaries' liabilities totaled approximately $4.0 billion and all such
liabilities would have ranked senior to the new notes. 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.
OPTIONAL REDEMPTION
8.250% NOTES
The 8.250% notes are not redeemable at the issuers' option prior to
maturity.
8.625% 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 8.625%
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 8.625% notes
remains outstanding immediately after the occurrence of such redemption
excluding 8.625% notes held by Charter Holdings and its Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 8.625% 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
8.625% 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,
131
135
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%
9.920% 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
9.920% 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
9.920% notes remains outstanding immediately after the occurrence of such
redemption, excluding 9.920% notes held by Charter Holdings and its
Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 9.920% 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
9.920% 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 8.250% notes and the 8.625% 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 9.920% notes, 101% of the Accreted Value plus, for
any Change of Control Offer occurring after the Full Accretion Date, accrued and
unpaid
132
136
interest, if any, on the date of purchase. Within ten days following any Change
of Control, the issuers will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on a certain date, the "Change of Control Payment Date",
specified in such notice, pursuant to the procedures required by the Indentures
and described in such notice. The issuers will comply with the requirements of
Rule 14e-1 under the Securities Exchange Act of 1934 or any successor rules, and
any other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the notes as a
result of a Change of Control.
On the Change of Control Payment Date, the issuers will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of notes or portions thereof being purchased by the
issuers.
The Paying Agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for such notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each holder
a new note equal in principal amount 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.
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 Charter Holdings and its Subsidiaries, taken as a whole.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
the Issuers to repurchase such notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Charter
Holdings and its Subsidiaries, taken as a whole, another Person or group may be
uncertain.
133
137
ASSET SALES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Charter Holdings or a Restricted Subsidiary of Charter Holdings
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by Charter Holdings' Board of
Directors and evidenced by a resolution of such Board of Directors set
forth in an Officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by Charter
Holdings or such Restricted Subsidiary is in the form of cash, Cash
Equivalents or readily marketable securities.
For purposes of this provision, each of the following shall be deemed to be
cash:
(a) any liabilities shown on Charter Holdings' or such Restricted
Subsidiary's most recent balance sheet, other than contingent liabilities
and liabilities that are by their terms subordinated to the notes, that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Charter Holdings or such Restricted
Subsidiary from further liability;
(b) any securities, notes or other obligations received by Charter
Holdings or any such Restricted Subsidiary from such transferee that are
converted by Charter Holdings or such Restricted Subsidiary into cash, Cash
Equivalents or readily marketable securities within 60 days after receipt
thereof, to the extent of the cash, Cash Equivalents or readily marketable
securities received in that conversion; and
(c) Productive Assets.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Charter Holdings or a Restricted Subsidiary of Charter Holdings may apply such
Net Proceeds at its option:
(1) to repay debt under the Credit Facilities or any other
Indebtedness of the Restricted Subsidiaries, other than Indebtedness
represented by a guarantee of a Restricted Subsidiary of Charter Holdings;
or
(2) to invest in Productive Assets; provided that any Net Proceeds
which Charter Holdings or a Restricted Subsidiary of Charter Holdings has
committed to invest in Productive Assets within 365 days of the applicable
Asset Sale may be invested in Productive Assets within two years of such
Asset Sale.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $25.0 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
134
138
(x) with respect to the 8.250% notes and the 8.625% notes, 100% of
principal amount plus accrued and unpaid interest, if any, to the date of
purchase, and
(y) with respect to the 9.925% notes, 100% of the Accreted Value thereof
plus, after the Full Accretion Date, accrued and unpaid interest, if any, to the
date of purchase. If any Excess Proceeds remain after consummation of an Asset
Sale Offer, Charter Holdings may use such Excess Proceeds for any purpose not
otherwise prohibited by the indentures. If the aggregate principal amount of
notes and such other 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 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 in this section are summaries of certain covenants contained in
the indentures. The covenants summarized are the following:
- Limitations on restricted payments by Charter Holdings and its Restricted
Subsidiaries. Restricted payments include
- dividends and other distributions on equity interests,
- purchases, redemptions on other acquisitions of equity interests, and
- purchases, redemptions, defeasance or other acquisitions of
subordinated debt;
- Limitations on restricted investments by Charter Holdings or its
Restricted Subsidiaries. Restricted investments include investments other
than
- investments in Restricted Subsidiaries, cash equivalents,
- non-cash consideration from an asset sale made in compliance with the
indenture,
135
139
- investments with the net cash proceeds of the issuance and sale of
equity interests,
- investments in productive assets not to exceed in the $150 million,
- other investments not exceeding $50 million in any person,
- investments in customers and suppliers which either generate accounts
receivable or are accepted in settlement of bona fide disputes, and
- the investment in Marcus Cable Holdings LLC.
This covenant also limits the Company from allowing any Restricted
Subsidiary from becoming an Unrestricted Subsidiary;
- Limitations on the occurrence of Indebtedness and issuance of preferred
stock generally unless the leverage ratio is not greater than 8.75 to 1.0
on a pro forma basis. This does not prohibit the incurrence of permitted
debt which includes:
- borrowings up to $3.5 billion under the credit facilities,
- existing indebtedness,
- capital lease obligations, mortgage financings or purchase money
obligations in an aggregate amount of up to $25 million at any one
time outstanding for the purchase, construction or improvement of
productive assets,
- permitted refinancing indebtedness,
- intercompany indebtedness,
- hedging obligations,
- up to $300 million of additional indebtedness,
- additional indebtedness not exceeding 200% of the net cash proceeds
from the sale of equity interests to the extent not used to make
restricted payments or permitted investments, and
- the accretion or amortization of original issue discount and the write
up of indebtedness in accordance with purchase accounting;
- Prohibitions against the creation of liens except permitted liens;
- Prohibitions against restrictions on the ability of any Restricted
Subsidiary to pay dividends or make other distributions on its capital
stock to Charter Holdings or any Restricted Subsidiary, make loans or
advances to Charter Holdings or its Restricted Subsidiaries or transfer
properties or assets to Charter Holdings or any of its Restricted
Subsidiaries. This covenant, however, does not prohibit restrictions
under
- existing indebtedness,
- the notes and the indentures,
- applicable law,
- the terms of indebtedness or capital stock of a person acquired by
Charter Holdings or any of its Restricted Subsidiaries,
- customary non-assignment provisions in leases,
136
140
- purchase money obligations,
- agreements for the sale or other disposition of a Restricted
Subsidiary restricting distributions pending its sale,
- permitted refinancing indebtedness,
- liens securing indebtedness permitted under the indentures,
- joint venture agreements,
- under ordinary course contracts with customers that restrict cash,
other deposits or net worth,
- indebtedness permitted under the indentures, and
- restrictions that are not materially more restrictive than customary
provisions in comparable financings which management determines will
not materially impair Charter Holdings' ability to make payments
required under the notes;
- Prohibitions against mergers, consolidations or the sale of all or
substantially all of an issuer's assets unless
- the issuer is the surviving corporation or the person formed by the
merger or consolidation or acquiring the assets is organized under the
law of the United States, any state or the District of Columbia,
- such person assumes all obligations under the notes and the
indentures,
- no default or event of default exists, and
- Charter Holdings or the person formed by the merger or consolidation
or acquiring all or substantially all the assets could incur at least
$1.00 of additional indebtedness under the leverage ratio or have a
leverage ratio after giving effect to the transaction no greater than
the leverage ratio of the issuer immediately prior to the transaction;
- Prohibitions against transactions with affiliates, unless Charter
Holdings delivers to the trustee
- for transactions exceeding $15.0 million a resolution approved by
a majority of the board of directors certifying that the
transaction complies with the covenant and
- for transactions exceeding $50.0 million a fairness opinion of an
accounting, appraisal or investment banking firm of national
standing.
Certain transactions are not subject to the covenant including:
- existing employment agreements and new employment agreements
entered into in the ordinary course of business and consistent
with past practice;
- management fees under agreements existing at the issue date or
after the issue date if the percentage fees are not higher than
those under agreements existing on the issue date.
- Limitations on sale and leaseback transactions exceeding three years; and
- Prohibitions against consent payments to holders of notes unless paid to
all consenting holders.
137
141
During any period of time that
(a) either the 8.250% notes, the 8.625% notes or the 9.920% notes have
Investment Grade Ratings from both Rating Agencies and
(b) no Default or Event of Default has occurred and is continuing under the
applicable indenture.
Charter Holdings and its Restricted Subsidiaries will not be subject to the
provisions of the indenture described under
- "-- Incurrence of Indebtedness and Issuance of preferred stock,"
- "-- Restricted Payments,"
- "-- Asset Sales,"
- "-- Sale and Leaseback Transactions,"
- "-- Dividend and Other Payment Restrictions Affecting Subsidiaries,"
- "-- Transactions with Affiliates,"
- "-- Investments" and
- clause (4) of the first paragraph of "-- Merger, Consolidation and
Sale of Assets".
If Charter Holdings and its Restricted Subsidiaries are not subject to
these covenants for any period of time and, subsequently, one or both of the
Rating Agencies withdraws its ratings or downgrades the ratings assigned to the
applicable notes below the required Investment Grade Ratings or a Default or
Event of Default occurs and is continuing, then Charter Holdings and its
Restricted Subsidiaries will be subject again to these covenants. Compliance
with the covenant with respect to Restricted Payments made after the time of
such withdrawal, downgrade, Default or Event of Default will be calculated as if
such covenant had been in effect during the entire period of time from the issue
date.
RESTRICTED PAYMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Charter Holdings' or any of its Restricted
Subsidiaries' Equity Interests, including, without limitation, any payment
in connection with any merger or consolidation involving Charter Holdings
or any of its Restricted Subsidiaries, or to the direct or indirect holders
of Charter Holdings' or any of its Restricted Subsidiaries' Equity
Interests in their capacity as such, other than dividends or distributions
payable in Equity Interests, other than Disqualified Stock, of Charter
Holdings or, in the case of Charter Holdings and its Restricted
Subsidiaries, to Charter Holdings or a Restricted Subsidiary of Charter
Holdings;
(2) purchase, redeem or otherwise acquire or retire for value,
including, without limitation, in connection with any merger or
consolidation involving Charter Holdings, any Equity Interests of Charter
Holdings or any direct or indirect parent of Charter Holdings or any
Restricted Subsidiary of Charter Holdings, other than, in the case of
Charter Holdings and its Restricted Subsidiaries, any such Equity Interests
owned by Charter Holdings or any Restricted Subsidiary of Charter Holdings;
or
138
142
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes, other than the notes, except a payment of
interest or principal at the Stated Maturity thereof, all such payments and
other actions set forth in clauses (1) through (3) above 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) Charter Holdings would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Leverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of preferred stock"; and
(6) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Charter Holdings and each of its
Restricted Subsidiaries after the date of the 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
Charter Holdings since the date of the indentures to the end of Charter
Holdings' most recently ended full fiscal quarter for which internal
financial statements are available, taken as a single accounting period,
less the product of 1.2 times the combined Consolidated Interest Expense
of Charter Holdings since the date of the indentures to the end of
Charter Holdings' most recently ended full fiscal quarter for which
internal financial statements are available, taken as a single
accounting period, plus
(b) an amount equal to 100% of Capital Stock Sale Proceeds less any
such Capital Stock Sale Proceeds used in connection with (i) an
Investment made pursuant to clause (6) of the definition of "Permitted
Investments" or (ii) the incurrence of Indebtedness pursuant to clause
(10) of "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 Charter Holdings in
exchange for, or out of the net proceeds of the substantially concurrent
sale, other than to a Subsidiary of Charter Holdings, of, Equity Interests
of Charter Holdings, other than Disqualified Stock; provided that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (3)(b) of the preceding paragraph;
139
143
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) regardless of whether a Default then exists, the payment of any
dividend or distribution to the extent necessary to permit direct or
indirect beneficial owners of shares of Capital Stock of Charter Holdings
to pay federal, state or local income tax liabilities that would arise
solely from income of Charter Holdings or any of its Restricted
Subsidiaries, as the case may be, for the relevant taxable period and
attributable to them solely as a result of Charter Holdings, and any
intermediate entity through which the holder owns such shares or any of
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 Charter Holdings to the holders of
its common Equity Interests on a pro rata basis;
(6) the payment of any dividend on Charter Holdings preferred stock or
the redemption, repurchase, retirement or other acquisition of Charter
Holdings preferred stock in an amount not in excess of its aggregate
liquidation value;
(7) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Charter Holdings held by any member of
Charter Holdings' management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the
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 Charter Holdings; and
(8) payment of fees in connection with any acquisition, merger or
similar transaction in an amount that does not exceed an amount equal to
1.25% of the transaction value of such acquisition, merger or similar
transaction.
The amount of all Restricted Payments, other than cash shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Charter Holdings or any of its
Restricted Subsidiaries pursuant to the Restricted Payment. The fair market
value of any assets or securities that are required to be valued by this
covenant shall be determined by the Board of Directors of Charter Holdings whose
resolution with respect thereto shall be delivered to the Trustee. Such Board of
Directors' determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $100 million. Not later than the date of making any
Restricted Payment, 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.
140
144
INVESTMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) make any Restricted Investment; or
(2) allow any Restricted Subsidiary of Charter Holdings to become an
Unrestricted Subsidiary, unless, in each case:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(2) Charter Holdings would, at the time of, and after giving effect
to, such Restricted Investment or such designation of a Restricted
Subsidiary as an unrestricted Subsidiary, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Leverage Ratio test
set forth in the first paragraph of the covenant described below under the
caption "-- Incurrence of Indebtedness and Issuance of preferred stock."
An Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary
if such redesignation would not cause a Default.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
(a) Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness, including Acquired
Debt, and Charter Holdings will not issue any Disqualified Stock and will not
permit any of its Restricted Subsidiaries to issue any shares of preferred stock
unless the Leverage Ratio would have been not greater than 8.75 to 1.0
determined on a pro forma basis, including a pro forma application of the net
proceeds therefrom, as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of the
most recently ended fiscal quarter.
So long as no Default shall have occurred and be continuing or would be
caused thereby, the first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by Charter Holdings and its Restricted Subsidiaries
of Indebtedness under the Credit Facilities; provided that the aggregate
principal amount of all Indebtedness of Charter Holdings 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 Charter
Holdings 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 Charter Holdings and its Restricted Subsidiaries
of Existing Indebtedness, other than the Credit Facilities;
(3) the incurrence on the Issue Date by Charter Holdings and its
Restricted Subsidiaries of Indebtedness represented by the Notes;
141
145
(4) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement, including, without limitation, the cost of
design, development, construction, acquisition, transportation,
installation, improvement, and migration, of Productive Assets of Charter
Holdings or any of its Restricted Subsidiaries in an aggregate principal
amount not to exceed $75 million at any time outstanding;
(5) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace, in whole or
in part, Indebtedness, other than intercompany Indebtedness, that was
permitted by the indentures to be incurred under the first paragraph of
this covenant or clauses (2) or (3) of this paragraph;
(6) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries, of intercompany Indebtedness between or among Charter
Holdings and any of its Wholly Owned Restricted Subsidiaries; provided,
that this clause does not permit Indebtedness between Charter Holdings or
any of its Restricted Subsidiaries, as creditor or debtor, as the case may
be, unless otherwise permitted by the indentures; provided, further, that:
(a) if Charter Holdings is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior payment in full
in cash of all Obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
Charter Holdings or a Wholly Owned Restricted Subsidiary thereof, and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either Charter Holdings or a Wholly Owned Restricted
Subsidiary thereof, shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Charter Holdings or any of its
Restricted Subsidiaries, as the case may be, that was not permitted by
this clause (6);
(7) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the indentures to be
outstanding;
(8) the guarantee by Charter Holdings of Indebtedness of Charter
Holdings or a Restricted Subsidiary of Charter Holdings, that was permitted
to be incurred by another provision of this covenant;
(9) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries, of additional Indebtedness in an aggregate principal amount
at any time outstanding, not to exceed $300 million;
(10) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries, of additional Indebtedness in an aggregate principal amount
at any time outstanding, not to exceed 200% of the net cash proceeds
received by Charter Holdings from the sale of its Equity Interests, other
than Disqualified Stock, after the date of the Indentures to the extent
such net cash proceeds have not been applied to make Restricted Payments or
to effect other transactions pursuant to the covenant described above
142
146
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,
Charter Holdings will be permitted to classify and from time to time to
reclassify such item of Indebtedness on the date of its incurrence in any manner
that complies with this covenant. For avoidance of doubt, Indebtedness incurred
pursuant to a single agreement, instrument, program, facility or line of credit
may be classified as Indebtedness arising in part under one of the clauses
listed above, and in part under any one or more of the clauses listed above, to
the extent that such Indebtedness satisfies the criteria for such clauses.
(b) Notwithstanding the foregoing, in no event shall any Restricted
Subsidiary of Charter Holdings consummate a Subordinated Debt Financing or a
preferred stock Financing. A "Subordinated Debt Financing" or a "preferred stock
Financing", as the case may be, with respect to any Restricted Subsidiary of
Charter Holdings shall mean a public offering or private placement, whether
pursuant to Rule 144A under the Securities Act or otherwise, of Subordinated
Notes or preferred stock, whether or not such preferred stock constitutes
Disqualified Stock, as the case may be, of such Restricted Subsidiary to one or
more purchasers, other than to one or more Affiliates of Charter Holdings.
"Subordinated Notes" with respect to any Restricted Subsidiary of Charter
Holdings shall mean Indebtedness of such Restricted Subsidiary that is
contractually subordinated in right of payment to any other Indebtedness of such
Restricted Subsidiary, including, without limitation, Indebtedness under the
Credit Facilities. The foregoing limitation shall not apply to (i) any
Indebtedness or preferred stock of any Person existing at the time such Person
is merged with or into or became a Subsidiary of Charter Holdings; provided that
such Indebtedness or preferred stock was not incurred or issued in connection
with, or in contemplation of, such Person merging with or into, or becoming a
Subsidiary of, Charter Holdings and (ii) any Indebtedness or preferred stock of
a Restricted Subsidiary issued in connection with, and as part of the
consideration for, an acquisition, whether by stock purchase, asset sale, merger
or otherwise, in each case involving such Restricted Subsidiary, which
Indebtedness or preferred stock is issued to the seller or sellers of such stock
or assets; provided that such Restricted Subsidiary is not obligated to register
such Indebtedness or preferred stock under the Securities Act of 1933 or
obligated to provide information pursuant to Rule 144A under the Securities Act
of 1933.
LIENS
Charter Holdings will not, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or
trade payables on any asset now owned or hereafter acquired, except Permitted
Liens.
143
147
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
Charter Holdings will not, directly or indirectly, create or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of Charter Holdings, to:
(1) pay dividends or make any other distributions on its Capital Stock
to Charter Holdings or any of its Restricted Subsidiaries, or with respect
to any other interest or participation in, or measured by, its profits, or
pay any indebtedness owed to Charter Holdings or any of its Restricted
Subsidiaries;
(2) make loans or advances to Charter Holdings or any of its
Restricted Subsidiaries or any of its Restricted Subsidiaries; or
(3) transfer any of its properties or assets to Charter Holdings or
any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indentures,
including, without limitation, the Credit Facilities and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a whole,
with respect to such dividend and other payment restrictions than those
contained in such Existing Indebtedness, as in effect on the date of the
Indentures;
(2) the indentures and the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Charter Holdings or any of its Restricted Subsidiaries as in
effect at the time of such acquisition, except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired; provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
Indentures to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary of Charter Holdings that restricts distributions by such
Restricted Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
144
148
(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "-- Liens" that limit the right of Charter Holdings or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) restrictions contained in the terms of Indebtedness permitted to
be incurred under the covenant "-- 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 Charter
Holdings determines that such restrictions will not materially impair
Charter Holdings' ability to make payments as required under the notes.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
Neither of the issuers may, directly or indirectly:
(1) consolidate or merge with or into another Person, whether or not
such issuer is the surviving corporation; or
(2) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(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 Charter Holdings, 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 Charter Holdings, 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) Charter Holdings or the Person formed by or surviving any such
consolidation or merger, if other than Charter Holdings, will, on the
date of such transaction after giving pro forma effect thereto and any
related financing
145
149
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, Charter Holdings may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Charter Holdings and any of its
Wholly Owned Subsidiaries.
TRANSACTIONS WITH AFFILIATES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to Charter Holdings or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Charter Holdings or
such Restricted Subsidiary with an unrelated Person; and
(2) Charter Holdings delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$15.0 million, a resolution of the Board of Directors of Charter
Holdings set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with this covenant and that such
Affiliate Transaction has been approved by a majority of the members of
the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$50.0 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 Charter Holdings or
any of its Subsidiaries and any employment agreement entered into by
Charter Holdings or any of its Restricted Subsidiaries in the ordinary
course of business and consistent with the past practice of Charter
Holdings or such Restricted Subsidiary;
(2) transactions between or among Charter Holdings and/or its
Restricted Subsidiaries;
146
150
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of Charter Holdings, and customary indemnification and
insurance arrangements in favor of directors, regardless of affiliation
with Charter Holdings, or any of its Restricted Subsidiaries;
(4) payment of management fees pursuant to management agreements
either (A) existing on 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
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Charter Holdings may enter into a sale and leaseback transaction if:
(1) Charter Holdings could have
(a) incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction under the Leverage Ratio
test in the first paragraph of the covenant described above under the
caption "-- Incurrence of Additional Indebtedness and Issuance of preferred
stock" and
(b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "-- Liens"; and
(2) the transfer of assets in that sale and leaseback transaction is
permitted by, and Charter Holdings applies the proceeds of such transaction
in compliance with, the covenant described above under the caption
"-- Asset Sales."
The foregoing restrictions do not apply to a sale and leaseback transaction
if the lease is for a period, including renewal rights, of not in excess of
three years.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
Charter Holdings will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee or pledge any assets to secure the payment
of any other Indebtedness of Charter Holdings, except in respect of the Credit
Facilities (the "Guaranteed Indebtedness") unless
(1) such Restricted Subsidiary of Charter Holdings simultaneously executes
and delivers a supplemental indenture providing for the Guarantee (a "Subsidiary
Guarantee") of the payment of the notes by such Restricted Subsidiary and
(2) until one year after all the notes have been paid in full in cash, such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against Charter Holdings or any other Restricted
Subsidiary of Charter Holdings as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall
not be applicable to any Guarantee or any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was
147
151
not Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary. If the Guaranteed Indebtedness is subordinated to the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated
to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated to the Notes.
PAYMENTS FOR CONSENT
Charter Holdings will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indentures or the Notes
unless such consideration is offered to be paid and is paid to all holders of
the Notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the Commission, so long as any Notes are
outstanding, Charter Holdings 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 Charter Holdings 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 Charter Holdings' certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Charter Holdings were required to file such
reports.
If Charter Holdings has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Charter
Holdings and its Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of Charter Holdings.
In addition, whether or not required by the Securities and Exchange
Commission, Charter Holdings will file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations, unless the Securities and Exchange Commission will not accept such
a filing, and make such information available to securities analysts and
prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(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;
148
152
(3) failure by Charter Holdings or any of its Restricted Subsidiaries,
to comply with the provisions described under the captions "-- Change of
Control" or "-- Merger, Consolidation, or Sale of Assets";
(4) failure by Charter Holdings or any of its Restricted Subsidiaries,
for 30 days after written notice thereof has been given to Charter Holdings
by the Trustee or to Charter Holdings and the Trustee by holders of at
least 25% of the aggregate principal amount of the notes outstanding to
comply with any of their other covenants or agreements in the indentures;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Charter Holdings or any of its
Restricted Subsidiaries, or the payment of which is guaranteed by Charter
Holdings or any of its Restricted Subsidiaries, whether such Indebtedness
or guarantee now exists, or is created after the date of the indentures, if
that default:
(a) is caused by a failure to pay at final stated maturity the
principal amount on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(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 Charter Holdings 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 Charter
Holdings or any of its Significant Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Charter Holdings, all outstanding
notes will become due and payable immediately without further action or notice.
If any other Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes 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.
Charter Holdings will be required to deliver to the trustee annually a
statement regarding compliance with the indentures. Upon becoming aware of any
Default or Event
149
153
of Default, Charter Holdings 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
Charter Holdings, as such, shall have any liability for any obligations of
Charter Holdings 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
Charter Holdings may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the Accreted Value or principal of, premium, if any, and
interest on such notes when such payments are due from the trust referred
to below;
(2) Charter Holdings' obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Charter Holdings' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indentures.
In addition, Charter Holdings may, at its option and at any time, elect to
have the obligations of Charter Holdings released with respect to certain
covenants that are described in the indentures ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Charter Holdings must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding notes on the stated maturity or on
the applicable redemption date, as the case may be, and Charter Holdings
must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, Charter Holdings shall have
delivered to the trustee an Opinion of Counsel reasonably acceptable to the
trustee confirming that
150
154
(a) Charter Holdings has received from, or there has been published
by, the Internal Revenue Service a ruling or
(b) since the date of the indentures, there has been a change in
the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the
holders of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Charter Holdings shall have
delivered to the trustee an Opinion of Counsel reasonably acceptable to the
trustee confirming that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either:
(a) on the date of such deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit; or
(b) 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 Charter
Holdings or any of its Restricted Subsidiaries is a party or by which
Charter Holdings or any of its Restricted Subsidiaries is bound;
(6) Charter Holdings must have delivered to the trustee an Opinion of
Counsel to the effect that after the 91st day assuming no intervening
bankruptcy, that no holder is an insider of Charter Holdings following the
deposit and that such deposit would not be deemed by a court of competent
jurisdiction a transfer for the benefit of either issuer in its capacity as
such, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally;
(7) Charter Holdings must deliver to the trustee an Officers'
certificate stating that the deposit was not made by Charter Holdings with
the intent of preferring the holders of Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of Charter Holdings or others; and
(8) Charter Holdings must deliver to the trustee an Officers'
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
Notwithstanding the foregoing, the Opinion of Counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all notes
not theretofore delivered to the trustee for cancellation
(a) have become due and payable or
151
155
(b) will become due and payable on the maturity date within one year under
arrangements satisfactory to the trustee for the giving of notice of redemption
by the trustee in the name, and at the expense, of the issuers.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided 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 8.250% notes and the
8.625% notes, and aggregate principal amount at maturity, in the case of the
9.920% 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 8.250% notes and
the 8.625% notes, and aggregate principal amount at maturity, in the case of the
9.920% 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;
(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,
Charter Holdings 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;
152
156
(3) to provide for the assumption of Charter Holdings' obligations to
holders of notes in the case of a merger or consolidation or sale of all or
substantially all of Charter Holdings' 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 Charter Holdings, the indentures limit
its right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such 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.
BOOK-ENTRY, DELIVERY AND FORM
The notes will initially be issued in the form of global securities held in
book-entry form. The notes will be deposited with the trustee as custodian for
the Depository Trust Company, and Depository Trust Company or its nominee will
initially be the sole registered holder of the notes for all purposes under the
indentures. Unless it is exchanged in whole or in part for debt securities in
definitive form as described below, a global security may not be transferred.
However, transfers of the whole security between DTC and its nominee or their
respective successors are permitted.
Upon the issuance of a global security, Depository Trust Company or its
nominee will credit on its internal system the principal amount at maturity of
the individual beneficial interest represented by the global security acquired
by the persons in this offering. Ownership of beneficial interests in a global
security will be limited to persons that have accounts with Depository Trust
Company or persons that hold interests through
153
157
participants. Ownership of beneficial interests will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by Depository Trust Company or its nominee relating to interests of
participants and the records of participants relating to interests of persons
other than participants. The laws of some jurisdictions require that some
purchasers of securities take physical delivery of the securities in definitive
form. These limits and laws may impair the ability to transfer beneficial
interests in a global security.
Principal and interest payments on global securities registered in the name
of Depository Trust Company's nominee will be made in immediate available funds
to Depository Trust Company's nominee as the registered owner of the global
securities. The issuers and the trustee will treat Depository Trust Company's
nominee as the owner of the global securities for all other purposes as well.
Accordingly, the issuers, the trustee, any paying agent and the Initial
Purchasers will have no direct responsibility or liability for any aspect of the
records relating to payments made on account of beneficial interests in the
global securities or for maintaining, supervising or reviewing any records
relating to these beneficial interests. It is Depository Trust Company's current
practice, upon receipt of any payment of principal or interest, to credit direct
participants' accounts on the payment date according to their respective
holdings of beneficial interests in the global securities. These payments will
be the responsibility of the direct and indirect participants and not of
Depository Trust Company, the issuers, the Trustee or the Initial Purchasers.
So long as Depository Trust Company or its nominee is the registered owner
or holder of the global security, Depository Trust Company or its nominee, as
the case may be, will be considered the sole owner or holder of the notes
represented by the global security for the purposes of:
(1) receiving payment on the notes;
(2) receiving notices; and
(3) for all other purposes under the indentures and the notes.
Beneficial interests in the notes will be evidenced only by, and transfers of
the notes will be effected only through, records maintained by Depository Trust
Company and its participants.
Except as described above, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of certificated notes
in definitive form and will not be considered the holders of the global security
for any purposes under the indentures. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of
Depository Trust Company. And, if that person is not a participant, the person
must rely on the procedures of the participant through which that person owns
its interest, to exercise any rights of a holder under the indentures. Under
existing industry practices, if the issuers request any action of holders or an
owner of a beneficial interest in a global security desires to take any action
under the indentures, Depository Trust Company would authorize the participants
holding the relevant beneficial interest to take that action. The participants
then would authorize beneficial owners owning through the participants to take
the action or would otherwise act upon the instructions of beneficial owners
owning through them.
Depository Trust Company has advised the issuers that it will take any
action permitted to be taken by a holder of notes only at the direction of one
or more participants to whose account with DTC interests in the global security
are credited. Further,
154
158
Depository Trust Company will take action only as to the portion of the
aggregate principal amount at maturity of the notes as to which the participant
or participants has or have given the direction.
Although Depository Trust Company has agreed to the procedures described
above in order to facilitate transfers of interests in global securities among
participants of Depository Trust Company, it is under no obligation to perform
these procedures, and the procedures may be discontinued at any time. None of
the issuers, the Trustee, any agent of the issuers or the Initial Purchasers
will have any responsibility for the performance by Depository Trust Company or
its participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
Depository Trust Company has provided the following information to us.
Depository Trust Company is a:
(1) limited-purpose trust company organized under the New York Banking Law;
(2) a banking organization within the meaning of the New York Banking Law;
(3) a member of the 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) Depository Trust Company notifies the issuers that it is unwilling or
unable to continue as depository or if Depository Trust Company ceases
to be a registered clearing agency, and a successor depository is not
appointed by the issuers within 90 days;
(2) the issuers determine not to require all of the notes to be represented
by a global security and notifies the Trustee of its decision; or
(3) an Event of Default or an event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default relating
to the notes represented by the global security has occurred and is
continuing.
Any global security that is exchangeable for certificated notes in
accordance with the preceding sentence will be transferred to, and registered
and exchanged for, certificated notes in authorized denominations and registered
in the names as Depository Trust Company or its nominee may direct. However, a
global security is only exchangeable for a global security of like denomination
to be registered in the name of Depository Trust Company or its nominee. If a
global security becomes exchangeable for certificated notes:
(1) certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
(2) payment of principal, premium, if any, and interest on the certificated
notes will be payable, and the transfer of the certificated notes will
be registrable, at the office or agency of the issuers maintained for
these purposes; and
155
159
(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 (1), (2), (3) or (4) for each $1,000 of principal amount
at maturity of the 9.920% 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
(2) 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
(x) the Accreted Value for the first Semi-Annual Accrual Date
less $613.94 multiplied by (y) 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;
(3) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of
(a) the Accreted Value for the Semi-Annual Accrual Date immediately
preceding such Specified Date and
(b) an amount equal to the product of
156
160
(1) the Accreted Value for the immediately following
Semi-Annual Accrual Date less the Accreted Value for the
immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the
immediately preceding Semi-Annual Accrual Date to the Specified
Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180; or
(4) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"ASSET ACQUISITION" means
(a) an Investment by Charter Holdings or any of its Restricted
Subsidiaries, in any other Person pursuant to which such Person shall become a
Restricted Subsidiary of Charter Holdings or any of its Restricted Subsidiaries,
or shall be merged with or into Charter Holdings or any of its Restricted
Subsidiaries, or
(b) the acquisition by Charter Holdings or any of its Restricted
Subsidiaries, of the assets of any Person which constitute all or substantially
all of the assets of such Person, any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of Charter Holdings
and its 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 Charter Holdings'
Restricted Subsidiaries or the sale of Equity Interests in any of Charter
Holdings' Restricted Subsidiaries.
157
161
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $100
million; or
(b) results in net proceeds to Charter Holdings and its Restricted
Subsidiaries of less than $100 million;
(2) a transfer of assets between or among Charter Holdings and its
Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary of Charter Holdings to Charter Holdings or to another Wholly
Owned Restricted Subsidiary of Charter Holdings;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- 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.
"ASSET SALE OFFER" means a situation in which the issuers commence an offer
to all holders to purchase notes pursuant to Section 4.11 of the indentures.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessee, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person," as such term is used in Section 13(d)(3)
of the Exchange Act, such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"CABLE RELATED BUSINESS" means the business of owning cable television
systems and businesses ancillary, complementary and related thereto.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
158
162
(4) any other interest, other than any debt obligation, or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate net cash proceeds,
including the fair market value of the non-cash proceeds, as determined by an
independent appraisal firm, received by Charter Holdings since the date of the
indentures
(x) as a contribution to the common equity capital or from the issue
or sale of Equity Interests of Charter Holdings, other than Disqualified
Stock, or
(y) from the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of Charter Holdings
that have been converted into or exchanged 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 Charter Holdings and its
Subsidiaries, taken as a
159
163
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 Charter Holdings;
(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 Charter
Holdings, becomes the Beneficial Owner, directly or indirectly, of more
than 35% of the Voting Stock of Charter Holdings, 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 Charter Holdings, measured by voting power rather than the number
of shares, than such person;
(4) after Charter Holdings' initial public offering, the first day on
which a majority of the members of the Board of Directors of Charter
Holdings are not Continuing Directors; or
(5) Charter Holdings consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into, Charter
Holdings, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of Charter Holdings is converted into or exchanged
for cash, securities or other property, other than any such transaction
where the Voting Stock of Charter Holdings 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 Charter Holdings and its Restricted Subsidiaries in
conformity with GAAP;
160
164
(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;
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.
161
165
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, without duplication, the sum of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization or original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments, if any, pursuant to Hedging Obligations; and
(2) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and
(3) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon;
excluding, however, any amount of such interest of any Restricted Subsidiary if
the net income of such Restricted Subsidiary is excluded in the calculation of
Consolidated EBITDA pursuant to clause (z) of the definition thereof, but only
in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Consolidated EBITDA pursuant to clause (z) of
the definition thereof, in each case, on a consolidated basis and in accordance
with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the Board of Directors of Charter Holdings who:
(1) was a member of such Board of Directors on the date of the
Indentures; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election or whose
election or appointment was previously so approved.
"CREDIT FACILITIES" means, with respect to Charter Holdings, and/or its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing, including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables, or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person, whether or not such Person
is the Surviving Person, or the sale, assignment, or transfer, lease conveyance
or other disposition of all or substantially all of such Person's assets or
Capital Stock.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof, or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable
162
166
at the option of the holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the notes mature. Notwithstanding
the preceding sentence, any Capital Stock that would constitute Disqualified
Stock solely because the holders thereof have the right to require Charter
Holdings to repurchase such Capital Stock upon the occurrence of a change of
control or an asset sale shall not constitute Disqualified Stock if the terms of
such Capital Stock provide that Charter Holdings may not repurchase or redeem
any such Capital Stock pursuant to such provisions unless such repurchase or
redemption complies with the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments."
"EVENTS OF DEFAULTS" means:
(1) the issuers default in the payment when due of interest on the
notes and such default continues for a period of 30 days;
(2) the issuers default in payment when due of the principal of or
premium, if any, on the notes;
(3) the Company or any of its Restricted Subsidiaries, or the
guarantor or any of its Restricted Subsidiaries, fails to comply with any
of the provisions of Sections 4.16 or 5.01;
(4) the Company or any of its Restricted Subsidiaries, or the
guarantor or any of its Restricted Subsidiaries, fails to comply with any
of their other covenants or agreements in the indentures 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;
(5) the Company or any of its Restricted Subsidiaries, or the
guarantor or any of its Restricted Subsidiaries, defaults 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, or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries, or by the Guarantor 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) the Company or any of its Restricted Subsidiaries, or the
guarantor or any of its Restricted Subsidiaries, fails 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;
163
167
(7) the Company, the guarantor or any of their Significant
Subsidiaries pursuant to or within the meaning of Bankruptcy Law:
(a) commences a voluntary case,
(b) consents to the entry of an order for relief against it in an
involuntary case,
(c) consents to the appointment of a custodian of it or for all or
substantially all of its property, or
(d) makes a general assignment for the benefit of its creditors; or
(8) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(a) is for relief against the Company, the guarantor or any of
their Significant Subsidiaries in an involuntary case;
(b) appoints a custodian of the Company, the guarantor or any of
their Significant Subsidiaries or for all or substantially all of the
property of the Company, the guarantor or any of their Significant
Subsidiaries; or
(c) orders the liquidation of the Company, the guarantor or any of
their Significant Subsidiaries;
and the order or decree remains unstayed and in effect for 60 consecutive
days.
(9) except as permitted by the indenture, the Guarantee of the
guarantor shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or the
guarantor, or any Person acting on behalf of the guarantor, shall deny or
disaffirm its obligations under the Guarantee;
(10) except as permitted by this Indenture, any of the pledge
documents cease to be in full force and effect, other than in accordance
with their respective terms or the terms of the Indenture, or any of the
pledge documents cease to give the trustee or the Company, as the case may
be, the Liens purported to be created thereby, or any pledge document is
declared null and void, or the Company or the guarantor shall repudiate or
deny in writing that it has any liability or obligation under any pledge
document.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"EQUITY OFFERING" means any private or underwritten public offering of
Qualified Capital Stock of Charter Holdings which the gross proceeds to the
Company are at least $25 million.
"EXCESS PROCEEDS" means any Net Proceeds from Asset Sales that are not
applied to repay debt under the Credit Facilities or other Indebtedness or
invested in Productive Assets, in accordance with the indenture.
"EXISTING INDEBTEDNESS" means Indebtedness of Charter Holdings and its
Restricted Subsidiaries in existence on the date of the Indentures, until such
amounts are repaid.
"FULL ACCRETION DATE" means April 1, 2004, the first date on which the
Accreted Value of the 9.920% notes has accreted to an amount equal to the
principal amount at maturity of the 9.920% notes.
164
168
"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;
(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.
165
169
"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 Charter
Holdings for the most recently ended fiscal quarter for which internal
financial statements are available multiplied by four (the "Reference
Period").
In addition to the foregoing, for purposes of this definition,
"Consolidated EBITDA" shall be calculated on a pro forma basis after giving
effect to
(1) the issuance of the notes;
(2) the incurrence of the Indebtedness or the issuance of the
Disqualified Stock or other preferred stock of a Restricted Subsidiary, and
the application of the proceeds therefrom, giving rise to the need to make
such calculation and any incurrence or issuance, and the application of the
proceeds therefrom, or repayment of other Indebtedness or Disqualified
Stock or other preferred stock 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;
(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.
166
170
"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 Charter
Holdings or any of its Restricted Subsidiaries in respect of any Asset Sale,
including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale, net of the
direct costs relating to such Asset Sale, including, without limitation, legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof or taxes paid or payable as a
result thereof, including amounts distributable in respect of owners', partners'
or members' tax liabilities resulting from such sale, in each case after taking
into account any available tax credits or deductions and any tax sharing
arrangements and amounts required to be applied to the repayment of
Indebtedness.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither Charter Holdings nor any of its Restricted
Subsidiaries
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness,
(b) is directly or indirectly liable as a guarantor or otherwise,
or
(c) constitutes the lender;
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder of
any other Indebtedness, other than the notes, of Charter Holdings or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of Charter Holdings or
any of its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PAYING AGENT" means an office or agency where notes may be presented for
payment.
"PERMITTED INVESTMENTS" means:
(1) any Investment by Charter Holdings in a Restricted Subsidiary of
Charter Holdings, or any Investment by a Restricted Subsidiary of Charter
Holdings in Charter Holdings;
167
171
(2) any Investment in Cash Equivalents;
(3) any Investment by Charter Holdings 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 Charter
Holdings; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Charter Holdings or a Restricted Subsidiary of Charter
Holdings;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
(5) Investment made out of the net cash proceeds of the issue and
sale, other than to a Subsidiary of Charter Holdings, of Equity Interests,
other than Disqualified Stock, of Charter Holdings 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 (6) since the Issue Date,
not to exceed $150 million; provided that either Charter Holdings or any of
its Restricted Subsidiaries, after giving effect to such Investments, will
own at least 20% of the Voting Stock of such Person;
(7) other Investments in any Person having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together with all
other Investments made pursuant to this clause (7) since the date of the
indentures, not to exceed $50 million;
(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) Charter Holdings' investment in Marcus Cable Holdings, LLC, as
outstanding on the Issue Date.
"PERMITTED LIENS" means:
(1) Liens on the assets of Charter Holdings securing Indebtedness and
other Obligations under clause (1) of the covenant "-- Incurrence of
Indebtedness and Issuance of preferred stock";
(2) Liens in favor of Charter Holdings and Liens on the assets of any
Restricted Subsidiary of Charter Holdings in favor of any other Restricted
Subsidiary of Charter Holdings;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Charter Holdings; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not
168
172
extend to any assets other than those of the Person merged into or
consolidated with Charter Holdings;
(4) Liens on property existing at the time of acquisition thereof by
Charter Holdings; provided that such Liens were in existence prior to the
contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) purchase money mortgages or other purchase money liens, including
without limitation any Capitalized Lease Obligations, incurred by Charter
Holdings upon any fixed or capital assets acquired after the Issue Date or
purchase money mortgages, including without limitation Capitalized Lease
Obligations, on any such assets, whether or not assumed, existing at the
time of acquisition of such assets, whether or not assumed, so long as
(a) such mortgage or lien does not extend to or cover any of the
assets of Charter Holdings, except the asset so developed, constructed,
or acquired, and directly related assets such as enhancements and
modifications thereto, substitutions, replacements, proceeds, including
insurance proceeds, products, rents and profits thereof, and
(b) such mortgage or lien secures the obligation to pay the
purchase price of such asset, interest thereon and other charges, costs
and expenses, including, without limitation, the cost of design,
development, construction, acquisition, transportation, installation,
improvement, and migration, and incurred in connection therewith, or the
obligation under such Capitalized Lease Obligation, only;
(7) Liens existing on the date of the Indentures, other than in
connection with the Credit Facilities;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(10) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(11) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligation, bankers'
acceptance, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business, exclusive of obligations for the payment
of borrowed money;
169
173
(12) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of Charter
Holdings or any of its Restricted Subsidiaries 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 Charter Holdings or any of its Restricted Subsidiaries that does
not give rise to an Event of Default;
(16) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(17) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Hedging Obligations and forward contracts,
options, future contracts, future options or similar agreements or
arrangements designed solely to protect Charter Holdings or any of its
Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
(18) Liens consisting of any interest or title of licensor in the
property subject to a license;
(19) Liens on the Capital Stock of Unrestricted Subsidiaries;
(20) Liens arising from sales or other transfers of accounts
receivable which are past due or otherwise doubtful of collection in the
ordinary course of business;
(21) Liens incurred in the ordinary course of business of Charter
Holdings, with respect to obligations which in the aggregate do not exceed
$50 million at any one time outstanding;
(22) Liens in favor of the Trustee arising under the provisions in the
Indentures under the subheading "-- Compensation and Indemnity"; and
(23) Liens in favor of the Trustee for its benefit and the benefit of
holders of the Notes, as their respective interests appear.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Charter
Holdings or any of its Restricted Subsidiaries, issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries, other than intercompany Indebtedness, provided that unless
permitted otherwise by the Indentures, no Indebtedness of Charter Holdings or
any of its Restricted Subsidiaries may be issued in exchange for, or the net
proceeds of are used to extend, refinance, renew, replace, defease or refund
Indebtedness of Charter Holdings or any of its Restricted Subsidiaries;
provided, further, that:
(1) the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount of,
or accreted value,
170
174
if applicable, plus accrued interest and premium, if any, on, the
Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded, plus the amount of reasonable expenses incurred in connection
therewith;
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
Notes on terms at least as favorable to the holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Charter Holdings or by any
of its Restricted Subsidiaries who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"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).
"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
171
175
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.
"SUBORDINATED DEBT FINANCING" means, with respect to any restricted
subsidiary of Charter Holdings or the guarantor, a public offering or private
placement, whether pursuant to Rule 144A under the Securities Act or otherwise,
of subordinated notes or preferred stock, whether or not such preferred stock
constitutes disqualified stock, as the case may be, of such restricted
subsidiary to one or more purchasers, other than to one or more affiliates of
Charter Holdings or the guarantor.
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which at
least 50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person, or a combination thereof, and, in the
case of any such entity of which 50% of the total voting power of shares of
Capital Stock is so owned or controlled by such Person or one or more of
the other Subsidiaries of such Person, such Person and its Subsidiaries
also has the right to control the management of such entity pursuant to
contract or otherwise; and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person, or any combination thereof.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of Charter Holdings that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Charter Holdings or any Restricted Subsidiary of Charter
Holdings unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Charter Holdings or any Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of Charter Holdings unless such terms constitute
Investments permitted by the covenant described above under the heading
"-- Investments";
(3) is a Person with respect to which neither Charter Holdings nor any
of its Restricted Subsidiaries has any direct or indirect obligation
(a) to subscribe for additional Equity Interests or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Charter Holdings or any of its
Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Charter Holdings or any of its Restricted
Subsidiaries or has at
172
176
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 Charter Holdings as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Investments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indentures and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of Charter Holdings as of such
date and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption "Incurrence of Indebtedness and
Issuance of preferred stock," Charter Holdings shall be in default of such
covenant. The Board of Directors of Charter Holdings may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Charter Holdings of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if
(1) such Indebtedness is permitted under the covenant described under the
caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of
preferred stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period; and
(2) no Default or Event of Default would be in existence following such
designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the board of
directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth,
that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which, other than directors' qualifying shares, shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
173
177
CERTAIN FEDERAL TAX CONSIDERATIONS
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Set forth below are the material United States federal income tax
consequences relevant to, in the opinion of Paul, Hastings, Janofsky & Walker,
LLP, our legal counsel, of the exchange offer. Except where noted, the following
deals only with notes held as capital assets within the meaning of section 1221
of the Internal Revenue Code of 1986, as amended by 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. The
following 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 following is based upon the provisions of the
Internal Revenue Code and regulations, rulings and judicial decisions
promulgated under the Internal Revenue Code as of the date hereof. Such
authorities may be repealed, revoked, or modified, possibly with retroactive
effect, so as to result in United States federal income tax consequences
different from those discussed below. In addition, except as otherwise
indicated, the following does not consider the effect of any applicable foreign,
state, local or other tax laws or estate or gift tax considerations.
As used herein, a "United States person" is
(1) a citizen or resident of the U.S.,
(2) a corporation, partnership or other entity created or organized in or
under the laws of the U.S. or any political subdivision thereof,
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source,
(4) a trust if
(A) a United States court is able to exercise primary supervision over
the administration of the trust and
(B) one or more United States persons have the authority to control
all substantial decisions of the trust,
(5) a certain type of trust in existence on August 20, 1996, which was
treated as a United States person under the Internal Revenue Code in effect
immediately prior to such date and which has made a valid election to be treated
as a United States person under the Internal Revenue Code and
(6) any person otherwise subject to U.S. federal income tax on a net income
basis in respect of its worldwide taxable income.
A U.S. holder is a beneficial owner of a note who is a United States
person. A non-U.S. holder is a beneficial owner of a note that is not a U.S.
holder.
THE EXCHANGE OFFER
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.
Accordingly:
(1) such exchange will not constitute a taxable event to a U.S. holder,
(2) no gain or loss will be realized by a U.S. holder upon receipt of a new
note,
174
178
(3) the holding period of the new note will include the holding period of
the original note exchanged therefor and
(4) 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% NOTES AND THE 8.625% NOTES.
Interest on the 8.250% notes and the 8.625% notes, 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% NOTES
The 9.920% notes will be issued with original issue discount. This means
that such notes 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. 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, original issue
discount income as described below.
The amount of original issue discount with respect to the 9.920% notes 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% notes will be equal to the price to the
public at which a substantial amount of such notes is initially sold for money,
excluding any sales to a bond house, broker or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler. The
stated redemption price at maturity of such a note is the total of all payments
provided by the 9.920% notes, including stated interest payments.
A U.S. holder of such a note is required to include in gross income for
U.S. federal income tax purposes an amount equal to the sum of the "daily
portions" of such original issue discount for all days during the taxable year
on which the holder holds such note. The daily portions of original issue
discount required to be included in such holder's gross income in a taxable year
will be determined on a constant yield basis. A pro rata portion of the original
issue discount on such note which is attributable to the "accrual period" in
which such day is included will be allocated to each day during the taxable year
in which the holder holds the 9.920% notes. 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%
notes as long as
(1) no accrual period is longer than one year and
(2) each scheduled payment of interest or principal on such note occurs on
either the first or final day of an accrual period. The amount of original issue
discount attributable to each accrual period will be equal to the product of
(1) the "adjusted issue price" at the beginning of such accrual period and
(2) the "yield to maturity" of the instrument, stated in a manner
appropriately taking into account the length of the accrual period.
175
179
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% notes, produces an
amount equal to the issue price of such notes. The adjusted issue price of such
a note at the beginning of an accrual period is generally defined as the issue
price of such note plus the aggregate amount of original issue discount that
accrued in all prior accrual periods, less any cash payments made on the 9.920%
notes. Accordingly, a U.S. holder of such a note will be required to include
original issue discount in gross income for U.S. federal income tax purposes in
advance of the receipt of cash attributable to such income. The amount of
original issue discount allocable to an initial short accrual period may be
computed using any reasonable method if all other accrual periods, other than a
final short accrual period, are of equal length. The amount of original issue
discount allocable to the final accrual period at maturity of a 9.920% note is
the difference between
(A) the amount payable at the maturity of such note and
(B) such note's adjusted issue price as of the beginning of the final
accrual period.
Payments on the 9.920% notes, including principal and stated interest
payments, are not separately included in a U.S. holder's income. Such payments
are treated first as payments of accrued original issue discount to the extent
of such accrued original issue discount and the excess as payments of principal,
which reduce the U.S. holder's adjusted tax basis in such notes.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON ORIGINAL ISSUE DISCOUNT
In the event of a change of control, we will be required to offer to redeem
all of the notes, at redemption prices specified elsewhere in this prospectus.
If we receive net proceeds from one or more equity offerings, we may, at our
option, use all or a portion of such net proceeds to redeem in the aggregate up
to 35% of the aggregate principal amount at maturity of the 8.625% notes and up
to 35% of the aggregate principal amount at maturity of the 9.920% notes,
provided that at least 65% of the aggregate principal amount of the 8.625% notes
and of the aggregate principal amount at maturity of the 9.920% notes 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% notes and the 9.920% notes, in whole or in part,
at any time on or after April 1, 2004, at redemption prices specified plus
accrued and unpaid stated interest, if any, on the notes so redeemed but
excluding the date of redemption. The United States Treasury Regulations contain
rules for determining the "maturity date" and the stated redemption price at
maturity of an instrument that may be redeemed prior to its stated maturity date
at the option of the issuer. Under United States Treasury Regulations, solely
for the purposes of the accrual of original issue discount, it is assumed that
an issuer will exercise any option to redeem a debt instrument if such exercise
would lower the yield to maturity of the debt instrument. We will not be
presumed to redeem the notes prior to their stated maturity under these rules
because the exercise of such options would not lower the yield to maturity of
the notes.
U.S. holders may wish to consult their own tax advisors regarding the
treatment of such contingencies.
176
180
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange, retirement or other taxable disposition of a note,
the holder will recognize gain or loss in an amount equal to the difference
between
(1) the amount of cash and the fair market value of other property received
in exchange. Amounts attributable to accrued but unpaid interest on the 8.250%
notes and the 8.625% notes will be treated as ordinary interest income 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% note by any original issue discount previously
included in income by such holder with respect to such note, and decreased in
the case of a 9.920% note by any payments received on such note.
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% note or an 8.625% Note for an amount below the
issue price, or
(2) purchases a 9.920% note for an amount below the adjusted issue price on
the date of purchase, as determined in accordance with the original issue
discount rules above.
Under the market discount rules, a U.S. holder will be required to treat
any partial principal payment on, or any gain on the sale, exchange, retirement
or other disposition of, a note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such note at the time of such payment or disposition. In
addition, the U.S. holder may be required to defer, until the maturity of the
note or its earlier disposition in a taxable transaction, the deduction of a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the note, unless the U.S.
holder elects to accrue such discount on a constant interest rate method. A U.S.
holder may elect to include market discount in income currently as it accrues,
on either a ratable or constant interest rate method. If this election is made,
the holder's basis in the note will be increased to reflect the amount of income
recognized and the rules described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service.
AMORTIZABLE BOND PREMIUM; ACQUISITION PREMIUM
A U.S. holder that:
(1) purchases an 8.250% note or an 8.625% note for an amount in excess of
the principal amount, or
177
181
(2) purchases a 9.920% note for an amount in excess of the stated
redemption price
will be considered to have purchased such note with "amortizable bond
premium." A U.S. holder generally may elect to amortize the premium over the
remaining term of the note on a constant yield method as applied with respect to
each accrual period of the note, and allocated ratably to each day within an
accrual period in a manner substantially similar to the method of calculating
daily portions of original issue discount, as described above. However, because
the notes may be optionally redeemed for an amount that is in excess of their
principal amount, special rules apply that could result in a deferral of the
amortization of bond premium until later in the term of the note. The amount
amortized in any year will be treated as a reduction of the U.S. holder's
interest income, including original issue discount income, from the note. Bond
premium on a note held by a U.S. holder that does not make such an election will
decrease the gain or increase the loss otherwise recognized upon disposition of
the note. The election to amortize premium on a constant yield method, once
made, applies to all debt obligations held or subsequently acquired by the
electing U.S. holder on or after the first day of the first taxable year to
which the election applies and may not be revoked without the consent of the
Internal Revenue Service.
A U.S. holder that purchases a 9.920% note 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 original issue discount rules, above, will be
considered to have purchased such note at an "acquisition premium." A holder of
a 9.920% note that is purchased at an acquisition premium may reduce the amount
of the original issue discount 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% note that
is purchased at an acquisition premium may elect to compute the original issue
discount 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 original issue discount rules thereto using a constant yield
method.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
The payment to a non-U.S. holder of interest on a note will not be subject
to U.S. federal withholding tax pursuant to the "portfolio interest exception,"
provided that
(1) the non-U.S. holder does not actually or constructively own 10% or more
of the capital or profits interest in us and is not a controlled foreign
corporation that is related to us within the meaning of the Internal Revenue
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 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
178
182
thereof. Recently adopted Treasury Regulations that will be effective
January 1, 2001 provide alternative methods for satisfying the
certification requirement described in (2) above. These regulations will
generally require, in the case of notes held by a foreign partnership, that
the certificate described in (2) above be provided by the partners rather
than by the foreign partnership, and that the partnership provide certain
information including a U.S. tax identification number. For purposes of the
U.S. federal withholding tax, payment of interest includes the amount of
any payment that is attributable to original issue discount that accrued
while such non-U.S. holder held the note.
If a non-U.S. holder cannot satisfy the requirements of the portfolio
interest exception described above, payments of interest 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, will be subject to U.S. federal
income tax on such interest including original issue discount in the same manner
as if it were a U.S. holder. In addition, if such non-U.S. holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits, subject to adjustment, for that
taxable year unless it qualifies for a lower rate under an applicable income tax
treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a person other than a U.S. holder generally
will not be subject to U.S. federal income tax provided
(1) such gain is not effectively connected with the conduct by such holder
of a trade or business in the United States,
(2) in the case of gains derived by an individual, such individual is not
present in the United States for 183 days or more in the taxable year of the
disposition and certain other conditions are met and
(3) the non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. federal income tax law applicable to certain expatriates.
FEDERAL ESTATE TAX
Subject to applicable estate tax treaty provisions, notes held by an
individual who is not a citizen or resident of the United States for federal
estate tax purposes at the time of his or her death will not be subject to U.S.
federal estate tax if the interest on the notes qualifies for the portfolio
interest exemption from U.S. federal income tax under the rules described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest, including accruals
of original issue discount, on a note, and to the proceeds of the sale or
redemption of a note before
179
183
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 original issue discount, made by us or a paying agent to
non-U.S. holders if the appropriate certification is received, provided that the
payor does not have actual knowledge that the holder is a U.S. holder. If any
payments of principal and interest are made 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
of such note or coupon, 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," that is, a foreign
corporation controlled by certain U.S. shareholders, with respect to the United
States unless the broker has documentary evidence in its records that the holder
is a non-U.S. holder and certain other conditions are met or the holder
otherwise establishes an exemption. Payment by a U.S. office of a broker is
subject to both backup withholding at a rate of 31% and information reporting
unless the holder certifies under penalties of perjury that it is a non-U.S.
holder or otherwise establishes an exemption.
In October 1997, Treasury regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a note or proceeds from the sale of a note that are made after
December 31, 2000. Among other things, such regulations expand the number of
foreign intermediaries that are potentially subject to information reporting and
address certain documentary evidence requirements relating to exemption from the
backup withholding requirements. Holders of the notes should consult their tax
advisers concerning the possible application of such regulations to any payments
made on or with respect to the notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder of the notes will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
We must report annually to the IRS and to each non-U.S. holder any interest
that is subject to withholding, or that is exempt from 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.
180
184
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of original notes that were acquired for
the account of such broker-dealer as a result of market-making or other trading
activities, other than original notes acquired directly from us or any of our
affiliates may exchange such original notes for new notes pursuant to the
exchange offer. This is true so long as each broker-dealer that receives new
notes for its own account in exchange for original notes, where such original
notes were acquired by such broker-dealer as a result of market-making or other
trading activities acknowledges that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for original notes where such
original notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period of 180 days after
consummation of the exchange offer or such time as any broker-dealer no longer
owns any registrable securities, we will make this prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. All dealers effecting transactions in
the new notes 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 in 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.
181
185
CHARTER COMMUNICATIONS HOLDINGS, LLC
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-6
Consolidated Balance Sheet as of December 31, 1998........ F-7
Consolidated Statement of Operations for the Period from
December 24, 1998, Through December 31, 1998........... F-8
Consolidated Statement of Cash Flows for the Period from
December 24, 1998, Through December 31, 1998........... F-9
Notes to Consolidated Financial Statements................ F-10
Report of Independent Public Accountants.................. F-24
Consolidated Balance Sheet as of December 31, 1997........ F-25
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-26
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-27
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-28
Notes to Consolidated Financial Statements................ F-29
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES:
Independent Auditors' Report.............................. F-38
Consolidated Balance Sheet as of December 31, 1997........ F-39
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-40
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-41
Consolidated Statement of Members' Equity from April 23,
1998 to December 23, 1998.............................. F-42
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-43
Notes to Consolidated Financial Statements................ F-44
CCA GROUP:
Report of Independent Public Accountants.................. F-56
Combined Balance Sheet as of December 31, 1997............ F-57
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-58
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-59
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-60
Notes to Combined Financial Statements.................... F-61
F-1
186
PAGE
----
CHARTERCOMM HOLDINGS, L.P.:
Report of Independent Public Accountants.................. F-76
Consolidated Balance Sheet as of December 31, 1997........ F-77
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-78
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-79
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-80
Notes to Consolidated Financial Statements................ F-81
GREATER MEDIA CABLEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-95
Combined Balance Sheets as of March 31, 1999 (unaudited),
September 30, 1998 and 1997............................ F-96
Combined Statements of Income for the Six Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years
Ended September 30, 1998, 1997 and 1996................ F-97
Combined Statements of Changes in Net Assets for the Six
Months Ended March 31, 1999 (unaudited) and for the
Years Ended September 30, 1996, 1997 and 1998.......... F-98
Combined Statements of Cash Flows for the Six Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years
Ended September 30, 1998, 1997 and 1996................ F-99
Notes to Combined Financial Statements.................... F-100
RENAISSANCE MEDIA GROUP LLC:
Report of Independent Auditors............................ F-106
Consolidated Balance Sheet as of December 31, 1998........ F-107
Consolidated Statement of Operations for the Year Ended
December 31, 1998...................................... F-108
Consolidated Statement of Changes in Members' Equity for
the Year Ended December 31, 1998....................... F-109
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998...................................... F-110
Notes to Consolidated Financial Statements for the Year
Ended December 31, 1998................................ F-111
PICAYUNE MS, LAFOURCHE, LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA AND JACKSON TN CABLE TELEVISION SYSTEMS:
Report of Independent Auditors............................ F-121
Combined Balance Sheet as of April 8, 1998................ F-122
Combined Statement of Operations for the Period from
January 1, 1998 through April 8, 1998.................. F-123
Combined Statement of Changes in Net Assets for the Period
from January 1, 1998 through April 8, 1998............. F-124
Combined Statement of Cash Flows for the Period from
January 1, 1998 through April 8, 1998.................. F-125
Notes to Combined Financial Statements.................... F-126
Report of Independent Auditors............................ F-133
Combined Balance Sheets as of December 31, 1996 and
1997................................................... F-134
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997....................... F-135
Combined Statements of Changes in Net Assets for the Years
Ended December 31, 1996 and 1997....................... F-136
Combined Statements of Cash Flows for the Years Ended
1995, 1996 and 1997.................................... F-137
Notes to Combined Financial Statements.................... F-138
F-2
187
PAGE
----
HELICON PARTNERS I, L.P. AND AFFILIATES:
Independent Auditors' Report.............................. F-146
Combined Balance Sheets as of December 31, 1997 and
1998................................................... F-147
Combined Statements of Operations for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-148
Combined Statements of Changes in Partners' Deficit for
Each of the Years in the Three-Year Period Ended
December 31, 1998...................................... F-149
Combined Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-150
Notes to Combined Financial Statements.................... F-151
INTERMEDIA CABLE SYSTEMS (comprised of components of
InterMedia Partners and InterMedia Capital Partners IV,
L.P.):
Report of Independent Accountants......................... F-165
Combined Balance Sheets at December 31, 1998 and 1997..... F-166
Combined Statements of Operations for the Years Ended
December 31, 1998 and 1997............................. F-167
Combined Statement of Changes in Equity for the Years
Ended December 31, 1998 and 1997....................... F-168
Combined Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997............................. F-169
Notes to Combined Financial Statements.................... F-170
RIFKIN CABLE INCOME PARTNERS L.P.:
Report of Independent Accountants......................... F-183
Balance Sheet at December 31, 1997 and 1998............... F-184
Statement of Operations for Each of the Three Years in the
Period Ended December 31, 1998......................... F-185
Statement of Partners' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998...... F-186
Statement of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998......................... F-187
Notes to Financial Statements............................. F-188
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Report of Independent Accountants......................... F-192
Consolidated Balance Sheet at December 31, 1998 and
1997................................................... F-193
Consolidated Statement of Operations for Each of the Three
Years in the Period Ended December 31, 1998............ F-194
Consolidated Statement of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............ F-195
Consolidated Statement of Partners' Capital (Deficit) for
Each of the Three Years in the Period Ended December
31, 1998............................................... F-196
Notes to Consolidated Financial Statements................ F-197
INDIANA CABLE ASSOCIATES, LTD.:
Report of Independent Auditors............................ F-211
Balance Sheet as December 31, 1997 and 1998............... F-212
Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998.................................... F-213
Statement of Partners' Deficit for the Years Ended
December 31, 1996, 1997 and 1998....................... F-214
Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998.................................... F-215
Notes to Financial Statements............................. F-216
F-3
188
PAGE
----
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP:
Report of Independent Auditors............................ F-221
Consolidated Balance Sheet as of December 31, 1997 and
1998................................................... F-222
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998....................... F-223
Consolidated Statement of Partners' Equity (Deficit) for
the Years Ended December 31, 1996, 1997 and 1998....... F-224
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998....................... F-225
Notes to Consolidated Financial Statements................ F-226
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-230
Statement of Operations and Changes in Net Assets for the
Period from April 1, 1998, through May 20, 1998........ F-231
Statement of Cash Flows for the Period from April 1, 1998,
through May 20, 1998................................... F-232
Notes to Financial Statements............................. F-233
LONG BEACH ACQUISITION CORP.:
Report of Independent Public Accountants.................. F-236
Statement of Operations for the Period from April 1, 1997,
through May 23, 1997................................... F-237
Statement of Stockholder's Equity for the Period from
April 1, 1997, through May 23, 1997.................... F-238
Statement of Cash Flows for the Period from April 1, 1997,
through May 23, 1997................................... F-239
Notes to Financial Statements............................. F-240
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998...................... F-245
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-246
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-247
Notes to Condensed Consolidated Financial Statements...... F-248
RENAISSANCE MEDIA GROUP LLC:
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998...................... F-253
Consolidated Statement of Operations for the Three Months
Ended March 31, 1999 (unaudited)....................... F-254
Consolidated Statement of Changes in Members' Equity for
the Three Months Ended March 31, 1999 (unaudited)...... F-255
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999 (unaudited)....................... F-256
Notes to Consolidated Financial Statements................ F-257
HELICON PARTNERS I, L.P. AND AFFILIATES:
Unaudited Condensed Combined Balance Sheet as of March 31,
1999................................................... F-260
Unaudited Condensed Combined Statements of Operations for
the Three-Month Periods Ended March 31, 1998 and
1999................................................... F-261
Unaudited Condensed Combined Statements of Changes in
Partners' Deficit for the Three-Month Period Ended
March 31, 1999......................................... F-262
Unaudited Condensed Combined Statements of Cash Flows for
the Three-Month Periods Ended March 31, 1998 and
1999................................................... F-263
Notes to Unaudited Condensed Combined Financial
Statements............................................. F-265
F-4
189
PAGE
----
INTERMEDIA CABLE SYSTEMS (comprised of components of
InterMedia Partners and InterMedia Capital Partners IV,
L.P.):
Combined Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998.................................. F-267
Combined Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-268
Combined Statement of Changes in Equity for the Three
Months Ended March 31, 1999 and for the Year Ended
December 31, 1998 (unaudited).......................... F-269
Combined Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-270
Notes to Combined Financial Statements (unaudited)........ F-271
RIFKIN CABLE INCOME PARTNERS L.P.:
Balance Sheet at December 31, 1998 and March 31, 1999
(unaudited)............................................ F-278
Statement of Operations for the Quarters Ended March 31,
1998 and 1999 (unaudited).............................. F-279
Statement of Partners' Equity for the Quarters Ended March
31, 1998 and 1999 (unaudited).......................... F-280
Statement of Cash Flows for the Quarters Ended March 31,
1998 and 1999 (unaudited).............................. F-281
Notes to Financial Statements............................. F-282
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Consolidated Balance Sheet at March 31, 1999 (unaudited)
and December 31, 1998.................................. F-284
Consolidated Statement Of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-285
Consolidated Statement of Cash Flow for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-286
Consolidated Statements of Partners' Capital (Deficit) for
the Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-287
Notes to Consolidated Financial Statements................ F-288
INDIANA CABLE ASSOCIATES, LTD.:
Balance Sheet as of March 31, 1999 (unaudited)............ F-290
Statement of Operations for the Three Months Ended March
31, 1998 and 1999 (unaudited).......................... F-291
Statement of Cash Flows for the Three Months Ended March
31, 1998 and 1999 (unaudited).......................... F-292
Notes to Financial Statement (unaudited).................. F-293
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
Consolidated Balance Sheet as of March 31, 1999
(unaudited)............................................ F-294
Consolidated Statement of Operations for the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-295
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-296
Notes to Consolidated Financial Statement (unaudited)..... F-297
F-5
190
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-6
191
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-7
192
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-8
193
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-9
194
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 of
$2.2 billion, excluding $2.0 billion in debt assumed (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 Inc.), all cable television operating companies, from
unrelated third parties for fair value. Charter previously managed and owned
minority interests in these companies. These acquisitions were accounted for
using the purchase method of accounting, and accordingly, results of operations
of CharterComm Holdings and CCA Group are included in the financial statements
from the date of acquisition. In February 1999, Charter transferred all of its
cable television operating subsidiaries to a wholly owned subsidiary of Charter
Holdings, Charter Communications Operating, LLC (Charter Operating). This
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests.
As a result of the change in ownership of CCP, CharterComm Holdings and CCA
Group, Charter Holdings has applied push-down accounting in the preparation of
the consolidated financial statements. Accordingly, Charter Holdings increased
its members' equity by $2.2 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 of intangible assets. The valuation information
is expected to be finalized in the third quarter of 1999. 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 giving Paul G. Allen a 97% direct and
indirect ownership interest in Charter Holdings. 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.
F-10
195
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements of Charter Holdings include the
accounts of Charter Operating and CCP and 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.
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.
F-11
196
CHARTER COMMUNICATIONS HOLDINGS, LLC 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
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 generally amortized using the
straight-line method over a period of 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, 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.
F-12
197
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SEGMENTS
In 1998, Charter Holdings adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." Segments have been identified based
upon management responsibility. Charter Holdings operates in one segment, cable
services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. 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).
F-13
198
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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....................................... (599,953) (631,592)
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.
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.
F-14
199
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, 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
========
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.
F-15
200
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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. As of December 31, 1998, the effective interest
rates on the Debentures and 11 1/4% Notes were 10.7% and 9.6%, respectively.
F-16
201
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-17
202
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and
the effective interest rate as of December 31, 1998 was 10.0%. The unamortized
discount was $30,225 at December 31, 1998.
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 and the effective interest rate as of December 31, 1998 was 14.1%. 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.
F-18
203
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
==========
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
F-19
204
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
Management believes that costs incurred by Charter on Charter Holdings behalf
and included in the accompanying financial statements are not materially
different than costs Charter Holdings would have incurred as a stand alone
entity.
Charter utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to Charter Holdings as determined by independent
actuaries at the present value of the actuarially computed present and future
liabilities for such benefits. Medical coverage provides for $2,435 aggregate
stop loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $800 aggregate stop loss protection and a
loss limitation of $150 per person per year.
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
F-20
205
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-21
206
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 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 (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.
F-22
207
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 swap of cable television
systems will be recorded at the fair value of the systems exchanged. 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 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. Charter Holdings
expects to record an extraordinary loss of approximately $4 million in
conjunction with the extinguishment of substantially all long-term debt and the
refinancing of its credit agreements.
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-23
208
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-24
209
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-25
210
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-26
211
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-27
212
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
========= ======= ========
The accompanying notes are an integral part of these consolidated statements.
F-28
213
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 of
$2.2 billion, excluding $2.0 billion in debt assumed (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 Inc.), all cable television operating companies, from
unrelated third parties for fair value. Charter previously managed and owned
minority interests in these companies. These acquisitions were accounted for
using the purchase method of accounting, and accordingly results of operations
of CarterComm Holdings and CCA Group are included in the financial statements of
Charter Holdings from the date of acquisition. In February 1999, Charter
transferred all of its cable television operating subsidiaries to a wholly owned
subsidiary of Charter Holdings, Charter Communications Operating, LLC (Charter
Operating). The transfer was accounted for as a reorganization of entities under
common control similar to a pooling of interests.
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.
F-29
214
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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 useful lives from 10 years to 5 years of
certain plant and equipment included in cable distribution systems associated
with costs of new customer installations. As a result, additional depreciation
of $550 was recorded during 1997. The estimated useful lives were shortened to
be more reflective of average customer lives.
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 generally amortized using the
straight-line method over a period of 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
F-30
215
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
F-31
216
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition. The
purchase prices were allocated to tangible and intangible assets based on
estimated fair values at the acquisition dates.
Unaudited pro forma operating results as though the 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-32
217
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-33
218
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
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
F-34
219
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the number of basic customers. Management considers this allocation to be
reasonable for the operations of the Company.
Charter utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to Charter Holdings as determined by independent
actuaries, at the present value of the actuarially computed present and future
liabilities for such benefits. Medical coverage provides for $2,435 aggregate
stop loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $800 aggregate stop loss protection and a
loss limitation of $150 per person per year.
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
F-35
220
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-36
221
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equal to 50% of the first 5% of contributions by each employee. The Company
contributed $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"). The Plan permits
Charter to grant 1,500,000 units to certain key employees, of which 1,251,500
were outstanding at December 31, 1997. Units received by an employee vest at a
rate of 20% per year, unless otherwise provided in the participant's
Appreciation Rights Unit Agreement. The appreciation rights entitle the
participants to receive payment, upon termination or change in control of
Charter, of the excess of the unit value over the base value (defined as the
appreciation value) for each vested unit. The unit value is based on Charter's
adjusted equity, as defined in the Plan. Deferred compensation expense recorded
by Charter is based on the appreciation value since the grant date and is being
amortized over the vesting period.
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-37
222
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-38
223
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-39
224
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-40
225
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-41
226
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-42
227
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-43
228
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-44
229
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-45
230
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-46
231
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-47
232
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-48
233
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-49
234
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-50
235
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-51
236
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-52
237
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-53
238
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-54
239
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-55
240
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-56
241
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-57
242
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-58
243
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-59
244
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-60
245
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-61
246
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.
F-62
247
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
F-63
248
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
=======
F-64
249
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997:
