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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000
REGISTRATION NO. 333-77499
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARTER COMMUNICATIONS HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
DELAWARE 4841 43-1843179
DELAWARE 4841 43-1843177
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (FEDERAL EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBERS)
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.
LEIGH P. RYAN, ESQ. IRELL & MANELLA LLP
PATRICIA M. CARROLL, ESQ. 1800 AVENUE OF THE STARS, SUITE 900
PAUL, HASTINGS, JANOFSKY & WALKER LLP LOS ANGELES, CALIFORNIA 90067-4276
399 PARK AVENUE (310) 277-1010
NEW YORK, NEW YORK 10022
(212) 318-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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$1,532,000,000
Offer to Exchange
10.00% Senior Notes due 2009,
10.25% Senior Notes due 2010 and 11.75% Senior Discount Notes due 2010
for any and all outstanding
10.00% Senior Notes due 2009,
10.25% Senior Notes due 2010 and 11.75% Senior Discount Notes due 2010,
respectively, of
CHARTER COMMUNICATIONS HOLDINGS, LLC
and
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
-------------------------
- This exchange offer expires at 5:00 p.m., New York City time, on May ,
2000, unless extended.
- No public market exists for the original notes or the new notes. We do
not intend to list the new notes on any securities exchange or to seek
approval for quotation through any automated quotation system.
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR ORIGINAL NOTES IN THE
EXCHANGE OFFER AND BY PURCHASERS OF THE NOTES FROM PERSONS ELIGIBLE TO USE THIS
PROSPECTUS FOR RESALES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any State in which the offer or sale would be unlawful.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-b OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-b IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
The date of this prospectus is April , 2000.
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TABLE OF CONTENTS
PAGE
----
Summary..................................................... 1
Risk Factors................................................ 15
Forward-Looking Statements.................................. 29
Use of Proceeds............................................. 30
Capitalization.............................................. 31
Unaudited Pro Forma Financial Statements.................... 33
Selected Historical Financial Data.......................... 45
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 46
The Exchange Offer.......................................... 67
Business.................................................... 76
Regulation and Legislation.................................. 104
Management.................................................. 112
Principal Equity Holders.................................... 123
Certain Relationships and Related Transactions.............. 126
Description of Certain Indebtedness......................... 142
Description of Notes........................................ 157
Material United States Federal Income Tax Considerations.... 198
Plan of Distribution........................................ 205
Legal Matters............................................... 206
Experts..................................................... 206
Index to Financial Statements............................... F-1
Index to Supplemental Consolidated Financial Statements..... F-484
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SUMMARY
The following summary contains a general discussion of our business, the
exchange offer and summary financial information. It likely does not contain all
the information that is important to you in making a decision to tender your
original notes in exchange for new notes. For a more complete understanding of
the exchange offer, you should read this entire prospectus and the other
documents to which we refer.
Unless stated otherwise, the discussion of our business in this prospectus
includes Charter Holdings and its direct and indirect subsidiaries after giving
effect to the Kalamazoo transaction described below.
OUR BUSINESS
We are the fourth largest operator of cable systems in the United States,
serving approximately 6.2 million customers. After giving effect to the
Kalamazoo transaction, as described below, we will serve approximately 6.3
million customers.
We offer a full range of traditional cable television services and have
begun to offer digital cable television services to customers in some of our
systems. Digital technology enables cable operators to increase the number of
channels a cable system can carry by permitting a significantly increased number
of video signals to be transmitted over a cable system's existing bandwidth.
Bandwidth is a measure of the information-carrying capacity. It is the range of
usable frequencies that can be carried by a cable system.
We have also started to introduce a number of other new products and
services, including interactive video programming, which allows information to
flow in both directions, and high-speed Internet access to the World Wide Web.
We are also exploring opportunities in telephony, which will integrate telephone
services with the Internet through the use of cable. The introduction of these
new services represents an important step toward the realization of our Wired
World(TM) vision, where cable's ability to transmit voice, video and data at
high speeds will enable it to serve as the primary platform for the delivery of
new services to the home and workplace. We are accelerating the upgrade of our
systems to more quickly provide these new services.
We have grown rapidly over the past five years. During this period, our
management team has successfully completed 34 acquisitions, including fourteen
acquisitions closed since January 1, 1999 and a merger with Marcus Cable
Holdings, LLC in April 1999. In addition, we have expanded our customer base
through significant internal growth. In 1999, our internal customer growth,
without giving effect to the cable systems we acquired during that period, was
3.1%, compared to the national industry average of 1.8%. In 1998, our internal
customer growth, without giving effect to the cable systems we acquired in that
year, was 4.8%, more than twice the national industry average of 1.7%.
Our principal executive offices are located at 12444 Powerscourt Drive, St.
Louis, Missouri 63131. Our telephone number is (314) 965-0555 and our web site
is located at www.chartercom.com. The information on our web site is not part of
this prospectus.
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BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
- rapidly integrate acquired cable systems and apply our core operating
strategies to raise the financial and operating performance of these
acquired systems;
- expand the array of services we offer to our customers through the
implementation of our Wired World vision;
- upgrade the bandwidth capacity of our systems to 550 megahertz or greater
to enable greater channel capacity and add two-way capability to
facilitate interactive communication. Two-way capability is the ability
to have bandwidth available for upstream, or two-way, communication;
- maximize customer satisfaction by providing reliable, high-quality
service offerings, superior customer service and attractive programming
choices at reasonable rates;
- employ innovative marketing programs tailored to local customer
preferences to generate additional revenues;
- emphasize local management autonomy to better serve our customers while
providing support from regional and corporate offices and maintaining
centralized financial controls; and
- improve the geographic clustering of our cable systems by selectively
trading or acquiring systems to increase operating efficiencies and
improve operating margins. Clusters refer to cable systems under common
ownership which are located within geographic proximity to each other.
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CHARTER ORGANIZATIONAL STRUCTURE
The new notes to be issued in the exchange offer will be issued by Charter
Communications Holdings, LLC and Charter Communications Capital Corporation, the
co-issuers of the original notes.
The chart below sets forth our organizational structure and that of our
direct and indirect parent companies and assumes that:
(1) none of the outstanding options to purchase membership units of Charter
Communications Holding Company have been exercised. See
"Management -- Option Plan."
(2) the pending merger of Cablevision of Michigan, Inc. with and into
Charter Communications, Inc. has been completed. See "-- Pending
Kalamazoo Transaction"; and
(3) none of the outstanding membership units in Charter Communications
Holding Company or membership units in an indirect subsidiary of
Charter Holdings, held by certain sellers in the Bresnan acquisition,
have been exchanged for shares of Class A common stock in Charter
Communications, Inc. See "Business -- Charter Organizational
Structure -- Bresnan Sellers."
Our cable systems, which are managed by Charter Communications, Inc., are
owned by our wholly owned subsidiaries.
[CHARTER COMMUNICATIONS FLOW CHART]
* In this merger, Charter Communications, Inc. will issue shares of its
Class A common stock in exchange for shares of Cablevision of Michigan,
Inc. The number of shares to be issued will be based upon the average
NASDAQ closing price for the 20 trading days preceding the closing date
of this merger. No estimate of the number of shares is provided here and
the percentages of equity ownership in Charter Communications, Inc. by
Mr. Allen and the public indicated on the
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chart do not reflect the decrease that will occur upon the issuance of
shares in the merger transaction.
** These equity interests are exchangeable for shares of Class A common
stock in Charter Communications, Inc.
For a more detailed description of each entity and how it relates to us,
see "Business -- Charter Organizational Structure."
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RECENT EVENTS
ACQUISITIONS IN 1999 AND 2000 AND RECENT TRANSFERS
Since January 1, 1999, we completed eleven acquisitions of cable systems,
including the Bresnan acquisition completed in February 2000.
On January 1, 2000, Charter Holdings and Charter Communications Holding
Company effected a number of transactions to transfer cable systems acquired in
the Fanch, Falcon and Avalon acquisitions to Charter Holdings. These
transactions are referred to in this prospectus as the "recent transfers". As a
result of these transactions, Charter Holdings became the indirect parent of the
Fanch, Falcon and Avalon cable systems.
A summary of information regarding these acquisitions and recent transfers
is as follows:
AS OF AND FOR THE YEAR ENDED
PURCHASE PRICE DECEMBER 31, 1999
ACQUISITION (INCLUDING -----------------------------
OR TRANSFER ASSUMED DEBT) REVENUES
DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS)
----------- -------------- ---------- ---------------
Renaissance Media Group LLC................. 4/99 $ 459 134,000 $ 62,428
American Cable Entertainment, LLC........... 5/99 240 69,000 37,216
Cable systems of Greater Media Cablevision,
Inc....................................... 6/99 500 176,000 85,933
Helicon Partners I, L.P. and affiliates..... 7/99 550 171,000 85,224
Vista Broadband Communications, L.L.C. ..... 7/99 126 26,000 14,112
Cable system of Cable Satellite of South
Miami, Inc................................ 8/99 22 9,000 4,859
Rifkin Acquisition Partners, L.L.L.P. and
InterLink Communications Partners, LLLP... 9/99 1,460 463,000 219,878
Cable systems of InterMedia Capital Partners
IV, L.P., InterMedia Partners and
affiliates................................ 10/99 873+ 420,000 179,259
systems swap (142,000)(a) (53,056)(b)
--------- ----------
278,000 126,203
Cable systems of Fanch Cablevision L.P. and
affiliates................................ 1/00 2,400 528,000 218,197
Falcon Communications, L.P. ................ 1/00 3,481 955,000 427,668
Avalon Cable of Michigan Holdings, Inc. .... 1/00 845(c) 258,000(c) 109,943(d)
Bresnan Communications Company
Limited Partnership....................... 2/00 3,100 686,000(e) 290,697(f)
Cable systems of Falcon/Capital Cable
Partners, L.P............................. 4/00 60 27,000 11,555
Cable systems of Farmington Cablevision
Company................................... 4/00 15 6,000 1,968
------------ --------- ----------
Total..................................... $ 14,131 3,786,000 $1,695,881
============ ========= ==========
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(a) As part of the transaction with InterMedia, we agreed to "swap" some of our
non-strategic cable systems located in Indiana, Montana, Utah and northern
Kentucky, representing 142,000 basic customers. We transferred cable systems
with 112,000 customers to InterMedia in connection with this swap in October
1999. The remaining Indiana cable system, with customers totaling 30,000,
was transferred in March 2000 after receipt of the necessary regulatory
approvals.
(b) Includes revenues for all swapped InterMedia systems, except the retained
Indiana system, for the nine months ended September 30, 1999, the date of
the transfer of these systems, and includes revenues for the Indiana system
for the year ended December 31, 1999.
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(c) Includes approximately 5,400 customers served by cable systems that we
acquired from certain former affiliates of Avalon in February 2000. The $845
million purchase price for Avalon includes the purchase price for these
systems of approximately $13 million.
(d) Includes revenues of approximately $1.6 million related to cable systems
acquired from certain former affiliates of Avalon.
(e) Includes approximately 19,400 customers served by cable systems acquired by
Bresnan since December 31, 1999.
(f) Includes revenues of approximately $7.1 million related to the cable systems
acquired by Bresnan since December 31, 1999.
PENDING KALAMAZOO TRANSACTION
In March 2000, Charter Communications, Inc. entered into an agreement
providing for the merger of Cablevision of Michigan, Inc., the indirect owner of
a cable system in Kalamazoo, Michigan, with and into Charter Communications,
Inc. After the merger, Charter Communications, Inc. will contribute 100% of the
equity interests of the direct owner of the Kalamazoo cable system to Charter
Communications Holding Company, which in turn will contribute such interests to
Charter Holdings. Information regarding the Kalamazoo transaction is as follows:
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1999
-----------------------------
ANTICIPATED PURCHASE PRICE REVENUES
PENDING TRANSACTION CLOSING DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS)
- - - ------------------- ---------------- -------------- ---------- ---------------
Kalamazoo........................... 3rd Quarter 2000 $172.5 49,000 $20,259
PENDING SWAP TRANSACTION
On December 1, 1999, Charter Communications, Inc. entered into a
non-binding letter of intent with AT&T Broadband & Internet Services to exchange
certain of our cable systems. This exchange of cable systems is referred to in
this prospectus as the "Swap Transaction". The Swap Transaction would involve
cable systems owned by AT&T located in municipalities in Alabama, Georgia,
Illinois and Missouri serving approximately 705,000 customers and certain of our
cable systems located in municipalities in California, Connecticut,
Massachusetts, Texas and other states serving approximately 631,000 customers.
As part of the Swap Transaction, we would pay AT&T approximately $108 million in
cash, which represents the difference in the agreed values of the systems being
exchanged. The Swap Transaction is subject to the negotiation and execution of a
definitive exchange agreement, regulatory approvals and other conditions typical
in transactions of this type. We cannot assure you that the Swap Transaction
will be completed.
INITIAL PUBLIC OFFERING OF COMMON STOCK OF CHARTER COMMUNICATIONS, INC., OUR
MANAGER
In November 1999, Charter Communications, Inc. completed an initial public
offering of 195,500,000 shares of its Class A common stock for total net
proceeds of $3.57 billion. At that time, Paul G. Allen purchased 50,000 shares
of high vote Class B common stock of Charter Communications, Inc. at the initial
public offering price. In addition, at the closing of the initial public
offering, Mr. Allen through Vulcan Cable III Inc. invested $750 million in cash
to purchase membership units from Charter Communications Holding Company at the
initial public offering price, net of underwriters' discounts. These membership
units are exchangeable at any time for shares of Class A common stock of Charter
Communications, Inc. All of the proceeds from Charter Communications, Inc.'s
public offering were used to purchase membership units in Charter Communications
Holding Company, which used a portion of the funds received from Charter
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Communications, Inc. along with the funds received from Vulcan Cable III Inc. to
pay a portion of the purchase prices of the Fanch, Falcon, Avalon and Bresnan
acquisitions.
APRIL 1999 MERGER WITH MARCUS HOLDINGS
On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable Company, L.L.C., and agreed to acquire the
remaining interests in Marcus Cable. The total purchase price was approximately
$3.2 billion, including $1.8 billion in assumed liabilities. On February 22,
1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus
Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999,
Mr. Allen completed the acquisition of all remaining interests of Marcus Cable.
On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, with
Charter Holdings surviving the merger. The operating subsidiaries of Marcus
Holdings became subsidiaries of our subsidiary, Charter Communications
Operating, LLC.
MARCH 1999 CHARTER HOLDINGS NOTES
On March 17, 1999, Charter Holdings and Charter Capital issued $3.6 billion
principal amount of senior notes, referred to in this prospectus as the "March
1999 Charter Holdings notes," consisting of $600 million in aggregate principal
amount of 8.250% senior notes due 2007, referred to in this prospectus as the
"March 1999 8.250% Charter Holdings notes," $1.5 billion in aggregate principal
amount of 8.625% senior notes due 2009, referred to in this prospectus as the
"March 1999 8.625% Charter Holdings notes," and $1.475 billion in aggregate
principal amount at maturity of 9.920% senior discount notes due 2011, referred
to in this prospectus as the "March 1999 9.920% Charter Holdings notes." The net
proceeds of approximately $2.99 billion, combined with borrowings under our
credit facilities, were used to consummate tender offers for publicly held debt
of several of our subsidiaries, to refinance borrowings under our previous
credit facilities, for working capital purposes and to finance a number of
acquisitions.
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THE EXCHANGE OFFER
Resales Without Further
Registration............. We believe that the new notes issued pursuant to
the exchange offer may be offered for resale,
resold or otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act of 1933,
as amended, provided that:
- you are acquiring the new notes issued in the
exchange offer in the ordinary course of your
business;
- you have not engaged in, do not intend to
engage in, and have no arrangement or
understanding with any person to participate
in, the distribution of the new notes issued to
you in the exchange offer, and;
- you are not our "affiliate," as defined under
Rule 405 of the Securities Act.
Each of the participating broker-dealers that
receives new notes for its own account in exchange
for original notes that were acquired by such
broker or dealer as a result of market-making or
other activities must acknowledge that it will
deliver a prospectus in connection with the resale
of the new notes.
Expiration Date............ 5:00 p.m., New York City time, on May , 2000
unless we extend the exchange offer.
Exchange and Registration
Rights Agreements........ You have the right to exchange the original notes
that you hold for new notes with substantially
identical terms. This exchange offer is intended to
satisfy these rights. Once the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights with respect to
your original notes.
Accrued Interest on the New
Notes and Original
Notes.................... The new notes will bear interest from January 12,
2000. Holders of original notes which are accepted
for exchange will be deemed to have waived the
right to receive any payment in respect of interest
on such original notes accrued to the date of
issuance of the new notes.
Conditions to the Exchange
Offer.................... The exchange offer is conditioned upon certain
customary conditions which we may waive and upon
compliance with securities laws.
Procedures for Tendering
Original Notes........... Each holder of original notes wishing to accept the
exchange offer must:
- complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal; or
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- arrange for the Depository Trust Company to
transmit certain required information to the
exchange agent in connection with a book-entry
transfer.
You must mail or otherwise deliver such
documentation together with the original notes to
the exchange agent.
Special Procedures for
Beneficial Holders....... If you beneficially own original notes registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to
tender your original notes in the exchange offer,
you should contact such registered holder promptly
and instruct them to tender on your behalf. If you
wish to tender on your own behalf, you must, before
completing and executing the letter of transmittal
for the exchange offer and delivering your original
notes, either arrange to have your original notes
registered in your name or obtain a properly
completed bond power from the registered holder.
The transfer of registered ownership may take
considerable time.
Guaranteed Delivery
Procedures............... You must comply with the applicable procedures for
tendering if you wish to tender your original notes
and:
- time will not permit your required documents to
reach the exchange agent by the expiration date
of the exchange offer; or
- you cannot complete the procedure for
book-entry transfer on time; or
- your original notes are not immediately
available.
Withdrawal Rights.......... You may withdraw your tender of original notes at
any time prior to 5:00 p.m., New York City time, on
the date the exchange offer expires.
Failure to Exchange Will
Affect You Adversely..... If you are eligible to participate in the exchange
offer and you do not tender your original notes,
you will not have further exchange or registration
rights and your original notes will continue to be
subject to some restrictions on transfer.
Accordingly, the liquidity of the original notes
will be adversely affected.
Material United States
Federal Income Tax
Consideration............ The disclosure in this prospectus represents our
legal counsel's opinion as to the material United
States Federal income tax consequences of
participating in the exchange offer and in
connection with the ownership and disposition of
the new notes. The exchange of original notes for
new notes pursuant to the exchange offer will not
result in a taxable event. Accordingly, it is our
legal counsel's opinion that:
- no gain or loss will be realized by a U.S.
holder upon receipt of a new note;
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- a holder's holding period for new notes will
include the holding period for original notes;
and
- the adjusted tax basis of the new notes will be
the same as the adjusted tax basis of the
original notes exchanged at the time of such
exchange.
Paul, Hastings, Janofsky & Walker LLP has rendered
the above-referenced opinion in connection with the
exchange offer. See "Material United States Federal
Income Tax Considerations."
Exchange Agent............. Harris Trust and Savings Bank is serving as
exchange agent.
Use of Proceeds............ We will not receive any proceeds from the exchange
offer.
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SUMMARY TERMS OF NEW NOTES
Issuers....................... Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation.
Notes Offered................. $675.0 million in principal amount of 10.00%
senior notes due 2009.
$325.0 million in principal amount of 10.25%
senior notes due 2010.
$532.3 million in principal amount at maturity
of 11.75% senior discount notes due 2010.
The form and terms of the new notes will be the
same as the form and terms of the outstanding
notes except that:
- the new notes will bear a different CUSIP
number from the original notes;
- the new notes will have been registered under
the Securities Act of 1933 and, therefore,
will not bear legends restricting their
transfer; and
- you will not be entitled to any exchange or
registration rights with respect to the new
notes.
The new notes will evidence the same debt as
the original notes. They will be entitled to
the benefits of the indentures governing the
original notes and will be treated under the
indentures as a single class with the original
notes.
MATURITY
DATE ISSUE PRICE INTEREST
---------------- --------------------------- ---------------------------
10.00% Notes..... April 1, 2009 100.00% plus accrued 10.00% per annum, payable
interest, if any, from every six months on April 1
January 12, 2000 and October 1, beginning
April 1, 2000
10.25% Notes..... January 15, 2010 100.00%, plus accrued 10.25% per annum, payable
interest, if any, from every six months on January
January 12, 2000 15 and July 15, beginning
July 15, 2000
11.75% Notes..... January 15, 2010 56.448%, with original Interest to accrete at a
issue discount to accrete rate of 11.75% per annum to
from January 12, 2000 an aggregate amount of
$532.0 million by January
15, 2005; thereafter, cash
interest will be payable
every six months on January
15 and July 15 at a rate of
11.75% per annum, beginning
July 15, 2005
Ranking.................... The new notes will be senior debts. They will rank
equally with the current and future unsecured and
unsubordinated debt of Charter Holdings, including
the March 1999 Charter Holdings notes and trade
payables, which are accounts payable to vendors,
suppliers and service
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providers. Charter Holdings is a holding company
and conducts all of its operations through its
direct and indirect subsidiaries. If it defaults,
your right to payment under the new notes will rank
below all existing and future liabilities,
including trade payables, of the subsidiaries of
Charter Holdings. As of December 31, 1999, all of
our outstanding debt, other than the March 1999
Charter Holdings notes and the original notes, but
including our credit facilities, was incurred by
our subsidiaries. As of that date, as adjusted to
give effect to the sale of the original notes,
acquisitions completed since that date, the recent
transfer to us of the Fanch, Falcon and Avalon
cable systems and the repurchase of certain of the
Falcon, Avalon and Bresnan notes and debentures and
the Kalamazoo transaction as if such transactions
had occurred on that date, our debt would have
totaled approximately $11.2 billion, $6.4 billion
of which would have ranked senior to the new notes.
Optional Redemption........ We will not have the right to redeem the 10.00%
notes prior to their maturity date on April 1,
2009.
On or after January 15, 2005, we may redeem some or
all of the 10.25% notes and the 11.75% discount
notes at any time at the redemption prices listed
in the "Description of Notes" section under the
heading "Optional Redemption."
Before January 15, 2003, we may redeem up to 35% of
the 10.25% notes and the 11.75% discount notes with
the proceeds of certain offerings of equity
securities at the prices listed in the "Description
of Notes" section under the heading "Optional
Redemption."
Mandatory Offer to
Repurchase................. If Charter Holdings, Charter Communications Holding
Company or Charter Communications, Inc. experiences
certain changes of control, we must offer to
repurchase any then-outstanding new notes at 101%
of their principal amount plus accrued and unpaid
interest or accreted value, as applicable.
Basic Covenants of
Indentures The indentures governing the notes will, among
other things, restrict our ability and the ability
of certain of our subsidiaries to:
- pay dividends on stock or repurchase stock;
- make investments;
- borrow money;
- create certain liens;
- sell all or substantially all of our assets or
merge with or into other companies;
- sell assets;
- in the case of our restricted subsidiaries,
create or permit to exist dividend or payment
restrictions with respect to us; and
- engage in certain transactions with affiliates.
These covenants are subject to important
exceptions. See "Description of Notes -- Certain
Covenants."
RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific risk factors under "Risk Factors"
for a discussion of risks associated with an investment in the new notes.
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UNAUDITED SUMMARY PRO FORMA DATA
You should read the following unaudited summary pro forma financial data of
Charter Holdings in conjunction with the historical financial statements and
other financial information appearing elsewhere in this prospectus, including
"Capitalization," "Unaudited Pro Forma Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------
CHARTER ACQUISITIONS AND KALAMAZOO OFFERING
HOLDINGS RECENT TRANSFERS SUBTOTAL TRANSACTION ADJUSTMENTS TOTAL
----------- ---------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS:
Revenues................................ $ 1,451,010 $ 1,479,616 $ 2,930,626 $ 20,259 $ -- $ 2,950,885
----------- ----------- ----------- -------- -------- -----------
Operating expenses:
Operating, general and
administrative...................... 752,630 747,972 1,500,602 12,006 -- 1,512,608
Depreciation and amortization......... 739,453 944,010 1,683,463 13,104 -- 1,696,567
Option compensation expense........... 79,979 -- 79,979 -- -- 79,979
Corporate expense charges(a).......... 48,158 61,656 109,814 816 -- 110,630
Management fees....................... -- 16,224 16,224 -- -- 16,224
----------- ----------- ----------- -------- -------- -----------
Total operating expenses............ 1,620,220 1,769,862 3,390,082 25,926 -- 3,416,008
----------- ----------- ----------- -------- -------- -----------
Loss from operations.................... (169,210) (290,246) (459,456) (5,667) (465,123)
Interest expense........................ (456,895) (530,528) (987,423) -- (34,187) (1,021,610)
Interest income......................... 3,956 1,335 5,291 -- -- 5,291
Other expense........................... (375) (481) (856) (189) -- (1,045)
----------- ----------- ----------- -------- -------- -----------
Loss before income taxes, minority
interest and extraordinary item....... (622,524) (819,920) (1,442,444) (5,856) (34,187) (1,482,487)
Income tax expense...................... -- (3,747) (3,747) -- -- (3,747)
Minority interest....................... -- (12,589) (12,589) -- -- (12,589)
----------- ----------- ----------- -------- -------- -----------
Loss before extraordinary item.......... $ (622,524) $ (836,256) $(1,458,780) $ (5,856) $(34,187) $(1,498,823)
=========== =========== =========== ======== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)............................... $ 569,868 $ 653,283 $ 1,223,151 $ 7,248 $ 1,230,399
EBITDA margin(c)........................ 39.3% 44.2% 41.7% 35.8% 41.7%
Adjusted EBITDA(d)...................... $ 698,380 $ 731,644 $ 1,430,024 $ 8,253 $ 1,438,277
Cash flows from operating activities.... 409,166 474,383 883,549 11,368 894,917
Cash flows used in investing
activities............................ (3,544,087) (635,471) (4,179,558) (6,253) (4,185,811)
Cash flows from financing activities.... 3,218,309 243,024 3,461,333 -- 3,461,333
Cash interest expense................... 847,958
Capital expenditures.................... 766,788 539,069 1,305,857 6,253 1,312,110
Total debt to EBITDA.................... 9.1x
Total debt to adjusted EBITDA........... 7.8
EBITDA to cash interest expense......... 1.5
EBITDA to interest expense.............. 1.2
Deficiency of earnings to cover fixed
charges(e)............................ $ 1,498,823
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $12,005,197 $10,080,965 $22,086,162 $176,510 $ 50,282 $22,312,954
Total debt.............................. 6,971,612 4,116,852 11,088,464 -- 66,422 11,154,886
Minority interest(f).................... -- 629,488 629,488 -- -- 629,488
Member's equity......................... 4,344,262 5,144,868 9,489,130 172,500 -- 9,661,630
OPERATING DATA (AT END OF PERIOD, EXCEPT
FOR AVERAGE):
Homes passed(g)......................... 4,040,000 5,874,000 9,914,000 60,000 9,974,000
Basic customers(h)...................... 2,274,000 3,897,000 6,171,000 49,000 6,220,000
Basic penetration(i).................... 56.3% 66.3% 62.2% 81.7% 62.4%
Premium units(j)........................ 1,445,000 1,712,000 3,157,000 30,000 3,187,000
Premium penetration(k).................. 63.5% 43.9% 51.2% 61.2% 51.2%
Average monthly revenue per basic
customer(l)........................... $ 39.53
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(a) From January 1, 1999 through November 9, 1999, the date of the initial
public offering of Charter Communications, Inc., Charter Investment, Inc.
provided management services to subsidiaries of Charter Operating. From and
after the initial public offering of Charter Communications Inc., such
management services were provided by Charter Communications, Inc. See
"Certain Relationships and Related Transactions."
(b) EBITDA represents earnings (loss) before extraordinary item before interest,
income taxes, depreciation and amortization, and minority interest. EBITDA
is presented because it is a widely accepted financial indicator of a cable
company's ability to service indebtedness. However, EBITDA should not be
considered as an alternative to income from operations or to cash flows from
operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. Management's discretionary use of funds depicted by
EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
(c) EBITDA margin represents EBITDA as a percentage of revenues.
(d) Adjusted EBITDA means EBITDA before option compensation expense, corporate
expense charges, management fees and other expense. Adjusted EBITDA is
presented because it is a widely accepted financial indicator of a cable
company's ability to service its indebtedness. However, adjusted EBITDA
should not be considered as an alternative to income from operations or to
cash flows from operating, investing or financing activities, as determined
in accordance with generally accepted accounting principles. Adjusted EBITDA
should also not be construed as an indication of a company's operating
performance or as a measure of liquidity. In addition, because adjusted
EBITDA is not calculated identically by all companies, the presentation here
may not be comparable to other similarly titled measures of other companies.
Management's discretionary use of funds depicted by adjusted EBITDA may be
limited by working capital, debt service and capital expenditure
requirements and by restrictions related to legal requirements, commitments
and uncertainties.
(e) Earnings include net income (loss) plus fixed charges. Fixed charges consist
of interest expense and an estimated interest component of rent expense.
(f) Represents preferred membership units in an indirect subsidiary of Charter
Holdings issued to certain Bresnan sellers, which are exchangeable on a
one-for-one basis for shares of Class A common stock of Charter
Communications, Inc.
(g) Homes passed are the number of living units, such as single residence homes,
apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
(h) Basic customers are customers who receive basic cable service.
(i) Basic penetration represents basic customers as a percentage of homes
passed.
(j) Premium units represent the total number of subscriptions to premium
channels.
(k) Premium penetration represents premium units as a percentage of basic
customers.
(l) Average monthly revenue per basic customer represents revenues divided by
twelve divided by the number of basic customers at December 31, 1999.
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RISK FACTORS
The new notes, like the original notes, entail the following risks. You
should carefully consider these risk factors, as well as the other information
in this prospectus, before exchanging the original notes for new notes.
OUR BUSINESS
WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL ADDITIONAL DEBT,
WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND OUR ABILITY TO OBTAIN
FINANCING IN THE FUTURE AND REACT TO CHANGES IN OUR BUSINESS.
We have a significant amount of debt. As of December 31, 1999, pro forma
for the sale of the original notes, acquisitions completed since that date, the
recent transfer to us of the Fanch, Falcon, and Avalon cable systems, the
repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures and
the Kalamazoo transaction, our total debt would have been approximately $11.2
billion, our total member's equity would have been approximately $9.7 billion
and the deficiency of our earnings available to cover fixed charges would have
been approximately $1.5 billion.
Our significant amount of debt could have important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations to you under the
notes, to our lenders under our credit facilities and to our other public
noteholders;
- increase our vulnerability to general adverse economic and cable industry
conditions, including interest rate fluctuations, because much of our
borrowings are and will continue to be at variable rates of interest;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which will reduce our funds available
for working capital, capital expenditures, acquisitions of additional
systems and other general corporate expenses;
- limit our flexibility in planning for, or reacting to, changes in our
business and the cable industry generally;
- place us at a disadvantage compared to our competitors that have
proportionately less debt; and
- limit our ability to borrow additional funds in the future, if we need
them, due to applicable financial and restrictive covenants in our debt.
The agreements and instruments governing our debt do not prohibit us from
incurring additional debt, although they do place certain limitations on such
additional debt. Further, the agreements and instruments governing our debt
allow for the incurrence of debt by our subsidiaries, all of which would rank
senior to the notes. We anticipate incurring significant additional debt in the
future to fund the expansion, maintenance and upgrade of our cable systems. We
have received a commitment for bridge loan facility and we may incur debt to
finance additional acquisitions in the future. If new debt is added to our
current debt levels, the related risks that we and you now face could intensify.
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THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND
LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT THE HOLDERS OF THE NOTES AND OUR
ABILITY TO OPERATE OUR BUSINESS.
Our credit facilities and the indentures governing the notes and our other
public debt contain a number of significant covenants that could adversely
impact the holders of the notes and our business. These covenants, among other
things, restrict our ability and the ability of our subsidiaries to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- pledge assets.
Furthermore, in accordance with our credit facilities, we are required to
maintain specified financial ratios and meet financial tests. The ability to
comply with these provisions may be affected by events beyond our control. The
breach of any of these covenants will result in a default under the applicable
debt agreement or instrument, which could place us in default under the
indentures governing the notes.
OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO REPAY THE
NOTES, SERVICE OUR OTHER DEBT AND GROW OUR BUSINESS DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on the notes and our other debt and to fund
our planned capital expenditures for upgrading our cable systems and our ongoing
operations will depend on our ability to generate cash and to secure financing
in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond our
control. If our business does not generate sufficient cash flow from operations,
and sufficient future borrowings are not available to us under our credit
facilities or from other sources of financing, we may not be able to repay the
notes or our other debt, to grow our business or to fund our other liquidity
needs.
IF WE DEFAULT UNDER OUR CREDIT FACILITIES, WE MAY NOT HAVE THE ABILITY TO MAKE
PAYMENTS ON THE NOTES, WHICH WOULD PLACE US IN DEFAULT UNDER THE INDENTURES
GOVERNING THE NOTES.
In the event of a default under our credit facilities, lenders could elect
to declare all amounts borrowed, together with accrued and unpaid interest and
other fees, to be due and payable. In any event, when a default exists under our
subsidiaries' credit facilities, funds may not be distributed by our
subsidiaries to Charter Holdings to pay interest or principal on the notes. If
the amounts outstanding under such credit facilities are accelerated, thereby
causing an acceleration of amounts outstanding under the notes, we may not be
able to repay such amounts or the notes. Any default under any of our credit
facilities or our debt instruments may adversely affect the holders of the notes
and our growth, financial condition and results of operations.
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CHARTER HOLDINGS IS A HOLDING COMPANY WHICH HAS NO OPERATIONS AND WILL DEPEND ON
ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED IN THEIR
ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF THE NOTES AND OUR OTHER
OBLIGATIONS.
As a holding company, Charter Holdings will depend entirely on its
operating subsidiaries for the cash necessary to satisfy its obligations to you
as a holder of the notes. These operating subsidiaries may not be able to make
funds available to Charter Holdings.
Charter Holdings will not hold any significant assets other than its direct
and indirect interests in its subsidiaries which conduct all of its operations.
Charter Holdings' cash flow will depend upon the cash flow of its operating
subsidiaries and the payment of funds by these operating subsidiaries to Charter
Holdings. This may adversely affect the ability of Charter Holdings to meet its
obligations to the holders of the notes.
Our operating subsidiaries are not obligated to make funds available for
payment of these obligations in the form of loans, distributions or otherwise.
In addition, our operating subsidiaries' ability to make any such loans,
distributions or other payments to Charter Holdings will depend on their
earnings, business and tax considerations and legal restrictions. Covenants in
the indentures and credit agreements governing the debt of Charter Holdings'
subsidiaries restrict their ability to make loans, distributions or other
payments to Charter Holdings. This could adversely impact our ability to pay
interest and principal due on the notes. See "Description of Certain
Indebtedness."
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, THE NOTES WILL BE SUBORDINATED TO ALL
LIABILITIES OF OUR SUBSIDIARIES.
The borrowers and guarantors under the Charter Operating credit facilities,
the Falcon credit facilities, the Fanch credit facilities, the Avalon credit
facilities and the Bresnan credit facilities are direct or indirect subsidiaries
of Charter Holdings. A number of Charter Holdings' subsidiaries are also
obligors under other debt instruments. As of December 31, 1999, as adjusted to
give effect to the sale of the original notes, acquisitions completed since that
date, the recent transfers to us of the Fanch, Falcon and Avalon cable systems,
and the repurchase of certain of the Falcon, Avalon and Bresnan notes and
debentures and the Kalamazoo transaction, as if such transactions had occurred
on that date, indebtedness of Charter Holdings and its subsidiaries would have
totaled approximately $11.2 billion, $6.4 billion of which would have ranked
senior to the notes. The lenders under all of these credit facilities and the
holders of the other debt instruments will have the right to be paid before
Charter Holdings from any of our subsidiaries' assets. In the event of
bankruptcy, liquidation or dissolution of a subsidiary, following payment by
such subsidiary of its liabilities, such subsidiary may not have sufficient
assets remaining to make payments to Charter Holdings as a shareholder or
otherwise. This will adversely affect our ability to make payments to you as a
holder of the notes.
WE HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT
SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE.
We commenced active operations in 1994 and have grown rapidly since then
through acquisitions of cable systems. As of December 31, 1999, after giving
effect to acquisitions completed since that date, the recent transfer to us of
the Fanch, Falcon and Avalon cable systems to us, our systems served
approximately 392% more customers than were served as of December 31, 1998. As a
result, historical financial information about us may not be indicative of the
future or of results that we can achieve with the cable systems which will be
under our control. Our recent growth in revenue over our short operating history
is not necessarily indicative of future performance.
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WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES.
CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE FUTURE OPERATIONS.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. We expect our net losses to increase as a
result of acquisitions completed in 1999 and 2000, the recent transfer to us of
the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction. We
reported net losses from continuing operations before extraordinary items of $5
million for 1997, $23 million for 1998 and $578 million for 1999. On a pro forma
basis, giving effect to the merger of Charter Holdings and Marcus Holdings,
acquisitions completed in 1999 and 2000, the recent transfer to us of the Fanch,
Falcon and Avalon cable systems and the Kalamazoo transaction, we had net losses
from continuing operations before extraordinary item of $1.5 billion for 1999.
We cannot predict what impact, if any, continued losses will have on our ability
to finance our operations in the future.
IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
If we are unable to grow our cash flow sufficiently, we may be unable to
repay the notes or our other debt, to grow our business or to fund our other
liquidity needs. We expect that a substantial portion of our future growth will
be achieved through revenues from new products and services and the acquisition
of additional cable systems. We may not be able to offer these new products and
services successfully to our customers and these new products and services may
not generate adequate revenues.
In addition, we cannot predict the success of our acquisition strategy. In
the past year, the cable television industry has undergone dramatic
consolidation which has reduced the number of future acquisition prospects. This
consolidation may increase the purchase price of future acquisitions, and we may
not be successful in identifying attractive acquisition targets in the future.
Additionally, those acquisitions we do complete are not likely to have a
positive net impact on our operating results in the near future. If we are
unable to grow our cash flow sufficiently, we may be unable to fulfill our
obligations to you under the notes or obtain alternative financing.
OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE
INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOW AND
OPERATING MARGINS.
Programming has been, and is expected to continue to be, our largest single
expense item. In recent years, the cable industry has experienced a rapid
escalation in the cost of programming, particularly sports programming. This
escalation may continue, and we may not be able to pass programming cost
increases on to our customers. The inability to pass these programming cost
increases on to our customers would have an adverse impact on our cash flow and
operating margins. In addition, as we upgrade the channel capacity of our
systems, add programming to our basic and expanded basic programming tiers and
reposition premium services to the basic tier, we may face additional market
constraints on our ability to pass programming costs on to our customers. Basic
programming includes a variety of entertainment and local programming. Expanded
basic programming offers more services than basic programming. Premium service
includes unedited, commercial-free movies, sports and other special event
entertainment programming.
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WE MAY NOT BE ABLE TO OBTAIN CAPITAL SUFFICIENT TO FUND OUR PLANNED UPGRADES AND
OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW
PRODUCTS AND SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We intend to upgrade a significant portion of our cable systems over the
coming years and make other capital investments. For the three years ending
December 31, 2002, we plan to spend approximately $6.0 billion for capital
expenditures, approximately $3.5 billion of which will be used to upgrade and
rebuild our systems to bandwidth capacity of 550 megahertz or greater and add
two-way capability so that we may offer advanced services. The remaining $2.5
billion will be used for extensions of systems, development of new products and
services, purchases of converters and system maintenance.
We cannot assure you that these amounts will be sufficient to accomplish
our planned system upgrades, maintenance and expansion. If we cannot obtain the
necessary funds from increases in our operating cash flow, additional borrowings
or other sources, we may not be able to fund our planned upgrades and expansion
and offer new products and services on a timely basis. Consequently, our growth,
financial condition and results of operations could suffer materially.
THE COMMITMENT WE HAVE RECEIVED FOR A BRIDGE LOAN FACILITY IS SUBJECT TO A
NUMBER OF CONDITIONS. IF THESE CONDITIONS ARE NOT MET, THESE FUNDS WILL NOT BE
AVAILABLE TO US. AS A RESULT, WE MAY BE UNABLE TO FUND OUR PROJECTED CAPITAL
EXPENDITURES.
The bridge loan facility will not close unless specified closing conditions
are satisfied. Some of these closing conditions are not under our control, and
we cannot assure you that all closing conditions will be satisfied. For example,
the closing conditions for the bridge loan facility include:
- the absence of various types of material adverse changes, including
adverse changes in the financial and capital markets; and
- receipt of required approvals from third parties.
See "Description of Certain Indebtedness" for a description of the material
closing conditions for this facility. If we are not able to obtain financing
under this facility, we will need to arrange other sources of financing to meet
our projected capital expenditures budget. We cannot assure you that alternate
financing sources will be available to us. As a result we may be unable to fund
our capital expenditures as projected in this prospectus.
WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS AND
SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY. CONSEQUENTLY, OUR
GROWTH, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER MATERIALLY.
The cable business is characterized by rapid technological change and the
introduction of new products and services. We cannot assure you that we will be
able to fund the capital expenditures necessary to keep pace with technological
developments, or that we will successfully anticipate the demand of our
customers for products and services requiring new technology. This type of rapid
technological change could adversely affect our plans to upgrade or expand our
systems and respond to competitive pressures. Our inability to upgrade, maintain
and expand our systems and provide enhanced services in a timely manner, or to
anticipate the demands of the market place, could adversely affect our ability
to compete. Consequently, our growth, financial condition and results of
operations could suffer materially.
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WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN ADVERSELY AFFECT
OUR BUSINESS AND OPERATIONS.
The industry in which we operate is highly competitive. In some instances,
we compete against companies with fewer regulatory burdens, easier access to
financing, greater personnel resources, greater brand name recognition and
long-standing relationships with regulatory authorities. Mergers, joint ventures
and alliances among any of the following businesses could result in providers
capable of offering cable television, Internet and other telecommunications
services in direct competition with us:
- cable television operators;
- regional telephone companies;
- long distance telephone service providers;
- electric utilities;
- local exchange carriers, which are local phone companies that provide
local area telephone services and access to long distance services to
customers;
- providers of cellular and other wireless communications services; and
- Internet service providers.
We face competition within the subscription television industry, which
includes providers of paid television service employing technologies other than
cable, such as direct broadcast satellite or DBS, and excludes broadcast
companies that transmit their signal to customers without assessing a
subscription fee. We also face competition from broadcast companies distributing
television broadcast signals without assessing a subscription fee and from other
communications and entertainment media, including conventional off-air
television and radio broadcasting services, newspapers, movie theaters, the
Internet, live sports events and home video products.
We cannot assure you that upgrading our cable systems will allow us to
compete effectively. Additionally, as we expand and introduce new and enhanced
services, including Internet and telecommunications services, we will be subject
to competition from telecommunications providers and Internet service providers.
We cannot predict the extent to which competition may affect our business and
operations in the future. See "Business -- Competition."
WE MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON FAVORABLE TERMS AND OUR
CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY. THIS COULD ADVERSELY AFFECT OUR
GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The expansion and upgrade of our existing systems and the systems we plan
to acquire will require us to hire contractors and enter into a number of
construction agreements. We may have difficulty hiring civil contractors, and
the contractors we hire may encounter cost overruns or delays in construction.
Our construction costs may increase significantly over the next few years as
existing contracts expire and as demand for cable construction services
continues to grow. We cannot assure you that we will be able to construct new
systems or expand or upgrade existing or acquired systems in a timely manner or
at a reasonable cost. This may adversely affect our growth, financial condition
and results of operations.
THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR
OBLIGATIONS IN THE FUTURE.
In the past, Mr. Allen and his affiliates have contributed funds to Charter
Holdings, Charter Communications, Inc. and Charter Communications Holding
Company. There should be no expectation that Mr. Allen or his affiliates will
contribute funds to Charter Holdings, Charter
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Communications, Inc., Charter Communications Holding Company or to our
subsidiaries in the future.
A SALE BY MR. ALLEN OF HIS DIRECT OR INDIRECT EQUITY INTERESTS COULD ADVERSELY
AFFECT OUR ABILITY TO MANAGE OUR BUSINESS.
Mr. Allen is not prohibited by any agreement from selling the shares of
Class B common stock he holds in Charter Communications, Inc. or causing Charter
Investment, Inc. or Vulcan Cable III Inc. to sell their membership units in
Charter Communications Holding Company after the last day of the 180-day lock-up
period following Charter Communications, Inc.'s November 1999 initial public
offering. We cannot assure you that Mr. Allen or any of his affiliates will
maintain all or any portion of his direct or indirect ownership interests in
Charter Communications, Inc. or Charter Communications Holding Company. In the
event he sells all or any portion of his direct or indirect ownership interest
in Charter Communications, Inc. or Charter Communications Holding Company, we
cannot assure you that he would continue as Chairman of Charter Communications,
Inc.'s board of directors or otherwise participate in our management. The
disposition by Mr. Allen or any of his affiliates of these equity interests or
the loss of his services by Charter Communications, Inc. and/or Charter
Communications Holding Company could adversely affect our growth, financial
condition and results of operations.
THE LOSS OF KEY EXECUTIVES COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR
BUSINESS.
Our success is substantially dependent upon the retention and the continued
performance of Mr. Allen, Chairman of Charter Communications, Inc.'s board of
directors, and Jerald L. Kent, Charter Communications, Inc.'s President and
Chief Executive Officer. The loss of the services of Mr. Allen or Mr. Kent could
adversely affect our growth, financial condition and results of operations.
CHARTER'S STRUCTURE
MR. ALLEN MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS.
Mr. Allen controls approximately 93.6% of the voting power of Charter
Communications, Inc. Charter Communications, Inc., in turn, controls Charter
Communications Holding Company, our 100% parent. Accordingly, Mr. Allen has the
ability to control fundamental corporate transactions, including, but not
limited to, approval of merger transactions involving us and the sale of all or
substantially all of our assets. Mr. Allen's control over our management and
affairs could create conflicts of interest if he is faced with decisions that
could have implications both for him and for us and the holders of the notes.
Further, Mr. Allen could cause us to enter into contracts with another entity in
which he owns an interest or cause us to decline a transaction that he or an
entity in which he owns an interest ultimately enters into.
Mr. Allen may engage in other businesses involving the operation of cable
television systems, video programming, high-speed Internet access, telephony or
electronic commerce, which is business and financial transactions conducted
through broadband interactivity and Internet services. Mr. Allen may also engage
in other businesses that compete or may in the future compete with us. In
addition, Mr. Allen currently engages and may engage in the future in businesses
that are complementary to our cable television business.
Accordingly, conflicts could arise with respect to the allocation of
corporate opportunities between us and Mr. Allen. Current or future agreements
between us and Mr. Allen or his affiliates may not be the result of arm's-length
negotiations. Consequently, such agreements may be less favorable to us than
agreements that we could otherwise have entered into with unaffiliated third
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parties. Further, many past and future transactions with Mr. Allen or his
affiliates are informal in nature. As a result, there will be some discretion
left to the parties, who are subject to the potentially conflicting interests
described above. We cannot assure you that the interests of either Mr. Allen or
his affiliates will not conflict with the interests of the holders of the notes.
We have not instituted any formal plans to address conflicts of interest that
may arise.
WE ARE NOT PERMITTED TO ENGAGE IN ANY BUSINESS ACTIVITY OTHER THAN THE CABLE
TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR. ALLEN AUTHORIZES US TO PURSUE
THAT PARTICULAR BUSINESS ACTIVITY. THIS COULD ADVERSELY AFFECT OUR ABILITY TO
OFFER NEW PRODUCTS AND SERVICES OUTSIDE OF THE CABLE TRANSMISSION BUSINESS AND
ENTER INTO NEW BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Charter Communications, Inc.'s certificate of incorporation and Charter
Communications Holding Company's limited liability company agreement provide
that Charter Communications, Inc. and Charter Communications Holding Company and
their subsidiaries, including Charter Holdings and its subsidiaries, cannot
engage in any business activity outside the cable transmission business except
for the joint venture through Broadband Partners, Inc. and incidental businesses
engaged in as of the closing of Charter Communications, Inc.'s initial public
offering in November 1999. This will be the case unless the opportunity to
pursue the particular business activity is first offered to Mr. Allen, he
decides not to pursue it and he consents to our engaging in the business
activity. The cable transmission business means the business of transmitting
video, audio, including telephone services, and data over cable television
systems owned, operated or managed by us from time to time. These provisions may
limit our ability to take advantage of attractive business opportunities.
Consequently, our ability to offer new products and services outside of the
cable transmission business and enter into new businesses could be adversely
affected, resulting in an adverse effect on our growth, financial condition and
results of operations. See "Certain Relationships and Related
Transactions -- Allocation of Business Opportunities with Mr. Allen."
OUR MANAGEMENT MAY BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND MAY
NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD GIVE RISE TO CONFLICTS
OF INTEREST AND IMPAIR OUR OPERATING RESULTS.
Mr. Allen and certain other of our affiliates may from time to time in the
future acquire cable systems in addition to those owned by us or to be acquired
by us in the Kalamazoo transaction. We cannot assure you that Charter
Communications, Inc., Charter Communications Holding Company or any of their
affiliates will contribute any future acquisitions to Charter Holdings or to any
of its subsidiaries.
Charter Communications, Inc., as well as some of the officers of Charter
Communications, Inc. who currently manage our cable systems, may have a
substantial role in managing outside cable systems that may be acquired in the
future. As a result, the time they devote to managing our systems may be
correspondingly reduced. This could adversely affect our growth, financial
condition and results of operations. Moreover, allocating managers' time and
other resources of Charter Communications, Inc. and Charter Communications
Holding Company between our systems and outside systems that may be held by our
affiliates could give rise to conflicts of interest. Charter Communications,
Inc. and Charter Communications Holding Company do not have or plan to create
formal procedures for determining whether and to what extent outside cable
television systems acquired in the future will receive priority with respect to
personnel requirements.
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ACQUISITIONS
WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW CABLE SYSTEMS THAT WE ACQUIRE
AND THE CUSTOMERS THEY SERVE WITH OUR EXISTING CABLE SYSTEMS. THIS COULD
ADVERSELY AFFECT OUR OPERATING RESULTS AND GROWTH STRATEGY.
We have grown rapidly through acquisitions of cable systems, and now own
and operate cable systems serving approximately 6.2 million customers. We will
acquire additional cable systems if the Swap Transaction and the Kalamazoo
transaction are completed and we may acquire more cable systems in the future,
through direct acquisition, system swaps or otherwise. The integration of the
cable systems we have recently acquired and plan to acquire poses a number of
significant risks, including:
- our acquisitions may not have a positive impact on our cash flows from
operations;
- the integration of these new systems and customers will place significant
demands on our management and our operations, information services, and
financial, legal and marketing resources. Our current operating and
financial systems and controls and information services may not be
adequate, and any steps taken to improve these systems and controls may
not be sufficient;
- our current information systems may be incompatible with the information
systems we have acquired or plan to acquire. We may be unable to
integrate these information systems at a reasonable cost or in a timely
manner;
- acquired businesses sometimes result in unexpected liabilities and
contingencies which could be significant; and
- our continued growth will also increase our need for qualified personnel.
We may not be able to hire such additional qualified personnel.
We cannot assure you that we will successfully integrate any acquired
systems into our operations.
THE FAILURE TO OBTAIN NECESSARY REGULATORY APPROVALS, OR TO SATISFY OTHER
CLOSING CONDITIONS, COULD IMPEDE THE CONSUMMATION OF A PENDING TRANSACTION. THIS
WOULD PREVENT OR DELAY OUR STRATEGY TO EXPAND OUR BUSINESS AND INCREASE
REVENUES.
The Swap Transaction and the Kalamazoo transaction are subject to federal,
state and local regulatory approvals. We cannot assure you that we will be able
to obtain any necessary approvals. These transactions are also subject to a
number of other closing conditions. We cannot assure you as to when, or if, each
such transaction will be consummated. Any delay, prohibition or modification
could adversely affect the terms of such transactions or could require us to
abandon an otherwise attractive opportunity and possibly forfeit earnest money.
IF CHARTER COMMUNICATIONS, INC. AND CHARTER COMMUNICATIONS HOLDING COMPANY DO
NOT HAVE SUFFICIENT CAPITAL TO FUND POSSIBLE RESCISSION LIABILITIES, THEY COULD
SEEK FUNDS FROM CHARTER HOLDINGS AND ITS SUBSIDIARIES.
The Rifkin, Falcon and Bresnan sellers who acquired Charter Communications
Holding Company membership units or, in the case of Bresnan, additional equity
interests in one of our subsidiaries, in connection with the respective Rifkin,
Falcon and Bresnan acquisitions, and the Helicon sellers who acquired shares of
Class A common stock in Charter Communications, Inc.'s initial public offering
may have rescission rights against Charter Communications, Inc. and Charter
Communications Holding Company arising out of possible violations of Section 5
of the Securities
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Act. If all of these equity holders successfully exercise their possible
rescission rights, Charter Communications, Inc. or Charter Communications
Holding Company would become obligated to repurchase all such equity interests
and the total repurchase obligation would be up to approximately $1.8 billion.
We cannot assure you that Charter Communications, Inc. and Charter
Communications Holding Company would be able to obtain capital sufficient to
fund any required repurchases. If Charter Communications, Inc. and Charter
Communications Holding Company fail to obtain capital sufficient to fund any
required repurchases, they could seek such funds from us and our subsidiaries.
This could adversely affect our financial condition and results of operations.
REGULATORY AND LEGISLATIVE MATTERS
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION.
THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY
AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses and limited the revenues of cable systems. Cable operators
are subject to, among other things:
- limited rate regulation;
- requirements that, under specified circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
Additionally, many aspects of these regulations are currently the subject
of judicial proceedings and administrative or legislative proposals. There are
also ongoing efforts to amend or expand the state and local regulation of some
of our cable systems, which may compound the regulatory risks we already face.
Certain states and localities, led by Florida, are considering new
telecommunications taxes that could increase operating expenses. We cannot
predict whether in response to these efforts any of the states or localities in
which we now operate will expand regulation of our cable systems in the future
or how they will do so.
WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE
PROVIDERS. THIS COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY
AFFECT THE UPGRADE OF OUR SYSTEMS OR OUR ABILITY TO PROVIDE NEW PRODUCTS AND
SERVICES.
Recently, a number of companies, including telephone companies and Internet
service providers, have requested local authorities and the Federal
Communications Commission to require cable operators to provide access to
cable's broadband infrastructure, which allows cable to deliver a multitude of
channels and/or services, so that these companies may deliver Internet services
directly to customers over cable facilities. Certain local franchising
authorities are considering or have already approved such "open access"
requirements. A federal district court in Portland, Oregon has upheld the
legality of an open access requirement, but that case has been appealed to the
Ninth Circuit.
We believe that allocating a portion of our bandwidth capacity to other
Internet service providers:
- would impair our ability to use our bandwidth in ways that would generate
maximum revenues;
- would strengthen our Internet service provider competitors; and
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- may cause us to decide not to upgrade our systems which would prevent us
from introducing our planned new products and services.
In addition, we cannot assure you that if we were required to provide
access in this manner, it would not have a significant adverse impact on our
profitability. This could impact us in many ways, including by:
- increasing competition;
- increasing the expenses we incur to maintain our systems; and/or
- increasing the expense of upgrading and/or expanding our systems.
OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL
OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR
BUSINESS IN A KEY MARKET.
Our cable systems generally operate pursuant to franchises, permits or
licenses typically granted by a municipality or other state or local government
controlling the public rights-of-way. Many franchises establish comprehensive
facilities and service requirements, as well as specific customer service
standards and establish monetary penalties for non-compliance. In many cases,
franchises are terminable if the franchisee fails to comply with material
provisions set forth in the franchise agreement governing system operations.
Franchises are generally granted for fixed terms and must be periodically
renewed. Local franchising authorities may resist granting a renewal if either
past performance or the prospective operating proposal is considered inadequate.
Franchise authorities often demand concessions or other commitments as a
condition to renewal, which have been and may continue to be costly to us. In
some instances, franchises have not been renewed at expiration, and we have
operated under either temporary operating agreements or without a license while
negotiating renewal terms with the local franchising authorities.
We cannot assure you that we will be able to comply with all material
provisions of our franchise agreements or that we will be able to renew our
franchises in the future. A termination of and/or a sustained failure to renew a
franchise could adversely affect our business in the affected geographic area.
WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION
IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
Our cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, such
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which we hold franchises. In some cases municipal utilities may legally
compete with us without obtaining a franchise from the local franchising
authority. The existence of more than one cable system operating in the same
territory is referred to as an overbuild. These overbuilds could adversely
affect our growth, financial condition and results of operations by increasing
competition or creating competition where none existed previously. As of
December 31, 1999, pro forma for the recent transfers to us of the Fanch, Falcon
and Avalon cable systems and the Bresnan acquisition, we are aware of overbuild
situations impacting 115,000 of our customers and potential overbuild situations
in areas servicing another 134,000 basic customers, together representing a
total of 249,000 customers. Additional overbuild situations may occur in other
systems.
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LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY
CONSTRAINTS ON OUR BUSINESS. THIS CAN FURTHER INCREASE OUR EXPENSES.
In addition to the franchise document, cable authorities have also adopted
in some jurisdictions cable regulatory ordinances that further regulate the
operation of cable systems. This additional regulation increases our expenses in
operating our business. We cannot assure you that the local franchising
authorities will not impose new and more restrictive requirements.
Local franchising authorities also have the power to reduce rates and order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. Basic service tier
rates are the prices charged for basic programming services. As of December 31,
1999, we have refunded a total of approximately $835,000 since our inception. We
may be required to refund additional amounts in the future.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE
CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS
COULD CAUSE US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS OR IMPAIR
OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS.
On March 31, 1999, the pricing of expanded basic cable programming packages
was deregulated, permitting cable operators to set their own rates. This
deregulation was not applicable to basic services. However, the Federal
Communications Commission and the United States Congress continue to be
concerned that cable rate increases are exceeding inflation. It is possible that
either the Federal Communications Commission or the United States Congress will
again restrict the ability of cable television operators to implement rate
increases. Should this occur, it would impede our ability to raise our rates. If
we are unable to raise our rates in response to increasing costs, our financial
condition and results of operations could be materially adversely affected.
IF WE OFFER TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL
REGULATORY BURDENS CAUSING US TO INCUR ADDITIONAL COSTS.
If we enter the business of offering telecommunications services, we may be
required to obtain federal, state and local licenses or other authorizations to
offer these services. We may not be able to obtain such authorizations in a
timely manner, or at all, and conditions could be imposed upon such licenses or
authorizations that may not be favorable to us. Furthermore, telecommunications
companies, including Internet protocol telephony companies, generally are
subject to significant regulation as well as higher fees for pole attachments.
Internet protocol telephony companies are companies that have the ability to
offer telephone services over the Internet. Pole attachments are cable wires
that are attached to poles.
In particular, cable operators who provide telecommunications services and
cannot reach agreement with local utilities over pole attachment rates in states
that do not regulate pole attachment rates will be subject to a methodology
prescribed by the Federal Communications Commission for determining the rates.
These rates may be higher than those paid by cable operators who do not provide
telecommunications services. The rate increases are to be phased in over a five-
year period beginning on February 8, 2001. If we become subject to
telecommunications regulation or higher pole attachment rates, we may incur
additional costs which may be material to our business. A recent court decision
suggests that the provision of Internet service may subject cable systems to
higher pole attachment rates.
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THE EXCHANGE OFFER
THERE IS NO MARKET FOR THE NOTES. AN ACTIVE TRADING MARKET MAY NOT DEVELOP
CAUSING DIFFICULTIES FOR YOU IF YOU TRY TO RESELL THE NOTES.
The new notes will be new securities for which there is currently no public
market. We do not intend to list the new notes on any national exchange or
quotation system. There can be no assurance as to the development of any market
or liquidity of any market that may develop for the new notes. If a trading
market does not develop or is not maintained, you may experience difficulty in
reselling new notes or you may be unable to sell them at all.
IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES FOR NEW NOTES, SUCH ORIGINAL NOTES
WILL REMAIN SUBJECT TO RESTRICTIONS ON TRANSFER. ACCORDINGLY, THE LIQUIDITY OF
THE MARKET FOR THE ORIGINAL NOTES COULD BE ADVERSELY AFFECTED.
Holders of original notes who do not exchange their original notes for new
notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the original notes set forth in the legend on the
original notes. This is a consequence of the issuance of the original notes
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act. In general, original notes may
not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. If we complete the exchange
offer, we will not be required to register the original notes, and we do not
anticipate that we will register the original notes, under the Securities Act.
Additionally, to the extent that original notes are tendered and accepted in the
exchange offer, the aggregate principal amount of original notes outstanding
will decrease, with a resulting decrease in the liquidity of the market for the
original notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FULFILL OUR
OBLIGATIONS UNDER THE NOTES FOLLOWING A CHANGE OF CONTROL. THIS WOULD PLACE US
IN DEFAULT UNDER THE INDENTURES GOVERNING THE NOTES.
Under the indentures governing the notes, upon the occurrence of specified
change of control events, we will be required to offer to repurchase all
outstanding notes. However, we may not have sufficient funds at the time of the
change of control event to make the required repurchase of the notes. In
addition, a change of control would require the repayment of borrowings under
our other publicly held debt and our credit facilities. Because our credit
facilities and other publicly held debt, other than the existing senior notes
and senior discount notes of Charter Holdings, are obligations of subsidiaries
of Charter Holdings, the credit facilities and such debt would have to be repaid
by our subsidiaries before their assets could be available to Charter Holdings
to repurchase the notes. Our failure to make or complete an offer to repurchase
the notes would place us in default under the indentures governing the notes.
You should also be aware that a number of important corporate events, such as
leveraged recapitalizations that would increase the level of our indebtedness,
would not constitute a change of control under the indentures governing the
notes.
IF WE DO NOT FULFILL OUR OBLIGATIONS TO YOU UNDER THE NOTES, YOU WILL NOT HAVE
ANY RECOURSE AGAINST CHARTER COMMUNICATIONS, INC., CHARTER COMMUNICATIONS
HOLDING COMPANY, MR. ALLEN OR THEIR EQUITY HOLDERS OR THEIR AFFILIATES.
The notes will be issued solely by Charter Holdings and Charter Capital.
None of our equity holders, directors, officers, employees or affiliates,
including Charter Communications, Inc., Charter Communications Holding Company
and Mr. Allen, will be an obligor or guarantor under the notes. Furthermore, the
indentures governing the notes expressly provide that these parties will not
have any
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liability for our obligations under the notes or the indentures governing the
notes. By accepting the notes, you waive and release all such liability as
consideration for issuance of the notes. Consequently, if the issuers of the
notes do not fulfill their obligations to you under the notes, you will have no
recourse against any of these parties.
Additionally, our equity holders, including Charter Communications, Inc.,
Charter Communications Holding Company and Mr. Allen, will be free to manage
other entities, including other cable companies. If we do not fulfill our
obligations to you under the notes, you will have no recourse against those
other entities or their assets.
THE 11.75% DISCOUNT NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT.
CONSEQUENTLY, HOLDERS OF THE 11.75% DISCOUNT NOTES WILL GENERALLY BE REQUIRED TO
INCLUDE AMOUNTS IN GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES IN ADVANCE OF
RECEIVING CASH.
The 11.75% discount notes will be issued at a substantial discount from
their stated principal amount. As a result, purchasers of the 11.75% discount
notes generally will be required to include the accrued portion of this discount
in gross income, as interest, for United States federal income tax purposes in
advance of the receipt of cash payments of this interest.
IF A BANKRUPTCY PETITION WERE FILED BY OR AGAINST US, YOU MAY RECEIVE A LESSER
AMOUNT FOR YOUR CLAIM THAN YOU WOULD BE ENTITLED TO RECEIVE UNDER THE INDENTURE
GOVERNING THE 11.75% DISCOUNT NOTES, AND YOU MAY REALIZE TAXABLE GAIN OR LOSS
UPON PAYMENT OF YOUR CLAIM.
If a bankruptcy petition were filed by or against us under the U.S.
Bankruptcy Code after the issuance of the 11.75% discount notes, the claim by a
holder of the 11.75% discount notes for the principal amount of the 11.75%
discount notes may be limited to an amount equal to the sum of:
(1) the initial offering price for the 11.75% discount notes; and
(2) that portion of the original issue discount that does not
constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code.
Any original issue discount that was not amortized as of the date of the
bankruptcy filing would constitute unmatured interest. Accordingly, holders of
11.75% discount notes under these circumstances may receive a lesser amount than
they would be entitled to receive under the terms of the indenture governing the
11.75% discount notes, even if sufficient funds are available. In addition, to
the extent that the U.S. Bankruptcy Code differs from the Internal Revenue Code
in determining the method of amortization of original issue discount, a holder
of 11.75% discount notes may realize taxable gain or loss upon payment of that
holder's claim in bankruptcy.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements regarding, among other
things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Many of the forward-looking statements contained in this prospectus
may be identified by the use of forward-looking words such as "believe,"
"expect," "anticipate," "should," "planned," "estimated" and "potential," among
others. Important factors that could cause actual results to differ materially
from the forward-looking statements we make in this prospectus are set forth in
this prospectus and in other reports or documents that we file from time to time
with the SEC and include, but are not limited to:
- Our plans to achieve growth by offering new products and services and
through acquisitions and swaps;
- Our anticipated capital expenditures for our planned upgrades and the
ability to fund these expenditures;
- Our beliefs regarding the effects of governmental regulation on our
business; and
- Our ability to effectively compete in a highly competitive environment.
All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by those cautionary statements.
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USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
the exchange and registration rights agreements entered into in connection with
the offering of the original notes. We will not receive any proceeds from the
exchange offer. In consideration for issuing the new notes, we will receive
original notes with the same original principal amount at maturity. The form and
terms of the original notes are the same as the form and terms of the new notes,
except as otherwise described in this prospectus. The original notes surrendered
in exchange for new notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the new notes will not result in any increase in
our outstanding debt.
We received proceeds totaling approximately $1.3 billion from the private
placement of the original notes. These proceeds were used to finance the Avalon,
Falcon and Bresnan change of control offers, including accrued and unpaid
interest.
The break-down of the uses of proceeds is as follows (in millions):
Change of control offers:
Falcon
8.375% senior debentures due 2010...................... $ 388.0
9.285% senior discount debentures due 2010............. 328.1
Avalon
9.375% senior subordinated notes due 2008.............. 153.7
11.875% senior discount notes due 2008................. 10.5
Bresnan
8.0% senior notes due 2005............................. 173.7
9.25% senior discount notes due 2009................... 196.0
Discounts and commissions................................... 26.8
Expenses.................................................... 23.5
--------
Total....................................................... $1,300.3
========
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CAPITALIZATION
The following table sets forth as of December 31, 1999 on a consolidated
basis:
- the actual capitalization of Charter Holdings;
- the pro forma capitalization of Charter Holdings, assuming that as of
December 31, 1999:
(1) all acquisitions closed since December 31, 1999 had been completed
(including the transfer of an Indiana cable system in the InterMedia
acquisition);
(2) the recent transfer to Charter Holdings of the Fanch, Falcon and
Avalon cable systems had occurred and the Kalamazoo transaction had
been completed; and
- the pro forma as adjusted capitalization of Charter Holdings to reflect:
(1) the issuance and sale of the original notes; and
(2) the repurchase of a portion of the Avalon 11.875% senior discount
notes and all the Avalon 9.375% senior subordinated notes, all of
the Falcon debentures and all of the Bresnan notes pursuant to the
Avalon, Falcon and Bresnan change of control offers at prices equal
to 101% of their aggregate principal amounts, plus accrued and
unpaid interest, or their accreted value, as applicable.
This table should be read in conjunction with the "Unaudited Pro Forma
Financial Statements" and the accompanying notes included elsewhere in this
prospectus.
AS OF DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Long-term debt:
Credit facilities:
Charter Operating(a)................................. $ 2,906,000 $ 3,862,096 $ 3,862,096
CC V -- Avalon....................................... -- 170,000 170,000
CC VI -- Fanch....................................... -- 850,000 850,000
CC VII -- Falcon..................................... -- 1,038,500 1,038,500
CC VIII Operating -- Bresnan(b)...................... -- 631,200 631,200
8.250% senior notes due 2007........................... 598,557 598,557 598,557
8.625% senior notes due 2009........................... 1,495,787 1,495,787 1,495,787
9.920% senior discount notes due 2011.................. 977,807 977,807 977,807
10.00% senior notes due 2009........................... -- -- 675,000
10.25% senior notes due 2010........................... -- -- 325,000
11.75% senior discount notes due 2010.................. -- -- 300,303
9.375% senior subordinated notes -- Avalon............. -- 151,500 --
11.875% senior discount notes -- Avalon(c)............. -- 129,212 118,675
8.375% senior debentures -- Falcon..................... -- 378,750 --
9.285% senior discount debentures -- Falcon............ -- 325,381 --
8.0% senior notes -- Bresnan........................... -- 171,700 --
9.25% senior discount notes -- Bresnan................. -- 196,013 --
Other notes(d)......................................... 87,461 87,961 87,961
Loans payable to parent companies -- related
parties(e)........................................... 906,000 24,000 24,000
----------- ----------- -----------
Total long-term debt................................. 6,971,612 11,088,464 11,154,886
----------- ----------- -----------
Minority interest(f)..................................... -- 629,488 629,488
Member's equity(g)....................................... 4,344,262 9,661,630 9,661,630
----------- ----------- -----------
Total capitalization................................. $11,315,874 $21,379,582 $21,446,004
=========== =========== ===========
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- - - -------------------------
(a) The increase in the Charter Operating credit facilities is related to
additional borrowings to finance the purchase prices of the Capital Cable
and Farmington acquisitions and to repay loans payable to parent
companies -- related parties.
(b) The Bresnan credit facilities in place on December 31, 1999 were amended and
the borrowing availability thereunder was increased in February 2000. The
Pro Forma and Pro Forma As Adjusted represent $534.2 million in outstanding
borrowings under the Bresnan credit facilities on December 31, 1999 and
$97.0 million in additional borrowings under these credit facilities used to
fund a portion of the Bresnan acquisition purchase price. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financing Activities" and "Description of Certain
Indebtedness."
(c) A portion of the Avalon 11.875% senior discount notes were repurchased
through a change of control offer using a portion of the proceeds from the
sale of the original notes.
(d) Primarily represents outstanding notes of our Renaissance subsidiary. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financing Activities" and "Description of Certain
Indebtedness."
(e) Represents loans payable to Charter Communications Holding Company and
Charter Communications, Inc., the direct and indirect parent companies of
Charter Holdings.
(f) Represents preferred membership units in an indirect subsidiary of Charter
Holdings issued to certain Bresnan sellers, which are exchangeable on a
one-for-one basis for shares of Class A common stock in Charter
Communications, Inc.
(g) The increase in member's equity is primarily a result of the transfers to
Charter Holdings of the Fanch, Falcon and Avalon cable systems; the
acquisition of a portion of Bresnan by Charter Communications Holding
Company and subsequent contribution to Charter Holdings; and the acquisition
of the Kalamazoo cable system by Charter Communications, Inc. and subsequent
contribution to Charter Holdings.
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements are based on the
historical financial statements of Charter Holdings. Since January 1, 1999,
Charter Holdings has closed numerous acquisitions. In addition, Charter Holdings
merged with Marcus Holdings in April 1999. Our financial statements, on a
consolidated basis, are adjusted on a pro forma basis to illustrate the
estimated effects of acquisitions closed since December 31, 1999, the recent
transfers to Charter Holdings of the Fanch, Falcon and Avalon cable systems, the
repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures,
the Kalamazoo transaction and the issuance and sale of the original notes as if
such transactions had occurred on December 31, 1999 for the Unaudited Pro Forma
Balance Sheet and to illustrate the estimated effects of the following
transactions as if they had occurred on January 1, 1999 for the Unaudited Pro
Forma Statement of Operations:
(1) the acquisition of Marcus Cable by Mr. Allen and Marcus Holdings'
merger with and into Charter Holdings effective March 31, 1999;
(2) the acquisitions by Charter Holdings and its subsidiaries completed
since January 1, 1999, including the Bresnan acquisition;
(3) the completion of the Fanch, Falcon and Avalon acquisitions and recent
transfers;
(4) the refinancing of the previous credit facilities of the Charter
Companies and certain subsidiaries acquired by us or transferred to us
in 1999 and 2000; and
(5) the sale of the March 1999 Charter Holdings notes and the original
notes, and the repurchase of certain of the Falcon, Avalon and Bresnan
notes and debentures.
The Unaudited Pro Forma Financial Statements reflect the application of the
principles of purchase accounting to the transactions listed in items (1) and
(2) above. The Unaudited Pro Forma Balance Sheet reflects the historical balance
sheets of the entities listed in item (3) to which the principles of purchase
accounting were applied upon their respective acquisitions by Charter
Communications Holding Company. The allocation of certain purchase prices is
based, in part, on preliminary information, which is subject to adjustment upon
obtaining complete valuation information of intangible assets and is subject to
post-closing purchase price adjustments. We believe that these adjustments will
not have a material impact on our results of operations or financial position.
The Unaudited Pro Forma Financial Statements of Charter Holdings do not
purport to be indicative of what our financial position or results of operations
would actually have been had the transactions described above been completed on
the dates indicated or to project our results of operations for any future date.
33
37
UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------
CHARTER ACQUISITIONS AND KALAMAZOO OFFERING
HOLDINGS RECENT TRANSFERS TRANSACTION ADJUSTMENTS
(NOTE A) (NOTE B) SUBTOTAL (NOTE B) (NOTE C) TOTAL
----------- ---------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS:
Revenues................................. $ 1,451,010 $ 1,479,616 $ 2,930,626 $ 20,259 $ -- $ 2,950,885
----------- ----------- ----------- -------- -------- -----------
Operating expenses:
Operating, general and
administrative....................... 752,630 747,972 1,500,602 12,006 -- 1,512,608
Depreciation and amortization.......... 739,453 944,010 1,683,463 13,104 -- 1,696,567
Option compensation expense............ 79,979 -- 79,979 -- -- 79,979
Corporate expense charges (Note D)..... 48,158 61,656 109,814 816 -- 110,630
Management fees........................ -- 16,224 16,224 -- -- 16,224
----------- ----------- ----------- -------- -------- -----------
Total operating expenses............. 1,620,220 1,769,862 3,390,082 25,926 -- 3,416,008
----------- ----------- ----------- -------- -------- -----------
Loss from operations..................... (169,210) (290,246) (459,456) (5,667) -- (465,123)
Interest expense......................... (456,895) (530,528) (987,423) -- (34,187) (1,021,610)
Interest income.......................... 3,956 1,335 5,291 -- -- 5,291
Other expense............................ (375) (481) (856) (189) -- (1,045)
----------- ----------- ----------- -------- -------- -----------
Loss before income taxes, minority
interest and extraordinary item........ (622,524) (819,920) (1,442,444) (5,856) (34,187) (1,482,487)
Income tax expense....................... -- (3,747) (3,747) -- -- (3,747)
Minority interest (Note E)............... -- (12,589) (12,589) -- -- (12,589)
----------- ----------- ----------- -------- -------- -----------
Loss before extraordinary item........... $ (622,524) $ (836,256) $(1,458,780) $ (5,856) $(34,187) $(1,498,823)
=========== =========== =========== ======== ======== ===========
OTHER FINANCIAL DATA:
EBITDA (Note F).......................... $ 569,868 $ 653,283 $ 1,223,151 $ 7,248 $ 1,230,399
EBITDA margin (Note G)................... 39.3% 44.2% 41.7% 35.8% 41.7%
Adjusted EBITDA (Note H)................. $ 698,380 $ 731,644 $ 1,430,024 $ 8,253 $ 1,438,277
Cash flows from operating activities..... 409,166 474,383 883,549 11,368 894,917
Cash flows used in investing
activities............................. (3,544,087) (635,471) (4,179,558) (6,253) (4,185,811)
Cash flows from financing activities..... 3,218,309 243,024 3,461,333 -- 3,461,333
Cash interest expense.................... 847,958
Capital expenditures..................... 766,788 539,069 1,305,857 6,253 1,312,110
Total debt to EBITDA..................... 9.1x
Total debt to adjusted EBITDA............ 7.8
EBITDA to cash interest expense.......... 1.5
EBITDA to interest expense............... 1.2
Deficiency of earnings to cover fixed
charges (Note I)....................... $ 1,498,823
OPERATING DATA (AT END OF PERIOD, EXCEPT
FOR AVERAGE):
Homes passed (Note J).................... 4,040,000 5,874,000 9,914,000 60,000 9,974,000
Basic customers (Note K)................. 2,274,000 3,897,000 6,171,000 49,000 6,220,000
Basic penetration (Note L)............... 56.3% 66.3% 62.2% 81.7% 62.4%
Premium units (Note M)................... 1,445,000 1,712,000 3,157,000 30,000 3,187,000
Premium penetration (Note N)............. 63.5% 43.9% 51.2% 61.2% 51.2%
Average monthly revenue per basic
customer (Note O)...................... $ 39.53
34
38
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Holdings consist of the
following (dollars in thousands):
HISTORICAL
-----------------------------
1/1/99
YEAR ENDED THROUGH
12/31/99 3/31/99
CHARTER MARCUS PRO FORMA
HOLDINGS HOLDINGS(a) ADJUSTMENTS TOTAL
-------------- ----------- ----------- ----------
Revenues................................................. $1,325,830 $125,180 $ -- $1,451,010
---------- -------- -------- ----------
Operating expenses:
Operating, general and administrative.................. 683,646 68,984 -- 752,630
Depreciation and amortization.......................... 675,786 51,688 11,979(b) 739,453
Option compensation expense............................ 79,979 -- -- 79,979
Corporate expense charges.............................. 48,158 -- -- 48,158
Management fees........................................ -- 4,381 (4,381)(c) --
---------- -------- -------- ----------
Total operating expenses............................. 1,487,569 125,053 7,598 1,620,220
---------- -------- -------- ----------
Income (loss) from operations............................ (161,739) 127 (7,598) (169,210)
Interest expense......................................... (434,995) (27,067) 5,167(d) (456,895)
Interest income.......................................... 18,821 104 (14,969)(e) 3,956
Other expense............................................ (217) (158) -- (375)
---------- -------- -------- ----------
Loss before extraordinary item........................... $ (578,130) $(26,994) $(17,400) $ (622,524)
========== ======== ======== ==========
- - - -------------------------
(a) Marcus Holdings represents the results of operations of Marcus Holdings
through March 31, 1999, the date of its merger with Charter Holdings.
(b) As a result of Mr. Allen acquiring a controlling interest in Marcus Cable, a
large portion of the purchase price was recorded as franchises ($2.5
billion) that are amortized over 15 years. This resulted in additional
amortization for the period from January 1, 1999 through March 31, 1999. The
adjustment to depreciation and amortization expense consists of the
following (dollars in millions):
WEIGHTED AVERAGE
USEFUL LIFE DEPRECIATION/
FAIR VALUE (IN YEARS) AMORTIZATION
---------- ---------------- -------------
Franchises.................................................. $2,500.0 15 $ 40.8
Cable distribution systems.................................. 720.0 8 21.2
Land, buildings and improvements............................ 28.3 10 0.7
Vehicles and equipment...................................... 13.6 3 1.0
------
Total depreciation and amortization....................... 63.7
Less -- historical depreciation and amortization of Marcus
Cable................................................... (51.7)
------
Adjustment.............................................. $ 12.0
======
(c) Reflects the elimination of management fees.
(d) As a result of the acquisition of Marcus Cable by Mr. Allen, the carrying
value of outstanding debt was recorded at estimated fair value, resulting in
a debt premium that is to be amortized as an offset to interest expense over
the term of the debt. This resulted in a reduction of interest expense.
Interest expense was further reduced by the effects of the extinguishment of
substantially all of our long-term debt in March 1999, excluding borrowings
under our previous credit facilities, and the refinancing of all previous
credit facilities.
(e) Reflects the elimination of interest income on excess cash since we assumed
substantially all such cash was used to finance a portion of the
acquisitions completed in 1999.
35
39
NOTE B: Pro forma operating results for our acquisitions completed in 1999
and 2000, recent transfers and the Kalamazoo transaction consist of the
following (dollars in thousands):
YEAR ENDED DECEMBER 31, 1999
ACQUISITIONS -- HISTORICAL
-------------------------------------------------------------------
GREATER
AMERICAN MEDIA
RENAISSANCE(a) CABLE(a) SYSTEMS(a) HELICON(a) RIFKIN(a)
-------------- -------- ---------- ---------- ---------
Revenues...................................... $20,396 $12,311 $42,348 $ 49,564 $152,364
------- ------- ------- -------- --------
Operating expenses:
Operating, general and administrative........ 9,382 6,465 26,067 31,563 95,077
Depreciation and amortization................ 8,912 5,537 5,195 16,617 77,985
Management fees.............................. -- 369 -- 2,511 2,513
------- ------- ------- -------- --------
Total operating expenses................... 18,294 12,371 31,262 50,691 175,575
------- ------- ------- -------- --------
Income (loss) from operations................. 2,102 (60) 11,086 (1,127) (23,211)
Interest expense.............................. (6,321) (3,218) (565) (20,682) (34,926)
Interest income............................... 122 32 -- 124 --
Other income (expense)........................ -- 2 (398) -- (12,742)
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item........................... (4,097) (3,244) 10,123 (21,685) (70,879)
Income tax expense (benefit).................. (65) 5 4,535 -- (1,975)
------- ------- ------- -------- --------
Income (loss) before extraordinary item....... $(4,032) $(3,249) $ 5,588 $(21,685) $(68,904)
======= ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1999
ACQUISITIONS -- HISTORICAL
----------------------------------
INTERMEDIA
SYSTEMS(a) BRESNAN OTHER(b)
---------- -------- --------
Revenues...................................... $152,789 $283,574 $24,826
-------- -------- -------
Operating expenses:
Operating, general and administrative........ 84,174 176,611 14,232
Depreciation and amortization................ 79,325 59,752 6,792
Management fees.............................. 2,356 -- 910
-------- -------- -------
Total operating expenses................... 165,855 236,363 21,934
-------- -------- -------
Income (loss) from operations................. (13,066) 47,211 2,892
Interest expense.............................. (17,636) (67,291) (6,180)
Interest income............................... 187 -- (20)
Other income (expense)........................ (2,719) (344) (30)
-------- -------- -------
Income (loss) before income taxes and
extraordinary item........................... (33,234) (20,424) (3,338)
Income tax expense (benefit).................. (2,681) -- --
-------- -------- -------
Income (loss) before extraordinary item....... $(30,553) $(20,424) $(3,338)
======== ======== =======
YEAR ENDED DECEMBER 31, 1999
RECENT TRANSFERS -- HISTORICAL
---------------------------------------------------------------------
FALCON FANCH
--------------------------------- ---------------------------------
BEFORE AFTER BEFORE AFTER
ACQUISITION BY ACQUISITION BY ACQUISITION BY ACQUISITION BY
CHARTER CHARTER CHARTER CHARTER
COMMUNICATIONS COMMUNICATIONS COMMUNICATIONS COMMUNICATIONS
HOLDING COMPANY HOLDING COMPANY HOLDING COMPANY HOLDING COMPANY
--------------- --------------- --------------- ---------------
Revenues.......................... $ 371,617 $ 56,051 $185,917 $ 32,281
--------- -------- -------- --------
Operating expenses:
Operating, general and
administrative................. 220,108 29,548 85,577 16,569
Depreciation and amortization.... 196,260 37,550 62,097 24,141
Equity-based deferred
compensation................... 44,600 -- -- --
Corporate expense charges........ -- 1,704 -- 979
Management fees.................. -- -- 6,162 --
--------- -------- -------- --------
Total operating expenses....... 460,968 68,802 153,836 41,689
--------- -------- -------- --------
Income (loss) from operations..... (89,351) (12,751) 32,081 (9,408)
Interest expense.................. (114,993) (19,106) -- (10,252)
Interest income................... -- -- -- --
Other income (expense)............ 8,021 -- (7,796) (26)
--------- -------- -------- --------
Income loss before income taxes
and extraordinary item........... (196,323) (31,857) 24,285 (19,686)
--------- -------- -------- --------
Income tax expense (benefit)...... 2,509 84 197 946
--------- -------- -------- --------
Income (loss) before extraordinary
item............................. $(198,832) $(31,941) $ 24,088 $(20,632)
========= ======== ======== ========
YEAR ENDED DECEMBER 31, 1999
RECENT TRANSFERS -- HISTORICAL
----------------------------------------------
AVALON
---------------------------------
BEFORE AFTER
ACQUISITION BY ACQUISITION BY
CHARTER CHARTER
COMMUNICATIONS COMMUNICATIONS
HOLDING COMPANY HOLDING COMPANY TOTAL
--------------- --------------- ----------
Revenues.......................... $ 94,383 $ 13,930 $1,492,351
-------- -------- ----------
Operating expenses:
Operating, general and
administrative................. 53,089 8,281 856,743
Depreciation and amortization.... 39,943 7,838 627,944
Equity-based deferred
compensation................... -- -- 44,600
Corporate expense charges........ -- 501 3,184
Management fees.................. -- -- 14,821
-------- -------- ----------
Total operating expenses....... 93,032 16,620 1,547,292
-------- -------- ----------
Income (loss) from operations..... 1,351 (2,690) (54,941)
Interest expense.................. (40,162) (7,523) (348,855)
Interest income................... 764 -- 1,209
Other income (expense)............ 4,499 2 (11,531)
-------- -------- ----------
Income loss before income taxes
and extraordinary item........... (33,548) (10,211) (414,118)
-------- -------- ----------
Income tax expense (benefit)...... (13,936) -- (10,381)
-------- -------- ----------
Income (loss) before extraordinary
item............................. $(19,612) $(10,211) $ (403,737)
======== ======== ==========
36
40
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
ACQUISITIONS AND RECENT TRANSFERS
--------------------------------------------------------------------------
PRO FORMA
-------------------------------------------------------------
HISTORICAL ACQUISITIONS(c) DISPOSITIONS(d) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------- ----------
Revenues........................... $1,492,351 $43,861 $(53,626) $ (2,970)(e) $1,479,616
---------- ------- -------- --------- ----------
Operating expenses:
Operating, general and
administrative.................. 856,743 25,370 (25,493) (108,648)(f) 747,972
Depreciation and amortization..... 627,944 11,165 (22,850) 327,751(g) 944,010
Equity-based deferred
compensation.................... 44,600 -- -- (44,600)(h) --
Corporate expense charges......... 3,184 1,279 -- 57,193(f) 61,656
Management fees................... 14,821 1,403 -- -- 16,224
---------- ------- -------- --------- ----------
Total operating expenses.......... 1,547,292 39,217 (48,343) 231,696 1,769,862
---------- ------- -------- --------- ----------
Income (loss) from operations...... (54,941) 4,644 (5,283) (234,666) (290,246)
Interest expense................... (348,855) (2,402) 37 (179,308)(j) (530,528)
Interest income.................... 1,209 126 -- -- 1,335
Other income (expense)............. (11,531) 49,024 (2,576) (35,398)(1) (481)
---------- ------- -------- --------- ----------
Income (loss) before income taxes,
minority interest and
extraordinary item................ (414,118) 51,392 (7,822) (449,372) (819,920)
Income tax expense (benefit)....... (10,381) (47) -- 14,175(m) 3,747
Minority interest.................. -- -- -- (12,589)(n) (12,589)
---------- ------- -------- --------- ----------
Income (loss) before extraordinary
item.............................. $ (403,737) $51,439 $ (7,822) $(476,136) $ (836,256)
========== ======= ======== ========= ==========
YEAR ENDED DECEMBER 31, 1999
------------------------------------
KALAMAZOO TRANSACTION
------------------------------------
PRO FORMA
----------------------
HISTORICAL ADJUSTMENTS TOTAL
----------- ----------- -------
Revenues........................... $ 20,259 $ -- $20,259
--------- --------- -------
Operating expenses:
Operating, general and
administrative.................. 12,321 (315)(f) 12,006
Depreciation and amortization..... 3,534 9,570(g) 13,104
Equity-based deferred
compensation.................... 1,868 (1,868)(i) --
Corporate expense charges......... 501 315(f) 816
Management fees................... -- -- --
--------- --------- -------
Total operating expenses.......... 18,224 7,702 25,926
--------- --------- -------
Income (loss) from operations...... 2,035 (7,702) (5,667)
Interest expense................... -- -- --
Interest income.................... 4,120 (4,120)(k) --
Other income (expense)............. (189) -- (189)
--------- --------- -------
Income (loss) before income taxes,
minority interest and
extraordinary item................ 5,966 (11,822) (5,856)
Income tax expense (benefit)....... -- -- --
Minority interest.................. -- -- --
--------- --------- -------
Income (loss) before extraordinary
item.............................. $ 5,966 $ (11,822) $(5,856)
========= ========= =======
- - - -------------------------
(a) Renaissance represents the results of operations of Renaissance through
April 30, 1999, the date of acquisition by Charter Holdings. American Cable
represents the results of operations of American Cable through May 7, 1999,
the date of acquisition by Charter Holdings. Greater Media Systems
represents the results of operations of Greater Media Systems through June
30, 1999, the date of acquisition by Charter Holdings. Helicon represents
the results of operations of Helicon through July 30, 1999, the date of
acquisition by the Charter Holdings. InterMedia represents the results of
operations of InterMedia through October 1, 1999, the date of acquisition by
Charter Holdings. Rifkin includes the results of operations of Rifkin
Acquisition Partners, L.L.L.P., Rifkin Cable Income Partners L.P., Indiana
Cable Associates, Ltd. and R/N South Florida Cable Management Limited
Partnership, all under common ownership through September 13, 1999, the date
of acquisition by Charter Holdings, as follows (dollars in thousands):
RIFKIN RIFKIN INDIANA SOUTH
ACQUISITION CABLE INCOME CABLE FLORIDA OTHER TOTAL
----------- ------------ ------- -------- --------- --------
Revenues............................. $ 68,829 $3,807 $ 6,034 $ 17,516 $ 56,178 $152,364
Income (loss) from operations........ (6,954) 146 (3,714) (14,844) 2,155 (23,211)
Loss before extraordinary item....... (21,571) (391) (4,336) (15,605) (27,001) (68,904)
(b) Represents the results of operations of Vista through July 30, 1999, the
date of acquisition by Charter Holdings, Cable Satellite through August 4,
1999, the date of acquisition by Charter Holdings, Capital Cable for the
year ended December 31, 1999 and Farmington for the year ended December 31,
1999.
(c) Represents the historical results of operations for the period from January
1, 1999 through the date of purchase for acquisitions completed by Rifkin,
Fanch and Bresnan and for the year ended December 31, 1999 for the systems
acquired by Bresnan after December 31, 1999.
37
41
These acquisitions were accounted for using the purchase method of
accounting. The purchase price in millions and closing dates for significant
acquisitions are as follows:
RIFKIN FANCH BRESNAN
ACQUISITIONS ACQUISITIONS ACQUISITIONS
------------- ------------- ------------
Purchase price................................. $165.0 $42.2 $40.0
Closing date................................... February 1999 February 1999 January 1999
Purchase price................................. $53.8 $248.0 $27.0
Closing date................................... July 1999 February 1999 March 1999
Purchase price................................. $70.5
Closing date................................... March 1999
Purchase price................................. $50.0
Closing date................................... June 1999
(d) Represents the elimination of the operating results related to the cable
systems transferred to InterMedia as part of a swap of cable systems in
October 1999. The agreed value of our systems transferred to InterMedia was
$420.0 million. This number includes 30,000 customers served by an Indiana
cable system that we did not transfer at the time of the InterMedia closing
because some of the necessary regulatory approvals were still pending. This
system was transferred in March 2000. No material gain or loss occurred on
the disposition as these systems were recently acquired and recorded at fair
value at that time. Also represents the elimination of the operating results
related to the sale of a Bresnan cable system sold in January 1999.
(e) Reflects the elimination of historical revenues and expenses associated with
an entity not included in the purchase by Charter.
(f) Reflects a reclassification of expenses representing corporate expenses
that would have occurred at Charter Investment, Inc. totaling $57.5
million. The remaining adjustment primarily relates to the elimination of
severance payments of $32.2 million and the write-off of debt issuance
costs of $7.4 million that were included in operating, general and
administrative expense.
(g) Represents additional depreciation and amortization as a result of our
acquisitions completed in 1999 and 2000 and the recent transfers. A large
portion of the purchase price was allocated to franchises ($12.6 billion)
that are amortized over 15 years. The adjustment to depreciation and
amortization expense consists of the following (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
Franchises............................................... $12,583.4 15 $ 735.1
Cable distribution systems............................... 1,754.9 8 194.3
Land, buildings and improvements......................... 54.7 10 4.5
Vehicles and equipment................................... 90.4 3 23.2
-------
Total depreciation and amortization................................................. 957.1
Less-historical depreciation and amortization....................................... (619.8)
-------
Adjustment..................................................................... $ 337.3
=======
(h) Reflects the elimination of approximately $44.6 million of change in control
payments under the terms of Falcon's equity-based compensation plans that
were triggered by the acquisition of Falcon by Charter Communications
Holding Company. These plans were terminated and the employees will
participate in the option plan of Charter Communications Holding Company. As
such, these costs will not recur.
(i) Reflects the elimination of approximately $1.9 million of change in control
payments under the terms of Cablevision's stock appreciation rights plan
that were triggered by the acquisition of Kalamazoo by Charter
38
42
Communications, Inc. These employees will participate in the option plan of
Charter Communications Holding Company. As such, these costs will not
recur.
(j) Reflects additional interest expense on borrowings, which were used to
finance the acquisitions as follows (dollars in millions):
$170.0 million of credit facilities at a composite current
rate of 8.6% -- Avalon.................................... $ 14.7
$150.0 million 9.375% senior subordinated notes -- Avalon... 14.1
$196.0 million 11.875% senior discount notes -- Avalon...... 14.8
$850.0 million of credit facilities at a composite current
rate of 8.5% -- Fanch..................................... 72.2
$1.0 billion of credit facilities at a composite current
rate of 8.0% -- Falcon.................................... 82.8
$375.0 million 8.375% senior debentures -- Falcon........... 31.4
$435.3 million 9.285% senior discount
debentures -- Falcon...................................... 30.0
$631.2 million of credit facilities at a composite current
rate of 8.4% -- Bresnan................................... 52.9
$170.0 million 8.0% senior notes -- Bresnan................. 13.6
$275.0 million 9.25% senior discount notes -- Bresnan....... 17.7
Interest expense on additional borrowings used to finance
acquisitions at a composite current rate of 8.8%.......... 186.3
-------
Total pro forma interest expense....................... 530.5
Less-historical interest expense from acquired
companies............................................. (351.2)
-------
Adjustment........................................... $ 179.3
=======
An increase in the interest rate of 0.125% on all variable rate debt would
result in an increase in interest expense of $8.2 million.
(k) Represents interest income on a historical related party receivable, which
will be retained by the seller.
(l) Represents the elimination of gain (loss) on sale of cable television
systems whose results of operations have been eliminated in (d) above.
(m) Reflects the elimination of income tax expense (benefit) as a result of
being acquired by a limited liability company.
(n) Represents 2% accretion of the preferred membership units of an indirect
subsidiary of Charter Holdings issued to certain Bresnan sellers.
NOTE C: The offering adjustment of approximately $34.2 million in higher
interest expense consists of the following (dollars in millions):
INTEREST
DESCRIPTION EXPENSE
----------- --------
$675.0 million of 10.00% senior notes....................... $ 67.5
$325.0 million of 10.25% senior notes....................... 33.3
$532.0 million of 11.75% senior discount notes.............. 36.3
Amortization of debt issuance costs......................... 5.0
-------
Total pro forma interest expense.......................... 142.1
Less-historical interest expense.......................... (107.9)
-------
Adjustment............................................. $ 34.2
=======
NOTE D: From January 1, 1999 through November 9, 1999, the date of the
initial public offering of Charter Communications, Inc., Charter Investment,
Inc. provided management services to subsidiaries of Charter Operating. From and
after the initial public offering of Charter Communications Inc., such
management services were provided by Charter Communications, Inc. See "Certain
Relationships and Related Transactions."
39
43
NOTE E: Represents the 2% accretion of the preferred membership units in
an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers,
which are exchangeable on a one-for-one basis for shares of Class A common stock
of Charter Communications, Inc.
NOTE F: EBITDA represents earnings (loss) before extraordinary item
before interest, income taxes, depreciation and amortization, and minority
interest. EBITDA is presented because it is a widely accepted financial
indicator of a cable company's ability to service indebtedness. However, EBITDA
should not be considered as an alternative to income from operations or to cash
flows from operating, investing or financing activities, as determined in
accordance with generally accepted accounting principles. EBITDA should also not
be construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because EBITDA is not calculated identically
by all companies, the presentation here may not be comparable to other similarly
titled measures of other companies. Management's discretionary use of funds
depicted by EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
NOTE G: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE H: Adjusted EBITDA means EBITDA before option compensation expense,
corporate expense charges, management fees and other income (expense). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of a
cable company's ability to service indebtedness. However, adjusted EBITDA should
not be considered as an alternative to income from operations or to cash flows
from operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. Adjusted EBITDA should also not
be construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because adjusted EBITDA is not calculated
identically by all companies, the presentation here may not be comparable to
other similarly titled measures of other companies. Management's discretionary
use of funds depicted by adjusted EBITDA may be limited by working capital, debt
service and capital expenditure requirements and by restrictions related to
legal requirements, commitments and uncertainties.
NOTE I: Earnings include net income (loss) plus fixed charges. Fixed
charges consist of interest expense and an estimated interest component of rent
expense.
NOTE J: Homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by the cable
television distribution network in a given cable system service area.
NOTE K: Basic customers are customers who receive basic cable service.
NOTE L: Basic penetration represents basic customers as a percentage of
homes passed.
NOTE M: Premium units represent the total number of subscriptions to
premium channels.
NOTE N: Premium penetration represents premium units as a percentage of
basic customers.
NOTE O: Average monthly revenue per basic customer represents revenues
divided by twelve divided by the number of basic customers at December 31, 1999.
40
44
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------------
ACQUISITIONS AND KALAMAZOO OFFERING
CHARTER RECENT TRANSFERS TRANSACTION ADJUSTMENTS
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL
----------- ---------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents........ $ 84,305 $ 23,592 $ 107,897 $ 168 $ -- $ 108,065
Accounts receivable, net......... 68,522 34,412 102,934 607 -- 103,541
Receivable from related party.... 14,500 -- 14,500 -- -- 14,500
Prepaid expenses and other....... 15,082 19,567 34,649 211 -- 34,860
----------- ----------- ----------- --------- -------- -----------
Total current assets........ 182,409 77,571 259,980 986 -- 260,966
Property, plant and equipment.... 2,525,854 1,330,779 3,856,633 18,402 -- 3,875,035
Franchises....................... 9,162,331 8,584,619 17,746,950 157,122 -- 17,904,072
Other assets..................... 134,603 87,996 222,599 -- 50,282 272,881
----------- ----------- ----------- --------- -------- -----------
Total assets................ $12,005,197 $10,080,965 $22,086,162 $ 176,510 $ 50,282 $22,312,954
=========== =========== =========== ========= ======== ===========
LIABILITIES AND MEMBER'S EQUITY
Accounts payable and accrued
expenses....................... $ 553,174 $ 128,319 $ 681,493 $ 4,010 $(16,140) $ 669,363
Payables to manager of cable
systems -- related parties..... 6,713 14,735 21,448 -- -- 21,448
----------- ----------- ----------- --------- -------- -----------
Total current liabilities... 559,887 143,054 702,941 4,010 (16,140) 690,811
Long-term debt................... 6,065,612 4,998,852 11,064,464 -- 66,422 11,130,886
Loans payable to parent
companies -- related parties... 906,000 (882,000) 24,000 -- -- 24,000
Deferred management
fees -- related parties........ 19,831 1,791 21,622 -- -- 21,622
Other long-term liabilities...... 109,605 44,912 154,517 -- -- 154,517
Minority interest................ -- 629,488 629,488 -- -- 629,488
Member's equity.................. 4,344,262 5,144,868 9,489,130 172,500 -- 9,661,630
----------- ----------- ----------- --------- -------- -----------
Total liabilities and
member's equity........... $12,005,197 $10,080,965 $22,086,162 $ 176,510 $ 50,282 $22,312,954
=========== =========== =========== ========= ======== ===========
41
45
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
NOTE A: Pro forma balance sheets for the recent transfers, the Bresnan
acquisition and the Kalamazoo transaction consist of the following (dollars in
thousands):
AS OF DECEMBER 31, 1999
----------------------------------------------------------------------
ACQUISITIONS AND RECENT TRANSFERS -- HISTORICAL
---------------------------------------------------------
FALCON FANCH AVALON BRESNAN OTHER TOTAL
---------- ---------- -------- --------- -------- ----------
Cash and cash equivalents........................... $ 10,556 $ 12,428 $ 6,806 $ 6,285 $ 220 $ 36,295
Accounts receivable, net............................ 21,110 2,191 1,920 9,006 197 34,424
Prepaid expenses and other.......................... 17,982 785 663 -- 84 19,514
---------- ---------- -------- --------- -------- ----------
Total current assets.............................. 49,648 15,404 9,389 15,291 501 90,233
Property, plant and equipment....................... 580,838 262,595 121,285 375,106 8,590 1,348,414
Franchises.......................................... 2,957,655 2,139,750 721,744 328,068 1,098 6,148,315
Other assets........................................ 76,679 7,494 1,983 19,038 504 105,698
---------- ---------- -------- --------- -------- ----------
Total assets...................................... $3,664,820 $2,425,243 $854,401 $ 737,503 $ 10,693 7,692,660
========== ========== ======== ========= ======== ==========
Accounts payable and accrued expenses............... $ 86,634 $ 35,482 $ 25,132 $ 66,261 $ 4,758 $ 218,267
Payables to manager of cable systems -- related
parties........................................... 9,740 3,362 1,557 -- 76 14,735
---------- ---------- -------- --------- -------- ----------
Total current liabilities......................... 96,374 38,844 26,689 66,261 4,834 233,002
Long-term debt...................................... 1,569,631 850,000 451,212 895,607 39,617 3,806,067
Loans payable to parent companies -- related
parties........................................... 173,000 -- -- -- 540 173,540
Deferred management fees -- related parties......... 982 547 262 -- -- 1,791
Other long-term liabilities......................... 31,425 53 3,414 10,020 -- 44,912
Equity (deficit).................................... 1,793,408 1,535,799 372,824 (234,385) (34,298) 3,433,348
---------- ---------- -------- --------- -------- ----------
Total liabilities and equity (deficit)............ $3,664,820 $2,425,243 $854,401 $ 737,503 $ 10,693 $7,692,660
========== ========== ======== ========= ======== ==========
AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------
ACQUISITIONS AND RECENT TRANSFERS
-----------------------------------------------------------------------------
PRO FORMA
----------------------------------------------------------------
HISTORICAL ACQUISITIONS(a) DISPOSITIONS(b) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------- -----------
Cash and cash equivalents.......... $ 36,295 $ 441 $ (144) $ (13,000)(c) $ 23,592
Accounts receivable, net........... 34,424 168 (180) -- 34,412
Receivable from related party...... -- 125 -- (125)(d) --
Prepaid expenses and other......... 19,514 119 (66) -- 19,567
---------- ------ -------- ---------- -----------
Total current assets.............. 90,233 853 (390) (13,125) 77,571
Property, plant and equipment...... 1,348,414 4,572 (22,207) -- 1,330,779
Franchises......................... 6,148,315 -- (67,832) 2,504,136(e) 8,584,619
Other assets....................... 105,698 819 (72) (18,449)(f) 87,996
---------- ------ -------- ---------- -----------
Total assets...................... $7,692,660 $6,244 $(90,501) $2,472,562 $10,080,965
========== ====== ======== ========== ===========
Accounts payable and accrued
expenses.......................... 218,267 553 (90,501) -- 128,319
Payables to manager of cable
systems -- related parties........ 14,735 -- -- -- 14,735
---------- ------ -------- ---------- -----------
Total current liabilities......... 233,002 553 (90,501) -- 143,054
Long-term debt..................... 3,806,067 2,702 -- 1,190,083(g) 4,998,852
Loans payable to parent
companies -- related parties...... 173,540 -- -- (1,055,540)(g) (882,000)
Deferred management fees -- related
parties........................... 1,791 -- -- -- 1,791
Other long-term liabilities........ 44,912 -- -- -- 44,912
Minority interest.................. -- -- -- 629,488(h) 629,488
Equity (deficit)................... 3,433,348 2,989 -- 1,708,531(i) 5,144,868
---------- ------ -------- ---------- -----------
Total liabilities and equity
(deficit)....................... $7,692,660 $6,244 $(90,501) $2,472,562 $10,080,965
========== ====== ======== ========== ===========
AS OF DECEMBER 31, 1999
--------------------------------------
KALAMAZOO TRANSACTION
--------------------------------------
PRO FORMA
-------------------------
HISTORICAL ADJUSTMENTS TOTAL
---------- ----------- --------
Cash and cash equivalents.......... $ 168 $ -- $ 168
Accounts receivable, net........... 607 -- 607
Receivable from related party...... 59,112 (59,112)(d) --
Prepaid expenses and other......... 211 -- 211
------- -------- --------
Total current assets.............. 60,098 (59,112) 986
Property, plant and equipment...... 18,402 -- 18,402
Franchises......................... -- 157,122(e) 157,122
Other assets....................... 253 (253)(f) --
------- -------- --------
Total assets...................... $78,753 $ 97,757 $176,510
======= ======== ========
Accounts payable and accrued
expenses.......................... 4,010 -- 4,010
Payables to manager of cable
systems -- related parties........ -- -- --
------- -------- --------
Total current liabilities......... 4,010 -- 4,010
Long-term debt..................... -- -- --
Loans payable to parent
companies -- related parties...... -- -- --
Deferred management fees -- related
parties........................... -- -- --
Other long-term liabilities........ -- -- --
Minority interest.................. -- -- --
Equity (deficit)................... 74,743 97,757(j) 172,500
------- -------- --------
Total liabilities and equity
(deficit)....................... $78,753 $ 97,757 $176,510
======= ======== ========
42
46
- - - -------------------------
(a) Represents the historical balance sheets as of December 31, 1999 for
acquisitions completed subsequent to December 31, 1999.
(b) Represents the historical assets and liabilities as of December 31, 1999 of
an Indiana cable system transferred in March 2000 to InterMedia as part of a
swap of cable systems. The cable system swapped was accounted for at fair
value. No gain or loss was recorded in conjunction with the swap. See
"Business -- Acquisitions Completed in 1999 and 2000 -- InterMedia Systems."
(c) Represents Charter Holdings' historical cash used to finance a portion of an
acquisition that occurred after December 31, 1999.
(d) Reflects assets retained by the seller.
(e) Substantial amounts of the purchase prices have been allocated to franchises
based on estimated fair values. The allocation of these purchase prices are
as follows (dollars in thousands):
BRESNAN OTHER KALAMAZOO
---------- -------- ---------
Working capital....................................... $ (50,894) $ (4,257) $ (3,024)
Property, plant and equipment......................... 376,541 8,590 18,402
Franchises............................................ 2,753,699 69,839 157,122
Other................................................. 1,697 -- --
---------- -------- --------
$3,081,043 $ 74,172 $172,500
========== ======== ========
The Bresnan acquisition was financed through the issuance of $1.0 billion
of equity to the Bresnan sellers, $964.4 million in debt assumed and
additional borrowings under the CC VIII Operating -- Bresnan credit
facilities. The other acquisitions were financed through additional
borrowings under the Charter Operating credit facilities. The Kalamazoo
transaction will be financed through the issuance of $172.5 million of
Class A common stock in Charter Communications, Inc. to the Kalamazoo
sellers.
(f) Represents the elimination of the unamortized historical cost of goodwill
and deferred financing costs based on the allocation of the purchase price
(see (e) above).
(g) Represents the following (dollars in millions):
Total pro forma debt not assumed............................ $ (938.5)
Repayment of loans payable to parent companies -- related
parties................................................... (882.0)
Long-term debt:
8.0% senior notes -- Bresnan........................... 171.7
9.25% senior discount notes -- Bresnan................. 196.0
Credit facilities:
Charter Operating.................................... 956.1
CC VIII Operating -- Bresnan......................... 631.2
--------
Total long-term debt................................... 1,955.0
--------
Adjustment............................................. $ 134.5
========
(h) Represents the preferred membership interests in an indirect subsidiary of
Charter Holdings issued to certain Bresnan sellers, which are exchangable on
a one-for-one basis for shares of Class A common stock in Charter
Communications, Inc.
(i) Represents the elimination of the historical deficits of $268.7 million
related to the Bresnan, Capital Cable and Farmington cable systems and an
additional contribution of $1.4 billion made to us related to the Bresnan
acquisition.
(j) Represents the elimination of the historical equity of Kalamazoo and the
contribution of the Kalamazoo system to Charter Holdings.
43
47
NOTE B: Offering adjustments represent additional long-term debt of $1.3
billion from the issuance and sale of the original notes, the use of the
proceeds from the original notes to repurchase the Avalon 9.375% senior
subordinated notes, Falcon debentures and Bresnan notes including accrued and
unpaid interest, pursuant to the Avalon, Falcon and Bresnan change of control
offers, and the addition to other assets of the expenses paid in connection with
the issuance and sale of the original notes which were capitalized and will be
amortized over the term of the related debt.
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48
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data below for the period from October 1,
1995 through December 31, 1995, for the years ended December 31, 1996 and 1997,
for the periods from January 1, 1998 through December 23, 1998 and from December
24, 1998 through December 31, 1998, and the year ended December 31, 1999 are
derived from the consolidated financial statements of Charter Holdings. The
consolidated financial statements of Charter Holdings for the year ended
December 31, 1997, for the periods from January 1, 1998 through December 23,
1998 and from December 24, 1998 through December 31, 1998 and for the year ended
December 31, 1999 have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The consolidated
financial statements of Charter Holdings for the period from October 1, 1995
through December 31, 1995 and the year ended December 31, 1996, have been
audited by Arthur Andersen LLP, independent public accountants, and are not
included elsewhere in this prospectus. The selected historical financial data
for the period from January 1, 1995 through September 30, 1995 are derived from
the unaudited financial statements of Charter Holdings' predecessor business and
are not included elsewhere in this prospectus. The information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements of Charter Holdings and related notes included elsewhere in this
prospectus.
PREDECESSOR OF
CHARTER HOLDINGS CHARTER HOLDINGS
---------------- --------------------------------------------------------------------------
YEAR ENDED
1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98 YEAR ENDED
THROUGH THROUGH ----------------- THROUGH THROUGH DECEMBER 31,
9/30/95 12/31/95 1996 1997 12/23/98 12/31/98 1999
---------------- -------- ------- ------- -------- ---------- -------------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS:
Revenues...................... $ 5,324 $ 1,788 $14,881 $18,867 $ 49,731 $ 13,713 $ 1,325,830
------- ------- ------- ------- -------- ---------- -----------
Operating expenses:
Operating, general and
administrative............ 2,581 931 8,123 11,767 25,952 7,134 683,646
Depreciation and
amortization.............. 2,137 648 4,593 6,103 16,864 8,318 675,786
Option compensation
expense................... -- -- -- -- -- 845 79,979
Management fees/corporate
expense charges........... 224 54 446 566 6,176 473 48,158
------- ------- ------- ------- -------- ---------- -----------
Total operating
expenses................ 4,942 1,633 13,162 18,436 48,992 16,770 1,487,569
------- ------- ------- ------- -------- ---------- -----------
Income (loss) from
operations.................. 382 155 1,719 431 739 (3,057) (161,739)
Interest expense.............. -- (691) (4,415) (5,120) (17,277) (2,353) (434,995)
Interest income............... -- 5 20 41 44 133 18,821
Other income (expense)........ 38 -- (47) 25 (728) -- (217)
------- ------- ------- ------- -------- ---------- -----------
Income (loss) before
extraordinary item.......... 420 (531) (2,723) (4,623) (17,222) (5,277) (578,130)
Extraordinary item -- loss
from early extinguishment of
debt........................ -- -- -- -- -- -- (7,794)
------- ------- ------- ------- -------- ---------- -----------
Net income (loss)............. $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (5,277) $ (585,924)
======= ======= ======= ======= ======== ========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.................. $26,342 $31,572 $67,994 $55,811 $281,969 $4,335,527 $12,005,197
Total debt.................... 10,480 28,847 59,222 41,500 274,698 2,002,206 6,971,612
Member's equity (deficit)..... 15,311 971 2,648 (1,975) (8,397) 2,147,379 4,344,262
45
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Reference is made to the "Certain Trends and Uncertainties" section below
in this Management's Discussion and Analysis for a discussion of important
factors that could cause actual results to differ from expectations and
non-historical information contained herein.
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of certain past
significant events, including:
(1) the acquisition by Mr. Allen of CCA Group, Charter Communications
Properties Holdings, LLC (CCPH) and CharterComm Holdings, LLC,
referred to together with their subsidiaries as the Charter companies;
(2) the merger of Marcus Holdings with and into Charter Holdings;
(3) our acquisitions completed since January 1, 1999, the recent
transfers, the Bresnan acquisition and the Kalamazoo transaction;
(4) the refinancing or replacement of the previous credit facilities of
the Charter companies and certain of our subsidiaries acquired in 1999
acquisitions, the recent transfers and the Bresnan acquisition; and
(5) the purchase of publicly held notes that had been issued by several of
the direct and indirect subsidiaries of Charter Holdings.
Provided below is a discussion of our organizational history consisting of:
(1) the operations and development of the Charter companies prior to the
acquisition by Mr. Allen, together with the acquisition of the Charter
companies by Mr. Allen;
(2) the merger of Marcus Holdings with and into Charter Holdings; and
(3) our 1999 acquisitions, the recent transfers, the Bresnan acquisition
and the Kalamazoo transaction.
ORGANIZATIONAL HISTORY
Prior to the acquisition of the Charter companies by Mr. Allen on December
23, 1998 and the merger of Marcus Holdings with and into Charter Holdings
effective April 7, 1999, the cable systems of the Charter and Marcus companies
were operated under four groups of companies. Three of these groups were
comprised of companies that were managed by Charter Investment prior to the
acquisition of the Charter companies by Mr. Allen and the fourth group was
comprised of companies that were subsidiaries of Marcus Holdings. Charter's
management began managing Marcus Holdings in October 1998.
The following is an explanation of how:
(1) CCPH, the operating companies that formerly comprised CCA Group and
CharterComm Holdings, and the Marcus companies became wholly owned
subsidiaries of Charter Operating;
(2) Charter Operating became a wholly owned subsidiary of Charter
Holdings;
(3) Charter Holdings became a wholly owned subsidiary of Charter
Communications Holding Company; and
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50
(4) Charter Communications Holding Company became a wholly owned
subsidiary of Charter Investment and, later, of Charter Communications,
Inc.
THE CHARTER COMPANIES
Prior to Charter Investment acquiring the remaining interests that it did
not previously own in two of the three groups of Charter companies, namely CCA
Group and CharterComm Holdings, as described below, the operating subsidiaries
of the three groups of Charter companies were parties to separate management
agreements with Charter Investment pursuant to which Charter Investment provided
management and consulting services. Prior to our acquisition by Mr. Allen, the
Charter companies were as follows:
(1) CCPH
CCPH was a wholly owned subsidiary of Charter Investment. The primary
subsidiary of CCPH, which owned the cable systems, was Charter
Communications Properties, LLC. In connection with Mr. Allen's acquisition
on December 23, 1998, CCPH was merged out of existence and Charter
Communications Properties became a direct, wholly owned subsidiary of
Charter Investment. On May 20, 1998, CCPH acquired certain cable systems
from Sonic Communications, Inc. for a total purchase price, net of cash
acquired, of $228.4 million, including $60.9 million of assumed debt.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates of Kelso &
Co. Charter Investment had only a minority interest. Effective December 23,
1998, prior to Mr. Allen's acquisition, Charter Investment acquired from
the Kelso affiliates the interests the Kelso affiliates held in CCA Group.
Consequently, the companies comprising CCA Group became wholly owned
subsidiaries of Charter Investment.
CCA Group consisted of the following three sister companies:
(a) CCT Holdings, LLC;
(b) CCA Holdings, LLC; and
(c) Charter Communications Long Beach, LLC.
The cable systems were owned by the various subsidiaries of these three
sister companies. The financial statements for these three sister companies
historically were combined and the term "CCA Group" was assigned to these
combined entities. In connection with Mr. Allen's acquisition on December
23, 1998, the three sister companies and some of the non-operating
subsidiaries were merged out of existence, leaving certain of the operating
subsidiaries owning all of the cable systems under this former group. These
operating subsidiaries became indirect, wholly owned subsidiaries of
Charter Investment.
(3) CharterComm Holdings, LLC
The controlling interests in CharterComm Holdings were held by affiliates
of Charterhouse Group International Inc. Charter Investment had only a
minority interest. Effective December 23, 1998, prior to Mr. Allen's
acquisition Charter Investment acquired from the Charterhouse Group
affiliates the interests the Charterhouse Group affiliates held in
CharterComm Holdings. Consequently, CharterComm Holdings became a wholly
owned subsidiary of Charter Investment.
The cable systems were owned by the various subsidiaries of CharterComm
Holdings. In connection with Mr. Allen's acquisition on December 23, 1998, some
of the non-operating subsidiaries were merged out of existence, leaving certain
of the operating subsidiaries owning all of
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51
the cable systems under this former group. CharterComm Holdings was merged out
of existence. Charter Communications, LLC became a direct, wholly owned
subsidiary of Charter Investment.
Our acquisition by Mr. Allen became effective on December 23, 1998, through
a series of transactions in which Mr. Allen acquired approximately 94% of the
equity interests of Charter Investment for an aggregate purchase price of $2.2
billion, excluding $2.0 billion in assumed debt. Charter Communications
Properties and the operating companies that formerly comprised CCA Group and
CharterComm Holdings were contributed to Charter Operating subsequent to Mr.
Allen's acquisition. CCPH is deemed to be our predecessor. Consequently, the
contribution of Charter Communications Properties was accounted for as a
reorganization under common control. Accordingly, Charter Holdings results of
operations for periods prior to and including December 23, 1998 include the
accounts of CCPH. The contributions of the operating companies that formerly
comprised CCA Group and CharterComm Holdings were accounted for in accordance
with purchase accounting. Accordingly, Charter Holdings results of operations
for periods after December 23, 1998 include the accounts of Charter
Communications Properties, CCA Group and CharterComm Holdings.
In February 1999, Charter Holdings was formed as a wholly owned subsidiary
of Charter Investment and Charter Operating was formed as a wholly owned
subsidiary of Charter Holdings. All of Charter Investment's direct interests in
the entities described above were transferred to Charter Operating. All of the
prior management agreements were terminated and a new management agreement was
entered into between Charter Investment and Charter Operating.
In May 1999, Charter Holdco was formed as a wholly owned subsidiary of
Charter Investment. All of Charter Investment's interests in Charter Holdings
were transferred to Charter Communications Holding Company.
In July 1999, Charter Communications, Inc. was formed as a wholly owned
subsidiary of Charter Investment. Also in November 1999, Charter Communications
Holding Company sold membership units to Vulcan Cable III. In the initial public
offering of Charter Communications, Inc., substantially all of its equity
interests were sold to the public and less than 1% of its equity interests were
sold to Mr. Allen. Charter Communications, Inc. contributed substantially all of
the proceeds of the initial public offering to Charter Communications Holding
Company which issued membership units to Charter Communications, Inc. In
November 1999, the management agreement between Charter Investment and Charter
Operating was amended and assigned from Charter Investment to Charter
Communications, Inc.
THE MARCUS COMPANIES
In April 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable, and agreed to acquire the remaining
interests. The owner of the remaining partnership interests retained voting
control of Marcus Cable. In October 1998, Marcus Cable entered into a management
consulting agreement with Charter Investment, pursuant to which Charter
Investment provided management and consulting services to Marcus Cable and its
subsidiaries which own cable systems. This agreement placed the Marcus cable
systems under common management with the cable systems of the Charter companies
acquired by Mr. Allen in December 1998.
In March 1999, all of Mr. Allen's interests in Marcus Cable were
transferred to Marcus Holdings, a then newly formed company. Later in March
1999, Mr. Allen acquired the remaining interests in Marcus Cable, including
voting control, which interests were transferred to Marcus Holdings. In April
1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating
subsidiaries of Marcus Holdings and all of the cable systems they owned came
under the ownership of Charter Holdings and, in turn, Charter Operating. For
financial reporting purposes, the
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52
merger of Marcus Holdings with and into Charter Holdings was accounted for as an
acquisition of Marcus Holdings effective March 31, 1999, and accordingly, the
results of operations of Marcus Holdings have been included in the consolidated
financial statements of Charter Communications Holding Company since that date.
ACQUISITIONS
Since the beginning of 1999, our direct or indirect subsidiaries completed
the Renaissance, American Cable, Greater Media, Helicon, Vista, Cable Satellite,
Rifkin (including InterLink) and InterMedia acquisitions for an aggregate
purchase price of approximately $4.2 billion including assumed debt of $354
million. These acquisitions were funded through excess cash from the issuance by
Charter Holdings of the March 1999 Charter Holdings notes, borrowings under the
Charter Operating credit facilities, capital contributions to Charter Holdings
by Mr. Allen through Vulcan Cable III and the assumption of the outstanding
Renaissance, Helicon and Rifkin notes.
In addition to these acquisitions, in November 1999, Charter Communications
Holding Company acquired the Fanch, Falcon and Avalon cable systems. In February
2000, we and Charter Communications Holding Company acquired equity interests in
the entity that owned the Bresnan cable systems. The aggregate purchase price
for the Fanch, Falcon, Avalon and Bresnan acquisitions was $9.8 billion
including assumed debt of $3.0 billion. The purchase prices for these
acquisitions were paid with the net proceeds of the initial public offering of
the common stock of Charter Communications, Inc., an equity contribution to
Charter Communications Holding Company by Mr. Allen through Vulcan Cable III,
borrowings under credit facilities, the assumption of outstanding notes issued
by Falcon, Avalon and Bresnan, equity issued to specific sellers in the Falcon
and Bresnan acquisitions and the assumption of Falcon and Bresnan notes and
debentures.
On January 1, 2000, as a result of transfers from Charter Communications
Holding Company, Charter Holdings became the indirect owner of the Fanch, Falcon
and Avalon cable systems. On February 14, 2000, as a result of the transfer to
us by Charter Communications Holding Company of the equity interests it had
purchased in the Bresnan systems, we became the indirect owner of the Bresnan
cable systems.
In April 2000, one of our subsidiaries acquired cable systems from Capital
Cable and Farmington for an aggregate purchase of approximately $75 million.
These acquisitions were funded with borrowings under the Charter Operating
credit facilities.
In the Falcon acquisition, certain of the Falcon sellers received a total
of $550 million of the Falcon purchase price in the form of membership units in
Charter Communications Holding Company. In the Bresnan acquisition, the Bresnan
sellers received $1.0 billion of the Bresnan purchase price in the form of
common membership units in Charter Communications Holding Company and preferred
membership units in an indirect subsidiary of Charter Holdings. In addition,
certain Rifkin sellers received a total of $133.3 million of the Rifkin purchase
price in the form of preferred membership units in Charter Communications
Holding Company. Under the Helicon purchase agreement, $25 million of the
purchase price was paid in the form of preferred limited liability company
interests of Charter-Helicon, LLC, our indirect subsidiary.
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53
The following table sets forth additional information on our acquisitions
since the beginning of 1999 and the recent transfers:
AS OF AND FOR
THE YEAR ENDED
PURCHASE PRICE DECEMBER 31, 1999
ACQUISITION (INCLUDING -----------------------------
OR TRANSFER ASSUMED DEBT) REVENUES
DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS)
----------- -------------- --------- --------------
Renaissance........................ 4/99 $ 459 134,000 $ 62,428
American Cable..................... 5/99 240 69,000 37,216
Greater Media systems.............. 6/99 500 176,000 85,933
Helicon............................ 7/99 550 171,000 85,224
Vista.............................. 7/99 126 26,000 14,112
Cable Satellite.................... 8/99 22 9,000 4,859
Rifkin............................. 9/99 1,460 463,000 219,878
InterMedia systems................. 10/99 873+ 420,000 179,259
systems swap (142,000)(a) (53,056)(b)
--------- ----------
278,000 126,203
Fanch.............................. 1/00 2,400 528,000 218,197
Falcon............................. 1/00 3,481 955,000 427,668
Avalon............................. 1/00 845(c) 258,000(c) 109,943(d)
Bresnan............................ 2/00 3,100 686,000(e) 290,697(f)
Capital Cable...................... 4/00 60 27,000 11,555
Farmington......................... 4/00 15 6,000 1,968
------------ --------- ----------
Total.............................. $ 14,131 3,786,000 $1,695,881
============ ========= ==========
- - - ---------------
(a) As part of the transaction with InterMedia, we agreed to "swap" some of our
non-strategic cable systems located in Indiana, Montana, Utah and northern
Kentucky, representing 142,000 basic customers. We transferred cable systems
with 112,000 customers to InterMedia in connection with this swap in October
1999. The remaining Indiana cable system, with customers totaling 30,000,
was transferred in March 2000 after receipt of the necessary regulatory
approvals.
(b) Includes revenues for all swapped InterMedia systems, except for the
retained Indiana system, for the nine months ended September 30, 1999, the
date of the transfer of these systems, and includes revenues for the Indiana
system for the year ended December 31, 1999.
(c) Includes approximately 5,400 customers served by cable systems that we
acquired from certain former affiliates of Avalon in February 2000. The $845
million purchase price for Avalon includes the purchase price for these
systems of approximately $13 million.
(d) Includes revenues of approximately $1.6 million related to the cable systems
acquired from certain former affiliates of Avalon.
(e) Includes approximately 19,400 customers served by cable systems acquired by
Bresnan since December 31, 1999.
(f) Includes revenues of approximately $7.1 million related to the cable systems
acquired by Bresnan since December 31, 1999.
PENDING KALAMAZOO TRANSACTION
In March 2000, Charter Communications, Inc. entered into an agreement
providing for the merger of Cablevision of Michigan, Inc., the indirect owner of
a cable system in Kalamazoo, Michigan, with and into Charter Communications,
Inc. As a result of the merger, Charter Communications, Inc. will become the
indirect owner of the Kalamazoo system. The merger
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consideration of approximately $172.5 million will be paid in Class A common
stock of Charter Communications, Inc. After the merger, Charter Communications,
Inc. will contribute 100% of the equity interests of the direct owner of the
Kalamazoo system to Charter Communications Holding Company in exchange for
membership units. Charter Communications Holding Company will in turn contribute
100% of the assets and 100% of equity interests to us. The Kalamazoo cable
system has approximately 49,000 customers and had revenue of approximately $20.3
million for the year ended December 31, 1999. We anticipate that this
acquisition will close in the third quarter of 2000.
POSSIBLE SWAP TRANSACTION On December 1, 1999, Charter Communications, Inc. and
AT&T entered into a non-binding letter of intent to exchange certain of our
cable systems for cable systems owned by AT&T. As part of the Swap Transaction,
we will be required to pay to AT&T approximately $108 million in cash, which
represents the difference in the agreed values of the systems to be exchanged.
The Swap Transaction is subject to the negotiation and execution of a definitive
exchange agreement, regulatory approvals and other conditions typical in
transactions of this type. We cannot assure that these conditions will be
satisfied.
In addition, we have had discussions with several other cable operators
about the possibility of "swapping" cable systems that would further complement
our regional operating clusters.
OVERVIEW
Approximately 87% of our historical revenues for the year ended December
31, 1999 are attributable to monthly subscription fees charged to customers for
our basic, expanded basic and premium cable television programming services,
equipment rental and ancillary services provided by our cable television
systems. In addition, we derive other revenues from installation and
reconnection fees charged to customers to commence or reinstate service,
pay-per-view programming, where users are charged a fee for individual programs
requested, advertising revenues and commissions related to the sale of
merchandise by home shopping services. We have generated increased revenues in
each of the past three fiscal years, primarily through internal customer growth,
basic and expanded tier rate increases, acquisitions and innovative marketing.
We are beginning to offer our customers several other services, which are
expected to significantly contribute to our revenues. One of these services is
digital cable, which provides customers with additional programming options. We
are also offering high-speed Internet access to the World Wide Web through cable
modems. Our television-based Internet access allows us to offer the services
provided by WorldGate Communications, Inc., which provides users with TV-based
e-mail and other Internet access.
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and amortization expense and management
fees/corporate expense charges. Operating costs primarily include programming
costs, cable service related expenses, marketing and advertising costs,
franchise fees and expenses related to customer billings. Programming costs
accounted for approximately 44% of our operating, general and administrative
expenses for the year ended December 31, 1999. Programming costs have increased
in recent years and are expected to continue to increase due to additional
programming being provided to customers, increased cost to produce or purchase
cable programming, inflation and other factors affecting the cable television
industry. In each year we have operated, our costs to acquire programming have
exceeded customary inflationary increases. Significant factors with respect to
increased programming costs are the rate increases and surcharges imposed by
national and regional sports networks directly tied to escalating costs to
acquire programming for professional sports packages in a competitive market. We
benefited in the past from our membership in an industry cooperative that
provides members with volume discounts from programming networks. We believe our
membership kept increases in our programming costs below what the increases
would otherwise have been. We have been able to negotiate favorable terms with
premium networks in conjunction with the premium packages we offer, which
minimized the
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impact on margins and provided substantial volume incentives to grow the premium
category. Although we believe that we will be able to pass future increases in
programming costs through to customers, there can be no assurance that we will
be able to do so.
General and administrative expenses primarily include accounting and
administrative personnel and professional fees. Depreciation and amortization
expense relates to the depreciation of our tangible assets and the amortization
of our franchise costs. Management fees/corporate expense charges are fees paid
or charges for management services. Charter Holdings records actual expense
charges incurred by Charter Communications, Inc. on behalf of Charter Holdings.
Prior to the acquisition of us by Mr. Allen, the CCA Group and CharterComm
Holdings recorded management fees payable to Charter Investment, Inc. equal to
3.0% to 5.0% of gross revenues plus certain expenses. In October 1998, Charter
Investment, Inc. began managing the cable operations of Marcus Holdings under a
management agreement, which was terminated in February 1999 and replaced by a
master management fee arrangement.
In connection with Charter Communications, Inc.'s initial public offering
of common stock in November 1999, the management agreement between Charter
Investment, Inc. and Charter Operating was assigned to Charter Communications,
Inc. and Charter Communications, Inc. entered into a new management agreement
with Charter Communications Holding Company. These management agreements are
substantially similar to the previous management agreement with Charter
Operating except that Charter Communications, Inc. is only entitled to receive
reimbursement of its expenses as consideration for its providing management
services. In addition, the Falcon, Fanch, Avalon and Bresnan cable systems are
managed pursuant to agreements that entitle Charter Communications, Inc. to
receive reimbursement of its expenses as consideration for its provision of
management services. Our credit facilities limit the amount of such
reimbursements to 3.5% of gross revenues.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include depreciation and amortization expenses associated
with our acquisitions, capital expenditures related to construction and
upgrading of our systems, and interest costs on borrowed money. We cannot
predict what impact, if any, continued losses will have on our ability to
finance our operations in the future.
RESULTS OF OPERATIONS
The following discusses the results of operations for:
(1) Charter Holdings, for the year ended December 31, 1997, and for the
period from January 1, 1998 through December 23, 1998;
(2) Charter Holdings, comprised of CCPH, CCA Group and CharterComm
Holdings, for the period from December 24, 1998 through December 31,
1998; and
(3) Charter Holdings, comprised of the following for the year ended
December 31, 1999:
- CCPH, CCA Group and CharterComm Holdings for the entire period;
- Marcus Holdings for the period from March 31, 1999, the date Mr.
Allen acquired voting control, through December 31, 1999;
- Renaissance Media Group LLC for the period from April 30, 1999, the
acquisition date, through December 31, 1999;
- American Cable Entertainment, LLC for the period from May 7, 1999,
the acquisition date, through December 31, 1999;
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- Cable systems of Greater Media Cablevision, Inc. for the period from
June 30, 1999, the acquisition date, through December 31, 1999;
- Helicon Partners I, L.P. and affiliates for the period from July 30,
1999, the acquisition date, through December 31, 1999;
- Vista Broadband Communications, L.L.C. for the period from July 30,
1999, the acquisition date, through December 31, 1999;
- Cable system of Cable Satellite of South Miami, Inc. for the period
from August 4, 1999, the acquisition date, through December 31, 1999;
- Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications
Partners, LLLP for the period from September 13, 1999, the
acquisition date, through December 31, 1999;
- Cable systems of InterMedia Capital Partners IV, L.P., InterMedia
Partners and affiliates for the period from October 1, 1999, "swap"
transaction date, through December 31, 1999;
No operating results are included for the Fanch, Falcon, Avalon, Bresnan,
Capital Cable and Farmington cable systems transferred to or acquired by us
after December 31, 1999.
On January 1, 2000, Charter Communications Holding Company and Charter
Holdings effected a number of transactions in which cable systems acquired by
Charter Communications Holding Company in November 1999 were contributed to
Charter Holdings. Effective January 1, 2000, Charter Holdings accounted for the
contribution of the transferred systems as a reorganization of entities under
common control in a manner similar to pooling of interests. Charter Holdings
revised its financial statements as of and for the year ended December 31, 1999
to reflect this reorganization. The accounts of the transferred systems have
been included in Charter Holdings' financial statements from the date the
transferred systems were acquired by Charter Communications Holding Company.
This revision has been reflected in Charter Holdings' supplemental financial
statements contained in this prospectus.
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods (dollars in
thousands).
YEAR ENDED 1/1/98 12/24/98 YEAR ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
1997 12/23/98 12/31/98 1999
---------------- ----------------- ---------------- -------------------
STATEMENTS OF OPERATIONS:
Revenues..................................... $18,867 100.0% $ 49,731 100.0% $13,713 100.0% $1,325,830 100.0%
------- ------ -------- ------ ------- ------ ---------- ------
Operating expenses:
Operating costs............................ 9,157 48.5% 18,751 37.7% 4,757 34.7% 461,363 34.8%
General and administrative costs........... 2,610 13.8% 7,201 14.5% 2,377 17.3% 222,283 16.8%
Depreciation and amortization.............. 6,103 32.3% 16,864 33.9% 8,318 60.7% 675,786 51.0%
Option compensation expense................ -- -- -- -- 845 6.2% 79,979 6.0%
Management fees/corporate expense
charges.................................. 566 3.0% 6,176 12.4% 473 3.4% 48,158 3.6%
------- ------ -------- ------ ------- ------ ---------- ------
Total operating expenses..................... 18,436 97.7% 48,992 98.5% 16,770 122.3% 1,487,569 112.2%
------- ------ -------- ------ ------- ------ ---------- ------
Income (loss) from operations................ 431 2.3% 739 1.5% (3,057) (22.3%) (161,739) (12.2%)
Interest income.............................. 41 0.2% 44 0.1% 133 1.0% 18,821 1.4%
Interest expense............................. (5,120) (27.1%) (17,277) (34.7%) (2,353) (17.2%) (434,995) (32.8%)
Other income (expense)....................... 25 0.1% (728) (1.5%) -- -- (217) --
------- ------ -------- ------ ------- ------ ---------- ------
Loss before extraordinary item............... (4,623) (24.5%) (17,222) (34.6%) (5,277) (38.5%) (578,130) (43.6%)
Extraordinary item -- loss from early
extinguishment of debt..................... -- -- -- -- -- -- (7,794) (0.6%)
------- ------ -------- ------ ------- ------ ---------- ------
Net loss..................................... $(4,623) (24.5%) $(17,222) (34.6%) $(5,277) (38.5%) $ (585,924) (44.2%)
======= ====== ======== ====== ======= ====== ========== ======
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FISCAL 1999 COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998
REVENUES. Revenues increased by $1,276.1 million, from $49.7 million for
the period from January 1, 1998 through December 23, 1998 to $1,325.8 million in
1999. The increase in revenues primarily resulted from the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional revenues from these entities included for the year ended December 31,
1999 were $618.8 million, $386.7 million and $247.8 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and
administrative costs increased by $657.7 million, from $26.0 million for the
period from January 1, 1998 through December 23, 1998 to $683.6 million in 1999.
This increase was due primarily to the acquisition of the CCA Group and
CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional
operating, general and administrative expenses from these entities included for
the year ended December 31, 1999 were $338.5 million, $209.3 million and $104.4
million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $658.9 million, from $16.9 million, for the period from January 1,
1998 through December 23, 1998 to $675.8 million in 1999. There was a
significant increase in amortization expense resulting from the acquisitions of
the CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional depreciation and amortization expense from these entities included
for the year ended December 31, 1999 were $346.3 million, $203.5 million and
$125.6 million, respectively. The increases were offset by the elimination of
depreciation and amortization expense related to dispositions of cable systems.
OPTION COMPENSATION EXPENSE. Option compensation expense in 1999 was $80.0
million due to the granting of options to employees in December 1998, February
1999 and April 1999. The exercise prices of the options on the date of grant
were deemed to be less than the estimated fair values of the underlying
membership units, resulting in compensation expense accrued over the vesting
period of each grant that varies from four to five years.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $42.0 million, from $6.2 million, for the period
from January 1, 1998 through December 23, 1998 to $48.2 million in 1999. The
increase in 1998 compared to 1999 was the result of the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
INTEREST INCOME. Interest income increased by $18.8 million, from $44,000
for the period from January 1, 1998 through December 23, 1998 to $18.8 million
in 1999 and the sale of the March 1999 Charter Holdings notes. The increase was
primarily due to investing excess cash that resulted from required credit
facilities drawdowns and the sale of the March 1999 Charter Holdings notes.
INTEREST EXPENSE. Interest expense increased by $417.7 million, from $17.3
million for the period from January 1, 1998 through December 23, 1998 to $435.0
million in 1999. This increase resulted primarily from interest on the notes and
credit facilities used to finance the acquisitions of CCA Group and CharterComm
Holdings, Marcus Holdings and 1999 acquisitions.
NET LOSS. Net loss increased by $568.7 million, from $17.2 million for the
period from January 1, 1998 through December 23, 1998 to $585.9 million in 1999.
The increase in revenues that resulted from the acquisitions of CCA Group,
CharterComm Holdings and Marcus Holdings was not sufficient to offset the
operating expenses associated with the acquired systems.
PERIOD FROM DECEMBER 24, 1998 THROUGH DECEMBER 31, 1998
This period is not comparable to any other period presented. The financial
statements represent eight days of operations. This period not only contains the
results of operations of CCPH, but also
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the results of operations of those entities purchased in the acquisition of the
Charter companies by Mr. Allen. As a result, no comparison of the operating
results for this eight-day period is presented.
PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997
REVENUES. Revenues increased by $30.9 million, or 163.6%, from $18.9
million in 1997 to $49.7 million for the period from January 1, 1998 through
December 23, 1998. The increase in revenues primarily resulted from the
acquisition of Sonic, which had revenues for that period of $29.8 million.
OPERATING COSTS. Operating costs increased by $9.6 million, or 104.8%,
from $9.2 million in 1997 to $18.8 million for the period from January 1, 1998
through December 23, 1998. This increase was due primarily to the acquisition of
Sonic, which had operating costs for that period of $9.4 million, partially
offset by the loss of $1.4 million on the sale of a cable system in 1997.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased by $4.6 million, or 175.9%, from $2.6 million in 1997 to $7.2 million
for the period from January 1, 1998 through December 23, 1998. This increase was
due primarily to the acquisition of Sonic, which had general and administrative
costs for that period of $6.0 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $10.8 million, or 176.3%, from $6.1 million in 1997 to $16.9
million for the period from January 1, 1998 through December 23, 1998. There was
a significant increase in amortization resulting from the acquisition of Sonic.
Incremental depreciation and amortization expenses of the acquisition of Sonic
were $9.9 million.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $5.6 million, or 991.2% from $0.6 million in 1997 to $6.2 million
for the period from January 1, 1998 through December 23, 1998. The increase from
1997 compared to the period from January 1, 1998 through December 23, 1998 was
the result of additional Charter Investment, Inc. charges related to equity
appreciation rights plans of $3.8 million for the period from January 1, 1998
through December 23, 1998 and an increase of $0.9 million in management services
provided by Charter Investment, Inc. as a result of the acquisition of Sonic.
INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%,
from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998
through December 23, 1998. This increase resulted primarily from the
indebtedness of $220.6 million, including a note payable for $60.9 million,
incurred in connection with the acquisition of Sonic resulting in additional
interest expense.
NET LOSS. Net loss increased by $12.6 million, or 272.5%, from $4.6
million in 1997 to $17.2 million for the period from January 1, 1998 through
December 23, 1998. The increase in revenues that resulted from cable television
customer growth was not sufficient to offset the operating expenses related to
the acquisition of Sonic.
OUTLOOK
Our business strategy emphasizes the increase of our operating cash flow by
increasing our customer base and the amount of cash flow per customer. We
believe that there are significant advantages in increasing the size and scope
of our operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for our cable systems and our infrastructure in general;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
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We seek to "cluster" cable systems in suburban and ex-urban areas
surrounding selected metropolitan markets. We believe that such "clustering"
offers significant opportunities to increase operating efficiencies and to
improve operating margins and cash flow by spreading fixed costs over an
expanding subscriber base. In addition, we believe that by concentrating
"clusters" in markets, we will be able to generate higher growth in revenues and
operating cash flow. Through strategic acquisitions and "swaps" of cable
systems, we seek to enlarge the coverage of our current areas of operations,
and, if feasible, develop "clusters" in new geographic areas within existing
regions. Swapping of cable systems allows us to trade systems that do not
coincide with our operating strategy while gaining systems that meet our
objectives. Several significant swaps have been announced. These swaps have
demonstrated the industry's trend to cluster operations. To date, we have
participated in one swap in connection with the transaction with InterMedia. In
addition, Charter Communications, Inc. has entered into a non-binding letter of
intent providing for the exchange of certain of our cable systems for systems
owned by AT&T.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant cash to fund acquisitions, capital
expenditures, debt service costs and ongoing operations. We have historically
funded and expect to fund future liquidity and capital requirements through cash
flows from operations, equity contributions, borrowings under our credit
facilities and debt and equity financings.
Our historical cash flows from operating activities in 1998 were $30.2
million, and in 1999 were $382.2 million. Pro forma for our merger with Marcus
Holdings, the sale of the original notes, acquisitions completed since January
1, 1999, the Fanch, Falcon and Avalon transfers and the Kalamazoo transaction,
our cash flows from operating activities for 1999 were $894.9 million.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our cable systems,
as well as for system maintenance, the development of new products and services,
and converters. Converters are set-top devices added in front of a subscriber's
television receiver to change the frequency of the cable television signals to a
suitable channel. The television receiver is then able to tune and to allow
access to premium service.
Upgrading our cable systems will enable us to offer new products and
services, including digital television, additional channels and tiers, expanded
pay-per-view options, high-speed Internet access and interactive services.
Capital expenditures for 1999, pro forma for acquisitions completed since
January 1, 1999, the recent transfers and the Kalamazoo transaction were
approximately $1.3 billion. In 1999, we made capital expenditures, excluding
cable systems acquired in 1999 and in our merger with Marcus Holdings, of $709.7
million. The majority of the capital expenditures related to rebuilding existing
cable systems. Those expenditures were funded from cash flows from operations
and borrowings under credit facilities.
For the period from January 1, 2000 to December 31, 2002, we plan to spend
approximately $6.0 billion for capital expenditures, approximately $3.5 billion
of which will be used to upgrade and rebuild our systems to a bandwidth capacity
of 550 megahertz or greater and add two-way capability, so that we may offer
advanced services. The remaining $2.5 billion will be used for extensions of
systems, development of new products and services, converters and system
maintenance. Capital expenditures for 2000 are expected to be approximately $2.7
billion and aggregate capital expenditures for 2001 and 2002 are expected to be
approximately $3.3 billion. We currently expect to finance the anticipated
capital expenditures with cash generated from operations and additional
borrowings under credit facilities including a bridge loan for which we have
received a commitment.
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We cannot assure you that these amounts will be sufficient to accomplish our
planned system upgrade, expansion and maintenance. If we are not able to obtain
amounts sufficient for our planned upgrades and other capital expenditures, it
could adversely affect our ability to offer new products and services and
compete effectively, and could adversely affect our growth, financial condition
and results of operations.
FINANCING ACTIVITIES
As of December 31, 1999, pro forma for the sale of the original notes, the
recent transfers, acquisitions completed since this date, the repurchase of
certain of the Falcon, Avalon and Bresnan notes and debentures, our debt would
have been approximately $11.2 billion, and the deficiency of earnings available
to cover fixed charges would have been approximately $1.5 billion. Our
significant amount of debt may adversely affect our ability to obtain financing
in the future and react to changes in our business. Our credit facilities and
other debt instruments contain, various financial and operating covenants that
could adversely impact our ability to operate our business, including
restrictions on the ability of our operating subsidiaries to distribute cash to
their parents. See "-- Certain Trends and Uncertainties -- Restrictive
Covenants," for further information.
MARCH 1999 CHARTER HOLDINGS NOTES. On March 17, 1999, Charter Holdings and
Charter Capital issued $3.6 billion principal amount of senior notes. The March
1999 Charter Holdings notes consisted of $600 million in aggregate principal
amount of 8.250% senior notes due 2007, $1.5 billion in aggregate principal
amount of 8.625% senior notes due 2009, and $1.475 billion in aggregate
principal amount at maturity of 9.920% senior discount notes due 2011. The net
proceeds of approximately $3.0 billion, combined with the borrowings under our
credit facilities, were used to consummate tender offers for publicly held debt
of several of our subsidiaries, as described below, to refinance borrowings
under our previous credit facilities, for working capital purposes and to
finance a number of acquisitions.
As of December 31, 1999, a total of $2.1 billion was outstanding under the
8.250% notes and the 8.625% notes, and the accreted value of the outstanding
9.920% notes was $977.8 million.
NOTES OF THE CHARTER COMPANIES AND THE MARCUS COMPANIES. In February and
March 1999, we commenced cash tender offers to purchase the 14% senior discount
notes issued by Charter Communications Southeast Holdings, LLC, the 11.25%
senior notes issued by Charter Communications Southeast, LLC, the 13.50% senior
subordinated discount notes issued by Marcus Cable Operating Company, L.L.C.,
and the 14.25% senior discount notes issued by Marcus Cable. All such notes,
except for $1.1 million in principal amount, were repaid in full for an
aggregate amount of $1.0 billion. The remaining $1.1 million of such notes were
repaid in September 1999.
CHARTER OPERATING CREDIT FACILITIES. The Charter Operating credit
facilities provide for two term facilities, one with a principal amount of $1.0
billion that matures in September 2007 (Term A), and the other with a principal
amount of $2.45 billion that matures in March 2008 (Term B). The Charter
Operating credit facilities also provide for a $1.25 billion revolving credit
facility with a maturity date in September 2007 and, at the option of the
lenders, supplemental credit facilities in the amount of $1.0 billion available
until March 18, 2002. Amounts under the Charter Operating credit facilities bear
interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of
up to 2.75% (8.22% to 9.25% as of December 31, 1999). A quarterly commitment fee
of between 0.25% and 0.375% per annum is payable on the unborrowed balance of
Term A and the revolving credit facility. As of December 31, 1999, outstanding
borrowings were approximately $2.9 billion and the unused availability was $1.2
billion. In March 2000, $600.0 million of the supplemental credit facility was
drawn down. The maturity date for this drawdown is September 18, 2008.
CHARTER HOLDINGS COMMITTED SENIOR BRIDGE LOAN FACILITY. Morgan Stanley
Senior Funding, Inc. has committed to provide Charter Holdings and Charter
Capital with senior increasing rate
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bridge loans in an aggregate principal amount of up to $1.0 billion. The
commitment to provide the bridge loans expires on October 14, 2000. Each bridge
loan must be in a principal amount not less than $400.0 million and the bridge
loans mature one year from the date of the initial loan.
The first loan will initially bear interest at an annual rate equal to the
yield corresponding to the bid price on our 10.25% notes less 0.25%, calculated
as of the initial date of funding of the loan. If the first loan is not repaid
within 90 days following its initial date of funding, the interest rate will
increase by 1.25% at the end of such 90-day period and will increase by an
additional 0.50% at the end of each additional 90-day period. The second loan
will initially bear interest at an annual rate equal to the greater of: (a) the
interest rate on the first loan in effect on the date of funding of the second
loan; or (b) the yield corresponding to the bid price on our 10.25% notes as of
the date of funding of the second loan. If the second loan is not repaid in
whole by the last day of each 90-day period following its funding, the interest
rate on the loan will increase on the last day of each 90-day period by an
amount equal to the increase in interest rate on the first loan on such day.
Unless additional default interest is assessed, the interest rate on the bridge
loans will be between 9% and 15% annually.
The bridge loan facility will not close unless specified closing conditions
are satisfied. We cannot assure you that all closing conditions will be
satisfied. For additional information on the closing conditions and other terms
of this facility, see "Description of Certain Indebtedness."
RENAISSANCE NOTES. When we acquired Renaissance in April 1999, Renaissance
had outstanding $163.2 million principal amount at maturity of 10% senior
discount notes due 2008. The Renaissance 10% notes do not require the payment of
interest until April 15, 2003. From and after April 15, 2003, the Renaissance
10% notes bear interest, payable semi-annually in cash, on April 15 and October
15, commencing on October 15, 2003. The Renaissance 10% notes are due on April
15, 2008. In May 1999, $48.8 million aggregate face amount of the Renaissance
Notes were repurchased at 101% of their accreted value plus accrued and unpaid
interest. As of December 31, 1999, the accreted value of the Renaissance 10%
notes that remained outstanding was approximately $83.0 million.
HELICON NOTES. We acquired Helicon in July 1999 and assumed Helicon's
$115.0 million in principal amount of 11% senior secured notes due 2003. On
November 1, 1999, we redeemed all of the Helicon 11% notes at a purchase price
equal to 103% of their principal amount, plus accrued and unpaid interest, for
$124.8 million.
RIFKIN NOTES. We acquired Rifkin in September 1999 and assumed Rifkin's
outstanding $125.0 million in principal amount of 11.125% senior subordinated
notes due 2006. In October 1999, we repurchased an individually held $3.0
million Rifkin promissory note for $3.4 million and publicly held notes with a
total outstanding principal amount of $124.1 million for a total of $140.6
million, including a consent fee of $30 per $1,000 to note holders who delivered
timely consents to amend the indenture governing those notes to eliminate
substantially all of the restrictive covenants. As of December 31, 1999, there
was $0.9 million in principal amount outstanding of Rifkin notes. In February
2000, we repurchased $0.5 million in principal amount of these notes.
FALCON DEBENTURES. When Falcon was acquired by Charter Communications
Holding Company in November 1999, it had outstanding $375 million in principal
amount of 8.375% senior debentures due 2010 and 9.285% senior discount
debentures due 2010 with an accreted value of approximately $319.1 million.
Falcon's 11.56% subordinated notes due 2001 were paid off for a total of $16.3
million, including principal, accrued and unpaid interest and a premium at the
closing of the Falcon acquisition. As of December 31, 1999, $375.0 million total
principal amount of the Falcon 8.375% debentures were outstanding and the
accreted value of the Falcon 9.285% debentures was approximately $323.0 million.
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On December 10, 1999, change of control offers were commenced to repurchase
the Falcon debentures at purchase prices of 101% of principal amount, plus
accrued and unpaid interest, or accreted value, as applicable. Pursuant to the
change of control offers and in purchases in the "open market," all of the
8.375% senior debentures were repurchased for $388.0 million and all of the
9.285% senior discount debentures were repurchased for $328.1 million in
February 2000.
FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the
previous Falcon credit facilities were amended to provide for two term
facilities, one with a principal amount of $198.0 million as of December 31,
1999 that matures June 2007 (Term B), and the other with the principal amount of
$297.0 million as of December 31, 1999 that matures December 2007 (Term C). The
Falcon credit facilities also provide for a $646.0 million revolving credit
facility with a maturity date of December 2006 and, at the option of the
lenders, supplemental credit facilities in the amounts of $700.0 million with a
maturity date in December 2007. At December 31, 1999, $110.0 million was
outstanding under the supplemental credit facilities. Amounts under the Falcon
credit facilities bear interest at the Base Rate or the Eurodollar rate, as
defined, plus a margin of up to 2.5% (7.57% to 9.25% as of December 31, 1999). A
quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance. As of December 31, 1999, outstanding borrowings were $865.5
million and unused availability was $385.5 million. However, debt covenants
limited the amount that could be borrowed to $342.0 million at December 31,
1999.
AVALON NOTES. When Avalon was acquired by Charter Communications Holding
Company in November 1999, it had outstanding $150 million in principal amount of
11.875% senior discount notes due 2008 and 9.375% senior subordinated notes due
2008 with an accreted value of $123.3 million. As of December 31, 1999, the
accreted value of the Avalon 11.875% notes was $124.8 and $150.0 million in
principal of the Avalon 9.375% notes remained outstanding. After December 1,
2003, cash interest on the Avalon 11.875% notes will be payable semi-annually on
June 1 and December 1 of each year, commencing June 1, 2004.
In January 2000, we completed change of control offers in which we
repurchased $16.3 million aggregate principal amount of the 11.875% discount
notes at a purchase price of 101% of accreted value as of January 28, 2000 for
$10.5 million. As of February 29, 2000, Avalon 11.875% notes with an aggregate
principal amount of $179.8 million at maturity remained outstanding with an
accreted value of $116.4 million.
In January 2000, we also completed a change of control offer in which we
repurchased $134.0 million aggregate principal amount of the Avalon 9.375% notes
at 101% of their principal amount, plus accrued and unpaid interest thereon
through January 28, 2000 for $137.4 million. These repurchases were funded with
equity contributions from Charter Holdings which made the cash available from
the proceeds of the sale of the original notes.
In addition to the above change of control repurchase, we repurchased the
remaining Avalon 9.375% notes, including accrued and unpaid interest, in the
"open market" for $16.3 million.
AVALON CREDIT FACILITIES. The Avalon credit facilities have maximum
borrowings of $300.0 million, consisting of a revolving facility in the amount
of $175.0 million that matures May 15, 2008, and a Term B loan in the amount of
$125.0 million that matures on November 15, 2008. The Avalon credit facilities
also provide, at the option of the lenders, for supplemental credit facilities
in amounts of $75 million available until December 31, 2003. Amounts under the
Avalon credit facilities bear interest at the Base Rate or the Eurodollar rate,
as defined, plus a margin up to 2.75% (7.995% to 8.870% as of December 31,
1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is
payable on the unborrowed balance. The Company borrowed $170.0 million under the
Avalon credit facilities to fund a portion of the Avalon purchase price. As of
December 31, 1999, outstanding borrowings were $170.0 million and unused
availability was $130.0 million.
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FANCH CREDIT FACILITIES. The Fanch credit facilities provide for two term
facilities, one with a principal amount of $450 million that matures May 2008
(Term A), and the other with a principal amount of $400 million that matures
November 2008 (Term B). The Fanch credit facilities also provide for a $350
million revolving credit facility with a maturity date in May 2008 and, at the
option of the lenders, supplemental credit facilities in the amount of $300.0
million available until December 31, 2004. Amounts under the Fanch credit
facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 3.0% (8.12% to 8.87% as of December 31, 1999). A
quarterly commitment fee of between 0.250% and 0.375% per annum is payable on
the unborrowed balance. The Company used $850.0 million of the credit facilities
to fund a portion of the Fanch purchase price. As of December 31, 1999,
outstanding borrowings were $850.0 million and unused availability was $350.0
million.
BRESNAN NOTES. We and Charter Communications Holding Company acquired
Bresnan in February 2000 and assumed Bresnan's $170 million in principal amount
of 8% senior notes due 2009 and $275 million in principal amount at maturity of
9.25% senior discount notes due 2009. In March 2000, we repurchased all of the
outstanding Bresnan notes at 101% of the outstanding principal amounts plus
accrued and unpaid interest or accreted value, as applicable, for a total of
$369.7 million.
BRESNAN CREDIT FACILITIES. Upon the closing of the Bresnan acquisition, we
amended and assumed the previous Bresnan credit facilities. The Bresnan
facilities provide for borrowings of up to $900.0 million. The Bresnan credit
facilities provide for two term facilities, one with a principal amount of $403
million (Term A), and the other with a principal amount of $297 million (Term
B). The Bresnan credit facilities also provide for a $200 million revolving
credit facility with a maturity date in June 2007 and, at the option of lenders,
supplemental facilities in the amount of $200 million. Amounts under the Bresnan
credit facilities bear interest at the Base Rate or the Eurodollar Rate, as
defined, plus a margin of up to 2.75% (7.57% to 9.00% as of December 31, 1999).
A quarterly commitment fee of between 0.250% and 0.375% is payable on the
unborrowed balance of Term A and the revolving credit facility. At the closing
of the Bresnan acquisition, we borrowed approximately $601.2 million to replace
the borrowings outstanding under the previous credit facilities and an
additional $30.0 million to fund a portion of the Bresnan purchase price. As of
February 29, 2000, $647.9 million was outstanding and $252.1 million was
available for borrowing.
JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter Holdings
and Charter Capital issued $1.5 billion principal amount of senior notes. The
January 2000 Charter Holdings notes consisted of $675 million in aggregate
principal amount of 10.00% senior notes due 2009, $325 million in aggregate
principal amount of 10.25% senior notes due 2010, and $532 million in aggregate
principal amount at maturity of 11.75% senior discount notes due 2010. The net
proceeds of approximately $1.3 billion were used to consummate change of control
offers for certain of the Falcon, Avalon and Bresnan notes and debentures.
Semi-annual interest payments with respect to the 10.00% notes and the 10.25%
notes will be approximately $50.4 million. Payments commenced for the 10.00%
notes on April 1, 2000 and will commence July 15, 2000 for the 10.25% notes. No
interest will be payable on the 11.75 notes prior to January 15, 2005.
Thereafter semi-annual interest payments will be approximately $81.7 in the
aggregate commencing on July 15, 2005.
As of February 29, 2000, $1.0 billion of the original 10.00% and 10.25%
senior notes were outstanding, and the accreted value of the original 11.75%
senior discount notes was approximately $304.9 million.
CONTRIBUTIONS BY AFFILIATES. In August 1999, Vulcan Cable III Inc.
contributed to Charter Communications Holding Company $500 million in cash and,
in September 1999, an additional $825 million, of which approximately $644.3
million was in cash and approximately $180.7 million was in the form of equity
interests acquired by Vulcan Cable III Inc. in connection with the Rifkin
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acquisition. Charter Communications Holding Company in turn contributed the cash
and equity interests to Charter Holdings. In November 1999, in connection with
Charter Communications, Inc.'s initial public offering, Vulcan Cable III
contributed to Charter Communications Holding Company $750 million in cash. In
connection with the Rifkin, Falcon and Bresnan acquisitions, Charter
Communications Holding Company issued equity interests totaling approximately
$1.1 billion and certain subsidiaries of Charter Holdings issued preferred
equity interests totaling $629.5 million to sellers in the Bresnan acquisition.
For a description of our acquisitions completed in 1999 and 2000 and the
pending Kalamazoo transaction, see "Business -- Acquisitions."
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties,
in addition to those discussed elsewhere in this prospectus that could
materially impact our business, results of operations and financial condition.
SUBSTANTIAL LEVERAGE. As of December 31, 1999, pro forma for the recent
transfers, acquisitions completed since this date, the sale of the original
notes and the Kalamazoo transaction, our total debt was approximately $11.2
billion. We anticipate incurring significant additional debt in the future to
fund the expansion, maintenance and the upgrade of our cable systems.
Our ability to make payments on our debt and to fund our planned capital
expenditures for upgrading our cable systems and our ongoing operations will
depend on our ability to generate cash and secure financing in the future. This,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. We cannot assure
you that our business will generate sufficient cash flow from operations, or
that future borrowings will be available to us under our existing credit
facilities, new facilities or from other sources of financing at acceptable
rates or in an amount sufficient to enable us to repay our debt, to grow our
business or to fund our other liquidity and capital needs.
VARIABLE INTEREST RATES. A significant portion of our debt bears interest
at variable rates that are linked to short-term interest rates. In addition, a
significant portion of our existing debt, assumed debt or debt we might arrange
in the future will bear interest at variable rates. If interest rates rise, our
costs relative to those obligations will also rise. See discussion on
"-- Interest Rate Risk."
RESTRICTIVE COVENANTS. Our credit facilities and the indentures governing
our outstanding debt contain a number of significant covenants that, among other
things, restrict our ability and the ability of our subsidiaries to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- pledge assets.
Furthermore, in accordance with our credit facilities we are required to
maintain specified financial ratios and meet financial tests. The ability to
comply with these provisions may be affected by events beyond our control. The
breach of any of these covenants will result in a default under the
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applicable debt agreement or instrument, which could trigger acceleration of the
debt. Any default under our credit facilities or the indentures governing our
outstanding debt may adversely affect our growth, our financial condition and
our results of operations.
IMPORTANCE OF GROWTH STRATEGY AND RELATED RISKS. We expect that a
substantial portion of any of our future growth will be achieved through
revenues from additional services and the acquisition of additional cable
systems. We cannot assure you that we will be able to offer new services
successfully to our customers or that those new services will generate revenues.
In addition, the acquisition of additional cable systems may not have a positive
net impact on our operating results. Acquisitions involve a number of special
risks, including diversion of management's attention, failure to retain key
acquired personnel, risks associated with unanticipated events or liabilities
and difficulties in assimilation of the operations of the acquired companies,
some or all of which could have a material adverse effect on our business,
results of operations and financial condition. If we are unable to grow our cash
flow sufficiently, we may be unable to fulfill our obligations or obtain
alternative financing.
MANAGEMENT OF GROWTH. As a result of the acquisition of the Charter
companies by Mr. Allen, the merger of Charter Holdings with Marcus Holdings, our
acquisitions completed since January 1, 1999, the recent transfers and the
Kalamazoo transaction, we have experienced and will continue to experience rapid
growth that has placed and is expected to continue to place a significant strain
on our management, operations and other resources. Our future success will
depend in part on our ability to successfully integrate the operations acquired
and to be acquired and to attract and retain qualified personnel. Historically,
acquired entities have had minimal employee benefit related costs and all
benefit plans have been terminated with acquired employees transferring to our
401(k) plan. No significant severance cost was incurred in conjunction with
acquisitions in 1999 and 2000. The failure to retain or obtain needed personnel
or to implement management, operating or financial systems necessary to
successfully integrate acquired operations or otherwise manage growth when and
as needed could have a material adverse effect on our business, results of
operations and financial condition.
In connection with our acquisitions over the past year, we maintain
multi-disciplinary teams to formulate plans for establishing customer service
centers, identifying property, plant and equipment requirements and possible
reduction of headends. Headends are the control centers of a cable television
system where incoming signals are amplified, converted, processed and combined
for transmission to customers. These teams also determine market position and
how to attract talented personnel. Our goals include rapid transition in
achieving performance objectives and implementing "best practice" procedures.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. These regulations have increased the
administrative and operational expenses of cable television systems and affected
the development of cable competition. Rate regulation of cable systems has been
in place since passage of the Cable Television Consumer Protection and
Competition Act of 1992, although the scope of this regulation recently was
sharply contracted. Since March 31, 1999, rate regulation exists only with
respect to the lowest level of basic cable service and associated equipment.
This change affords cable operators much greater pricing flexibility, although
Congress could revisit this issue if confronted with substantial rate increases.
Cable operators also face significant regulation of their channel capacity.
They currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access users, and
unaffiliated commercial leased access programmers. This carriage burden could
increase in the future, particularly if the Federal Communications Commission
were to require cable systems to carry both the analog and digital versions of
local broadcast signals. The FCC is currently conducting a proceeding in which
it is considering this channel usage possibility. The FCC recently rejected a
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request to allow unaffiliated Internet service providers seeking direct cable
access to invoke commercial leased access rights originally devised for video
programmers.
There is also uncertainty whether local franchising authorities, the FCC,
or the U.S. Congress will impose obligations on cable operators to provide
unaffiliated Internet service providers with access to cable plant on
non-discriminatory terms. If they were to do so, and the obligations were found
to be lawful, it could complicate our operations in general, and our Internet
operations in particular, from a technical and marketing standpoint. These
access obligations could adversely impact our profitability and discourage
system upgrades and the introduction of new products and services.
POSSIBLE RESCISSION LIABILITY. The Rifkin, Falcon and Bresnan sellers who
acquired Charter Communications Holding Company membership units or, in the case
of Bresnan, additional equity interests in one of our subsidiaries, in
connection with the respective Rifkin, Falcon and Bresnan acquisitions, and the
Helicon sellers who acquired shares of Class A common stock in Charter
Communications, Inc.'s initial public offering may have rescission rights
against Charter Communications, Inc. and Charter Communications Holding Company
arising out of possible violations of Section 5 of the Securities Act in
connection with the offers and sales of these equity interests.
If all of these equity holders successfully exercised their possible
rescission rights, Charter Communications, Inc. or Charter Communications
Holding Company would become obligated to repurchase all such equity interests
and the total repurchase obligation would be up to approximately $1.8 billion.
If Charter Communications, Inc. and Charter Communications Holding Company fail
to obtain capital sufficient to fund any required repurchases, they could seek
funds from us and our subsidiaries. This could adversely affect our financial
condition and results of operations. These rescission rights expire one year
from the dates of issuance of these equity interests.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements is required under the terms of the credit facilities of our
subsidiaries. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to pay lower market rates. Collars limit our
exposure to and benefits from interest rate fluctuations on variable rate debt
to within a certain range of rates.
Our participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
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The table set forth below summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1999 (dollars in thousands):
EXPECTED MATURITY DATE
-------------------------------------------------------------------------------- FAIR VALUE AT
2000 2001 2002 2003 2004 THEREAFTER TOTAL DECEMBER 31, 1999
---------- -------- -------- -------- -------- ---------- ---------- -----------------
DEBT
Fixed Rate................. -- -- -- -- -- $3,690,313 $3,690,313 $2,914,820
Average Interest Rate.... -- -- -- -- -- 9.1% 9.1%
Variable Rate.............. $ 88,875 $156,000 $168,500 $2,492,625 $2,906,000 $2,906,000
Average Interest Rate.... 8.8% 8.8% 8.8% 9.6% 9.5%
INTEREST RATE INSTRUMENTS
Variable to Fixed Swaps.... $2,375,000 $660,000 $250,000 $ 30,000 -- -- $3,315,000 $ 17,951
Average Pay Rate......... 8.5% 7.9% 7.8% 8.0% -- -- 8.4%
Average Receive Rate..... 8.3% 9.2 9.2% 9.2% -- -- 8.6%
Collars.................... $ 195,000 $ 45,000 -- -- -- -- $ 240,000 $ (199)
Average Cap Rate......... 8.8% 8.7% -- -- -- -- 8.8%
Average Floor Rate....... 7.8% 7.6% -- -- -- -- 7.7%
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the costs (proceeds) to settle the outstanding contracts. Interest
rates on variable debt are estimated using the average implied forward London
Interbank Offering Rate (LIBOR) rates for the year of maturity based on the
yield curve in effect at December 31, 1999. While swaps, caps and collars
represent an integral part of our interest rate risk management program, their
incremental effect on interest expense for the years ended December 31, 1999,
1998, and 1997 was not significant.
YEAR 2000 ISSUES
GENERAL. Many existing computer systems and applications, and other
control devices and embedded computer chips use only two digits, rather than
four, to identify a year in the date field, failing to consider the impact of
the change in the century. Computer chips are the physical structure upon which
integrated circuits are fabricated as components of systems, such as telephone
systems, computers and memory systems. As a result, such systems, applications,
devices, and chips could create erroneous results or might fail altogether
unless corrected to properly interpret data related to the year 2000 and beyond.
These errors and failures may result, not only from a date recognition problem
in the particular part of a system failing, but may also result as systems,
applications, devices and chips receive erroneous or improper data from
third-parties suffering from the year 2000 problem. In addition, two interacting
systems, applications, devices or chips, each of which has individually been
fixed so that it will properly handle the year 2000 problem, could nonetheless
result in a failure because their method of dealing with the problem is not
compatible.
We have not experienced significant disruptions or any other problems since
the beginning of 2000. We cannot assure you, however, that such problems will
not arise in connection with customer billing or other periodic information
gathering.
COST. The total cost of our year 2000 remediation programs was
approximately $9.8 million. We do not anticipate significant additional
expenditures.
OPTIONS
In accordance with an employment agreement and a related option agreement
with Jerald L. Kent, our President and Chief Executive Officer, Mr. Kent was
issued an option to purchase 7,044,127 membership units in Charter
Communications Holding Company in December 1998. The option vests over a
four-year period from the date of grant and expires ten years from the date of
grant.
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In February 1999, Charter Holdings adopted an option plan, which was
assumed by Charter Communications Holding Company in May 1999, providing for the
grant of options to employees, consultants and directors of Charter
Communications Holding Company and its affiliates to purchase up to 25,009,798
Charter Communications Holding Company membership units. Options granted under
the plan will be fully vested after five years from the date of grant. Options
not exercised accumulate and are exercisable, in whole or in part, in any
subsequent period, but not later than ten years from the date of grant.
Membership units received upon exercise of the options issued to Mr. Kent
and to optionees under the plan are automatically exchanged for shares of Class
A common stock of Charter Communications, Inc. on a one-for-one basis.
The following chart sets forth the number of options outstanding and the
exercise price of such options as of March 31, 1999.
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------- REMAINING -----------
NUMBER OF EXERCISE TOTAL LIFE NUMBER OF
OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS(4)
---------- ------------ ------------ ---------- -----------
Outstanding as of
January 1, 1999 (1)................... 7,044,127 $ 20.00 $140,882,540 10.0(3) 3,081,808(5)
Granted:
February 9, 1999 (2).................. 9,111,681 20.00 182,233,620 130,000
April 5, 1999 (2)..................... 473,000 20.73 9,805,290 --
November 8, 1999 (2).................. 4,781,400 19.00 90,846,600 240,000
February 15, 2000(2).................. 5,566,600 19.47 108,375,022 --
Cancelled............................... (960,600) 19.00-20.73 (19,017,756) --
---------- ------------ ------------ ---- ---------
Outstanding as of
March 31, 1999........................ 26,016,208 $ 19.72(3) $513,125,316 9.1(3) 3,451,808(5)
========== ============ ============ ==== =========
- - - ---------------
(1) Granted to Jerald L. Kent pursuant to his employment agreement and related
option agreement.
(2) Granted pursuant to the option plan.
(3) Weighted average.
(4) As of March 31, 2000.
(5) The weighted average exercise price for options exercisable was $20.00 and
$19.93 at December 31, 1998 and March 31, 2000, respectively.
The weighted average fair value of options granted was $12.59 and $12.50 at
December 31, 1999 and 1998, respectively.
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for options issued under the option plan and the
options held by Mr. Kent. We recorded option compensation expense of $845,000
for the period from December 24, 1998 through December 31, 1998 and $80.0
million for the year ended December 31, 1999 in the financial statements since
the exercise prices were less than the estimated fair values of the underlying
membership units on the date of grant. The estimated fair value was determined
using the valuation inherent in Mr. Allen's acquisition of Charter and
valuations of public companies in the cable industry adjusted for factors
specific to us. Compensation expense is accrued over the vesting period of each
grant that varies from four to five years. As of December 31, 1999, deferred
compensation remaining to be recognized in future periods totaled $79.4 million.
ACCOUNTING STANDARD NOT YET IMPLEMENTED
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments
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embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value and that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133 -- An Amendment of FASB No. 133"
has delayed the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. We have not yet quantified the impacts of adopting SFAS No. 133
on our consolidated financial statements nor have we determined the timing or
method of our adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings (loss).
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
We sold the original notes on January 12, 2000 in a transaction exempt from
the registration requirements of the Securities Act of 1933, as amended. The
initial purchasers of the notes subsequently resold the original notes to
qualified institutional buyers in reliance on Rule 144A and under Regulation S
under the Securities Act.
In connection with the sale of original notes to the initial purchasers
pursuant to the Purchase Agreement, dated January 6, 2000, among us and Goldman,
Sachs & Co., Chase Securities Inc., Credit Suisse First Boston, FleetBoston
Robertson Stephens, Merrill & Co., Morgan Stanley Dean Witter, TD Securities,
First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable
Securities, the holders of the original notes became entitled to the benefits of
the exchange and registration rights agreements dated January 12, 2000, among us
and the initial purchasers.
Under the registration rights agreements, the issuers became obligated to
file a registration statement in connection with an exchange offer within 120
days after January 12, 2000 and to use their reasonable best efforts to have the
exchange offer registration statement declared effective within 180 days after
January 12, 2000. The exchange offer being made by this prospectus, if
consummated within the required time periods, will satisfy our obligations under
the registration rights agreements. This prospectus, together with the letter of
transmittal, is being sent to all beneficial holders of original notes known to
the issuers.
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, the issuers will accept all
original notes properly tendered and not withdrawn prior to the expiration date.
The issuers will issue $1,000 principal amount of new notes in exchange for each
$1,000 principal amount of outstanding original notes accepted in the exchange
offer. Holders may tender some or all of their original notes pursuant to the
exchange offer.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties we believe that holders of the new notes
issued in exchange for original notes may offer for resale, resell and otherwise
transfer the new notes, other than any holder that is an affiliate of ours
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act. This
is true as long as the new notes are acquired in the ordinary course of the
holder's business, the holder has no arrangement or understanding with any
person to participate in the distribution of the new notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the new notes. A broker-dealer that acquired original notes
directly from the issuers cannot exchange the original notes in the exchange
offer. Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the new notes cannot rely on the no-action
letters of the staff of the Securities and Exchange Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for original notes, where original notes were acquired by such broker-dealer as
a result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes. See
"Plan of Distribution" for additional information.
We shall be deemed to have accepted validly tendered original notes when,
as and if we have given oral or written notice of the acceptance of such notes
to the exchange agent. The exchange agent will act as agent for the tendering
holders of original notes for the purposes of receiving the new notes from the
issuers and delivering new notes to such holders.
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If any tendered original notes are not accepted for exchange because of an
invalid tender or the occurrence of the conditions set forth under
"-- Conditions" without waiver by us, certificates for any such unaccepted
original notes will be returned, without expense, to the tendering holder of any
such original notes as promptly as practicable after the expiration date.
Holders of original notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
original notes, pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes in connection with the exchange
offer. See "-- Fees and Expenses."
SHELF REGISTRATION STATEMENT
Pursuant to the registration rights agreements, if the exchange offer is
not completed prior to the date on which the earliest of any of the following
events occurs:
(a) applicable interpretations of the staff of the Securities and
Exchange Commission do not permit us to effect the exchange offer,
(b) any holder of notes notifies us that either:
(1) such holder is not eligible to participate in the exchange
offer, or
(2) such holder participates in the exchange offer and does not
receive freely transferable new notes in exchange for tendered original
notes, or
(c) the exchange offer is not completed within 210 days after January
12, 2000,
we will, at our cost:
- file a shelf registration statement covering resales of the original
notes,
- use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act at the earliest
possible time, but no later than 90 days after the time such obligation
to file arises, and
- use our reasonable best efforts to keep effective the shelf registration
statement until the earlier of two years after the date as of which the
Securities and Exchange Commission declares such shelf registration
statement effective or the shelf registration otherwise becomes
effective, or the time when all of the applicable original notes are no
longer outstanding.
If any of the events described occurs, we will refuse to accept any
original notes and will return all tendered original notes.
We will, if and when we file the shelf registration statement, provide to
each holder of the original notes copies of the prospectus which is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take other actions as are required to permit
unrestricted resales of the original notes. A holder that sells original notes
pursuant to the shelf registration statement generally must be named as a
selling security-holder in the related prospectus and must deliver a prospectus
to purchasers, a seller will be subject to civil liability provisions under the
Securities Act in connection with these sales. A seller of the original notes
also will be bound by applicable provisions of the registration rights
agreements, including indemnification obligations. In addition, each holder of
original notes must deliver information to be used in connection with the shelf
registration statement and provide comments on the shelf registration statement
in order to have its original notes included in the shelf registration statement
and benefit from the provisions regarding any liquidated damages in the
registration rights agreement.
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INCREASE IN INTEREST RATE
If:
(1) the registration statement, of which this prospectus is a part, has not
been declared effective by the Securities and Exchange Commission within 180
days of the issuance of the original notes, and we have not used or are not
continuing to use our reasonable best efforts to cause the registration
statement to become effective, or
(2) the exchange offer has not been completed within 30 business days after
the initial effective date of the exchange offer registration statement, or
(3) the exchange offer registration statement is either withdrawn by us or
subject to an effective stop order without being followed immediately by an
additional registration statement filed and declared effective, or
(4) we are required to file the shelf registration statement and either
(a) the shelf registration statement has not become effective or been
declared effective on or before the 90th calendar day following the
date such obligation to file arises, or
(b) the shelf registration statement has been declared effective and
such shelf registration statement ceases to be effective, except as
specifically permitted in the registration rights agreements,
without being succeeded promptly by an additional registration
statement filed and declared effective,
the interest rate borne by the original notes will be increased by 0.25% per
year for the first 90 days of default, 0.50% per year for the second 90 days of
default, 0.75% per year for the third 90 days of default and 1.0% per year for
the remaining period of time in default.
The sole remedy available to the holders of the original notes will be the
immediate increase in the interest rate on the original notes as described
above. Any amounts of additional interest due as described above will be payable
in cash on the same interest payments dates as the original notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENT
We will keep the exchange offer open for not less than 30 days, or longer
if required by applicable law, after the date on which notice of the exchange
offer is mailed to the holders of the old notes. The term "expiration date"
means the expiration date set forth on the cover page of this prospectus, unless
we extend the exchange offer, in which case the term "expiration date" means the
latest date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange agent
of any extension by oral or written notice and will issue a public announcement
of the extension, each prior to 5:00 p.m., New York City time, on the next
business day after the previously scheduled expiration date.
We reserve the right
(a) to delay accepting any original notes, to extend the exchange
offer or to terminate the exchange offer and not accept original notes not
previously accepted if any of the conditions set forth under
"-- Conditions" shall have occurred and shall not have been waived by us,
if permitted to be waived by us, by giving oral or written notice of such
delay, extension or termination to the exchange agent, or
(b) to amend the terms of the exchange offer in any manner deemed by
us to be advantageous to the holders of the original notes.
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Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice. If the exchange
offer is amended in a manner determined by us to constitute a material change,
we promptly will disclose such amendment in a manner reasonably calculated to
inform the holders of the original notes of such amendment. Depending upon the
significance of the amendment, we may extend the exchange offer if it otherwise
would expire during such extension period.
Without limiting the manner in which we may choose to make a public
announcement of any extension, amendment or termination of the exchange offer,
we will not be obligated to publish, advertise, or otherwise communicate any
such announcement, other than by making a timely release to an appropriate news
agency.
PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, have the
signatures on the letter of transmittal guaranteed if required by instruction 2
of the letter of transmittal, and mail or otherwise deliver such letter of
transmittal or such facsimile or an agent's message in connection with a book
entry transfer, together with the original notes and any other required
documents. To be validly tendered, such documents must reach the exchange agent
before 5:00 p.m., New York City time, on the expiration date. Delivery of the
original notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the exchange agent prior to the expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent, forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant in
such book-entry transfer facility tendering the original notes that such
participant has received and agrees to be bound by the terms of the letter of
transmittal and that we may enforce such agreement against such participant.
The tender by a holder of original notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL
NOTES SHOULD BE SENT TO US.
Only a holder of original notes may tender original notes in the exchange
offer. The term "holder" with respect to the exchange offer means any person in
whose name original notes are registered on our books or any other person who
has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose original notes are registered in the name of
its broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on its behalf. If such beneficial holder wishes
to tender on its own behalf, such registered holder must, prior to completing
and executing the letter of transmittal and delivering its original notes,
either make appropriate
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arrangements to register ownership of the original notes in such holder's name
or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States referred to
as an "eligible institution", unless the original notes are tendered
(a) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal or
(b) for the account of an eligible institution. In the event that
signatures on a letter of transmittal or a notice of withdrawal, are
required to be guaranteed, such guarantee must be by an eligible
institution.
If the letter of transmittal is signed by a person other than the
registered holder of any original notes listed therein, such original notes must
be endorsed or accompanied by appropriate bond powers and a proxy which
authorizes such person to tender the original notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the original notes.
If the letter of transmittal or any original notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by us,
evidence satisfactory to us of their authority so to act must be submitted with
the letter of transmittal.
All questions as to the validity, form, eligibility, including time of
receipt, and withdrawal of the tendered original notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all original notes not properly
tendered or any original notes our acceptance of which, in the opinion of
counsel for us, would be unlawful. We also reserve the right to waive any
irregularities or conditions of tender as to particular original notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of original notes must be cured within such time as we shall determine. None of
us, the exchange agent or any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of original
notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of original notes will not be deemed to have been made
until such irregularities have been cured or waived. Any original notes received
by the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the exchange agent to the tendering holders of original notes,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In addition, we reserve the right in our sole discretion to
(a) purchase or make offers for any original notes that remain outstanding
subsequent to the expiration date or, as set forth under
"-- Conditions," to terminate the exchange offer in accordance with the
terms of the registration rights agreements and
(b) to the extent permitted by applicable law, purchase original notes in
the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the
exchange offer.
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By tendering, each holder will represent to us that, among other things,
(a) the new notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of such holder or other
person,
(b) neither such holder nor such other person is engaged in or intends to
engage in a distribution of the new notes,
(c) neither such holder or other person has any arrangement or
understanding with any person to participate in the distribution of
such new notes, and
(d) such holder or other person is not our "affiliate," as defined under
Rule 405 of the Securities Act, or, if such holder or other person is
such an affiliate, will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the original
notes at the Depository Trust Company for the purpose of facilitating the
exchange offer, and subject to the establishment of such accounts, any financial
institution that is a participant in the Depository Trust Company's system may
make book-entry delivery of original notes by causing the Depository Trust
Company to transfer such original notes into the exchange agent's account with
respect to the original notes in accordance with the Depository Trust Company's
procedures for such transfer. Although delivery of the original notes may be
effected through book-entry transfer into the exchange agent's account at the
Depository Trust Company, an appropriate letter of transmittal properly
completed and duly executed with any required signature guarantee, or an agent's
message in lieu of the letter of transmittal, and all other required documents
must in each case be transmitted to and received or confirmed by the exchange
agent at its address set forth below on or prior to the expiration date, or, if
the guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to Depository
Trust Company does not constitute delivery to the exchange agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their original notes and
(a) whose original notes are not immediately available or
(b) who cannot deliver their original notes, the letter of transmittal
or any other required documents to the exchange agent prior to the
expiration date, may effect a tender if:
(1) the tender is made through an eligible institution;
(2) prior to the expiration date, the exchange agent receives from
such eligible institution a properly completed and duly executed Notice
of Guaranteed Delivery, by facsimile transmission, mail or hand
delivery, setting forth the name and address of the holder of the
original notes, the certificate number or numbers of such original notes
and the principal amount of original notes tendered, stating that the
tender is being made thereby, and guaranteeing that, within three
business days after the expiration date, the letter of transmittal, or
facsimile thereof or agent's message in lieu of the letter of
transmittal, together with the certificate(s) representing the original
notes to be tendered in proper form for transfer and any other documents
required by the letter of transmittal will be deposited by the eligible
institution with the exchange agent; and
(3) such properly completed and executed letter of transmittal (or
facsimile thereof) together with the certificate(s) representing all
tendered original notes in proper form for
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transfer and all other documents required by the letter of transmittal
are received by the exchange agent within three business days after the
expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date. However, where the expiration date has been extended, tenders
of original notes previously accepted for exchange as of the original expiration
date may not be withdrawn.
To withdraw a tender of original notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth in this prospectus prior to 5:00 p.m., New York
City time, on the expiration date. Any such notice of withdrawal must:
(a) specify the name of the depositor, who is the person having
deposited the original notes to be withdrawn,
(b) identify the original notes to be withdrawn, including the
certificate number or numbers and principal amount of such original notes
or, in the case of original notes transferred by book-entry transfer, the
name and number of the account at Depository Trust Company to be credited,
(c) be signed by the depositor in the same manner as the original
signature on the letter of transmittal by which such original notes were
tendered, including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
original notes register the transfer of such original notes into the name
of the depositor withdrawing the tender and
(d) specify the name in which any such original notes are to be
registered, if different from that of the depositor. All questions as to
the validity, form and eligibility, including time of receipt, of such
withdrawal notices will be determined by us, and our determination shall be
final and binding on all parties. Any original notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer
and no new notes will be issued with respect to the original notes
withdrawn unless the original notes so withdrawn are validly retendered.
Any original notes which have been tendered but which are not accepted for
exchange will be returned to its holder without cost to such holder as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn original notes may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange, any new notes for any original
notes, and may terminate or amend the exchange offer before the expiration date,
if the exchange offer violates any applicable law or interpretation by the staff
of the Securities and Exchange Commission.
If we determine in our reasonable discretion that the foregoing condition
exists, we may
(1) refuse to accept any original notes and return all tendered
original notes to the tendering holders,
(2) extend the exchange offer and retain all original notes tendered
prior to the expiration of the exchange offer, subject, however, to the
rights of holders who tendered such original notes to withdraw their
tendered original notes, or
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(3) waive such condition, if permissible, with respect to the exchange
offer and accept all properly tendered original notes which have not been
withdrawn. If such waiver constitutes a material change to the exchange
offer, we will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the holders, and we will extend the
exchange offer as required by applicable law.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as exchange agent for the
exchange offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to Harris Trust and Savings Bank addressed as follows:
For Information by Telephone:
(212) 701-7624
HARRIS TRUST AND SAVINGS BANK
By Registered or Certified Mail By Hand or Overnight Mail:
c/o Harris Trust Company of New York c/o Harris Trust Company of New York
Wall Street Station Wall Street Plaza
P.O. Box 1023 88 Pine Street
New York, New York 10268-1023 19th Floor
New York, New York 10005
Attention: Reorganization Trust Department
By Facsimile Transmission:
(212) 701-7637
(Telephone Confirmation)
(212) 701-7624
Harris Trust and Savings Bank is an affiliate of the trustee under the
indentures governing the notes.
FEES AND EXPENSES
We have agreed to bear the expenses of the exchange offer pursuant to the
exchange and registration rights agreements. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the exchange
offer. We, however, will pay the exchange agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of Harris Trust and
Savings Bank as exchange agent, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the original
notes as reflected in our accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us.
The expenses of the exchange offer and the unamortized expenses related to the
issuance of the original notes will be amortized over the term of the notes.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of original notes who are eligible to participate in the exchange
offer but who do not tender their original notes will not have any further
registration rights, and their original notes will continue to be subject to
restrictions on transfer. Accordingly, such original notes may be resold only
- to us, upon redemption of these notes or otherwise,
- so long as the original notes are eligible for resale pursuant to Rule
144A under the Securities Act, to a person inside the United States whom
the seller reasonably believes is a qualified institutional buyer within
the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A,
- in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us,
- outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or
- under an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States.
REGULATORY APPROVALS
We do not believe that the receipt of any material federal or state
regulatory approval will be necessary in connection with the exchange offer,
other than the effectiveness of the exchange offer registration statement under
the Securities Act.
OTHER
Participation in the exchange offer is voluntary and holders of original
notes should carefully consider whether to accept the terms and condition of
this exchange offer. Holders of the original notes are urged to consult their
financial and tax advisors in making their own decisions on what action to take
with respect to the exchange offer.
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BUSINESS
OVERVIEW
We are the fourth largest operator of cable television systems in the
United States, serving approximately 6.2 million customers. After giving effect
to the Kalamazoo transaction, we will serve approximately 6.3 million customers.
We offer a full range of traditional cable television services. Our service
offerings include the following programming packages:
- basic programming;
- expanded basic programming;
- premium service; and
- pay-per-view television programming.
As part of our Wired World vision, we are also beginning to offer an array
of new services including:
- digital television;
- interactive video programming; and
- high-speed Internet access.
We are also exploring opportunities in telephony.
The new products and services described above will take advantage of the
significant bandwidth of our cable systems. We are accelerating the upgrade of
our cable systems to more quickly provide these products and services.
For the year ended December 31, 1999, pro forma for our merger with Marcus
Holdings, the acquisitions completed since the beginning of 1999, the recent
transfer to Charter Holdings of the Fanch, Falcon and Avalon cable systems and
the Kalamazoo transaction, our revenues would have been approximately $3.0
billion.
Mr. Allen, the principal owner of Charter Communications, Inc. and one of
the computer industry's visionaries, has long believed in a Wired World in which
cable technology will facilitate the convergence of television, computers and
telecommunications. We believe cable's ability to deliver voice, video and data
at high speeds will enable it to serve as the primary platform for the delivery
of new services to the home and workplace.
BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate
acquired cable systems and apply our core operating strategies to raise the
financial and operating performance of these acquired systems. Our integration
process occurs in three stages:
System Evaluation. We conduct an extensive evaluation of each system
we acquire. This process begins prior to reaching an agreement to purchase
the system and focuses on the system's:
- demographic profile of the market as well as the number of homes
passed and customers;
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- business plan;
- customer service standards;
- management capabilities; and
- technological capacity and compatibility.
We also evaluate opportunities to consolidate headends and billing and
other administrative functions. Based upon this evaluation, we formulate plans
for customer service centers, plant upgrades, market positioning, new product
and service launches and human resource requirements.
Implementation of Our Core Operating Strategies. To achieve our high
standards for customer satisfaction and financial and operating
performance, we:
- attract and retain high quality local management;
- empower local managers with a high degree of day-to-day operational
autonomy;
- set key financial and operating benchmarks for management to meet,
such as revenue and cash flow per subscriber, subscriber growth,
customer service and technical standards; and
- provide incentives to all employees through grants of cash bonuses
and equity options.
Ongoing Support and Monitoring. We provide local managers with
regional and corporate management guidance, marketing and other support for
implementation of their business plans. We monitor performance of our
acquired cable systems on a frequent basis to ensure that performance goals
can be met.
The turn-around in our Fort Worth system, which our management team began
to manage in October 1998, is an example of our success in integrating newly
acquired cable systems into our operations. We introduced a customer care team
that has worked closely with city governments to improve customer service and
local government relations, and each of our customer service representatives
attended a training program. We also conducted extensive training programs for
our technical and engineering, dispatch, sales and support, and management
personnel. We held a series of sales events and service demonstrations to
increase customer awareness and enhance our community exposure and reputation.
We reduced the new employee hiring process from two to three weeks to three to
five days. As a result of these and other actions taken by the Charter
management team, relations with local franchising authorities are greatly
improved, customer service has been significantly enhanced, and the number of
customers and operating cash flow have increased.
OFFER NEW PRODUCTS AND SERVICES. We intend to expand the array of products
and services we offer to our customers to implement our Wired World vision.
Using digital technology, we plan to offer additional channels on our existing
service tiers, create new service tiers, introduce multiple packages of premium
services and increase the number of pay-per-view channels. We also plan to add
digital music services and interactive program guides which are comprehensive
guides to television program listings that can be accessed by network, time,
date or programming genre. In addition, we have begun to roll out advanced
services, including interactive video programming and high-speed Internet
access, and we are currently exploring opportunities in telephony. We have
entered into agreements with several providers of high-speed Internet and other
interactive services, including High-Speed Access Corp., EarthLink Network,
Inc., Excite@Home Corporation, Convergence.com, WorldGate Communications, Inc.
and Wink Communications, Inc. We have recently entered into a joint venture with
Vulcan Ventures Inc. and Go2Net, Inc. to deliver high-speed Internet portal
services to our customers.
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UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. We plan to spend
approximately $6.0 billion from 2000 to 2002 for capital expenditures.
Approximately $3.5 billion will be used to upgrade our systems to bandwidth
capacity of 550 megahertz or greater. Upgrading to at least 550 megahertz of
bandwidth capacity will allow us to:
- offer advanced services, such as digital television, Internet access and
other interactive services;
- increase channel capacity up to 82 analog channels, or even more
programming channels if some of our bandwidth is used for digital
services; and
- permit two-way communication which will give our customers the ability
to send and receive signals over the cable system so that high-speed
cable services, such as Internet access, will not require a separate
telephone line and will enable our systems to provide telephony
services.
The remaining capital will be spent on plant extensions, new services,
converters and system maintenance.
As of December 31, 1999, approximately 45% of our customers were served by
cable systems with at least 550 megahertz bandwidth capacity, and approximately
30% of our customers had two-way communication capability. By year-end 2003, we
expect that approximately 98% of our customers will be served by cable systems
with at least 550 megahertz bandwidth capacity and two-way communication
capability and approximately 92% of our customers will be served by cable
systems with at least 750 megahertz bandwidth and two-way communication
capability.
Our planned upgrades are designed to reduce the number of headends from
1,257 at year-end 1999, including the Fanch, Falcon, Avalon and Bresnan cable
systems and the Kalamazoo transaction, to 459 at year-end 2003. Reducing the
number of headends will reduce headend equipment and maintenance expenditures
and, together with other upgrades, will provide enhanced picture quality and
system reliability. In addition, by year-end 2003, we expect that approximately
90% of our customers will be served by headends serving at least 10,000
customers.
MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we
operate our business to provide reliable, high-quality products and services,
superior customer service and attractive programming choices at reasonable
rates. We have implemented stringent internal customer service standards which
we believe meet or exceed those established by the National Cable Television
Association, the Washington, D.C.-based trade association for the cable
television industry. We believe that our customer service efforts have
contributed to our superior customer growth, and will strengthen the Charter
brand name and increase acceptance of our new products and services.
EMPLOY INNOVATIVE MARKETING. We have developed and successfully
implemented a variety of innovative marketing techniques to attract new
customers and increase revenue per customer. Our marketing efforts focus on
tailoring Charter-branded entertainment and information services that provide
value, choice, convenience and quality to our customers. We use demographic
"cluster codes" to address messages to target audiences through direct mail and
telemarketing. Cluster codes identify customers by marketing type such as young
professionals, retirees or families. In addition, we promote our services on
radio, in local newspapers and by door-to-door selling. In many of our systems,
we offer discounts to customers who purchase multiple premium services such as
Home Box Office or Showtime. We also have a coordinated strategy for retaining
customers that includes televised retention advertising to reinforce the link
between quality service and the Charter brand name and to encourage customers to
purchase higher service levels. Successful implementation of these marketing
techniques has contributed to internal customer growth rates in excess of the
cable industry average
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in each year from 1996 through 1999 for the systems we owned in each of those
years. We have begun to implement our marketing programs in all of the systems
we have recently acquired.
EMPHASIZE LOCAL MANAGEMENT AUTONOMY WHILE PROVIDING REGIONAL AND CORPORATE
SUPPORT AND CENTRALIZED FINANCIAL CONTROLS. Our local cable systems are
organized into eleven operating regions. A regional management team oversees
multiple local system operations in each region. We believe that a strong
management presence at the local system level:
- improves our customer service;
- increases our ability to respond to customer needs and programming
preferences;
- reduces the need for a large centralized corporate staff;
- fosters good relations with local governmental authorities; and
- strengthens community relations.
Our regional management teams work closely with both local managers and
senior management in our corporate office to develop budgets and coordinate
marketing, programming, purchasing and engineering activities. Our centralized
financial management enables us to set financial and operating benchmarks and
monitor performance on an ongoing basis. In order to attract and retain high
quality managers at the local and regional operating levels, we provide a high
degree of operational autonomy and accountability along with cash and
equity-based compensation. Charter Communications Holding Company has a plan to
distribute to directors, consultants and substantially all employees, including
members of corporate management and key regional and system-level management
personnel, options exercisable for up to 25,009,798 Charter Communications
Holding Company membership units that are automatically exchanged for shares of
Charter Communications, Inc. Class A common stock on a one-for-one basis.
CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve
operating margins and increase operating efficiencies, we regularly seek to
improve the geographic clustering of our cable systems by selectively swapping
our cable systems for systems of other cable operators or acquiring systems in
close proximity to our systems. We believe that by concentrating our systems in
clusters, we will be able to generate higher growth in revenues and operating
cash flow. Clustering enables us to consolidate headends and spread fixed costs
over a larger subscriber base. Charter Communications, Inc. and AT&T Broadband &
Internet Services have entered into a non-binding letter of intent to exchange
certain cable systems. If completed, this transaction will allow us to improve
the clustering of our cable systems in certain key markets. We are negotiating
with several other cable operators whose systems we consider to be potential
acquisition or swapping candidates.
CHARTER ORGANIZATIONAL STRUCTURE
Each of the entities in our organizational structure and how it relates to
us is described below. In our discussion of the following entities, we make the
same assumptions as described on page 3 with respect to our organizational
chart.
OWNERSHIP OF CHARTER COMMUNICATIONS, INC. Mr. Allen owns less than 2% of
the outstanding capital stock of Charter Communications, Inc. and controls
approximately 93.7% of the voting power of Charter Communications, Inc.'s
capital stock. The remaining equity interest and voting control are held by the
public. Mr. Allen's voting control arises from his ownership of Charter
Communications, Inc.'s high vote Class B common stock, his Class A common stock,
and his ownership of Vulcan Cable III Inc., which owns membership units in
Charter Communications Holding Company that are exchangeable for shares of high
vote Class B common stock of Charter Communications, Inc.
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VULCAN CABLE III INC. Mr. Allen owns 100% of the equity of Vulcan Cable
III. Vulcan Cable III has a 19.0% equity interest and no voting rights in
Charter Communications Holding Company. In August 1999, Mr. Allen, through
Vulcan Cable III, contributed to Charter Communications Holding Company $500
million in cash. In September 1999, he contributed an additional $825 million
through Vulcan Cable III, of which approximately $644.3 million was in cash and
approximately $180.7 million was in the form of equity interests Vulcan Cable
III acquired in connection with the Rifkin acquisition. Upon each of these
contributions, Vulcan Cable III received Charter Communications Holding Company
membership units at a price per membership unit of $20.73. In addition, in
November 1999, Mr. Allen, through Vulcan Cable III, made a $750 million cash
equity contribution to Charter Communications Holding Company for which Vulcan
Cable III received additional membership units at a price per membership unit of
$18.24.
CHARTER INVESTMENT, INC. Charter Investment, Inc. has a 38.8% equity
interest and no voting rights in Charter Communications Holding Company. Mr.
Allen owns approximately 96.8% of the outstanding stock of Charter Investment,
Inc. The remaining 3.2% equity is beneficially owned by our founders, Jerald L.
Kent, Barry L. Babcock and Howard L. Wood.
BRESNAN SELLERS. Under the terms of the Bresnan acquisition, some of the
sellers received a portion of their purchase price in Charter Communications
Holding Company common membership units rather than in cash. These common
membership units are exchangeable for shares of Charter Communications, Inc.
Class A common stock on a one-for-one basis. In addition, certain other Bresnan
sellers received a portion of the purchase price in preferred membership units
in an indirect subsidiary of Charter Holdings. The preferred membership units
are also exchangeable for shares of Charter Communications, Inc. Class A common
stock on a one-for-one basis. If all of the Bresnan sellers exchanged their
membership units in Charter Communications Holding Company or such indirect
subsidiary, as applicable, these equity holders as a group would have a 14.9%
equity interest in Charter Communications, Inc.
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications
Holding Company is the direct 100% parent of Charter Communications Holdings.
Charter Communications Holding Company is owned 39.6% by Charter Communications,
Inc., 19.0% by Vulcan Cable III Inc., 38.8% by Charter Investment, Inc. and 2.6%
by certain sellers in our Bresnan acquisition. All of the outstanding units in
Charter Communications Holding Company are exchangeable for shares of Class A
common stock of Charter Communications, Inc. on a one-for-one basis at any time.
Charter Communications, Inc. has 100% of the voting power of Charter
Communications Holding Company.
CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer of
$3.575 billion aggregate principal of notes issued in March 1999 (referred to as
the March 1999 Charter Holdings notes) and $1.532 billion aggregate principal
amount of the original notes issued in January 2000. Charter Holdings owns 100%
of Charter Capital, the co-issuer of the March 1999 Charter Holdings notes, the
original notes and the notes to be issued in the exchange offer. Charter
Holdings also owns the various subsidiaries that conduct all of our cable
operations, including the Charter, Falcon, Fanch, Avalon and Bresnan companies
described below.
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Capital is a
wholly owned subsidiary of Charter Holdings and a co-issuer of the notes
described in the preceding paragraph.
CHARTER COMPANIES. These companies are subsidiaries of Charter Holdings
and own or operate all of the cable systems originally managed by Charter
Investment, Inc. (namely Charter Communications Properties Holdings, LLC, CCA
Group and CharterComm Holdings, LLC), the cable systems obtained through the
merger of Marcus Holdings with Charter Holdings and the cable systems we
acquired in eight acquisitions in 1999. Historical financial information is
presented separately for these acquired entities. Charter Operating, a direct
subsidiary of Charter Holdings, owns all of the Charter companies' operating
subsidiaries and is the borrower under the Charter
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Operating credit facilities. The Charter Companies also include the issuers of
the outstanding publicly held notes of Renaissance.
FALCON COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Falcon acquisition and
Falcon Cable Communications, which is the borrower under the Falcon credit
facilities.
FANCH COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Fanch acquisition and CC
VI Operating, LLC, which is the borrower under the Fanch credit facilities.
AVALON COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Avalon acquisition,
including CC Michigan, LLC and CC New England, LLC, which are the borrowers
under the Avalon credit facilities. CC V Holdings, LLC (formerly Avalon Cable
LLC) and CC V Holdings Finance, Inc. (formerly Avalon Cable Finance Holdings,
Inc.) are co-issuers of the outstanding publicly held Avalon notes.
BRESNAN COMPANIES. These companies are subsidiaries of Charter Holdings
and own or operate all of the cable systems acquired in the Bresnan acquisition
and CC VIII Operating, LLC, which is the borrower under the Bresnan credit
facilities.
ACQUISITIONS
Our primary criterion in considering acquisition and swapping opportunities
is the financial return that we expect to ultimately realize. We consider each
acquisition in the context of our overall existing and planned operations,
focusing particularly on the impact on our size and scope and the ability to
reinforce our clustering strategy, either directly or through future swaps or
acquisitions. Other specific factors we consider in acquiring a cable system
are:
- demographic profile of the market as well as the number of homes passed
and customers within the system;
- per customer revenues and operating cash flow and opportunities to
increase these financial benchmarks;
- proximity to our existing cable systems or the potential for developing
new clusters of systems;
- the technological state of such system; and
- the level of competition within the local market.
We believe that there are significant advantages in increasing the size and
scope of our operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for our cable plants and our infrastructure in general;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
We believe that as a result of our acquisition strategy and our systems
upgrade we will be well positioned to have cable systems with economies of scale
sufficient to allow us to execute our strategy to expand the array of products
and services that we offer to our customers as we implement our Wired World
vision. We will, however, continue to explore acquisitions and swaps of cable
systems that would further complement our existing cable systems.
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ACQUISITIONS COMPLETED IN 1999 AND 2000
MERGER WITH MARCUS HOLDINGS. On April 23, 1998, Mr. Allen acquired
approximately 99% of the non-voting economic interests in Marcus Cable Company,
L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The
aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion
in assumed liabilities. On February 22, 1999, Marcus Holdings was formed, and
all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings
on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all
remaining interests of Marcus Cable. On April 7, 1999, the holding company
parent of the Marcus companies, Marcus Holdings, merged into Charter Holdings,
which was the surviving entity of the merger. The subsidiaries of Marcus
Holdings became subsidiaries of Charter Operating. During the period of
obtaining the requisite regulatory approvals for the transaction, the Marcus
systems came under common management with our subsidiaries in October 1998
pursuant to the terms of a management agreement.
The cable systems we acquired in the merger with Marcus Holdings are
located in Wisconsin, Tennessee, North Carolina, Georgia, California, Alabama
and Texas, has approximately 1,001,000 customers and is operated as part of our
North Central, Southeast, Southern California, Gulf Coast and Metroplex regions.
For the year ended December 31, 1999, Marcus had revenues of approximately
$511.9 million.
RENAISSANCE. In April 1999, one of our subsidiaries purchased Renaissance
Media Group LLC for approximately $459 million, consisting of $348 million in
cash and $111 million of assumed debt. Renaissance owns cable systems located in
Louisiana, Mississippi and Tennessee, has approximately 134,000 customers and is
operated as part of our Gulf Coast and Mid-South regions. For the year ended
December 31, 1999, Renaissance had revenues of approximately $62.4 million.
AMERICAN CABLE. In May 1999, one of our subsidiaries purchased American
Cable Entertainment, LLC for approximately $240 million. American Cable owns
cable systems located in California serving approximately 69,000 customers and
is operated as part of our Southern California region. For the year ended
December 31, 1999, American Cable had revenues of approximately $37.2 million.
GREATER MEDIA SYSTEMS. In June 1999, one of our subsidiaries purchased
certain cable systems of Greater Media Cablevision Inc. for approximately $500
million. The Greater Media systems are located in Massachusetts, have
approximately 176,000 customers and are operated as part of our Northeast
Region. For the year ended December 31, 1999, the Greater Media systems had
revenues of approximately $85.9 million.
HELICON. In July 1999, one of our subsidiaries acquired Helicon Partners
I, L.P. and affiliates for approximately $550 million, consisting of $410
million in cash, $115 million of assumed debt, and $25 million in the form of
preferred limited liability company interest of Charter-Helicon LLC, a direct
wholly owned subsidiary of Charter Communications, LLC. Helicon owns cable
systems located in Alabama, Georgia, New Hampshire, North Carolina, West
Virginia, South Carolina, Tennessee, Pennsylvania, Louisiana and Vermont, and
has approximately 171,000 customers. For the year ended December 31, 1999,
Helicon had revenues of approximately $85.2 million.
VISTA AND CABLE SATELLITE. One of our subsidiaries acquired Vista
Broadband Communications, LLC in July 1999 and acquired a cable system of Cable
Satellite of South Miami, Inc. in August 1999. These cable systems are located
in Georgia and southern Florida and serve a total of approximately 35,000
customers. The aggregate purchase price for these acquisitions was approximately
$148 million in cash. For the year ended December 31, 1999, these systems had
revenues of approximately $19.0 million.
RIFKIN. In September 1999, Charter Operating acquired Rifkin Acquisition
Partners L.L.L.P. and InterLink Communications Partners, LLLP for a purchase
price of approximately $1.46 billion,
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consisting of $1.2 billion in cash, $133.3 million in equity in Charter
Communications Holding Company and $128.0 million in assumed debt.
Rifkin owns cable systems primarily in Florida, Georgia, Illinois, Indiana,
Tennessee, Virginia and West Virginia, serving approximately 463,000 customers.
For the year ended December 31, 1999, Rifkin had revenues of approximately
$219.9 million.
INTERMEDIA SYSTEMS. In October 1999, Charter Communications, LLC purchased
certain cable systems of InterMedia Capital Partners IV, L.P., InterMedia
Partners and their affiliates in exchange for approximately $873 million in cash
and certain of our cable systems. The InterMedia systems serve approximately
420,000 customers in North Carolina, South Carolina, Georgia and Tennessee. As
part of this transaction, we agreed to "swap" some of our non-strategic cable
systems serving approximately 142,000 customers in Indiana, Montana, Utah and
northern Kentucky.
At the closing, we retained a cable system located in Indiana serving
approximately 30,000 customers for which we were unable to timely obtain the
necessary regulatory approvals of the system transfer. Such approval was
subsequently obtained and the Indiana system assets were transferred in March
2000.
This transaction, including the transfer of the retained Indiana system,
resulted in a net increase of 278,000 customers concentrated in our Southeast
and Mid-South regions. For the year ended December 31, 1999, the InterMedia
systems had revenues of approximately $179.3 million ($126.2 million net of
disposed systems).
BRESNAN. In February 2000, Charter Communications Holding Company and one
of our subsidiaries purchased Bresnan Communications Company Limited Partnership
for a total purchase price of approximately $3.1 billion, consisting of cash,
$1.0 billion in membership units in Charter Communications Holding Company and
an indirect subsidiary of Charter Communications Holding Company and $964.4
million in assumed debt.
The cable systems acquired in the Bresnan acquisition are primarily located
in Michigan, Minnesota, Wisconsin and Nebraska and serve approximately 686,000
customers. For the year ended December 31, 1999, these systems and systems
acquired by Bresnan since December 31, 1999 had revenues of approximately $290.7
million. In February 2000, Charter Communications Holding Company transferred to
us the interests it held in the Bresnan systems.
CAPITAL CABLE AND FARMINGTON. In April 2000, one of our subsidiaries
purchased a cable system of Falcon Capital Cable Partners, L.P. and another
cable system of Farmington Cablevision Company. These cable systems are
primarily located in Illinois, Indiana and Missouri. The aggregate purchase
price for these acquisitions was approximately $75 million in cash. For the year
ended December 31, 1999, these systems had revenues of approximately $13.5
million.
RECENT TRANSFERS COMPLETED IN JANUARY 2000
FANCH. In November 1999, Charter Communications Holding Company purchased
the partnership interests of Fanch Cablevision of Indiana, L.P., specified
assets of Cooney Cable Associates of Ohio, Limited Partnership, Fanch-JV2 Master
Limited Partnership, Mark Twain Cablevision Limited Partnership,
Fanch-Narragansett CSI Limited Partnership, North Texas Cablevision, Ltd., Post
Cablevision of Texas, Limited Partnership and Spring Green Communications, L.P.
and the stock of Tioga Cable Company, Inc., Cable Systems, Inc. and, indirectly,
Hornell Television Service, Inc. for a total combined purchase price of
approximately $2.4 billion in cash. These interests and assets were transferred
to us on January 1, 2000.
The cable systems acquired in this acquisition are located in Colorado,
Indiana, Kansas, Kentucky, Michigan, Mississippi, New Mexico, Oklahoma, Texas
and Wisconsin, and serve
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approximately 528,000 customers. For the year ended December 31, 1999, these
systems had revenues of approximately $218.2 million.
FALCON. In November 1999, Charter Communications Holding Company purchased
partnership interests in Falcon Communications, L.P. from Falcon Holding Group,
L.P. and TCI Falcon Holdings, LLC, interests in a number of Falcon entities held
by Falcon Cable Trust and Falcon Holding Group, Inc., specified interests in
Enstar Communications Corporation and Enstar Finance Company, LLC held by Falcon
Holding Group, L.P., and specified interests in Adlink held by DHN Inc. These
interests were transferred to us on January 1, 2000.
The purchase price for the acquisition was approximately $3.5 billion,
consisting of cash, $550 million in common membership units in Charter
Communications Holding Company issued to certain of the Falcon sellers and $1.7
billion in assumed debt.
The Falcon cable systems are located in California and the Pacific
Northwest, Missouri, North Carolina, Alabama and Georgia and serve approximately
955,000 customers. For the year ended December 31, 1999, these systems had
revenues of approximately $427.7 million.
AVALON. In November 1999, Charter Communications Holding Company purchased
directly and indirectly all of the equity interests of Avalon Cable of Michigan
Holdings, Inc. from Avalon Cable Holdings LLC and Avalon Investors, L.L.C. for
approximately $832 million, consisting of $558.2 million in cash and $273.8
million in assumed notes. These interests were transferred to us on January 1,
2000.
Avalon operates primarily in Michigan and New England and serves
approximately 252,000 customers. For the year ended December 31, 1999, Avalon
had revenues of approximately $108.3 million.
PENDING KALAMAZOO TRANSACTION
In March 2000, Charter Communications, Inc. entered into an agreement
providing for the merger of Cablevision of Michigan, Inc., the indirect owner of
a cable system in Kalamazoo, Michigan, with and into Charter Communications,
Inc. As a result of this merger, Charter Communications, Inc. will become the
indirect owner of the Kalamazoo system. The merger consideration of
approximately $173 million will be paid in Class A common stock of Charter
Communications, Inc. After the merger, Charter Communications, Inc. will
contribute 100% of the equity interests of the direct owner of the Kalamazoo
system to Charter Communications Holding Company in exchange for membership
units. Charter Communications Holding Company will in turn contribute the equity
interests to Charter Holdings, which will in turn contribute the equity
interests to a subsidiary. The Kalamazoo cable system has approximately 49,000
customers and had revenues of approximately $20.3 million for the year ended
December 31, 1999. We anticipate that this transaction will close in the third
quarter of 2000.
PENDING SWAP TRANSACTION
On December 1, 1999, Charter Communications, Inc. entered into a
non-binding letter of intent with AT&T Broadband & Internet Services to exchange
certain cable systems. The Swap Transaction would involve cable systems owned by
AT&T located in municipalities in Alabama, Georgia, Illinois and Missouri
serving approximately 705,000 subscribers and certain of our cable systems
located in municipalities in California, Connecticut, Massachusetts, Texas and
certain other states, serving approximately 631,000 subscribers. As part of the
Swap Transaction, we will be required to pay AT&T approximately $108 million in
cash. This represents the difference in the agreed values of the systems being
exchanged. The Swap Transaction is subject to the negotiation and execution of a
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definitive exchange agreement, regulatory approvals and other conditions typical
in transactions of this type. We cannot assure you that the Swap Transaction
will be completed.
PRODUCTS AND SERVICES
We offer our customers a full array of traditional cable television
services and programming and we have begun to offer new and advanced high
bandwidth services such as high-speed Internet access. We plan to continually
enhance and upgrade these services, including adding new programming and other
telecommunications services, and will continue to position cable television as
an essential service.
TRADITIONAL CABLE TELEVISION SERVICES. As of December 31, 1999, pro forma
for the recent transfers and the Bresnan acquisition, approximately 85% of our
customers subscribed to both "basic" and "expanded basic" service and generally
receive a line-up of between 33 and 85 channels of television programming,
depending on the bandwidth capacity of the system. Customers who pay additional
amounts can also subscribe to additional channels, either individually or in
packages of several channels, as add-ons to the basic channels. As of December
31, 1999, more than 22% of our customers subscribe to premium channels, with
additional customers subscribing to other special add-on packages. We tailor
both our basic channel line-up and our additional channel offerings to each
system according to demographics, programming preferences, competition, price
sensitivity and local regulation.
Our traditional cable television service offerings include the following:
- BASIC CABLE. All of our customers receive basic cable services, which
generally consist of local broadcast television, local community
programming, including governmental and public access, and limited
satellite programming. For the year ended December 31, 1999, pro forma
for the recent transfers, the average monthly fee was $13.54 for our
basic service.
- EXPANDED BASIC CABLE. This expanded tier includes a group of
satellite-delivered or non-broadcast channels, such as Entertainment and
Sports Programming Network (ESPN), Cable News Network (CNN) and Lifetime
Television, in addition to the basic channel line-up. For the year ended
December 31, 1999, pro forma for the recent transfers, the average
monthly fee was $14.88 for our expanded basic service.
- PREMIUM CHANNELS. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. Home
Box Office, Cinemax and Showtime are typical examples. We offer
subscriptions to these channels either individually or in packages. For
the year ended December 31, 1999, pro forma for the recent transfers,
the average monthly fee was $6.15 per premium subscription.
- PAY-PER-VIEW. These channels allow customers to pay to view a single
showing of a recently released movie, a one-time special sporting event
or music concerts on an unedited, commercial-free basis. We currently
charge a fee that ranges from $2.95 to $8.95 for movies. For special
events, such as championship boxing matches, we have charged a fee of up
to $54.95.
We have employed a variety of targeted marketing techniques to attract new
customers by focusing on delivering value, choice, convenience and quality. We
employ direct mail and telemarketing, using demographic "cluster codes" to
target specific messages to target audiences. In many of our systems, we offer
discounts to customers who purchase premium services on a limited trial basis in
order to encourage a higher level of service subscription. We also have a
coordinated strategy for retaining customers that includes televised retention
advertising to reinforce the decision to subscribe and to encourage customers to
purchase higher service levels.
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NEW PRODUCTS AND SERVICES. A variety of emerging technologies and the
rapid growth of Internet usage have presented us with substantial opportunities
to provide new or expanded products and services to our customers and to expand
our sources of revenue. The desire for such new technologies and the use of the
Internet by businesses in particular have triggered a significant increase in
our commercial market penetration. As a result, we are in the process of
introducing a variety of new or expanded products and services beyond the
traditional offerings of analog television programming for the benefit of both
our residential and commercial customers. These new products and services
include:
- digital television and its related enhancements;
- high-speed Internet access via cable modems installed in personal
computers;
- WorldGate television-based Internet access, which allows customers to
access the Internet through the use of our two-way capable cable plant
without the need for a personal computer;
- interactive services, such as Wink, which adds interactivity and
electronic commerce opportunities to traditional programming and
advertising; and
- telephony and data transmission services, which are private network
services interconnecting locations for a customer.
Cable television's high bandwidth allows cable to be well positioned to
deliver a multitude of channels and/or new and advanced products and services.
We believe that this high bandwidth will be a key factor in the successful
delivery of these products and services.
DIGITAL TELEVISION. As part of upgrading our systems, we are installing
headend equipment capable of delivering digitally encoded cable transmissions to
a two-way digital-capable set-top converter box in the customer's home. This
digital connection offers significant advantages. For example, we can compress
the digital signal to allow the transmission of up to twelve digital channels in
the bandwidth normally used by one analog channel. This will allow us to
increase both programming and service offerings, including near video-on-demand
for pay-per-view customers. We expect to increase the amount of these services
purchased by our customers.
Digital services customers may receive a mix of additional television
programming, an electronic program guide and up to 40 channels of digital music.
The additional programming falls into four categories which are targeted toward
specific markets:
- additional expanded basic channels, which are marketed in systems
primarily serving rural communities;
- additional premium channels, which are marketed in systems serving both
rural and urban communities;
- "multiplexes" of premium channels to which a customer previously
subscribed, such as multiple channels of HBO or Showtime, which are
varied as to time of broadcast or programming content theme and which
are marketed in systems serving both rural and urban communities; and
- additional pay-per-view programming, such as more pay-per-view options
and/or frequent showings of the most popular films to provide near
video-on-demand, which are more heavily marketed in systems primarily
serving both rural and urban communities.
As part of our pricing strategy for digital services, we have established a
retail rate of $4.95 to $8.95 per month for the digital set-top converter and
the delivery of "multiplexes" of premium services, additional pay-per-view
channels, digital music and an electronic programming guide. Some
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of our systems also offer additional expanded basic tiers of service. These
tiers of services retail for $3.95 per month each or $8.95 for all three tiers.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, more than 155,400 of our customers subscribed to the digital
service offered in 85 markets. As of December 31, 1999, pro forma for the recent
transfers and the Bresnan acquisition, approximately 4.7 million of our
customers were served by cable systems capable of delivering digital services.
By year-end 2000, we anticipate that digital services will pass approximately
7.0 million homes.
INTERNET ACCESS. We currently provide Internet access to our customers by
two principal means:
- via cable modems attached to personal computers, either directly or
through an outsourcing contract with an Internet service provider; and
- through television access, via a service such as WorldGate.
We also provide Internet access in some markets through traditional dial-up
telephone modems, using a third party service provider.
The principal advantage of cable Internet connections is the high speed of
data transfer over a cable system. We currently offer these services to our
residential customers over coaxial cable at speeds that can range up to
approximately 50 times the speed of a conventional telephone modem. Furthermore,
a two-way communication cable system using a hybrid fiber optic/coaxial
structure can support the entire connection at cable modem speeds without the
need for a separate telephone line. If the cable system only supports one-way
signals from the headend to the customer, the customer must use a separate
telephone line in order to send signals to the provider, although such customer
still receives the benefit of high speed cable access when downloading
information, which is the primary reason for using cable as an Internet
connection. In addition to Internet access over our traditional coaxial system,
we also provide our commercial customers fiber optic cable access at a price
that we believe is less than the price offered by the telephone companies.
In the past, cable Internet connections have provided customers with widely
varying access speeds because each customer accessed the Internet by sending and
receiving data through a node. Users connecting simultaneously through a single
node share the bandwidth of that node, so that users' connection speeds may
diminish as additional users connect through the same node. To induce users to
switch to our Internet services, we guarantee our cable modem customers the
minimum access speed selected from several speed options we offer. We also
provide higher guaranteed access speeds for customers willing to pay an
additional cost. In order to meet these guarantees, we are increasing the
bandwidth of our systems and "splitting" nodes easily and cost-effectively to
reduce the number of customers per node.
CABLE MODEM-BASED INTERNET ACCESS. We have deployed cable modem-based
Internet access services in 84 markets including Los Angeles, California; St.
Louis, Missouri; and Fort Worth, Texas.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we provided Internet access service to approximately 65,600
residential customers and 280 commercial customers. The following table
indicates the projected availability of cable modem-based Internet access
services in our systems, as of the dates indicated. Only a small percentage of
our customers currently subscribe to these services.
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HOMES MADE AVAILABLE FOR
ADVANCED DATA SERVICES
--------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
(PRO FORMA) (PROJECTED)
HIGH-SPEED INTERNET ACCESS VIA CABLE MODEMS:
High Speed Access Corp................................... 1,128,300 3,180,500
EarthLink/Charter Pipeline............................... 708,700 772,700
Excite@Home.............................................. 867,800 917,700
Convergence.com.......................................... 263,200 --
In-House/Other........................................... 445,600 523,700
--------- ---------
Total cable modems..................................... 3,413,600 5,394,600
========= =========
Internet access via WorldGate............................ 428,800 488,800
========= =========
We have a relationship with High Speed Access Corp. to offer Internet
access in some of our smaller systems. High Speed Access also provides Internet
access services to our customers under the Charter Pipeline brand name. Although
the Internet access service is provided by High Speed Access, the Internet
"domain name" of our customer's e-mail address and web site, if any, is
"Charter.net," allowing the customer to switch or expand to our other Internet
services without a change of e-mail address.
High Speed Access provides three different tiers of service to us. The base
tier is similar to our arrangements with EarthLink and Excite@Home described
below. The turnkey tier bears all capital, operating and marketing costs of
providing the service, and seeks to build economies of scale in our smaller
systems that we cannot efficiently build ourselves by simultaneously contracting
to provide the same services to other small geographically contiguous systems.
The third tier allows for a la carte selection of services between the base tier
and the turnkey tier. As of December 31, 1999, pro forma for the recent
transfers and the Bresnan acquisition, we have made Internet access available to
approximately 1,128,300 of our homes passed, and approximately 15,200 customers
have signed up for the service. During 2000, we anticipate making available for
service an additional 73 markets to High Speed Access, covering approximately
2,052,200 additional homes passed.
We have an agreement with EarthLink Network, Inc., an independent Internet
service provider, to provide service marketed and branded as Charter
Pipeline(TM), which is a cable modem-based, high-speed Internet access service
we offer. EarthLink and MindSpring Enterprises, Inc. merged in February 2000
creating the second-largest Internet service provider (ISP) in the United
States. We currently charge a monthly usage fee of between $24.95 and $39.95.
Our customers have the option to lease a cable modem for $10 to $15 a month or
to purchase a modem for between $200 and $300. As of December 31, 1999, we made
EarthLink Internet access available to approximately 708,700 homes passed and
had approximately 10,500 customers who subscribed to this service.
We have a revenue sharing agreement with Excite@Home, under which
Excite@Home provides Internet service to customers in our systems serving Fort
Worth, University Park and Highland Park, Texas. The Excite@Home network
provides high-speed, cable modem-based Internet access using our cable
infrastructure. As of December 31, 1999, pro forma for the recent transfers and
the Bresnan acquisition, we have made Excite@Home available to approximately
867,800 of our homes passed and had approximately 18,200 customers who
subscribed to this service.
We also have services agreements with Convergence.com under which
Convergence.com provides Internet service to customers in systems acquired from
Rifkin. The Convergence.com network provides high-speed, cable modem-based
Internet access using our cable infrastructure. As of December 31, 1999, pro
forma for the recent transfers and the Bresnan acquisition, we have made
available Convergence.com service to approximately 263,200 homes passed and had
approximately 7,100 customers.
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We actively market our cable modem service to businesses in each one of our
systems where we have the capability to offer such service. Our marketing
efforts are often door-to-door, and we have established a separate division
whose function is to make businesses aware that this type of Internet access is
available through us. We also provide several virtual local area networks for
municipal and educational facilities in our Los Angeles cluster including
California Institute of Technology located in Pasadena, the City of Pasadena and
the City of West Covina.
TV-BASED INTERNET ACCESS. We have a non-exclusive agreement with WorldGate
to provide its TV-based e-mail and Internet access to our cable customers.
WorldGate's technology is only available to cable systems with two-way
capability. WorldGate offers easy, low-cost Internet access to customers at
connection speeds ranging up to 128 kilobits per second. For a monthly fee, we
provide our customers with e-mail and Internet access that does not require the
use of a PC, an existing or additional telephone line, or any additional
equipment. Instead, the customer accesses the Internet through the set-top box,
which the customer already has on his television set, and a wireless keyboard,
that is provided with the service and which interfaces with the box. WorldGate
works on advanced analog and digital converters and, therefore, can be installed
utilizing advanced analog converters already deployed. In contrast, other
converter-based, non-PC Internet access products require a digital platform and
a digital converter prior to installation.
Customers who opt for television-based Internet access are generally
first-time Internet users who prefer this more user-friendly interface. Although
the WorldGate service bears the WorldGate brand name, the Internet domain names
of the customers who use this service is "Charter.net." This allows the
customers to switch or expand to our other Internet services without a change of
e-mail address.
We first offered WorldGate to customers on the upgraded portion of our
systems in St. Louis in April 1998. We are also currently offering this service
in five other systems. In addition, we plan to introduce it in four additional
systems during 2000. As of December 31, 1999, pro forma for the recent transfers
and the Bresnan acquisition, we provided WorldGate Internet service to
approximately 7,100 customers.
INTERNET PORTAL SERVICES. On October 1, 1999, Charter Communications
Holding Company, Vulcan Ventures, an entity controlled by Mr. Allen, and Go2Net,
Inc. entered into a joint venture to form Broadband Partners, Inc. Broadband
will provide access to the Internet through a "portal" to our customers on the
digital service tier. A portal is an Internet web site that serves as a user's
initial point of entry to the World Wide Web. By offering selected content,
services and links to other web sites, a portal guides and directs users through
the World Wide Web. In addition, the portal generates revenues from advertising
on its own web pages and by sharing revenues generated by linked or featured web
sites.
Revenue splits and other economic terms in this arrangement will be at
least as favorable to us as terms between Broadband and any other parties.
Charter Communications Holding Company has agreed to use Broadband's portal
services exclusively for an initial six-year period that will begin when the
portal services are launched, except that Charter Communications Holding
Company's existing agreements with other Internet high-speed portal services and
High Speed Access may run for their current term to the extent that such
agreements do not allow for the carriage of content provided by Charter
Communications Holding Company or Vulcan Ventures. The joint venture is for an
initial 25-year term, subject to successive five-year renewals by mutual
consent. Vulcan Ventures will own 55.2%, Charter Communications Holding Company
will own 24.9% and Go2Net will own 19.9% of Broadband's equity interests and
Vulcan Ventures will have voting control over the Broadband entity. Broadband's
board of directors will consist of three directors designated by Vulcan Ventures
and one by each of Charter Communications Holding Company and Go2Net.
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Each of Broadband's investors will be obligated to provide their pro rata
share of funding for Broadband's operations and capital expenditures, except
that Vulcan Ventures will fund our portion of Broadband's expenses for the first
four years and will fund Go2Net's portion of Broadband's expenses to the extent
Go2Net's portion exceeds budget for the first four years.
We believe that our participation in the Broadband joint venture will
facilitate the delivery of a broad array of Internet products and services to
our customers over the television through the use of an advanced digital set-top
box or through the personal computer.
The Broadband joint venture has not yet established a timetable for a
commercial launch of its portal services. However, we anticipate that alpha and
beta testing of this Internet portal service will be completed during 2000. We
do not anticipate that our participation in the joint venture will have a
material adverse impact on our financial condition or results of operations for
the foreseeable future.
WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which
sells technology to embed interactive features, such as additional information
and statistics about a program or the option to order an advertised product,
into programming and advertisements. A customer with a Wink-enabled set-top box
and a Wink-enabled cable provider sees an icon flash on the screen when
additional Wink features are available to enhance a program or advertisement. By
pressing the select button on a standard remote control, a viewer of a
Wink-enhanced program is able to access additional information regarding such
program, including, for example, information on prior episodes or the program's
characters. A viewer watching an advertisement would be able to access
additional information regarding the advertised product and may also be able to
utilize the two-way transmission features to order a product. We have bundled
Wink's services with our traditional cable services in both our advanced analog
and digital platforms. Wink's services are provided free of charge. A company
controlled by Mr. Allen has made an equity investment in Wink.
Various programming networks, including CNN, NBC, ESPN, HBO, Showtime,
Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing
over 1,000 hours of Wink-enhanced programming per week. Under certain
revenue-sharing arrangements, we will modify our headend technology to allow
Wink-enabled programming to be offered on our systems. We receive fees from Wink
each time one of our customers uses Wink to request certain additional
information or order an advertised product.
TELEPHONE SERVICES. We expect to be able to offer cable telephony services
in the near future using our systems' direct, two-way connections to homes and
other buildings. We are exploring technologies using Internet protocol
telephony, as well as traditional switching technologies that are currently
available, to transmit digital voice signals over our systems. AT&T and other
telephone companies have already begun to pursue strategic partnering and other
programs which make it attractive for us to acquire and develop this alternative
Internet protocol technology. For the last two years, we have sold telephony
services as a competitive access provider in the state of Wisconsin through one
of our subsidiaries, and are currently looking to expand our services as a
competitive access provider into other states.
JOINT VENTURE WITH RCN CORPORATION. On October 1, 1999, Charter
Communications Holding Company and RCN Corporation entered into a binding term
sheet containing the principal terms of a non-exclusive joint venture to provide
a broad range of telephony services to the customers of Charter Communications
Holding Company's subsidiaries in its Los Angeles franchise territory. RCN is
engaged in the businesses of bundling residential voice, video and Internet
access operations, cable operations and certain long distance telephony
operations. RCN is developing advanced fiber optic networks to provide a wide
range of telecommunications services, including long distance telephone, video
programming and data services, such as high-speed Internet access.
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Charter Communications Holding Company will provide access to our Los
Angeles customer base and will provide the capital necessary to develop
telephony capability in Los Angeles. In addition, Charter Communications Holding
Company will provide the necessary personnel to oversee and manage the telephony
services. RCN will provide the necessary personnel and support services to
develop and implement telephony services to be provided by Charter
Communications Holding Company. We will pay RCN's fees at rates consistent with
industry market compensation. We will have all rights to the telephony business
and assets and will receive all revenues derived from the telephony business
unless the parties expand RCN's role by mutual agreement. We believe that our
telephony joint venture, together with Mr. Allen's investment in RCN, may allow
us to take advantage of RCN's telephony experience as we deliver telephone
services to our customers, although we cannot assure you that we will realize
anticipated advantages.
The term sheet contains only the principal terms of this joint venture and
provides that the parties will enter into definitive agreements, which will
contain, among other terms, details of the compensation to be received by RCN.
To date, we have only had preliminary discussions with RCN regarding specific
operational matters and have not determined a timetable for the commencement of
services by the joint venture. We do not anticipate that this joint venture will
have a material impact on our financial condition or results of operations in
the foreseeable future.
OUR SYSTEMS
As of December 31, 1999, including the recent transfers of the Fanch,
Falcon and Avalon cable systems, acquisitions completed since this date and the
Kalamazoo transaction, our cable systems consisted of approximately 182,000
miles of coaxial and approximately 12,600 sheath miles of fiber optic cable
passing approximately 10.0 million households and serving approximately 6.2
million customers. Coaxial cable is a type of cable used for broadband data and
cable systems. This type of cable has excellent broadband frequency
characteristics, noise, immunity and physical durability. The cable is connected
from each node to individual homes or buildings. A node is a single connection
to a cable system's main high-capacity fiber optic cable that is shared by a
number of customers. A sheath mile is the actual length of cable in miles. Fiber
optic cable is a communication medium that uses hair-thin glass fibers to
transmit signals over long distances with minimum signal loss or distortion. As
of December 31, 1999, without giving effect to acquisitions since that date and
the recent transfers, approximately 45% of our customers were served by systems
with at least 550 megahertz bandwidth capacity, approximately 30% had at least
750 megahertz bandwidth capacity and approximately 30% were served by systems
capable of providing two-way interactive communication capability. Such two-way
interactive communication capability includes two-way Internet connections,
services provided by Wink, and interactive program guides.
CORPORATE MANAGEMENT. Pursuant to a services agreement between Charter
Communications, Inc. and Charter Investment, Inc., Charter Investment, Inc.
provides the necessary personnel and services to manage Charter Communications
Holding Company, Charter Holdings and their subsidiaries. These personnel and
services are provided to Charter Communications, Inc. on a cost reimbursement
basis. Management of Charter Communications, Inc. and Charter Investment, Inc.
consists of approximately 310 people led by Charter Communications chief
executive officer Jerald L. Kent. They are responsible for coordinating and
overseeing our operations, including certain critical functions, such as
marketing and engineering, that are conducted by personnel at the regional and
local system level. The corporate office also performs certain financial control
functions such as accounting, finance and acquisitions, payroll and benefit
administration, internal audit, purchasing and programming contract
administration on a centralized basis.
OPERATING REGIONS. To manage and operate our systems, we have established
two divisions that contain a total of eleven operating regions. Each of the two
divisions is managed by a Senior Vice
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President who reports directly to Mr. Kent and is responsible for overall
supervision of the operating regions within the division. Each region is managed
by a team consisting of a Senior Vice President or a Vice President, supported
by operational, marketing and engineering personnel. Within each region, certain
groups of cable systems are further organized into clusters. We believe that
much of our success is attributable to our operating philosophy which emphasizes
decentralized management, with decisions being made as close to the customer as
possible.
The Western Division is comprised of the following regions: Central, North
Central, Southern California, Northwest, Michigan and National. The Eastern
Division is comprised of the following regions: Southeast, Mid-South, Northeast,
Gulf Coast and Mid-Atlantic.
The following table provides an overview of customer data for each of our
operating regions as of December 31, 1999, pro forma for the recent transfers,
the Bresnan acquisition, and the Kalamazoo Transaction, after which our systems
will pass approximately 10.0 million homes serving approximately 6.2 million
customers.
CUSTOMER DATA AS OF DECEMBER 31, 1999
ACQUISITIONS AND
CHARTER RECENT KALAMAZOO
HOLDINGS TRANSFERS SUBTOTAL TRANSACTION TOTAL
--------- ---------------- --------- ----------- ---------
WESTERN DIVISION
Central....................... 318,464 142,865 461,329 -- 461,329
North Central................. 408,865 391,697 800,562 -- 800,562
Southern California........... 588,906 159,082 747,988 -- 747,988
Northwest..................... -- 370,619 370,619 -- 370,619
Michigan...................... -- 544,327 544,327 48,500 592,827
National...................... 242,537 185,215 427,752 -- 427,752
--------- --------- --------- ------ ---------
1,558,772 1,793,805 3,352,577 48,500 3,401,077
EASTERN DIVISION
Southeast..................... 823,671 136,481 960,152 -- 960,152
Mid-South..................... 477,543 65,533 543,076 -- 543,076
Northeast..................... 302,047 26,061 328,108 -- 328,108
Gulf Coast.................... 365,502 66,986 432,488 -- 432,488
Mid-Atlantic.................. 183,803 371,052 554,855 -- 554,855
--------- --------- --------- ------ ---------
2,152,566 666,113 2,818,679 -- 2,818,679
--------- --------- --------- ------ ---------
Total......................... 3,711,338 2,459,918 6,171,256 48,500 6,219,756
========= ========= ========= ====== =========
The following discussion provides a description of our operating regions as
of December 31, 1999, giving effect to the recent transfers, acquisitions closed
since this date and the Kalamazoo transaction.
CENTRAL REGION. The Central region consists of cable systems serving
approximately 461,000 customers of which approximately 261,000 customers reside
in and around St. Louis County or in adjacent areas in Illinois. The remaining
customers, approximately 200,000, reside in small to medium-sized communities in
Missouri, Illinois and Indiana.
NORTH CENTRAL REGION. The North Central region consists of cable systems
serving approximately 801,000 customers located throughout the states of
Wisconsin and Minnesota. Approximately 518,000 and 283,000 customers reside in
the states of Wisconsin and Minnesota, respectively. Within the state of
Wisconsin, the two largest operating clusters are located in and around Madison,
serving approximately 231,000 customers, and Fond du Lac, serving approximately
107,000 customers.
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Within the state of Minnesota, the two largest operating clusters are located in
and around Rochester, serving approximately 142,000 customers, and St. Cloud,
serving approximately 62,000 customers.
SOUTHERN CALIFORNIA REGION. The Southern California region consists of
cable systems serving approximately 748,000 customers located in the state of
California, with approximately 509,000 customers in the Los Angeles metropolitan
area. These customers reside primarily in the communities of Pasadena, Alhambra,
Glendale, Long Beach and Riverside. We also have approximately 239,000 customers
in central California, principally located in the communities of San Luis
Obispo, West Sacramento and Turlock.
NORTHWEST REGION. The Northwest region was formed in connection with the
recent Fanch and Falcon acquisitions. After these acquisitions, the Northwest
region consists of cable systems serving approximately 371,000 customers
residing in the states of Oregon, Washington, Idaho, Utah and California. The
two largest operating clusters in the Northwest region are located in and around
Kennewick, Washington, serving approximately 85,000 customers and Medford,
Oregon, serving approximately 72,000 customers.
MICHIGAN REGION. The Michigan region was formed in connection with the
recent Fanch, Avalon, Falcon transfers and the Bresnan acquisition. Pro forma
for these transactions and the pending transaction, the Michigan region will
consist of cable systems serving approximately 593,000 customers. The largest
operating cluster in the Michigan region is located in and around Bay City,
Michigan serving approximately 132,000 customers.
NATIONAL REGION. The National region consists of cable systems serving
approximately 240,000 customers residing in small to medium-sized communities in
the states of Nebraska, Texas, New Mexico, North Dakota, Kansas, Colorado and
Oklahoma and cable systems serving approximately 188,000 customers in Texas of
which approximately 132,000 are served by the Fort Worth, Texas system. These
systems are managed from our Fort Worth, Texas regional office.
SOUTHEAST REGION. The Southeast region consists of cable systems serving
approximately 960,000 customers residing primarily in small to medium-sized
communities in North Carolina, South Carolina, Georgia and Florida. There are
significant clusters of cable systems in and around the cities and counties of
Greenville/Spartanburg, South Carolina; Hickory and Asheville, North Carolina;
and Atlanta, Georgia.
MID-SOUTH REGION. The Mid-South region consists of cable systems serving
approximately 543,000 customers residing in the states of Tennessee and
Kentucky. The Mid-South region has a significant cluster of cable systems in and
around Kingsport, Tennessee serving approximately 124,000 customers.
NORTHEAST REGION. The Northeast region consists of cable systems serving
approximately 328,000 customers residing in the states of Connecticut and
Massachusetts. These systems serve the communities of Newtown and Willimantic,
Connecticut, and areas in and around Pepperell and Worcester, Massachusetts.
GULF COAST REGION. The Gulf Coast region was formed in connection with the
Fanch and Falcon acquisitions. The Gulf Coast region consists of cable systems
serving approximately 432,000 customers residing in the states of Louisiana,
Mississippi and Alabama. Within the state of Alabama, the two largest operating
clusters are located in and around Birmingham, serving approximately 117,000
customers, and Montgomery, serving approximately 25,000 customers.
MID-ATLANTIC REGION. The Mid-Atlantic region consists of cable systems
serving approximately 555,000 customers residing in the states of Virginia, West
Virginia, Vermont, Ohio, Pennsylvania, New York and Maryland. The Mid-Atlantic
region has significant clusters of cable systems in and
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around the cities of Charleston, West Virginia, serving approximately 189,000
customers, and Johnstown, Pennsylvania, serving approximately 77,000 customers.
PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to
upgrade our existing cable plant over the next three years. For the period from
January 1, 2000 to December 31, 2002, we plan to spend approximately $6.0
billion for capital expenditures, approximately $3.5 billion of which will be
used to upgrade our systems to bandwidth capacity of 550 megahertz or greater,
so that we may offer advanced services. The remaining capital will be spent on
plant extensions, new services, converters and system maintenance.
The following table describes the current technological state of our
systems, including the recent transfers, and the anticipated progress of planned
upgrades through 2003, based on the percentage of our customers who will have
access to the bandwidth and two-way capability.
LESS THAN 750 MEGAHERTZ TWO-WAY
550 MEGAHERTZ 550 MEGAHERTZ OR GREATER 870 MEGAHERTZ CAPABILITY
------------- ------------- ------------- ------------- ----------
December 31, 1999....... 53% 14% 30% 3% 33%
December 31, 2000....... 33% 9% 32% 26% 58%
December 31, 2001....... 17% 7% 33% 43% 76%
December 31, 2002....... 6% 5% 33% 56% 89%
December 31, 2003....... 2% 6% 33% 59% 92%
We have adopted the hybrid fiber coaxial cable (HFC) architecture as the
standard for our ongoing systems upgrades. HFC architecture combines the use of
fiber optic cable, which can carry hundreds of video, data and voice channels
over extended distances, with coaxial cable, which requires a more extensive
signal amplification in order to obtain the desired transmission levels for
delivering channels. In most systems, we deliver our signals via fiber optic
cable to individual nodes serving a maximum of 500 homes or commercial
buildings. Currently, our average node size is approximately 380 homes per node.
Our HFC architecture consists of six strands of fiber to each node, with two
strands activated and four strands reserved for future services. We believe that
this network design provides high capacity and superior signal quality, and will
enable us to provide the newest forms of telecommunications services to our
customers. The primary advantages of HFC architecture over traditional coaxial
cable networks include:
- increased channel capacity of cable systems;
- reduced number of amplifiers, which are devices to compensate for signal
loss caused by coaxial cable, needed to deliver signals from the headend
to the home, resulting in improved signal quality and reliability;
- reduced number of homes that need to be connected to an individual node,
improving the capacity of the network to provide high-speed Internet
access and reducing the number of households affected by disruptions in
the network; and
- sufficient dedicated bandwidth for two-way services, which avoids
reverse signal interference problems that can otherwise occur when you
have two-way communication capability.
The HFC architecture will enable us to offer new and enhanced services,
including:
- additional channels and tiers;
- expanded pay-per-view options;
- high-speed Internet access;
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- wide area networks, which permit a network of computers to be connected
together beyond an area;
- point-to-point data services, which can switch data links from one point
to another; and
- digital advertising insertion, which is the insertion of local, regional
and national programming.
The upgrades will facilitate our new services in two primary ways:
- Greater bandwidth allows us to send more information through our
systems. This provides us with the capacity to provide new services in
addition to our current services. As a result, we will be able to roll
out digital cable programming in addition to existing analog channels
offered to customers who do not wish to subscribe to a package of
digital services.
- Enhanced design configured for two-way communication with the customer
allows us to provide cable Internet services without telephone support
and other interactive services, such as an interactive program guide,
impulse pay-per-view, video-on-demand and Wink, that cannot be offered
without upgrading the bandwidth capacity of our systems.
This HFC architecture will also position us to offer cable telephony
services in the future, using either Internet protocol technology or
switch-based technology, another method of linking communications.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
Providing a high level of service to our customers has been a central
driver of our historical success. Our emphasis on system reliability,
engineering support and superior customer satisfaction is key to our management
philosophy. In support of our commitment to customer satisfaction, we operate a
24-hour customer service hotline in most systems and offer on-time installation
and service guarantees. It is our policy that if an installer is late for a
scheduled appointment the customer receives free installation, and if a service
technician is late for a service call the customer receives a $20 credit.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we maintained seventeen call centers located in our eleven regions,
which are responsible for handling call volume for more than 53% of our
customers. They are staffed with dedicated personnel who provide service to our
customers 24 hours a day, seven days a week. We believe operating regional call
centers allows us to provide "localized" service, which also reduces overhead
costs and improves customer service. We have invested significantly in both
personnel and equipment to ensure that these call centers are professionally
managed and employ state-of-the-art technology. As of December 31, 1999, pro
forma for the recent transfers and the Bresnan acquisition, we employed
approximately 2,920 customer service representatives. Our customer service
representatives receive extensive training to develop customer contact skills
and product knowledge critical to successful sales and high rates of customer
retention. As of December 31, 1999, pro forma for the recent transfers and the
Bresnan acquisition, we had approximately 5,490 technical employees who are
encouraged to enroll in courses and attend regularly scheduled on-site seminars
conducted by equipment manufacturers to keep pace with the latest technological
developments in the cable television industry. We utilize surveys, focus groups
and other research tools as part of our efforts to determine and respond to
customer needs. We believe that all of this improves the overall quality of our
services and the reliability of our systems, resulting in fewer service calls
from customers.
We are also committed to fostering strong community relations in the towns
and cities our systems serve. We support many local charities and community
causes in various ways, including marketing promotions to raise money and
supplies for persons in need, and in-kind donations that
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include production services and free air-time on major cable networks. Recent
charity affiliations include campaigns for "Toys for Tots," United Way, local
theatre, children's museums, local food banks and volunteer fire and ambulance
corps. We also participate in the "Cable in the Classroom" program, whereby
cable television companies throughout the United States provide schools with
free cable television service. In addition, we install and provide free basic
cable service to public schools, government buildings and non-profit hospitals
in many of the communities in which we operate. We also provide free cable
modems and high-speed Internet access to schools and public libraries in our
franchise areas. We place a special emphasis on education, and regularly award
scholarships to employees who intend to pursue courses of study in the
communications field.
SALES AND MARKETING
PERSONNEL RESOURCES. We have a centralized team responsible for
coordinating the marketing efforts of our individual systems. For most of our
systems with over 30,000 customers we have a dedicated marketing manager, while
smaller systems are handled regionally. We believe our success in marketing
comes in large part from new and innovative ideas and from good interaction
between our corporate office, which handles programs and administration, and our
field offices, which implement the various programs. We are also continually
monitoring the regulatory arena, customer perception, competition, pricing and
product preferences to increase our responsiveness to our customer base. Our
customer service representatives are given the incentive to use their daily
contacts with customers as opportunities to sell our new service offerings.
MARKETING STRATEGY. Our long-term marketing objective is to increase cash
flow through deeper market penetration and growth in revenue per household. To
achieve this objective and to position our service as an indispensable consumer
service, we are pursuing the following strategies:
- increase the number of rooms per household with cable;
- introduce new cable products and services;
- design product offerings to enable greater opportunity for customer
choices;
- utilize "tiered" packaging strategies to promote the sale of premium
services and niche programming;
- offer our customers more value through discounted bundling of products;
- increase the number of residential consumers who use our set-top box,
which enables them to obtain advanced digital services such as a greater
number of television stations and interactive services;
- target households based on demographic data;
- develop specialized programs to attract former customers, households
that have never subscribed and illegal users of the service; and
- employ Charter branding of products to promote customer awareness and
loyalty.
We have innovative marketing programs which utilize market research on
selected systems, compare the data to national research and tailor marketing
programs for individual markets. We gather detailed customer information through
our regional marketing representatives and use the Claritas geodemographic data
program and consulting services to create unique packages of services and
marketing programs. These marketing efforts and the follow-up analysis provide
consumer information down to the city block or suburban subdivision level, which
allows us to create very targeted marketing programs.
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We seek to maximize our revenue per customer through the use of "tiered"
packaging strategies to market premium services and to develop and promote niche
programming services.
We regularly use targeted direct mail campaigns to sell these tiers and
services to our existing customer base. We are developing an in-depth profile
database that goes beyond existing and former customers to include all homes
passed. This database information is expected to improve our targeted direct
marketing efforts, bringing us closer toward our objective of increasing total
customers as well as sales per customer for both new and existing customers. For
example, using customer profile data currently available, we are able to
identify customers who have children under a specified age and do not currently
subscribe to The Disney Channel. We then target our marketing efforts with
respect to The Disney Channel to those households. In 1998, we were chosen by
Claritas Corporation, sponsor of a national marketing competition across all
industries, as the first place winner in their media division, which includes
cable systems operations, telecommunications and newspapers, for our national
segmenting and targeted marketing program.
In 1998, we introduced a new package of premium services. Customers receive
a substantial discount on bundled premium services of HBO, Showtime, Cinemax and
The Movie Channel. We were able to negotiate favorable terms with premium
networks, which allowed minimal impact on margins and provided substantial
volume incentives to grow the premium category. The MVP package has increased
our premium household penetration, premium revenue and cash flow. We are
currently introducing this same premium strategy in the systems we have recently
acquired.
We expect to continue to invest significant amounts of time, effort and
financial resources in the marketing and promotion of new and existing services.
To increase customer penetration and increase the level of services used by our
customers, we use a coordinated array of marketing techniques, including
door-to-door solicitation, telemarketing, media advertising and direct mail
solicitation. We believe we have one of the cable television industry's highest
success rates in attracting and retaining customers who have never before
subscribed to cable television. Historically, these "nevers" are the most
difficult customers to attract and retain.
PROGRAMMING SUPPLY
GENERAL. We believe that offering a wide variety of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and retain our cable services. We devote considerable resources to
obtaining access to a wide range of programming that we believe will appeal to
both existing and potential customers of basic and premium services. We rely on
extensive market research, customer demographics and local programming
preferences to determine channel offerings in each of our markets.
PROGRAMMING SOURCES. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. As of December 31, 1999,
we obtained approximately 64% of our programming through contracts entered into
directly with a programming supplier. We obtained the rest of our programming
through TeleSynergy, Inc., which offers its partners contract benefits in buying
programming by virtue of volume discounts available to a larger buying base.
Recent consolidation in the cable television industry coupled with our growth
through acquisitions has reduced the benefits associated with our participation
in TeleSynergy. As a result of our recent acquisitions, we reviewed our
programming arrangements and terminated our agreement with TeleSynergy,
effective January 31, 2000.
Programming tends to be made available to us for a flat fee per customer.
However, some channels are available without cost to us. In connection with the
launch of a new channel, we may receive a distribution fee to support the
channel launch, a portion of which is applied to marketing
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expenses associated with the channel launch. The amounts we receive in
distribution fees are not significant.
Our programming contracts generally continue for a fixed period of time,
usually from three to ten years, and are subject to negotiated renewal. Although
longer contract terms are available, we prefer to limit contracts to three years
so that we retain flexibility to change programming and include new channels as
they become available. Some program suppliers offer marketing support or volume
discount pricing structures. Some of our programming agreements with premium
service suppliers offer cost incentives under which premium service unit prices
decline as certain premium service growth thresholds are met.
For home shopping channels, we receive a percentage of the amount spent in
home shopping purchases by our customers on channels we carry. In 1998, cash
receipts totaled approximately $220,000. In 1999, cash receipts totaled
approximately $5.0 million.
PROGRAMMING COSTS. Our cable programming costs have increased in recent
years and are expected to continue to increase due to factors including:
- system acquisitions;
- additional programming being provided to customers;
- increased cost to produce or purchase cable programming; and
- inflationary increases.
In every year we have operated, our costs to acquire programming have
exceeded customary inflationary and cost-of-living type increases. Sports
programming costs have increased significantly over the past several years. In
addition, contracts to purchase sports programming sometimes contain built-in
cost increases for programming added during the term of the contract which we
may or may not have the option to add to our service offerings.
Under rate regulation of the Federal Communications Commission, cable
operators may increase their rates to customers to cover increased costs for
programming, subject to certain limitations. See "Regulation and Legislation."
We believe we will, as a general matter, be able to pass increases in our
programming costs through to customers, although we cannot assure you that it
will be possible.
RATES
Pursuant to the Federal Communications Commission's rules, we have set
rates for cable-related equipment, such as converter boxes and remote control
devices and installation services. These rates are based on actual costs plus an
11.25% rate of return. We have unbundled these charges from the charges for the
provision of cable service.
Rates charged to our customers vary based on the market served and service
selected, and are typically adjusted on an annual basis. As of December 31,
1999, including the Fanch, Falcon and Avalon cable systems, the average monthly
fee was $13.54 for basic service and $14.88 for expanded basic service.
Regulation of the expanded basic service was eliminated by federal law as of
March 31, 1999 and such rates are now based on market conditions. A one-time
installation fee, which may be waived in part during certain promotional
periods, is charged to new customers. We believe our rate practices are in
accordance with Federal Communications Commission Guidelines and are consistent
with those prevailing in the industry generally. See "Regulation and
Legislation."
THEFT PROTECTION
The unauthorized tapping of cable plant and the unauthorized receipt of
programming using cable converters purchased through unauthorized sources are
problems which continue to challenge
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the entire cable industry. We have adopted specific measures to combat the
unauthorized use of our plant to receive programming. For instance, in several
of our regions, we have instituted a "perpetual audit" whereby each technician
is required to check at least four other nearby residences during each service
call to determine if there are any obvious signs of piracy, namely, a drop line
leading from the main cable line into other homes. Addresses where the
technician observes drop lines are then checked against our customer billing
records. If the address is not found in the billing records, a sales
representative calls on the unauthorized user to correct the "billing
discrepancy" and persuade the user to become a formal customer. In our
experience, approximately 25% of unauthorized users who are solicited in this
manner become customers. Billing records are then closely monitored to guard
against these new customers reverting to their status as unauthorized users.
Unauthorized users who do not convert are promptly disconnected and, in certain
instances, flagrant violators are referred for prosecution. In addition, we have
prosecuted individuals who have sold cable converters programmed to receive our
signals without proper authorization.
FRANCHISES
As of December 31, 1999, pro forma for the recent transfers, our systems
operated pursuant to an aggregate of approximately 3,670 franchises, permits and
similar authorizations issued by local and state governmental authorities. As of
December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we held approximately 4,215 franchises in the aggregate. Each
franchise is awarded by a governmental authority and is usually not transferable
unless the granting governmental authority consents. Most franchises are subject
to termination proceedings in the event of a material breach. In addition, most
franchises require us to pay the granting authority a franchise fee of up to
5.0% of gross revenues generated by cable television services under the
franchise (i.e., the maximum amount that may be charged under the Communications
Act).
Our franchises have terms which range from four years to more than 32
years. Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. This process usually takes three
years but can take a longer period of time and often involves substantial
expense. The Communications Act provides for an orderly franchise renewal
process in which granting authorities may not unreasonably withhold renewals. If
a renewal is withheld and the granting authority takes over operation of the
affected cable system or awards it to another party, the granting authority must
pay the existing cable operator the "fair market value" of the system. The
Communications Act also established comprehensive renewal procedures requiring
that an incumbent franchisee's renewal application be evaluated on its own merit
and not as part of a comparative process with competing applications. In
connection with the franchise renewal process, many governmental authorities
require the cable operator make certain commitments, such as technological
upgrades to the system, which may require substantial capital expenditures. We
cannot assure you, however, that any particular franchise will be renewed or
that it can be renewed on commercially favorable terms. Our failure to obtain
renewals of our franchises, especially those in major metropolitan areas where
we have the most customers, would have a material adverse effect on our
business, results of operations and financial condition.
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The following table summarizes our systems' franchises, including the
Fanch, Falcon and Avalon cable systems, by year of expiration and approximate
number of basic customers as of December 31, 1999.
NUMBER PERCENTAGE PERCENTAGE
OF OF TOTAL TOTAL BASIC OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS(A) CUSTOMERS
- - - ---------------------------- ---------- ---------- ------------ ----------
Prior to December 31, 1999.................... 116 3% 124,300 2%
2000 to 2002.................................. 862 24% 1,452,000 27%
2003 to 2005.................................. 847 23% 1,174,500 21%
2006 or after................................. 1,844 50% 2,732,300 50%
----- --- --------- ---
Total....................................... 3,669 100% 5,483,100 100%
===== === ========= ===
- - - ---------------
(a) Includes approximately 30,000 customers served by an Indiana cable system
that we did not transfer at the time of the InterMedia closing but
transferred in March 2000.
Under the 1996 Telecom Act, state and local authorities are prohibited from
limiting, restricting or conditioning the provision of telecommunications
services. They may, however, impose "competitively neutral" requirements and
manage the public rights-of-way. Granting authorities may not require a cable
operator to provide telecommunications services or facilities, other than
institutional networks, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits
franchise fees to an operator's cable-related revenues and clarifies that they
do not apply to revenues that a cable operator derives from providing new
telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems which are eligible for renewal have been
renewed or extended at or prior to their stated expiration dates.
COMPETITION
We face competition in the areas of price, service offerings and service
reliability. We compete with other providers of television signals and other
sources of home entertainment. In addition, as we expand into additional
services such as Internet access, interactive services and telephony, we will
face competition from other providers of each type of service. See "Risk
Factors -- Business -- We operate in a very competitive business environment
which can adversely affect our business and operations."
To date, we believe that we have not lost a significant number of customers
or a significant amount of revenue to our competitors' systems. However,
competition from other providers of the technologies we expect to offer in the
future may have a negative impact on our business in the future.
Through mergers such as the recent merger of Tele-Communications, Inc. and
AT&T and the pending merger of America Online, Inc. (AOL) and Time Warner Inc.,
customers will come to expect a variety of services from a single provider.
While these mergers have no direct or immediate impact on our business, it
encourages providers of cable and telecommunications services to expand their
service offerings. It also encourages consolidation in the cable industry as
cable operators recognize the competitive benefits of a large customer base and
expanded financial resources.
Key competitors today include:
BROADCAST TELEVISION. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast
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signals available through "off-air" reception compared to the services provided
by the local cable system. The recent licensing of digital spectrum by the
Federal Communications Commission will provide incumbent television licenses
with the ability to deliver high definition television pictures and multiple
digital-quality program streams, as well as advanced digital services such as
subscription video.
DBS. Direct broadcast satellite, known as DBS, has emerged as significant
competition to cable systems. The DBS industry has grown rapidly over the last
several years, far exceeding the growth rate of the cable television industry,
and now serves more than 10 million subscribers nationwide. DBS service allows
the subscriber to receive video services directly via satellite using a
relatively small dish antenna. Moreover, video compression technology allows DBS
providers to offer more than 100 digital channels, thereby surpassing the
typical analog cable system. DBS companies historically were prohibited from
retransmitting popular local broadcast programming, but a change to the
copyright laws in November 1999 eliminated this legal impediment. After an
initial six-month grace period, DBS companies will need to secure retransmission
consent from the popular broadcast stations they wish to carry, and they will
face mandatory carriage obligations of less popular broadcast stations as of
January 2002. In response to the legislation, DirecTV, Inc. and EchoStar
Communications Corporation already have begun carrying the major network
stations in the nation's top television markets. DBS, however, is limited in the
local programming it can provide because of the current capacity limitations of
satellite technology. It is, therefore, expected that DBS companies will offer
local broadcast programming only in the larger U.S. markets in the foreseeable
future. The same legislation providing for DBS carriage of local broadcast
stations reduced the compulsory copyright fees paid by DBS companies and allows
them to continue offering distant network signals to rural customers. In March
2000, both DirecTV and EchoStar announced that they would be capable of
providing two-way high-speed Internet access by the end of this year. AOL, the
nation's leading provider of Internet services has announced a plan to invest
$1.5 billion in Hughes Electronics Corp., DirecTV's parent company, and these
companies intend to jointly market AOL's prospective Internet television service
to DirecTV's DBS customers.
DSL. The deployment of digital subscriber line technology, known as DSL,
will allow Internet access to subscribers at data transmission speeds greater
than those of modems over conventional telephone lines. Several telephone
companies and other companies are introducing DSL service. The Federal
Communications Commission recently released an order in which it mandated that
incumbent telephone companies grant access to the high frequency portion of the
local loop over which they provide voice services. This will enable competitive
carriers to provide DSL services over the same telephone lines simultaneously
used by incumbent telephone companies to provide basic telephone service.
However, in a separate order the Federal Communications Commission declined to
mandate that incumbent telephone companies unbundle their internal packet
switching functionality or related equipment for the benefit of competitive
carriers. This functionality or equipment could otherwise have been used by
competitive carriers directly to provide DSL or other high-speed broadband
services. We are unable to predict whether the Federal Communications
Commission's decisions will be sustained upon administrative or judicial appeal,
the likelihood of success of the Internet access offered by our competitors or
the impact on our business and operations of these competitive ventures.
TRADITIONAL OVERBUILDS. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. It is possible that a franchising
authority might grant a second franchise to another cable operator and that
franchise might contain terms and conditions more favorable than those afforded
us. In addition, entities willing to establish an open video system, under which
they offer unaffiliated programmers non-discriminatory access to a portion of
the system's cable system may be able to avoid local franchising requirements.
Well financed businesses from outside the cable industry, such as public
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utilities which already possess fiber optic and other transmission lines in the
areas they serve may over time become competitors. There has been a recent
increase in the number of cities that have constructed their own cable systems,
in a manner similar to city-provided utility services. There has been an
increased interest in traditional overbuilds by private companies. Constructing
a competing cable system is a capital intensive process which involves a high
degree of risk. We believe that in order to be successful, a competitor's
overbuild would need to be able to serve the homes and businesses in the
overbuilt area on a more cost-effective basis than us. Any such overbuild
operation would require either significant access to capital or access to
facilities already in place that are capable of delivering cable television
programming.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we are aware of overbuild situations in some of our cable systems.
Approximately 115,000 basic customers, or approximately 1.9% of our total basic
customers, are passed by these overbuilds. Additionally, we have been notified
that franchises have been awarded, and present potential overbuild situations,
in other of our systems. These potential overbuild areas service an aggregate of
approximately 134,000 basic customers or approximately 2.2% of our total basic
customers. In response to such overbuilds, these systems have been designated
priorities for the upgrade of cable plant and the launch of new and enhanced
services. We have upgraded many of these systems to at least 750 megahertz
two-way HFC architecture, and anticipate upgrading the other systems to at least
750 megahertz by December 31, 2001.
TELEPHONE COMPANIES AND UTILITIES. The competitive environment has been
significantly affected by both technological developments and regulatory changes
enacted in The Telecommunications Act of 1996, which were designed to enhance
competition in the cable television and local telephone markets. Federal
cross-ownership restrictions historically limited entry by local telephone
companies into the cable television business. The 1996 Telecom Act modified this
cross-ownership restriction, making it possible for local exchange carriers who
have considerable resources to provide a wide variety of video services
competitive with services offered by cable systems.
As we expand our offerings to include Internet and other telecommunications
services, we will be subject to competition from other telecommunications
providers. The telecommunications industry is highly competitive and includes
competitors with greater financial and personnel resources, who have brand name
recognition and long-standing relationships with regulatory authorities.
Moreover, mergers, joint ventures and alliances among franchise, wireless or
private cable television operators, local exchange carriers and others may
result in providers capable of offering cable television, Internet, and
telecommunications services in direct competition with us.
Several telephone companies have obtained or are seeking cable television
franchises from local governmental authorities and are constructing cable
systems. Cross-subsidization by local exchange carriers of video and telephony
services poses a strategic advantage over cable operators seeking to compete
with local exchange carriers that provide video services. Some local exchange
carriers may choose to make broadband services available under the open video
regulatory framework of the Federal Communications Commission or through
wireless technology. In addition, local exchange carriers provide facilities for
the transmission and distribution of voice and data services, including Internet
services, in competition with our existing or potential interactive services
ventures and businesses, including Internet service, as well as data and other
non-video services. We cannot predict the likelihood of success of the broadband
services offered by our competitors or the impact on us of such competitive
ventures. The entry of telephone companies as direct competitors in the video
marketplace, however, may become more widespread and could adversely affect the
profitability and valuation of the systems.
Additionally, we are subject to competition from utilities which possess
fiber optic transmission lines capable of transmitting signals with minimal
signal distortion.
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PRIVATE CABLE. Additional competition is posed by satellite master antenna
television systems known as "SMATV systems" serving multiple dwelling units,
referred to in the cable industry as "MDU's", such as condominiums, apartment
complexes, and private residential communities. These private cable systems may
enter into exclusive agreements with such MDUs, which may preclude operators of
franchise systems from serving residents of such private complexes. Such private
cable systems can offer both improved reception of local television stations and
many of the same satellite-delivered program services which are offered by cable
systems. SMATV systems currently benefit from operating advantages not available
to franchised cable systems, including fewer regulatory burdens and no
requirement to service low density or economically depressed communities.
Exemption from regulation may provide a competitive advantage to certain of our
current and potential competitors. The FCC ruled in 1998 that private cable
operators can lease video distribution capacity from local telephone companies
and distribute cable programming services over public rights-of-way without
obtaining a cable franchise. In 1999, both the Fifth and Seventh Circuit Courts
of Appeals upheld this FCC policy.
WIRELESS DISTRIBUTION. Cable television systems also compete with wireless
program distribution services such as multi-channel multipoint distribution
systems or "wireless cable," known as MMDS. MMDS uses low-power microwave
frequencies to transmit television programming over-the-air to paying customers.
Wireless distribution services generally provide many of the programming
services provided by cable systems, and digital compression technology is likely
to increase significantly the channel capacity of their systems. Both analog and
digital MMDS services require unobstructed "line of sight" transmission paths.
Analog MMDS has impacted our customer growth in Riverside and Sacramento,
California and Missoula, Montana. Digital MMDS is a more significant competitor,
presenting potential challenges to us in Los Angeles, California and Atlanta,
Georgia.
PROPERTIES
Our principal physical assets consist of cable television distribution
plant and equipment, including signal receiving, encoding and decoding devices,
headend reception facilities, distribution systems and customer drop equipment
for each of our cable television systems.
Our cable television plant and related equipment are generally attached to
utility poles under pole rental agreements with local public utilities and
telephone companies, and in certain locations are buried in underground ducts or
trenches. We own or lease real property for signal reception sites and business
offices in many of the communities served by our systems and for our principal
executive offices. We own most of our service vehicles.
Our subsidiaries own the real property housing a regional data center in
Town & Country, Missouri, as well as the regional office for the Northeast
Region in Newtown, Connecticut and additional real estate located in Hickory,
North Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo,
California. Our subsidiaries lease space for our regional data center located in
Dallas, Texas and additional locations for business offices throughout our
operating regions and generally own the towers on which our equipment is
located. Our headend locations are generally located on owned or leased parcels
of land, and we generally own the towers on which our equipment is located.
We believe that our properties are in good operating condition and are
suitable for our business operations.
EMPLOYEES
Pursuant to a services agreement between Charter Communications, Inc. and
Charter Investment, Inc., Charter Investment, Inc. provides the necessary
personnel and services to manage Charter Communications Holding Company and its
subsidiaries, including us. These personnel and
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services are provided to Charter Communications, Inc. on a cost reimbursement
basis. Charter Communications, Inc. currently has only thirteen employees, all
of whom are senior management and are also executive officers of Charter
Investment, Inc. The management of Charter Communications, Inc. and Charter
Investment, Inc. consists of approximately 325 people led by Charter
Communications chief executive officer Jerald L. Kent. They are responsible for
coordinating and overseeing our operations, including certain critical
functions, such as marketing and engineering, that are conducted by personnel at
the regional and local system level. The corporate office also performs certain
financial control functions such as accounting, finance and acquisitions,
payroll and benefit administration, internal audit, purchasing and programming
contract administration on a centralized basis.
As of February 29, 2000, our subsidiaries had approximately 11,970
full-time equivalent employees of which 375 were represented by the
International Brotherhood of Electrical Workers. We believe we have a good
relationship with our employees and have never experienced a work stoppage. See
"Certain Relationships and Related Transactions."
INSURANCE
We have insurance to cover risks incurred in the ordinary course of
business, including general liability, property coverage, business interruption
and workers' compensation insurance in amounts typical of similar operators in
the cable industry and with reputable insurance providers. As is typical in the
cable industry, we do not insure our underground plant. We believe our insurance
coverage is adequate.
LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters incidental to
our business. We believe that the resolution of such matters will not have a
material adverse impact on our financial position or results of operations.
REGULATION AND LEGISLATION
The following summary addresses the key regulatory developments and
legislation affecting the cable television industry.
The operation of a cable system is extensively regulated by the Federal
Communications Commission, some state governments and most local governments.
The 1996 Telecom Act has altered the regulatory structure governing the nation's
communications providers. It removes barriers to competition in both the cable
television market and the local telephone market. Among other things, it also
reduces the scope of cable rate regulation and encourages additional competition
in the video programming industry by allowing local telephone companies to
provide video programming in their own telephone service areas.
The 1996 Telecom Act requires the Federal Communications Commission to
undertake a host of implementing rulemakings. Moreover, Congress and the Federal
Communications Commission have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect our
operations, and there have been calls in Congress and at the Federal
Communications Commission to maintain or even tighten cable regulation in the
absence of widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which limited the ability of
cable companies to increase subscriber fees. Under that regime, all cable
systems were subjected to rate regulation, unless they faced "effective
competition" in their local franchise area. Federal law defines "effective
competition" on a
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community-specific basis as requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the Federal Communications Commission established the underlying
regulatory scheme, local government units, commonly referred to as local
franchising authorities, are primarily responsible for administering the
regulation of the lowest level of cable service -- the basic service tier, which
typically contains local broadcast stations and public, educational, and
government access channels. Before a local franchising authority begins basic
service rate regulation, it must certify to the Federal Communications
Commission that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, approximately 17% of our local franchising authorities were
certified to regulate basic tier rates. The 1992 Cable Act permits communities
to certify and regulate rates at any time, so that it is possible that
additional localities served by the systems may choose to certify and regulate
basic rates in the future.
The Federal Communications Commission historically administered rate
regulation of cable programming service tiers, which are the expanded basic
programming packages that offer services other than basic programming and which
typically contains satellite-delivered programming. As of December 31, 1999, pro
forma for the recent transfers and the Bresnan acquisition, we had cable
programming service tier rate complaints relating to approximately 440,000
customers pending at the Federal Communications Commission. Under the 1996
Telecom Act, however, the Federal Communications Commission's authority to
regulate cable programming service tier rates sunset on March 31, 1999. The
Federal Communications Commission has taken the position that it will still
adjudicate pending cable programming service tier complaints but will strictly
limit its review, and possible refund orders, to the time period predating the
sunset date. We do not believe any adjudications regarding these pre-sunset
complaints will have a material adverse effect on our business. The elimination
of cable programming service tier regulation on a prospective basis affords us
substantially greater pricing flexibility.
Under the rate regulations of the Federal Communication Commission, most
cable systems were required to reduce their basic service tier and cable
programming service tier rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. The Federal Communications Commission
has modified its rate adjustment regulations to allow for annual rate increases
and to minimize previous problems associated with regulatory lag. Operators also
have the opportunity to bypass this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Cost of service regulation is a traditional form of rate
regulation, under which a utility is allowed to recover its costs of providing
the regulated service, plus a reasonable profit. The Federal Communications
Commission and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. Premium cable services offered on a
per-channel or per-program basis remain unregulated. However, federal law
requires that the basic service tier be offered to all cable subscribers and
limits the ability of operators to require purchase of any cable programming
service tier if a customer seeks to purchase premium services offered on a
per-channel or per-program basis, subject to a technology exception which
sunsets in 2002.
As noted above, Federal Communications Commission regulation of cable
programming service tier rates for all systems, regardless of size, sunset
pursuant to the 1996 Telecom Act on March 31,
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1999. As a result, the regulatory regime just discussed is now essentially
applicable only to the basic service tier and cable equipment. The 1996 Telecom
Act also relaxes existing "uniform rate" requirements by specifying that uniform
rate requirements do not apply where the operator faces "effective competition,"
and by exempting bulk discounts to multiple dwelling units, although complaints
about predatory pricing still may be made to the Federal Communications
Commission.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more
favorable environment for us to provide telecommunications services beyond
traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. A cable
operator is authorized under the 1996 Telecom Act to provide telecommunications
services without obtaining a separate local franchise. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles, beginning in 2001, if the operator provides telecommunications
service, as well as cable service, over its plant. The Federal Communications
Commission clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access, but a recent decision by the
11th Circuit Court of Appeals disagreed and suggested that Internet traffic is
neither cable service nor telecommunications service and might leave cable
attachments that carry Internet traffic ineligible for Pole Attachment Act
protections.
Cable entry into telecommunications will be affected by the regulatory
landscape now being developed by the Federal Communications Commission and state
regulators. One critical component of the 1996 Telecom Act to facilitate the
entry of new telecommunications providers, including cable operators, is the
interconnection obligation imposed on all telecommunications carriers. The
Supreme Court upheld most of the Federal Communications Commission
interconnection regulations. Although these regulations should enable new
telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
Federal Communications Commission can mandate that incumbent carriers make
available to competitors, remain subject to administrative and judicial appeal.
If the Federal Communications Commission's current list of unbundled network
elements is upheld on appeal, it would make it easier for us to provide
telecommunications service.
INTERNET SERVICE. Although there is at present no significant federal
regulation of cable system delivery of Internet services, and the Federal
Communications Commission recently issued several reports finding no immediate
need to impose such regulation, this situation may change as cable systems
expand their broadband delivery of Internet services. In particular, proposals
have been advanced at the Federal Communications Commission and Congress that
would require cable operators to provide access to unaffiliated Internet service
providers and online service providers. The FCC recently rejected a petition by
certain Internet service providers attempting to use existing modes of access
that are commercially leased to gain access to cable system delivery. Finally,
some states and local franchising authorities are considering the imposition of
mandatory Internet access requirements as part of cable franchise renewals or
transfers and a few local jurisdictions have adopted these requirements. A
federal district court in Portland, Oregon recently upheld the legal ability of
local franchising authority to impose such conditions, but an appeal was filed
with the Ninth Circuit Court of Appeals, oral argument has been held and the
parties are awaiting a decision. Other local authorities have imposed or may
impose mandatory Internet access requirements on cable operators. These
developments could, if they become widespread, burden the capacity of cable
systems and complicate our own plans for providing Internet service.
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TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers,
including the regional telephone companies, can now compete with cable operators
both inside and outside their telephone service areas with certain regulatory
safeguards. Because of their resources, local exchange carriers could be
formidable competitors to traditional cable operators. Various local exchange
carriers already are providing video programming services within their telephone
service areas through a variety of distribution methods, including both the
deployment of broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of
the Federal Communications Commission's open video system rules, including its
preemption of local franchising. The Federal Communications Commission recently
revised its OVS rules to eliminate this general preemption, thereby leaving
franchising discretion to state and local authorities. It is unclear what effect
this ruling will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Co-located cable
systems are cable systems serving an overlapping territory. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market are also
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the Federal Communications Commission with the
limited authority to grant waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the Federal Communications Commission for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several such utilities have been granted broad authority by the Federal
Communications Commission to engage in activities which could include the
provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing Federal Communications
Commission regulations prohibiting local cross-ownership between co-located
television stations and cable systems.
Pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules precluding a cable system from devoting more than 40% of its
activated channel capacity to the carriage of affiliated national video program
services. Also pursuant to the 1992 Cable Act, the Federal Communications
Commission has adopted rules that preclude any cable operator from serving more
than 30% of all U.S. domestic multichannel video subscribers, including cable
and direct broadcast satellite subscribers. This provision might require AT&T to
divest certain cable ownership. However, this provision has been stayed pending
further judicial review.
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MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements. Broadcast signal carriage is the transmission of
broadcast television signals over a cable system to cable customers. These
requirements, among other things, allow local commercial television broadcast
stations to elect once every three years between "must carry" status or
"retransmission consent" status. Less popular stations typically elect must
carry, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to require a cable system to carry the
station. More popular stations, such as those affiliated with a national
network, typically elect retransmission consent which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to negotiate for payments for granting permission to the cable operator to carry
the stations. Must carry requests can dilute the appeal of a cable system's
programming offerings because a cable system with limited channel capacity may
be required to forego carriage of popular channels in favor of less popular
broadcast stations electing must carry. Retransmission consent demands may
require substantial payments or other concessions. Either option has a
potentially adverse effect on our business. The burden associated with must
carry may increase substantially if broadcasters proceed with planned conversion
to digital transmission and the Federal Communications Commission determines
that cable systems must carry all analog and digital broadcasts in their
entirety. This burden would reduce capacity available for more popular video
programming and new internet and telecommunication offerings. A rulemaking is
now pending at the Federal Communications Commission regarding the imposition of
dual digital and analog must carry.
ACCESS CHANNELS. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for public,
educational and governmental access programming. Federal law also requires cable
systems to designate a portion of their channel capacity, up to 15% in some
cases, for commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted rules regulating the terms, conditions and
maximum rates a cable operator may charge for commercial leased access use. We
believe that requests for commercial leased access carriages have been
relatively limited. The Federal Communications Commission recently rejected a
request that unaffiliated Internet service providers be found eligible for
commercial leased access. Although we do not believe such use is in accord with
the governing statute, a contrary ruling, should the ruling be appealed, could
lead to substantial leased activity by Internet service providers and disrupt
our own plans for Internet service.
ACCESS TO PROGRAMMING. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their cable operators over new competitors and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. There also has been
interest expressed in further restricting the marketing practices of cable
programmers, including subjecting programmers who are not affiliated with cable
operators to all of the existing program access requirements, and subjecting
terrestrially delivered programming to the program access requirements.
Terrestrially delivered programming is programming delivered other than by
satellite. These changes should not have a dramatic impact on us, but would
limit potential competitive advantages we now enjoy. Pursuant to the Satellite
Home Viewer Improvement Act, the Federal Communications Commission has adopted
regulations governing retransmission consent negotiations between broadcasters
and all multichannel video programming distributors, including cable and DBS.
INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997, the Federal
Communications Commission established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the
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cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a higher fee, where such a fee is permissible. The Federal
Communications Commission has also proposed abrogating all exclusive multiple
dwelling unit service agreements held by incumbent operators, but allowing such
contracts when held by new entrants. In another proceeding, the Federal
Communications Commission has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This Federal Communications Commission ruling may limit
the extent to which we along with multiple dwelling unit owners may enforce
certain aspects of multiple dwelling unit agreements which otherwise prohibit,
for example, placement of digital broadcast satellite receiver antennae in
multiple dwelling unit areas under the exclusive occupancy of a renter. These
developments may make it even more difficult for us to provide service in
multiple dwelling unit complexes.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION. In addition to
the Federal Communications Commission regulations noted above, there are other
regulations of the Federal Communications Commission covering such areas as:
- equal employment opportunity,
- subscriber privacy,
- programming practices, including, among other things,
(1) syndicated program exclusivity, which is a Federal Communications
Commission rule which requires a cable system to delete particular
programming offered by a distant broadcast signal carried on the
system which duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
(2) network program nonduplication,
(3) local sports blackouts,
(4) indecent programming,
(5) lottery programming,
(6) political programming,
(7) sponsorship identification,
(8) children's programming advertisements, and
(9) closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
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- emergency alert systems.
The Federal Communications Commission recently ruled that cable customers
must be allowed to purchase cable converters from third parties and established
a multi-year phase-in during which security functions, which would remain in the
operator's exclusive control, would be unbundled from basic converter functions,
which could then be satisfied by third party vendors. The first phase
implementation date is July 1, 2000 and compliance may be technically and
operationally difficult in some locations.
The Federal Communications Commission has the authority to enforce its
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of Federal Communications Commission licenses needed to
operate certain transmission facilities used in connection with cable
operations.
COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system, cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The possible
modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect our ability to
obtain desired broadcast programming. We cannot predict the outcome of this
legislative activity. Copyright clearances for nonbroadcast programming services
are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. A prior voluntarily negotiated
agreement with Broadcast Music has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for American Society of Composers music based on the
previously negotiated Broadcast Music rate. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
STATE AND LOCAL REGULATION. Cable systems generally are operated pursuant
to nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee failed to
comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states,
including Connecticut, subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories
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of programming. Certain states are considering the imposition of new broadly
applied telecommunications taxes.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, most franchises have been renewed for and consents
granted to cable operators that have provided satisfactory services and have
complied with the terms of their franchise.
Under the 1996 Telecom Act, states and local franchising authorities are
prohibited from limiting, restricting, or conditioning the provision of
competitive telecommunications services, except for certain "competitively
neutral" requirements and as necessary to manage the public rights-of-way. This
law should facilitate entry into competitive telecommunications services,
although certain jurisdictions still may attempt to impose rigorous entry
requirements. In addition, local franchising authorities may not require a cable
operator to provide any telecommunications service or facilities, other than
institutional networks under certain circumstances, as a condition of an initial
franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom
Act also provides that franchising fees are limited to an operator's
cable-related revenues and do not apply to revenues that a cable operator
derives from providing new telecommunications services.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Charter Holdings is a holding company with no operations. Charter Capital
is a direct wholly owned finance subsidiary of Charter Holdings that exists
solely for the purpose of serving as co-obligor of the notes and the March 1999
Charter Holdings notes and has no operations. Neither Charter Holdings nor
Charter Capital has any employees. We and our direct and indirect subsidiaries
are managed by Charter Communications, Inc. See "Certain Relationships and
Related Transactions."
The persons listed below are directors of Charter Communications, Inc.,
Charter Communications Holding Company, Charter Holdings or Charter Capital, as
indicated. Each of the directors is elected annually.
DIRECTORS AGE POSITION
- - - --------- --- --------
Paul G. Allen............................. 47 Chairman of the Board of Directors of Charter
Communications, Inc. and Director of Charter
Communications Holding Company
Jerald L. Kent............................ 43 Director of Charter Communications, Inc., Charter
Communications Holding Company, Charter
Holdings and Charter Capital
Marc B. Nathanson......................... 54 Director of Charter Communications, Inc.
Ronald L. Nelson.......................... 47 Director of Charter Communications, Inc.
Nancy B. Peretsman........................ 46 Director of Charter Communications, Inc.
William D. Savoy.......................... 35 Director of Charter Communications, Inc., Charter
Communications Holding Company and Charter
Holdings
Howard L. Wood............................ 60 Director of Charter Communications, Inc.
The following sets forth certain biographical information with respect to
the directors listed above.
PAUL G. ALLEN has been Chairman of the board of directors of Charter
Communications, Inc. since July 1999, and Chairman of the board of directors of
Charter Investment, Inc. since December 1998. Mr. Allen, a co-founder of
Microsoft Corporation, has been a private investor for more than five years,
with interests in a wide variety of companies, many of which focus on multimedia
digital communications. These companies include Interval Research Corporation,
Vulcan Ventures, Inc., Vulcan Programming, Inc., and Vulcan Cable III Inc. He is
a director of Microsoft Corporation, USA Networks, Inc. and various other
private corporations.
JERALD L. KENT has been the President, Chief Executive Officer and a
director of Charter Communications, Inc. since July 1999 and of Charter
Investment, Inc. since April 1995. He previously held the position of Chief
Financial Officer of Charter Investment, Inc. Prior to co-founding Charter
Investment, Inc. in 1993, Mr. Kent was Executive Vice President and Chief
Financial Officer of Cencom Cable Associates, Inc., where he previously held
other executive positions. Earlier he was with Arthur Andersen LLP, where he
attained the position of tax manager. Mr. Kent is a member of the board of
directors of High Speed Access Corp., Cable Television Laboratories, Inc. and
Com21 Inc. Mr. Kent, a certified public accountant, received his undergraduate
and M.B.A. degrees from Washington University.
MARC B. NATHANSON has been a director of Charter Communications, Inc. since
January 2000. Mr. Nathanson was Chairman and Chief Executive Officer of Falcon
Holding Group, Inc. and its
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predecessors from 1975 to 1999, and held the same positions with Enstar
Communications Corporation from 1988 until November 1999. Prior to 1975, he held
executive positions with Teleprompter Corporation, Warner Cable, and Cypress
Communications Corporation. He is a director of Digital Entertainment Network,
Inc. and of the National Cable Television Association and serves as Chairman of
U.S. International Broadcasting Agency.
RONALD L. NELSON has been a director of Charter Communications, Inc. since
November 1999. Mr. Nelson is a founding member of Dream Works LLC, where he has
served in executive management since 1994. Prior to that time, during his 15
years at Paramount Communications Inc., he served in a variety of operating and
executive positions. He currently serves as a member of the board of directors
of Advanced Tissue Sciences, Inc. Mr. Nelson has a B.S. from the University of
California at Berkeley and an M.B.A. from the University of California at Los
Angeles.
NANCY B. PERETSMAN has been a director of Charter Communications, Inc.
since November 1999. Ms. Peretsman has been a Managing Director and Executive
Vice President of Allen & Company Incorporated, an investment bank unrelated to
Mr. Allen, since 1995. From 1983 to 1995 she was an investment banker at Salomon
Brothers Inc., where she was a Managing Director since 1990. She is a director
of Oxygen Media, Inc., Priceline.com Incorporated and several privately held
companies. She received a B.A. from Princeton University and an M.P.P.M. from
Yale University.
WILLIAM D. SAVOY has been a director of Charter Communications, Inc. since
July 1999 and a director of Charter Investment, Inc. since December 1998. Since
1990, Mr. Savoy has been an officer and a director of many affiliates of Mr.
Allen, including Vice President and a director of Vulcan Ventures, Inc.,
President of Vulcan Northwest, Inc., and President and a director of Vulcan
Programming, Inc. and Vulcan Cable III Inc. Mr. Savoy also serves as a director
of drugstore.com, inc., Go2Net, Inc., Harbinger Corporation, High Speed Access
Corp., Metricom, Inc., Telescan, Inc., Ticketmaster Online -- CitySearch, Inc.,
USA Networks, Inc., and Value America, Inc. Mr. Savoy holds a B.S. in computer
science, accounting and finance from Atlantic Union College.
HOWARD L. WOOD has been a director of Charter Communications, Inc. since
January 2000. Mr. Wood co-founded Charter Investment, Inc. in 1993 and served in
various executive capacities until November 1999, when he became a consultant to
Charter Communications, Inc. Prior to 1993, Mr. Wood was Chief Executive Officer
of Cencom Cable Associates, Inc., where he also served in various other
executive positions. Earlier he was Partner-in-Charge of the St. Louis Tax
Division of Arthur Andersen LLP. He is a director of VanLiner Group, Inc., First
State Community Bank, Gaylord Entertainment Company and Data Research, Inc. Mr.
Wood, a certified public accountant, graduated from Washington University (St.
Louis) School of Business.
DIRECTOR COMPENSATION
The employee directors of Charter Holdings, Charter Capital, Charter
Communications Holding Company and Charter Communications, Inc. do not receive
any additional compensation for serving as a director, nor are they paid any
fees for attendance at any meeting of the board of directors. Each non-employee
director of Charter Communications, Inc., other than Mr. Allen, has been issued
40,000 fully vested options in consideration for agreeing to join the board of
directors and may receive additional compensation to be determined. Directors
may also be reimbursed for the actual reasonable costs incurred in connection
with attendance at board meetings.
EMPLOYMENT AND OTHER AGREEMENTS
Effective as of December 23, 1998, Jerald L. Kent entered into an
employment agreement with Mr. Allen for a three-year term with automatic
one-year renewals. The employment agreement was
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assigned by Mr. Allen to Charter Investment, Inc. as of December 23, 1998.
Charter Investment, Inc. subsequently assigned Mr. Kent's employment agreement
to Charter Communications, Inc. and Charter Communications, Inc. has assumed all
rights and obligations of Charter Investment, Inc. under the agreement, except
with respect to the grant of options, which have already been granted by Charter
Communications Holding Company.
Under this agreement, Mr. Kent has agreed to serve as President and Chief
Executive Officer of Charter Communications, Inc., with responsibility for the
nationwide general management, administration and operation of all present and
future business of Charter Communications, Inc. and its subsidiaries. During the
initial term of the agreement, Mr. Kent receives an annual base salary of
$1,250,000, or such higher rate as may from time to time be determined by
Charter Communications, Inc.'s board of directors in its discretion. In
addition, Mr. Kent is eligible to receive an annual bonus in an aggregate amount
not to exceed $625,000, to be determined by the board based on an assessment of
the performance of Mr. Kent as well as the achievement of certain financial
targets.
Under the agreement, Mr. Kent is entitled to participate in any disability
insurance, pension, or other benefit plan afforded to employees generally or
executives of Charter Communications, Inc. Mr. Kent will be reimbursed by
Charter Communications, Inc. for life insurance premiums up to $30,000 per year,
and is granted personal use of the corporate airplane. Mr. Kent was also granted
a car valued at up to $100,000 and the fees and dues for his membership in a
country club of his choice. Also under this agreement and a related agreement
with Charter Communications Holding Company, Mr. Kent received options to
purchase 7,044,127 Charter Communications Holding Company membership units. The
options have a term of ten years and vested 25% on December 23, 1998. The
remaining 75% vest 1/36 on the first day of each of the 36 months commencing on
the first day of the thirteenth month following December 23, 1998. The terms of
these options provide that immediately following the issuance of Charter
Communications Holding Company membership units received upon exercise of such
options, these units will be automatically exchanged for shares of Charter
Communications, Inc. Class A common stock on a one-for-one basis.
Charter Communications, Inc. will indemnify and hold harmless Mr. Kent to
the maximum extent permitted by law from and against any claims, damages,
liabilities, losses, costs or expenses in connection with or arising out of the
performance by Mr. Kent of his duties.
If the agreement expires because Charter Communications, Inc. gives Mr.
Kent notice of its intention not to extend the initial term, or if the agreement
is terminated by Mr. Kent for good reason or by Charter Communications, Inc.
without cause:
- Charter Communications, Inc. will pay to Mr. Kent an amount equal to the
aggregate base salary due to Mr. Kent for the remaining term and the
board of directors will consider additional amounts, if any, to be paid
to Mr. Kent; and
- any unvested options of Mr. Kent shall immediately vest.
EXECUTIVE OFFICERS
The following persons are executive officers of each of Charter
Communications, Inc., Charter Communications Holding Company and Charter
Holdings:
EXECUTIVE OFFICERS AGE POSITION
------------------ --- --------
Jerald L. Kent......................... 43 President and Chief Executive Officer
David G. Barford....................... 41 Senior Vice President of Operations -- Western
Division
Mary Pat Blake......................... 44 Senior Vice President -- Marketing and Programming
Eric A. Freesmeier..................... 47 Senior Vice President -- Administration
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EXECUTIVE OFFICERS AGE POSITION
------------------ --- --------
Thomas R. Jokerst...................... 50 Senior Vice President -- Advanced Technology
Development
Kent D. Kalkwarf....................... 40 Senior Vice President and Chief Financial Officer
Ralph G. Kelly......................... 43 Senior Vice President -- Treasurer
David L. McCall........................ 44 Senior Vice President of Operations -- Eastern
Division
John C. Pietri......................... 50 Senior Vice President -- Engineering
Michael E. Riddle...................... 41 Senior Vice President and Chief Information Officer
Steven A. Schumm....................... 47 Executive Vice President, Assistant to the President
Curtis S. Shaw......................... 51 Senior Vice President, General Counsel and Secretary
Stephen E. Silva....................... 40 Senior Vice President -- Corporate Development and
Technology
Information regarding our executive officers is set forth below.
Our executive officers, except for Mr. Riddle, were appointed to their
positions following our formation in February 1999, and became employees of
Charter Communications, Inc. in November 1999. Prior to that time, they were
employees of Charter Investment, Inc. All of our executive officers
simultaneously serve in the same capacity with Charter Investment, Inc.
JERALD L. KENT, President, Chief Executive Officer and director of Charter
Communications, Inc. Mr. Kent has held these positions with Charter
Communications, Inc. since July 1999 and with Charter Investment, Inc. since
April 1995. He previously held the position of Chief Financial Officer of
Charter Investment, Inc. Prior to co-founding Charter Investment, Inc. in 1993,
Mr. Kent was Executive Vice President and Chief Financial Officer of Cencom
Cable Associates, Inc., where he previously held other executive positions.
Earlier he was with Arthur Andersen LLP, where he attained the position of tax
manager. Mr. Kent is a member of the board of directors of High Speed Access
Corp., Cable Television Laboratories, Inc. and Com21 Inc. Mr. Kent, a certified
public accountant, received his undergraduate and M.B.A. degrees from Washington
University.
DAVID G. BARFORD, Senior Vice President of Operations -- Western
Division. Prior to joining Charter Investment, Inc. in 1995, Mr. Barford held
various senior marketing and operating roles during nine years at Comcast Cable
Communications, Inc. He received a B.A. from California State University,
Fullerton, and an M.B.A. from National University.
MARY PAT BLAKE, Senior Vice President -- Marketing and Programming. Prior
to joining Charter Investment, Inc. in 1995, Ms. Blake was active in the
emerging business sector and formed Blake Investments, Inc. in 1993. She has 18
years of experience with senior management responsibilities in marketing, sales,
finance, systems, and general management. Ms. Blake received a B.S. from the
University of Minnesota and an M.B.A. from the Harvard Business School.
ERIC A. FREESMEIER, Senior Vice President -- Administration. From 1986
until joining Charter Investment, Inc. in 1998, Mr. Freesmeier served in various
executive management positions at Edison Brothers Stores, Inc. Earlier he held
management and executive positions at Montgomery Ward. Mr. Freesmeier holds
bachelor's degrees from the University of Iowa and a master's degree from
Northwestern University's Kellogg Graduate School of Management.
THOMAS R. JOKERST, Senior Vice President -- Advanced Technology
Development. Mr. Jokerst joined Charter Investment, Inc. in 1994. Previously he
served as a vice president of Cable Television Laboratories and as a regional
director of engineering for Continental Cablevision. He is a graduate of Ranken
Technical Institute and of Southern Illinois University.
KENT D. KALKWARF, Senior Vice President and Chief Financial Officer. Prior
to joining Charter Investment, Inc. in 1995, Mr. Kalkwarf was employed for 13
years by Arthur Andersen LLP, where
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he attained the position of senior tax manager. He has extensive experience in
cable, real estate, and international tax issues. Mr. Kalkwarf has a B.S. from
Illinois Wesleyan University and is a certified public accountant.
RALPH G. KELLY, Senior Vice President --Treasurer. Prior to joining
Charter Investment, Inc. in 1993, Mr. Kelly was controller and then treasurer of
Cencom Cable Associates. He left Charter in 1994, to become chief financial
officer of CableMaxx, Inc., and returned in 1996. Mr. Kelly received his
bachelor's degree in accounting from the University of Missouri -- Columbia and
his M.B.A. from Saint Louis University.
DAVID L. MCCALL, Senior Vice President of Operations -- Eastern
Division. Prior to joining Charter Investment, Inc. in 1995, Mr. McCall was
associated with Crown Cable and its predecessor company, Cencom Cable
Associates, Inc., from 1983 to 1994. Mr. McCall has served as a director of the
South Carolina Cable Television Association for ten years and is a member of the
Southern Cable Association's Tower Club.
JOHN C. PIETRI, Senior Vice President -- Engineering. Prior to joining
Charter Investment, Inc. in 1998, Mr. Pietri was with Marcus Cable for 9 years,
most recently serving as senior vice president and chief technical officer.
Earlier he was in operations with West Marc Communications and Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
MICHAEL E. RIDDLE, Senior Vice President and Chief Information
Officer. Prior to joining Charter Communications, Inc. in December 1999, Mr.
Riddle was director, applied technologies of Cox Communications for 4 years.
Prior to that, he held technical and management positions during 17 years at
Southwestern Bell and its subsidiaries. Mr. Riddle attended Fort Hays State
University.
STEVEN A. SCHUMM, Executive Vice President, Assistant to the
President. Prior to joining Charter Investment, Inc. in 1998, Mr. Schumm was
managing partner of the St. Louis office of Ernst & Young LLP, where he was a
partner for 14 of 24 years. He served as one of 10 members of the firm's
National Tax Committee. Mr. Schumm earned a B.S. degree from Saint Louis
University.
CURTIS S. SHAW, Senior Vice President, General Counsel and
Secretary. Prior to joining Charter Investment, Inc. in 1997, Mr. Shaw served
as corporate counsel to NYNEX since 1988. He has over 26 years of experience as
a corporate lawyer, specializing in mergers and acquisitions, joint ventures,
public offerings, financings, and federal securities and antitrust law. Mr. Shaw
received a B.A. with honors from Trinity College and a J.D. from Columbia
University School of Law.
STEPHEN E. SILVA, Senior Vice President -- Corporate Development and
Technology. From 1983 until joining Charter Investment, Inc. in 1995, Mr. Silva
served in various management positions at U.S. Computer Services, Inc. He is a
member of the board of directors of High Speed Access Corp.
The employee directors of Charter Communications, Inc. do not receive any
compensation for serving as a director, nor are they paid any fees for
attendance at any meeting of the board of directors. Each non-employee director
other than Mr. Allen has been issued 40,000 options in connection with joining
or agreeing to join the board of directors and may receive additional
compensation to be determined. Directors may also be reimbursed for the actual
reasonable costs incurred in connection with attendance at board meetings.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective as of December 23, 1998, Jerald L. Kent entered into an
employment agreement with Mr. Allen for a three-year term with automatic
one-year renewals. The employment agreement was assigned by Mr. Allen to Charter
Investment, Inc. as of December 23, 1998. Charter Investment, Inc. subsequently
assigned Mr. Kent's employment agreement to Charter Communications, Inc. and
Charter Communications, Inc. has assumed all rights and obligations of Charter
Investment, Inc.
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under the agreement, except with respect to the grant of options which have
already been granted by Charter Communications Holding Company.
Under this agreement, Mr. Kent has agreed to serve as President and Chief
Executive Officer of Charter Communications, Inc., with responsibility for the
nationwide general management, administration and operation of all present and
future business of Charter Communications, Inc. and its subsidiaries. During the
initial term of the agreement, Mr. Kent receives an annual base salary of
$1,250,000, or such higher rate as may from time to time be determined by
Charter Communications, Inc.'s board of directors in its discretion. In
addition, Mr. Kent is eligible to receive an annual bonus in an aggregate amount
not to exceed $625,000, to be determined by the board based on an assessment of
the performance of Mr. Kent as well as the achievement of certain financial
targets.
Under the agreement, Mr. Kent is entitled to participate in any disability
insurance, pension, or other benefit plan afforded to employees generally or
executives of Charter Communications, Inc. Mr. Kent will be reimbursed by
Charter Communications, Inc. for life insurance premiums up to $30,000 per year,
and is granted personal use of the corporate airplane. Mr. Kent was also granted
a car valued at up to $100,000 and the fees and dues for his membership in a
country club of his choice. Also under this agreement and a related agreement
with Charter Communications Holding Company, Mr. Kent received options to
purchase 7,044,127 Charter Communications Holding Company membership units. The
options have a term of ten years and vested 25% on December 23, 1998. The
remaining 75% vest 1/36 on the first day of each of the 36 months commencing on
the first day of the thirteenth month following December 23, 1998. The terms of
these options provide that immediately following the issuance of Charter
Communications Holding Company membership units received upon exercise of such
options, these units will be automatically exchanged for shares of Charter
Communications, Inc. Class A common stock on a one-for-one basis. Charter
Communications, Inc. will indemnify and hold harmless Mr. Kent to the maximum
extent permitted by law from and against any claims, damages, liabilities,
losses, costs or expenses in connection with or arising out of the performance
by Mr. Kent of his duties.
If the agreement expires because Charter Communications, Inc. gives Mr.
Kent notice of its intention not to extend the initial term, or if the agreement
is terminated by Mr. Kent for good reason or by Charter Communications, Inc.
without cause:
- Charter Communications, Inc. will pay to Mr. Kent an amount equal to the
aggregate base salary due to Mr. Kent for the remaining term and the
board of directors will consider additional amounts, if any, to be paid
to Mr. Kent; and
- any unvested options of Mr. Kent shall immediately vest.
Effective as of November 12, 1999, Charter Communications, Inc. entered
into a consulting agreement with Howard L. Wood. In connection with this
agreement, Mr. Wood received options to purchase 40,000 membership units of
Charter Communications Holding Company, which vested immediately. Upon exercise
of such options, the membership units received are immediately exchanged for
shares of Charter Communications, Inc. Class A common stock on one-for-one
basis. The consulting agreement has a one-year term with automatic one-year
renewals. Under this agreement, Mr. Wood provides consulting services to Charter
Communications, Inc. and will also be responsible for such other duties as the
Chief Executive Officer determines. During the term of this agreement, Mr. Wood
will receive annual cash compensation initially at a rate of $60,000. In
addition, Mr. Wood is entitled to receive health benefits as well as use of an
office and a full-time secretary. Charter Communications, Inc. will indemnify
and hold harmless Mr. Wood to the maximum extent permitted by law from and
against any claims, damages, liabilities, losses, costs or expenses incurred in
connection with or arising out of the performance by him of his duties.
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Effective as of May 25, 1999, Marc B. Nathanson entered into a letter
agreement with Charter Communications, Inc. for a three-year term. Under this
agreement, Mr. Nathanson agreed to serve as Vice-Chairman and as a director of
Charter Communications, Inc. During the term of this agreement, Mr. Nathanson
will receive a benefit equal to $193,197 per year, which amount is being paid by
Charter Communications, Inc. to a company controlled by Mr. Nathanson. In
addition, Mr. Nathanson is entitled to the rights and benefits provided to other
directors of Charter Communications, Inc. Charter Communications, Inc. will
indemnify and hold harmless Mr. Nathanson to the maximum extent permitted by law
from and against any claims, damages, liabilities, losses, costs or expenses
incurred in connection with or arising out of the performance by Mr. Nathanson
of his duties.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Most executive officer compensation determinations have been made based
upon the recommendations of Mr. Kent. Prior to November 1999, these
determinations were made by the board of directors of Charter Investment, with
option grant determinations being made in conjunction with the board of
directors of Charter Communications Holding Company. During this period, the
board of Charter Investment included Messrs. Allen, Savoy and Kent, and the
board of Charter Communications Holding Company included Messrs. Savoy and Kent.
Commencing in November 1999, when Charter Communications, Inc. became the
successor principal employer of the executive officers, the board of directors
of Charter Communications, Inc. took over the role of the Charter Investment
board in the decision-making process. In November 1999, the board of directors
of Charter Communications, Inc. was comprised of Messrs. Allen, Savoy, Kent and
Nelson, and Ms. Peretsman. Commencing in February 2000, when the Charter
Communications, Inc. board of directors appointed a compensation committee
comprised of Messrs. Allen, Savoy, Nathanson and Wood, executive officers
compensation matters, including option grants, were delegated to the new
committee.
EXECUTIVE COMPENSATION
None of the executive officers listed above has ever received any
compensation from Charter Holdings or Charter Capital, nor do such individuals
expect to receive compensation from Charter Holdings or Charter Capital at any
time in the future. The following table sets forth information regarding the
compensation paid to executive officers of Charter Communications, Inc., the
manager of Charter Holdings and its subsidiaries, during the fiscal years ended
December 31, 1999 and 1998, including the Chief Executive Officer, each of the
other four most highly compensated executive officers as of December 31, 1999,
and two other highly compensated executive officers who resigned during 1999.
Through the beginning of November 1999, such executive officers had received
their compensation from Charter Investment, Inc., the former manager of Charter
Holdings and its subsidiaries. Effective in November 1999, such officers began
receiving their compensation from Charter Communications, Inc. Pursuant to a
mutual services agreement between Charter Communications, Inc. and Charter
Investment, Inc., each of those entities provides services to each other,
including the knowledge and expertise of their respective officers. See "Certain
Relationships and Related Transactions."
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SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARD
--------------------------------------- ------------
YEAR OTHER SECURITIES
ENDED ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- - - --------------------------- ------- --------- -------- --------------- ------------ ---------------
Jerald L. Kent.................... 1999 1,250,000 --(1) 80,799(2) -- --
President and Chief Executive 1998 790,481 641,353 -- 7,044,127 --
Officer
Steven A. Schumm(3)............... 1999 400,000 60,000 -- 80,000 --
Executive Vice President 1998 -- 12,300 -- -- --
David G. Barford.................. 1999 235,000 80,000 -- 200,000 --
Senior Vice President of 1998 220,000 225,000(4) -- -- 8,390,888(5)
Operations -- Western Division
Curtis S. Shaw.................... 1999 200,000 80,000 -- 200,000 --
Senior Vice President, General 1998 190,000 80,000 -- -- 8,178,967(5)
Counsel and Secretary
John C. Pietri(6)................. 1999 200,000 70,000 -- 165,000 --
Senior Vice President -- 1998 -- -- -- -- --
Engineering
Barry L. Babcock(7)............... 1999 623,000 -- -- 65,000 385,093(8)
Former Vice Chairman 1998 575,000 925,000(9) -- -- --
Howard L. Wood(10)................ 1999 311,300 -- -- 145,000 --
Former Vice Chairman 1998 575,000(11) 675,000(12) -- -- --
- - - -------------------------
(1) Mr. Kent is entitled under his employment agreement to receive a bonus for
1999 in an amount up to $625,000. The amount of any 1999 bonus has not yet
been determined.
(2) Includes $55,719 paid for club membership and dues and $20,351 attributed
to personal use of Charter Investment, Inc.'s airplane.
(3) Mr. Schumm became affiliated with Charter Investment, Inc. on December 16,
1998.
(4) Includes $150,000 received as a one-time bonus.
(5) Received in March 1999, in connection with a one-time change of control
payment under the terms of a previous equity appreciation rights plan. This
payment was triggered by the acquisition of us by Mr. Allen on December 23,
1998, but was income for 1999.
(6) Mr. Pietri became affiliated with Charter Investment, Inc. on January 1,
1999.
(7) Mr. Babcock resigned as an executive officer, terminated his employment and
became a consultant in October 1999.
(8) Includes a bonus of $312,500 and accrued vacation of $48,077 paid in
connection with termination of Mr. Babcock's employment agreement, plus
$24,516 as consulting fees.
(9) Includes $500,000 earned as a one-time bonus upon signing of an employment
agreement.
(10) Mr. Wood resigned as an executive officer, terminated his employment and
became a consultant in November 1999.
(11) Includes a bonus of $468,750 and accrued vacation of $24,038 paid in
connection with termination of Mr. Wood's employment agreement, plus $8,166
in consulting fees.
(12) Includes $250,000 earned as a one-time bonus upon signing of an employment
agreement.
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1999 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE
The following table sets forth for certain executive officers information
concerning options exercised during 1999, including the value realized upon
exercise, and the number of securities for which options were held at December
31, 1999, including the value of unexercised "in-the-money" options (i.e., the
positive spread between the exercise price of outstanding options and the market
value of Charter Communications, Inc.'s Class A common stock on December 31,
1999), the options granted during the fiscal year ended December 31, 1999, and
the value of unexercised options as of December 31, 1999.
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SECURITIES AT DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
Jerald L. Kent.......... -- -- 1,761,031 5,283,096 -- --
David G. Barford........ -- -- -- 200,000 -- --
Curtis S. Shaw.......... -- -- -- 200,000 -- --
John C. Pietri.......... -- -- -- 165,000 -- --
Barry L. Babcock........ -- -- 65,000 -- -- --
Howard L. Wood.......... -- -- 145,000 -- -- --
- - - ---------------
(1) No options were in-the-money as of December 31, 1999.
1999 OPTION GRANTS
The following table shows individual grants of options made to certain
named executive officers during 1999. All such grants were made under the option
plan.
NUMBER OF POTENTIAL REALIZABLE VALUE AT
MEMBERSHIP % OF TOTAL ASSUMED ANNUAL RATES OF
UNITS OPTIONS MEMBERSHIP UNIT PRICE
UNDERLYING GRANTED TO APPRECIATION FOR OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------------------
NAME GRANTED IN 1999 PRICE DATE 5% 10%
- - - ---- ---------- ---------- -------- ---------- -------------- ---------------
Jerald L. Kent..................... -- -- -- -- -- --
Steven A. Schumm................... 782,681 5.7% $20.00 2/8/09 $9,844,478 $24,947,839
David G. Barford................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970
Curtis S. Shaw..................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970
John C. Pietri..................... 165,000 1.2% 20.00 2/8/09 2,075,352 5,259,350
Barry L. Babcock................... 65,000 0.5% 20.00 2/8/09 817,563 2,071,865
Howard L. Wood..................... 65,000 1.1% 20.00 2/8/09 817,563 2,071,865
80,000 19.00 11/8/09 955,920 2,422,488
- - - ---------------
(1) This column shows the hypothetical gains on the options granted based on
assumed annual compound price appreciation of 5% and 10% over the full
ten-year term of the options. The assumed rates of appreciation are mandated
by the SEC and do not represent our estimate or projection of future prices.
OPTION PLAN
The Charter Communications Option Plan was adopted in February 1999. This
plan provides for the grant of options to purchase up to 25,009,798 membership
units in Charter Communications Holding Company. Under the terms of the plan,
each membership unit acquired as a result of exercise of options will be
exchanged automatically for shares of Class A common stock of Charter
Communications, Inc. on a one-for-one basis. The plan provides for grants of
options to current and
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prospective to employees and consultants of Charter Communications Holding
Company and its affiliates and current and prospective non-employee directors of
Charter Communications, Inc. The plan is intended to promote the long-term
financial interest of Charter Communications Holding Company and its affiliates
by encouraging eligible individuals to acquire an ownership position in Charter
Communications Holding Company and its affiliates and providing incentives for
performance. The options expire after ten years from the date of grant. Under
the plan, the plan administrator has the discretion to accelerate the vesting of
any options.
As of March 31, 2000, a total of 18,972,081 options are outstanding under
the plan. Of the options granted on February 9, 1999, there remain outstanding
8,478,881 options with an exercise price of $20.00. Of the options granted on
April 5, 1999, there remain outstanding 395,800 options with an exercise price
of $20.73. Of the options granted on November 8, 1999, there remain outstanding
4,530,800 options with an exercise price of $19.00. Of the options granted on
February 15, 2000, there remain outstanding 5,566,600 with an exercise price of
$19.47. Of the options granted on February 9, 1999, 130,000 options have vested.
Of the remaining 8,348,881 options granted on that date, one-fourth vest on
April 3, 2000 and the remainder vest 1/45 on each monthly anniversary following
April 3, 2000. One-fourth of the options granted on April 5, 1999 vest on the
15-month anniversary from April 5, 1999, with the remainder vesting 1/45 on each
monthly anniversary for 45 months following the 15-month anniversary of the date
of grant. Of the options granted on November 8, 1999, 240,000 options have
vested. Of the remaining 4,290,800 options granted on that date, one-fourth vest
on February 8, 2001, with the remainder vesting 1/45 on each monthly anniversary
following the 15-month anniversary of the date of grant. Of the options granted
on February 15, 2000, one-fourth vest on May 15, 2001 and the remaining vest
1/45 on each 15 month anniversary following February 15, 2000. The options
expire after ten years from the date of grant.
Any unvested options issued under the plan vest immediately upon a change
of control of Charter Communications Holding Company. Options will not vest upon
a change of control, however, to the extent that any such acceleration of
vesting would result in the disallowance of specified tax deductions that would
otherwise be available to Charter Communications Holding Company or any of its
affiliates or to the extent that any optionee would be liable for any excise tax
under a specified section of the tax code. In the plan, a change of control
includes:
(1) a sale of more than 49.9% of the outstanding membership units in
Charter Communications Holding Company, except where Mr. Allen and his
affiliates retain effective voting control of Charter Communications
Holding Company;
(2) a merger or consolidation of Charter Communications Holding
Company with or into any other corporation or entity, except where Mr.
Allen and his affiliates retain effective voting control of Charter
Communications Holding Company; or
(3) any other transaction or event, including a sale of the assets of
Charter Communications Holding Company, that results in Mr. Allen holding
less than 50.1% of the voting power of the surviving entity, except where
Mr. Allen and his affiliates retain effective voting control of Charter
Communications Holding Company.
If an optionee's employment with or service to Charter Communications
Holding Company or its affiliates is terminated other than for cause, the
optionee has the right to exercise any vested options within sixty days of the
termination of employment. After this sixty-day period, all vested and unvested
options held by the optionee are automatically canceled. If an optionee's
employment or service is terminated for cause, any unexercised options are
automatically canceled. In this case, Mr. Allen, or, at his option, Charter
Communications Holding Company will have the right for ninety days after
termination to purchase all membership units held by the optionee for a purchase
price equal to the exercise price at which the optionee acquired the membership
units, or the optionee's purchase price for the membership units if they were
not acquired on the exercise of an option.
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In the event of an optionee's death or disability, all vested options may
be exercised until the earlier of their expiration and one year after the date
of the optionee's death or disability. Any options not so exercised will
automatically be canceled. Upon termination for any other reason, all unvested
options will immediately be canceled and the optionee will not be entitled to
any payment. All vested options will be automatically canceled if not exercised
within ninety days after termination.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS. The limited
liability company agreement of Charter Holdings and the certificate of
incorporation of Charter Capital limit the liability of their respective
directors to the maximum extent permitted by Delaware law. The Delaware General
Corporation Law provides that a limited liability company and a corporation may
eliminate or limit the personal liability of a director for monetary damages for
breach of fiduciary duty as a director, except for liability for:
(1) any breach of the director's duty of loyalty to the corporation
and its stockholders;
(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) unlawful payments of dividends or unlawful stock purchases or
redemptions; or
(4) any transaction from which the director derived an improper
personal benefit.
The limited liability company agreement of Charter Holdings and the by-laws
of Charter Capital provide that directors and officers shall be indemnified for
acts or omissions performed or omitted that are determined, in good faith, to be
in our best interest. No such indemnification is available for actions
constituting bad faith, willful misconduct or fraud.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Charter Holdings
and Charter Capital pursuant to the foregoing provisions, we have been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
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PRINCIPAL EQUITY HOLDERS
Charter Holdings is a direct, wholly owned subsidiary of Charter
Communications Holding Company. Charter Communications, Inc. holds an
approximate 39.6% economic interest and 100% of the voting interest in Charter
Communications Holding Company. Charter Investment, Inc. and Vulcan Cable III
hold approximately a 38.8% and 19.0% economic interest, respectively, in Charter
Communications Holding Company.
The following table sets forth certain information regarding beneficial
ownership of Charter Communications, Inc. common stock and Charter
Communications Holding Company common membership units as of April 1, 2000 by:
- each of our directors and the directors of Charter Communications, Inc.;
- each of our named executive officers and the named executive officers of
Charter Communications, Inc.;
- all current directors and executive officers of Charter Holdings and
Charter Communications, Inc. as a group; and
- each person known by us to own beneficially 5% or more of the outstanding
shares of Charter Communications, Inc. common stock and shares of common
stock issuable upon exchange of Charter Communications Holding Company
membership units that are issuable upon exercise of options that are
vested or will vest within 60 days or upon exchange of membership units
held in a subsidiary of Charter Holdings.
With respect to the percentage of voting power of Charter Communications,
Inc. set forth in the following table:
- each holder of Class A common stock is entitled to one vote per share;
and
- each holder of Class B common stock is entitled to a number of votes
based on the number of outstanding Class B common stock and outstanding
membership units exchangeable for Class B common stock. For example, Mr.
Allen is entitled to ten votes for each share of Class B common stock
held by him or his affiliates and ten votes for each membership unit held
by him or his affiliates.
NUMBER OF
CLASS A PERCENTAGE OF
NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED(1) OWNED(2) VOTING POWER(3)
- - - ------------------- ------------------- ------------------- ------------------
Paul G. Allen(4)(5)(7)............................ 327,039,404 59.9% 93.7%
Charter Investment, Inc.(6)....................... 217,585,246 49.5% *
Vulcan Cable III Inc.(4)(7)....................... 106,715,234 32.5% *
Jerald L. Kent(8)................................. 2,656,549 1.2% *
Howard L. Wood(9)................................. 145,000 * *
Marc B. Nathanson(10)............................. 9,829,806 4.4% *
Ronald L. Nelson(11).............................. 40,000 * *
Nancy B. Peretsman(11)............................ 50,000 * *
William D. Savoy(12).............................. 515,669 * *
Steven A. Schumm(13).............................. 212,415 * *
David G. Barford(14).............................. 55,833 * *
Curtis S. Shaw(14)................................ 58,333 * *
John C. Pietri(15)................................ 49,000 * *
Barry L. Babcock(16).............................. 65,000 * *
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NUMBER OF
CLASS A PERCENTAGE OF
NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED(1) OWNED(2) VOTING POWER(3)
- - - ------------------- ------------------- ------------------- ------------------
All current directors and executive officers as a
group (19 persons)(17).......................... 340,631,014 61.9% 94.0%
Janus Capital Corporation(18)..................... 15,958,030 7.2 *
TCID of Michigan, Inc.(19)........................ 15,117,743 6.4% *
- - - ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3. The named
holders of Charter Communications, Inc. Class B common stock and of Charter
Communications Holding Company membership units are deemed to be beneficial
owners of an equal number of shares of Charter Communications, Inc. Class A
common stock because such holdings are either convertible for (in the case
of Class B shares) or exchangeable into (in the case of the membership
units) shares of Class A common stock on a one-for-one basis. Unless
otherwise noted, the named holders have sole investment and voting power
with respect to the shares listed as beneficially owned.
(2) The calculation of this percentage assumes for each person that: the 50,000
shares of Class B common stock held by Mr. Allen have been converted into
shares of Class A common stock; all shares of Class A common stock that
such person has the right to acquire upon exchange of Charter
Communications Holding Company membership units upon exercise of options
that have vested or will vest within 60 days have been acquired; and that
none of the other listed persons or entities has received any shares of
common stock that are issuable to him or her pursuant to the exercise of
options or otherwise.
(3) The calculation of this percentage assumes that Mr. Allen's equity
interests are retained in the form that maximizes voting power (i.e., the
50,000 shares of Class B common stock held by Mr. Allen have not been
converted into shares of Class A common stock; that the membership units of
Charter Communications Holding Company owned by Vulcan Cable III have not
been exchanged for shares of Class A common stock; and that the membership
units of Charter Communications Holding Company owned by Charter
Investment, Inc. have not been exchanged for shares of Class A common
stock).
(4) The address of these persons is 110 110th Street, NE, Suite 550, Bellevue,
WA 98004.
(5) Mr. Allen is the owner of 100% of the Class B common stock which is
convertible into Class A common stock on a one-for-one basis; represents
217,585,246 membership units held by Charter Investment, Inc.; 106,715,233
membership units held by Vulcan Cable III; 2,688,925 shares of Class A
common stock held directly by Mr. Allen; and 50,000 shares of Class B
common stock held directly by Mr. Allen.
(6) The address of this person is Charter Communications, Inc., 12444
Powerscourt Drive, Suite 100, St. Louis, MO 63131.
(7) Of this amount, 475,669 shares of Class A common stock are issuable upon
exchange for membership units in Charter Communications Holding Company
held by Vulcan Cable III that are subject to options granted by Vulcan
Cable III to Mr. Savoy that have vested or will vest within 60 days.
(8) Represents 2,641,549 shares of Class A common stock issuable upon the
exchange of membership units that are issuable upon the exercise of options
that have vested or will vest within 60 days, and 15,000 shares of Class A
common stock held directly by Mr. Kent.
(9) Represents 145,000 shares of Class A common stock issuable upon exchange of
membership units that are issuable upon exercise of options that have
vested.
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(10) Includes 40,000 shares of Class A common stock issuable upon exchange of
membership units that are issuable upon exercise of options that have
vested. Also includes 9,789,806 shares of Class A common stock as follows:
3,951,636 shares for which Mr. Nathanson has sole investment and voting
power, 5,444,861 shares for which he has shared voting and investment
power; and 393,309 shares for which he has sole investment power and shared
voting power. The address of this person is c/o Falcon Holding Group, Inc.
and Affiliates, 10900 Wilshire Blvd., Los Angeles, CA 90024.
(11) Includes 40,000 shares of Class A common stock issuable upon the exchange
of membership units that are issuable upon exercise of options that have
vested.
(12) Represents 40,000 shares of Class A common stock issuable upon the exchange
of membership units that are issuable upon exercise of options that have
vested and 475,669 shares of Class A common stock that Mr. Savoy would
receive upon exercise of options from Vulcan Cable III to purchase such
shares that have vested or will vest within 60 days.
(13) Includes 208,715 shares of Class A common stock issuable upon the exchange
of membership units that would be issued upon exercise of options that have
vested or will vest within 60 days and 2,200 shares for which Mr. Schumm
has shared investment and voting power.
(14) Includes 53,333 shares of Class A common stock issuable upon the exchange
of membership units that are issuable upon exercise of options that have
vested or will vest within 60 days.
(15) Includes 44,000 shares of Class A common stock issuable upon exchange of
membership units that are issuable upon exercise of options that have
vested or will vest within 60 days.
(16) Represents 65,000 shares of Class A common stock issuable upon exchange of
membership units that would be issued upon exercise of options that have
vested.
(17) Represents 50,000 shares of Class B common stock convertible into shares of
Class A common stock on a one-for-one basis; 12,638,606 shares of Class A
common stock; 324,300,479 shares of Class A common stock issuable upon the
exchange of outstanding Charter Communications Holding Company membership
units; and 3,641,929 shares of Class A common stock issuable upon exchange
of membership units that are issuable upon exercise of options that have
vested or will vest within 60 days.
(18) As reported in Schedule 13G provided to Charter Communications, Inc. on
February 16, 2000. Janus Capital Corporation is a registered investment
advisor that provides investment advice to investment companies and other
clients. As a result of being an investment advisor, Janus Capital may be
deemed to beneficially own shares held by its clients. As indicated in the
Schedule 13G, Mr. Thomas Bailey, President, Chairman of the Board and 12.2%
shareholder of Janus Capital disclaims beneficial ownership with respect to
such shares. The address of these persons is 100 Fillmore St., Denver,
Colorado 80206-4923.
(19) Represents shares of Class A common stock issuable upon exchange of
preferred membership units held in an indirect subsidiary of Charter
Holdings.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth certain transactions in which we and our
directors, executive officers and affiliates and the directors and executive
officers of Charter Communications, Inc., Charter Communications Holding
Company, Charter Capital and Charter Investment, Inc., are involved. We believe
that each of the transactions described below was on terms no less favorable to
us than could have been obtained from independent third parties.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
MERGER WITH MARCUS
On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable, and agreed to acquire the remaining
interests in Marcus Cable. The aggregate purchase price was approximately $1.4
billion, excluding $1.8 billion in liabilities assumed. On February 22, 1999,
Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable
were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr.
Allen completed the acquisition of all remaining interests in Marcus Cable.
On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of
Charter Investment, Inc. for an aggregate purchase price of approximately $2.2
billion, excluding $2.0 billion in debt assumed. On February 9, 1999, Charter
Holdings was formed as a wholly owned subsidiary of Charter Investment, Inc. On
February 10, 1999, Charter Operating was formed as a wholly owned subsidiary of
Charter Holdings. In April 1999, Mr. Allen merged Marcus Holdings into Charter
Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable
systems they owned came under the ownership of Charter Holdings, and, in turn,
Charter Operating. On May 25, 1999, Charter Communications Holding Company was
formed as a wholly owned subsidiary of Charter Investment, Inc. All of Charter
Investment, Inc.'s equity interests in Charter Holdings were transferred to
Charter Communications Holding Company.
In March 1999, we paid $20 million to Vulcan Northwest, an affiliate of Mr.
Allen, for reimbursement of direct costs incurred in connection with Mr. Allen's
acquisition of Marcus Cable. Such costs were principally comprised of financial,
advisory, legal and accounting fees.
On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings.
Charter Holdings survived the merger, and the operating subsidiaries of Marcus
Holdings became subsidiaries of Charter Holdings.
At the time Charter Holdings issued $3.6 billion in principal amount of
notes in March 1999, this merger had not yet occurred. Consequently, Marcus
Holdings was a party to the indentures governing the March 1999 Charter Holdings
notes as a guarantor of Charter Holdings' obligations. Charter Holdings loaned
some of the proceeds from the sale of the March 1999 Charter Holdings notes to
Marcus Holdings, which amounts were used to complete the cash tender offers for
then-outstanding notes of subsidiaries of Marcus Holdings. Marcus Holdings
issued a promissory note in favor of Charter Holdings. The promissory note was
in the amount of $1.7 billion, with an interest rate of 9.92% and a maturity
date of April 1, 2007. Marcus Holdings guaranteed its obligations under the
promissory note by entering into a pledge agreement in favor of Charter Holdings
pursuant to which Marcus Holdings pledged all of its equity interests in Marcus
Cable as collateral for the payment and performance of the promissory note.
Charter Holdings pledged this promissory note to the trustee under the
indentures for the March 1999 Charter Holdings notes as collateral for the equal
and ratable benefit of the holders of the March 1999 Charter Holdings notes.
Upon the closing
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of the merger, and in accordance with the terms of the March 1999 Charter
Holdings notes and the indentures for the March 1999 Charter Holdings notes:
- the guarantee issued by Marcus Holdings was automatically terminated;
- the promissory note issued by Marcus Holdings was automatically
extinguished, with no interest having accrued or being paid; and
- the pledge in favor of Charter Holdings of the equity interests in Marcus
Cable as collateral under the promissory note and the pledge in favor of
the trustee of the promissory note as collateral for the March 1999
Charter Holdings notes were automatically released.
MANAGEMENT AGREEMENTS WITH CHARTER COMMUNICATIONS, INC.
PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a
series of management agreements with certain of our subsidiaries, Charter
Investment, Inc. provided management and consulting services to those
subsidiaries. In exchange for these services, Charter Investment, Inc. was
entitled to receive management fees of 3% to 5% of the gross revenues of all of
our systems plus reimbursement of expenses. However, our previous credit
facilities limited such management fees to 3% of gross revenues. The balance of
management fees payable under the previous management agreements was accrued.
Payment is at the discretion of Charter Investment, Inc. Certain deferred
portions of management fees bore interest at the rate of 8% per annum. Following
the closing of Charter Operating's current credit facilities, the previous
management agreements were replaced by a revised management agreement. The
material terms of our previous management agreements are substantially similar
to the material terms of the revised management agreement.
PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus
Cable entered into a management consulting agreement with Charter Investment,
Inc. pursuant to which Charter Investment, Inc. agreed to provide certain
management and consulting services to Marcus Cable and its subsidiaries, in
exchange for a fee equal to 3% of the gross revenues of Marcus Cable's systems
plus reimbursement of expenses. Management fees expensed by Marcus Cable during
the period from October 1998 to December 31, 1998 were approximately $3.3
million. Upon Charter Holdings' merger with Marcus Holdings and the closing of
Charter Operating's current credit facilities, this agreement was terminated and
the subsidiaries of Marcus Cable began to receive management and consulting
services from Charter Investment, Inc. under the revised management agreement
described below.
THE REVISED MANAGEMENT AGREEMENT. On February 23, 1999, Charter
Investment, Inc. entered into a revised management agreement with Charter
Operating, which was amended and restated as of March 17, 1999. Upon the closing
of Charter Operating's credit facilities on March 18, 1999, our previous
management agreements and the management consulting agreement with Marcus Cable
terminated and the revised management agreement became operative. Under the
revised management agreement, Charter Investment, Inc. agreed to manage the
operations of the cable television systems owned by Charter Operating's
subsidiaries, as well as any cable television systems Charter Operating
subsequently acquires. The term of the revised management agreement is ten
years.
The revised management agreement provided that Charter Operating would pay
Charter Investment, Inc. a management fee equal to its actual costs to provide
these services and a management fee of 3.5% of gross revenues. Gross revenues
include all revenues from the operation of Charter Operating's cable systems,
including, without limitation, subscriber payments, advertising revenues, and
revenues from other services provided by Charter Operating's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to our cable systems.
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Payment of the management fee to Charter Investment, Inc. is permitted
under Charter Operating's current credit facilities, but ranks below Charter
Operating's payment obligations under its credit facilities. In the event any
portion of the management fee due and payable is not paid by Charter Operating,
it is deferred and accrued as a liability. Any deferred amount of the management
fee will bear interest at the rate of 10% per annum, compounded annually, from
the date it was due and payable until the date it is paid. As of December 31,
1999, no interest had accrued.
Pursuant to the terms of the revised management agreement, Charter
Operating agreed to indemnify and hold harmless Charter Investment, Inc. and its
shareholders, directors, officers and employees. This indemnity extends to any
and all claims or expenses, including reasonable attorneys' fees, incurred by
them in connection with any action not constituting gross negligence or willful
misconduct taken by them in good faith in the discharge of their duties to
Charter Operating.
The total management fees, including expenses, earned by Charter
Investment, Inc. under all management agreements were as follows:
TOTAL FEES
YEAR FEES PAID EARNED
- - - ---- --------- ----------
(IN THOUSANDS)
Year Ended December 31, 1999................................ $ 48,528 $ 54,330
Year Ended December 31, 1998................................ 17,073 27,500
Year Ended December 31, 1997................................ 14,772 20,290
Year Ended December 31, 1996................................ 11,792 15,443
As of December 31, 1999, approximately $25.4 million remains unpaid under
all management agreements.
ASSIGNMENT AND AMENDMENT OF REVISED CHARTER OPERATING MANAGEMENT
AGREEMENT. On November 12, 1999, Charter Investment, Inc. assigned to Charter
Communications, Inc. all of its rights and obligations under the revised Charter
Operating management agreement. In connection with the assignment, the revised
Charter Operating management agreement was amended to eliminate the 3.5%
management fee. Under the amended agreement, Charter Communications, Inc. is
entitled to reimbursement from Charter Operating for all of its expenses, costs,
losses, liabilities and damages paid or incurred by it in connection with the
performance of its services under the amended agreement, with no cap on the
amount of reimbursement.
MANAGEMENT AGREEMENT WITH CHARTER COMMUNICATIONS, INC. On November 12,
1999, Charter Communications, Inc. entered into a management agreement with
Charter Communications Holding Company. Under this agreement, Charter
Communications, Inc. manages and operates the cable television systems owned or
to be acquired by Charter Communications Holding Company and its subsidiaries,
to the extent such cable systems are not subject to management agreements
between Charter Communications, Inc. and specific subsidiaries of Charter
Communications Holding Company.
The terms of this management agreement are substantially similar to the
terms of the Charter Operating management agreement. Charter Communications,
Inc. is entitled to reimbursement from Charter Communications Holding Company
for all expenses, costs, losses, liabilities and damages paid or incurred by
Charter Communications, Inc. in connection with the performance of its services,
which expenses will include any fees Charter Communications, Inc. is obligated
to pay under the mutual services agreement described below. There is no cap on
the amount of reimbursement to which Charter Communications, Inc. is entitled.
MUTUAL SERVICES AGREEMENT WITH CHARTER INVESTMENT, INC. Charter
Communications, Inc. has only thirteen employees, all of whom are also executive
officers of Charter Investment, Inc. Effective
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November 12, 1999, Charter Communications, Inc. and Charter Investment, Inc.
entered into a mutual services agreement pursuant to which each entity provides
services to the other as may be reasonably requested in order to manage Charter
Communications Holding Company and to manage and operate the cable systems owned
by its subsidiaries, including Charter Holdings. In addition, officers of
Charter Investment, Inc. also serve as officers of Charter Communications, Inc.
The officers and employees of each entity are available to the other to provide
the services described above. All expenses and costs incurred with respect to
the services provided are paid by Charter Communications, Inc. Charter
Communications, Inc. will indemnify and hold harmless Charter Investment, Inc.
and its directors, officers and employees from and against any and all claims
that may be made against any of them in connection with the mutual services
agreement except due to its or their gross negligence or willful misconduct. The
term of the mutual services agreement is ten years, commencing on November 12,
1999, and the agreement may be terminated at any time by either party upon
thirty days' written notice to the other.
FALCON MANAGEMENT AGREEMENT. On November 12, 1999, Falcon Cable
Communications, a parent company of the Falcon operating companies, entered into
a management consulting agreement with Charter Communications, Inc. pursuant to
which Charter Communications, Inc. agreed to provide certain management and
consulting services to Falcon and its subsidiaries. The term of the management
agreement is ten years. The management agreement provides that Falcon will pay
Charter Communications, Inc. a management fee equal to its actual costs to
provide these services but limited to 5% of gross revenues.
Gross revenues include all revenues from the operation of Falcon's cable
systems, including, without limitation, subscriber payments, advertising
revenues, and revenues from other services provided by Falcon's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to cable systems.
Payment of the management fee is subject to certain restrictions under the
Falcon credit facilities. In the event any portion of the management fee due and
payable is not paid by Falcon, it is deferred and accrued as a liability. Any
deferred amount of the management fee will bear interest at the rate of 10% per
annum, compounded annually, from the date it was due and payable until the date
it is paid.
FANCH MANAGEMENT AGREEMENT. On November 12, 1999, CC VI Operating Company,
LLC, the parent company of the Fanch operating companies, entered into a
management consulting agreement with Charter Communications, Inc. pursuant to
which Charter Communications, Inc. agreed to provide certain management and
consulting services to Fanch and its subsidiaries. The term of the management
agreement is ten years. The management agreement provides that Fanch will pay
Charter Communications, Inc. a management fee equal to its actual costs to
provide these services but limited to 5% of gross revenues.
Gross revenues include all revenues from the operation of Fanch's cable
systems, including, without limitation, subscriber payments, advertising
revenues, and revenues from other services provided by Fanch's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to cable systems.
Payment of the management fee is subject to certain restrictions under the
Fanch credit facilities. In the event any portion of the management fee due and
payable is not paid by Fanch, it is deferred and accrued as a liability. Any
deferred amount of the management fee will bear interest at the rate of 10% per
annum, compounded annually, from the date it was due and payable until the date
it is paid.
AVALON MANAGEMENT ARRANGEMENT. Under the Avalon limited liability company
agreements, Charter Communications, Inc. agreed to provide certain management
and consulting services to
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CC Michigan, CC New England and their subsidiaries. Under these arrangements, CC
Michigan and CC New England will pay Charter Communications, Inc. a management
fee equal to their actual costs to provide these services but limited to 2% of
gross revenues.
Gross revenues include all revenues from the operation of the Avalon cable
systems, including, without limitation, subscriber payments, advertising
revenues, and revenues from other services provided by Avalon's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to cable systems.
Payment of the management fee is permitted under the current credit
facilities of CC Michigan and CC New England, but ranks below the senior debt of
such companies and shall not be paid except to the extent allowed under such
credit facilities. In the event any portion of the management fee due and
payable is not paid by CC Michigan or CC New England, it is deferred and accrued
as a liability. Any deferred amount of the management fee will bear interest at
the rate of 10% per annum, compounded annually, from the date it was due and
payable until the date it is paid.
BRESNAN MANAGEMENT AGREEMENT. On February 14, 2000, CC VIII Operating LLC,
parent of the Bresnan cable systems, and several wholly owned subsidiaries,
entered into a management consulting agreement with Charter Communications, Inc.
pursuant to which Charter Communications, Inc. agreed to provide certain
management and consulting services to the Bresnan cable systems. The management
agreement provides that Bresnan will pay Charter Communications, Inc. a
management fee equal to its actual cost to provide these services without
limitation as to the amount. The term of the management agreement is ten years.
Payment of the management fee is subject to certain restrictions under the
Bresnan credit facilities. In the event that any portion of the management fee
due and payable is not paid by Bresnan, it is deferred and accrued as a
liability. Any deferred amount of the management fee will bear interest at the
rate of 10% per annum, compounded annually, from the date it was due and payable
until the date it is paid.
CONSULTING AGREEMENT
On March 10, 1999, Charter Holdings entered into a consulting agreement
with Vulcan Northwest and Charter Investment, Inc. Pursuant to the terms of the
consulting agreement, Charter Holdings retained Vulcan Northwest and Charter
Investment, Inc. to provide advisory, financial and other consulting services
with respect to acquisitions of the business, assets or stock of other companies
by Charter Holdings or by any of its affiliates. Such services include
participation in the evaluation, negotiation and implementation of these
acquisitions. The agreement expires on December 31, 2000, and automatically
renews for successive one-year terms unless otherwise terminated.
All reasonable out-of-pocket expenses incurred by Vulcan Northwest and
Charter Investment, Inc. are Charter Holdings' responsibility and must be
reimbursed. Charter Holdings must also pay Vulcan Northwest and Charter
Investment, Inc. a fee for their services rendered for each acquisition made by
Charter Holdings or any of its affiliates. This fee equals 1% of the aggregate
value of such acquisition. Neither Vulcan Northwest nor Charter Investment, Inc.
received or will receive a fee in connection with the American Cable,
Renaissance, Greater Media, Helicon, Vista, Cable Satellite, InterMedia, Rifkin,
Avalon, Falcon, Fanch and Bresnan acquisitions. No such fee is or would be
payable to either Vulcan Northwest or Charter Investment, Inc. in connection
with the Swap Transaction if that transaction is completed. Charter Holdings has
also agreed to indemnify and hold harmless Vulcan Northwest and Charter
Investment, Inc., and their respective officers, directors, stockholders,
agents, employees and affiliates, for all claims, actions, demands and expenses
that arise out of this consulting agreement and the services they provide to
Charter Holdings.
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Mr. Allen owns 100% of Vulcan Northwest and is the Chairman of the board.
William D. Savoy, another of Charter Communications, Inc.'s directors, is the
President and a director of Vulcan Northwest.
TRANSACTIONS WITH MR. ALLEN
On December 21, 1998, Mr. Allen contributed approximately $431 million to
Charter Investment, Inc. and received non-voting common stock of Charter
Investment, Inc. Such non-voting common stock was converted to voting common
stock on December 23, 1998. The $431 million contribution was used to redeem
stock of certain shareholders in Charter Investment, Inc.
On December 23, 1998, Mr. Allen contributed approximately $1.3 billion to
Charter Investment, Inc. and received voting common stock of Charter Investment,
Inc. Additionally, Charter Investment, Inc. borrowed approximately $6.2 million
in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by
Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge
loan was accrued or paid by Charter Investment, Inc. On the same date, Mr. Allen
also contributed approximately $223.5 million to Vulcan Cable II, Inc., a
company owned by Mr. Allen. Vulcan II was merged with and into Charter
Investment, Inc. The $1.3 billion and $223.5 million contributions by Mr. Allen
were used by Charter Investment, Inc. to purchase the remaining interest in CCA
Group and CharterComm Holdings.
On January 5, 1999, Charter Investment, Inc. borrowed approximately $132.2
million in the form of a bridge loan from Mr. Allen. This bridge loan was
contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest
on such bridge loan was accrued or paid by Charter Investment, Inc. On the same
date, Mr. Allen also acquired additional voting common stock of Charter
Investment, Inc. from Jerald L. Kent, Howard L. Wood and Barry L. Babcock for an
aggregate purchase price of approximately $176.7 million.
On January 11, 1999, Charter Investment, Inc. borrowed $25 million in the
form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr.
Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan
was accrued or paid by Charter Investment, Inc.
On March 16, 1999, Mr. Allen contributed approximately $124.8 million in
cash to Charter Investment, Inc. In connection with this contribution and the
contribution of the three bridge loans described above, Mr. Allen received
11,316 shares of common stock of Charter Investment, Inc.
All other contributions to Charter Investment, Inc. by Mr. Allen were used
in operations of Charter Investment, Inc. and were not contributed to Charter
Holdings.
On August 10, 1999, Vulcan Cable III Inc. purchased 24.1 million Charter
Communications Holding Company membership units for $500 million. On September
22, 1999, Mr. Allen, through Vulcan Cable III Inc., contributed an additional
$825 million, consisting of approximately $644.3 million in cash and
approximately $180.7 million in equity interests in Rifkin that Vulcan Cable III
Inc. had acquired in the Rifkin acquisition in exchange for 39.8 million Charter
Communications Holding Company membership units. Charter Communications Holding
Company in turn contributed the cash and equity interests to Charter Holdings.
As part of the membership interests purchase agreement, Vulcan Ventures
Incorporated, Charter Communications, Inc., Charter Investment, Inc. and Charter
Communications Holding Company entered into an agreement on September 21, 1999
regarding the right of Vulcan Ventures to use up to eight of our digital cable
channels. Specifically, we will provide Vulcan Ventures with exclusive rights
for carriage of up to eight digital cable television programming services or
channels on each of the digital cable television systems with local control of
the digital product now or hereafter owned, operated, controlled or managed by
us of 550 megahertz or more. If the system offers digital services but has less
than 550 megahertz of capacity, then the programming services will be equitably
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reduced. Upon request of Vulcan Ventures, we will attempt to reach a
comprehensive programming agreement pursuant to which we will pay the
programmer, if possible, a fee per digital subscriber. If such fee arrangement
is not achieved, then we and the programmer shall enter into a standard
programming agreement. We believe that this transaction is on terms at least as
favorable to us as Mr. Allen would negotiate with other cable operators.
In November 1999, in connection with Charter Communications, Inc.'s initial
public offering, Mr. Allen, through Vulcan Cable III Inc., purchased $750
million of membership units of Charter Communications Holding Company at a per
membership unit price equal to the net initial public offering price.
During the second and third quarters of 1999, one of our subsidiaries sold
interests in several airplanes to Mr. Allen for approximately $8 million. We
believe that the purchase price paid by Mr. Allen for these interests was the
fair market price.
ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN
As described under "-- Business Relationships," Mr. Allen and a number of
his affiliates have interests in various entities that provide services or
programming to a number of our subsidiaries. Given the diverse nature of Mr.
Allen's investment activities and interests, and to avoid the possibility of
future disputes as to potential business, Charter Communications Holding Company
and Charter Communications, Inc., under the terms of their respective
organizational documents, may not, and may not allow their subsidiaries to,
engage in any business transaction outside the cable transmission business
except for the joint venture with Broadband Partners and incidental businesses
engaged in as of the closing of the initial public offering of Charter
Communications, Inc. This restriction will remain in effect until all of the
shares of Charter Communications, Inc.'s high-vote Class B common stock have
been converted into shares of Class A common stock due to Mr. Allen's equity
ownership falling below specified threshholds.
Should Charter Communications, Inc. or Charter Communications Holding
Company wish to pursue, or allow their subsidiaries to pursue, a business
transaction outside of this scope, it must first offer Mr. Allen the opportunity
to pursue the particular business transaction. If he decides not to do so and
consents to Charter Communications, Inc., Charter Communications Holding Company
or any of their subsidiaries engaging in the business transaction, it will be
able to do so. In any such case, the restated certificate of incorporation and
the limited liability company agreement of Charter Communications, Inc. and
Charter Communications Holding Company would be amended accordingly to
appropriately modify the current restrictions on their ability to engage in any
business other than the cable transmission business. The cable transmission
business means the business of transmitting video, audio, including telephony,
and data over cable television systems owned, operated or managed by Charter
Communications, Inc., Charter Communications Holding Company or any of their
subsidiaries from time to time. The businesses of RCN Corporation, a company in
which Mr. Allen has made a significant investment, are not considered cable
transmission businesses under these provisions. See "-- Business
Relationships -- RCN Corporation."
Under Delaware corporate law, each director of Charter Communications,
Inc., including Mr. Allen, is generally required to present to Charter
Communications, Inc. any opportunity he or she may have to acquire any cable
transmission business or any company whose principal business is the ownership,
operation or management of cable transmission businesses so that we may
determine whether we wish to pursue such opportunities. However, Mr. Allen and
the other directors generally will not have an obligation to present to Charter
Communications, Inc. other business opportunities and they may exploit such
opportunities for their own account.
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ASSIGNMENTS OF ACQUISITIONS
On January 1, 1999, Charter Investment, Inc. entered into a membership
purchase agreement with ACEC Holding Company, LLC for the acquisition of
American Cable. On February 23, 1999, Charter Investment, Inc. assigned its
rights and obligations under this agreement to one of our subsidiaries, Charter
Communications Entertainment II, LLC, effective as of March 8, 1999, or such
earlier date as mutually agreed to by the parties. The acquisition of American
Cable was completed in May 1999.
On February 17, 1999, Charter Investment, Inc. entered into an asset
purchase agreement with Greater Media, Inc. and Greater Media Cablevision, Inc.
for the acquisition of the Greater Media systems. On February 23, 1999, Charter
Investment, Inc. assigned its rights and obligations under this agreement to one
of our subsidiaries, Charter Communications Entertainment I, LLC. The
acquisition of the Greater Media systems was completed in June 1999.
On April 26, 1999, Charter Investment, Inc. entered into a purchase and
sale agreement with InterLink Communications Partners, LLLP and the other
sellers listed on the signature pages of the agreement. On June 30, 1999,
Charter Investment, Inc. assigned its rights and obligations under this
agreement to Charter Operating. The acquisition contemplated by these agreements
was completed in September 1999.
On April 26, 1999, Charter Investment, Inc. entered into a purchase and
sale agreement with Rifkin Acquisition Partners L.L.L.P and the other sellers
listed on the signature pages of the agreement. On June 30, 1999, Charter
Investment, Inc. assigned its rights and obligations under this agreement to
Charter Operating. The acquisition contemplated by these agreements was
completed in September 1999.
On April 26, 1999, Charter Investment, Inc. entered into the RAP indemnity
agreement with InterLink Communications Partners, LLLP and the other sellers and
InterLink partners listed on the signature pages of the agreement. On June 30,
1999, Charter Investment, Inc. assigned its rights and obligations under this
agreement to Charter Operating.
In May 1999, Charter Investment, Inc. entered into the Falcon purchase
agreement. As of June 22, 1999, pursuant to the first amendment to the Falcon
purchase agreement, Charter Investment, Inc. assigned its rights under the
Falcon purchase agreement to Charter LLC, a subsidiary of Charter Communications
Holding Company.
In May 1999, Charter Investment, Inc. entered into the Fanch purchase
agreement. On September 21, 1999, Charter Investment, Inc. assigned its rights
and obligations to purchase stock interests under this agreement to Charter
Communications Holding Company and its rights and obligations to purchase
partnership interests and assets under this agreement to Charter Communications
VI, LLC, an indirect wholly owned subsidiary of Charter Communications Holding
Company.
In December 1999, Charter Communications Holding Company entered into
contribution and sale agreements with three of its indirect subsidiaries.
Effective January 1, 2000 Charter Communications Holding Company transferred to
us the equity interests it held in the entities that owned the Fanch, Falcon and
Avalon cable systems.
In June 1999, Charter Communications Holding Company entered into the
Bresnan purchase agreement. In February 2000, Charter Communications Holding
Company assigned its rights under the Bresnan purchase agreement to purchase
certain assets to us and we accepted such assignment and assumed all obligations
of Charter Communications Holding Company under the Bresnan purchase agreement.
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INTERCOMPANY LOANS
In November 1999, Charter Communications Holding Company loaned $856
million to Charter Operating, maturing March 18, 2009. As of December 31, 1999,
the loan bore interest at a rate of 7.82% per year. In January 2000, Charter
Communications Holding Company loaned an additional $66 million to Charter
Operating, maturing March 18, 2009 with an interest rate of 7.79%. In February
2000, Charter Operating repaid $540 million. Accordingly, $382 million remained
outstanding as of February 29, 2000.
In November 1999, Charter Communications Holding Company loaned $21 million
to CC VI Operating Company, LLC, maturing November 30, 2009. The funds were used
by CC VI Operating Company to pay down a portion of amounts outstanding under
the Fanch credit facilities. Effective December 31, 1999, Charter Communications
Holding Company forgave the amounts outstanding, including accrued and unpaid
interest of approximately $314,000, and contributed such amounts to CC VI
Holdings, LLC, the parent company of the Fanch companies.
In November 1999, Charter Communications Holding Company loaned $173.0
million to Falcon Cable Communications, LLC, maturing December 31, 2008. As of
December 31, 1999, the loan bore interest at a rate of 7.57% per year. In
January 2000, Charter Communications Holding Company loaned an additional $373
million to Falcon Cable Communications with an interest rate of 7.54%. In
February 2000, Falcon Cable Communications repaid all outstanding balances.
In November and December 1999, Charter Communications, Inc. loaned $50
million to Charter Operating. As of December 31, 1999, these loans bore interest
at rates ranging from 7.865% to 7.9125% and mature March 18, 2009.
OTHER AGREEMENTS
Mr. Kent has entered into an employment agreement with Charter
Communications, Inc. We have summarized this agreement in "Directors and
Executive Officers -- Employment and Consulting Agreements."
Effective as of December 23, 1998, Howard L. Wood entered into an
employment agreement with Charter Investment, Inc. for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Wood agreed to serve as
an officer of Charter Investment, Inc. During the initial term of the agreement,
Mr. Wood was entitled to receive a base salary for the remaining month of the
term of $312,500, or such higher rate as determined by the Chief Executive
Officer in his discretion. In addition, Mr. Wood was eligible to receive an
annual bonus to be determined by the board of directors in its discretion. Mr.
Wood received a one-time payment as part of his employment agreement of
$250,000. Under the agreement, Mr. Wood was entitled to participate in any
disability insurance, pension or other benefit plan afforded to employees
generally or executives of Charter Investment, Inc. Charter Investment, Inc.
agreed to indemnify and hold harmless Mr. Wood to the maximum extent permitted
by law from and against any claims, damages, liabilities, losses, costs or
expenses incurred in connection with or arising out of the performance by Mr.
Wood of his duties. Effective on November 12, 1999, this employment agreement
ceased to be effective. Mr. Wood received an amount equal to his base salary for
the remaining month of the term plus a bonus of $312,500. In addition, the
options then held by Mr. Wood vested in full.
Mr. Wood has entered into a consulting agreement with Charter
Communications, Inc. We have summarized this agreement in "Directors and
Executive Officers -- Employment and Consulting Agreements."
A company controlled by Mr. Wood occasionally leases to Charter
Communications, Inc. and its subsidiaries and affiliates an airplane for
business travel. Charter Communications, Inc. or its subsidiaries or affiliates,
as applicable, in turn, pays to such company market rates for such use.
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Mr. Wood reimburses Charter Communications, Inc. for the full annual cost of two
individuals qualified to operate the plane and who are otherwise available to
Charter in connection with its own flight operations.
In addition, Mr. Wood's daughter, a Vice President of Charter Investment,
Inc., received a bonus in the form of a three-year promissory note bearing
interest at 7% per year. One-third of the original outstanding principal amount
of the note is forgiven as long as she remains employed by Charter Investment,
Inc. at the end of each of the first three anniversaries of the issue date in
February 1999. The outstanding balance on the note as of February 29, 2000 was
$150,000.
Mr. Nathanson has entered into a letter agreement with Charter
Communications, Inc. We have summarized this agreement in "Directors and
Officers -- Employment and Consulting Agreements."
Effective as of December 23, 1998, Barry L. Babcock entered into an
employment agreement with Charter Investment, Inc. for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Babcock agreed to serve
as Vice Chairman of Charter Investment, Inc. with responsibilities including the
government and public relations of Charter Investment, Inc. During the initial
term of the agreement, Mr. Babcock was entitled to receive a base salary of
$625,000, or such higher rate as may have been determined by the Chief Executive
Officer in his discretion. This employment agreement was terminated in October
1999. Pursuant to the termination agreement, Mr. Babcock received an amount
equal to his base salary for the remaining month of the term plus a $312,500
bonus. In addition, the options held by Mr. Babcock vested in full.
Effective as of November 12, 1999, Charter Communications, Inc. entered
into a consulting agreement with Mr. Babcock which expired in March 2000. During
the term of this agreement, Mr. Babcock received monthly cash compensation at a
rate of $10,000 per month, disability and health benefits and the use of an
office and secretarial services, upon request. Charter Communications, Inc.
agreed to indemnify and hold harmless Mr. Babcock to the maximum extent
permitted by law from and against any claims, damages, liabilities, losses,
costs or expenses incurred in connection with or arising out of the performance
by Mr. Babcock of his duties.
INSURANCE
Insurance covering our operations and workers' compensation is negotiated
by our manager, which was Charter Investment, Inc. prior to November 8, 1999 and
thereafter, Charter Communications, Inc. Charter Holdings expensed approximately
$13,797,000 for the year ended December 31, 1999, approximately $603,000 for the
year ended December 31, 1998, approximately $172,100 for the year ended December
31, 1997, and approximately $108,000 for the year ended December 31, 1996,
relating to insurance allocations.
OTHER RELATIONSHIPS
David L. McCall, Senior Vice President of Operations -- Eastern Division of
Charter Communications, Inc., is a partner in a partnership that leases office
space to us. The partnership has received approximately $177,500 pursuant to
such lease and related agreements for the year ended December 31, 1999. In
addition, approximately $646,000 was paid in 1999 to a construction company
controlled by Mr. McCall's brother, Marvin A. McCall for construction services.
In January 1999, Charter Investment, Inc. issued bonuses to executive
officers in the form of three-year promissory notes. One-third of the original
outstanding principal amount of each of these notes is forgiven, as long as the
employee is still employed by Charter Investment, Inc. or any of its
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affiliates, at the end of each of the first three anniversaries of the issue
date. The promissory notes bear interest at 7% per year. Outstanding balances as
of February 29, 2000 are as follows:
INDIVIDUAL AMOUNT
---------- --------
David G. Barford.................................. $300,000
Mary Pat Blake.................................... $300,000
Eric A. Freesmeier................................ $300,000
Thomas R. Jokerst................................. $300,000
Kent D. Kalkwarf.................................. $300,000
Ralph G. Kelly.................................... $300,000
David L. McCall................................... $300,000
John C. Pietri.................................... $150,000
Steven A. Schumm.................................. $600,000
Curtis S. Shaw.................................... $300,000
Stephen E. Silva.................................. $200,000
Marc B. Nathanson was the Chairman of the board of directors of Falcon
Holding Group, Inc., which was the general partner of Falcon Holding Group, L.P.
from whom the Falcon cable systems were acquired.
BUSINESS RELATIONSHIPS
Mr. Allen or certain affiliates of Mr. Allen own equity interests or
warrants to purchase equity interests in various entities which provide a number
of our affiliates with services or programming. Among these entities are High
Speed Access Corp., WorldGate Communications, Inc., Wink Communications, Inc.,
ZDTV, L.L.C., USA Networks, Oxygen Media, Inc., Broadband Partners, Inc.,
Go2Net, Inc. and RCN Corporation. These affiliates include Charter Investment,
Inc. and Vulcan Ventures, Inc. Mr. Allen owns 100% of the equity of Vulcan
Ventures, and is its Chief Executive Officer. Mr. Savoy is also a Vice President
and a director of Vulcan Ventures. The various cable, Internet and telephony
companies that Mr. Allen has invested in may mutually benefit one another. The
Broadband Partners Internet portal joint venture announced in the fourth quarter
of 1999 is an example of a cooperative business relationship among his
affiliated companies. We can give no assurance, nor should you expect, that this
joint venture will be successful, that we will realize any benefits from this or
other relationships with Mr. Allen's affiliated companies or that we will enter
into any joint ventures or business relationships in the future with Mr. Allen's
affiliated companies.
Mr. Allen and his affiliates have made, and in the future likely will make,
numerous investments outside of us and our business. We cannot assure you that,
in the event that we or any of our subsidiaries enter into transactions in the
future with any affiliate of Mr. Allen, such transactions will be on terms as
favorable to us as terms we might have obtained from an unrelated third party.
Also, conflicts could arise with respect to the allocation of corporate
opportunities between us and Mr. Allen and his affiliates.
We have not instituted any formal plan or arrangement to address potential
conflicts of interest.
HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet
access over cable modems. In November 1998, Charter Investment, Inc. entered
into a systems access and investment agreement with Vulcan Ventures and High
Speed Access and a related network services agreement with High Speed Access.
Additionally, Vulcan Ventures and High Speed Access entered into a programming
content agreement. Charter Investment Inc.'s rights and obligations under these
agreements were assigned by Charter Investment, Inc. to Charter Communications
Holding Company
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upon closing of Charter Communications, Inc's initial public offering. Under
these agreements, High Speed Access will have exclusive access to at least
750,000 of our homes with an installed cable drop from our cable system or which
is eligible for a cable drop by virtue of our cable system passing the home. The
term of the systems access and investment agreement continues until the earlier
of termination of the network services agreement or midnight of the day High
Speed Access ceases to provide High Speed Access services to cable subscribers
in a geographic area or region. The term of the network services agreement is,
as to a particular cable system, five years from the date revenue billing
commences for that cable system. Following the five-year initial term, the
network services agreement automatically renews on a year-to-year basis unless
Charter provides notice of termination prior to the end of the five-term in
accordance with the terms of the agreement. Additionally, Charter Communications
Holding Company can terminate High Speed Access' exclusivity rights, on a
system-by-system basis, if High Speed Access fails to meet performance
benchmarks or otherwise breaches the agreements including their commitment to
provide content designated by Vulcan Ventures. The programming content agreement
is effective until terminated for any breach and will automatically terminate
upon the expiration of the systems access and investment agreement. All of
Charter Communications Holding Company's operations take place at the subsidiary
level and it is as subsidiaries of Charter Communications Holding Company that
we derive our rights and obligations with respect to High Speed Access. Under
the terms of the network services agreement, we split revenue with High Speed
Access based on set percentages of gross revenues in each category of service.
The programming content agreement provides each of Vulcan Ventures and High
Speed Access with a license to use certain content and materials of the other on
a non-exclusive, royalty-free basis. Operations began in the first quarter of
1999. Net receipts from High Speed Access for the year ended December 31, 1999
were approximately $461,000.
Concurrently with entering into these agreements, High Speed Access issued
8 million shares of series B convertible preferred stock to Vulcan Ventures at a
purchase price of $2.50 per share. Vulcan Ventures also subscribed to purchase
2.5 million shares of series C convertible preferred stock, at a purchase price
of $5.00 per share on or before November 25, 2000, and received an option to
purchase an additional 2.5 million shares of series C convertible preferred
stock at a purchase price of $5.00 per share. In April 1999, Vulcan Ventures
purchased the entire 5 million shares of series C convertible preferred stock
for $25 million in cash. The shares of series B and series C convertible
preferred stock issued to Vulcan Ventures automatically converted at a price of
$3.23 per share into 22,224,688 million shares of common stock upon completion
of High Speed Access' initial public offering in June 1999.
Additionally, High Speed Access granted Vulcan Ventures warrants to
purchase up to 5,006,500 shares of common stock at a purchase price of $5.00 per
share. These warrants were converted to warrants to purchase up to 7,750,000
shares of common stock at a purchase price of $3.23 per share upon completion of
High Speed Access' initial public offering. The warrants were subsequently
assigned to Charter Communications Holding Company. The warrants are exercisable
at the rate of 1.55 shares of common stock for each home passed in excess of
750,000. On or before July 31, 2001 3.875 million warrants may be earned. These
warrants must be exercised on or before July 31, 2002. In addition, 3.875
million warrants may be earned on or before July 31, 2003 and must be exercised
on or before July 31, 2004. The warrants may be forfeited in certain
circumstances, generally if the number of homes passed in a committed system is
reduced.
As of December 31, 1999, Charter Communications Holding Company has earned
77,738 warrants under the agreements described above.
On April 13, 2000, Charter Communications, Inc. entered into a binding
letter of intent with High Speed Access. Charter Communications, Inc., on behalf
of itself and its subsidiaries, agreed to commit homes passed by our cable
television systems to High Speed Access for which High Speed
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Access will provide residential Tier 2 and above technical support and network
operations center support. Such systems will be in locations where we have
formally launched or intend to launch cable modem-based Internet access to
residential customers. Tier 2 support is support beyond the initial screening of
a problem.
We have agreed to commit an aggregate of 5,000,000 homes passed, including
all homes passed in systems previously committed by us to High Speed Access
(other than full turnkey systems), on or prior to the third anniversary of the
date of the definitive agreements. With respect to each system launched or
intended to be launched, we will pay a per customer fee to High Speed Access
according to agreed pricing terms. In addition, we will also compensate High
Speed Access for services that exceed certain minimum thresholds.
Upon entering into definitive agreements, High Speed Access will issue to
Charter Communications, Inc. a warrant to purchase shares of common stock of
High Speed Access at a price of $3.23 per share. Portions of such warrant will
become vested at the time an authorization to proceed is delivered to High Speed
Access with respect to a system, and will be based upon the number of homes
passed in such system. With respect to the initial aggregate 5,000,000 homes
passed, the warrant will provide that Charter Communications, Inc. will have the
right to purchase .775 shares of common stock for every home passed. With
respect to any additional homes passed, the warrant will provide that Charter
Communications, Inc. will have the right to purchase 1.55 shares of common stock
for every home passed.
The agreement governing the services to be provided by High Speed Access
will have a term of five years. We will have the option to renew the agreement
for additional successive 5-year terms on similar terms. On each renewal date,
High Speed Access will issue Charter Communications, Inc. an additional warrant
for each renewal term. These renewal warrants will grant Charter Communications,
Inc., the right to purchase additional shares of common stock at a price of
$10.00 per share. The number of shares of common stock subject to a renewal
warrant will be determined based upon .50 shares of common stock for every home
passed in each system committed to High Speed Access during the initial 5-year
term and each 5-year renewal term.
Either Charter Communications, Inc. or High Speed Access may terminate the
letter of intent if the definitive agreements are not executed by May 13, 2000.
The letter of intent and the definitive agreements may be assigned by Charter
Communications, Inc. to one or more of its direct or indirect subsidiaries
without consent from High Speed Access.
Vulcan Ventures owns 37.1% of the outstanding stock of High Speed Access.
Jerald L. Kent, our President and Chief Executive Officer and a director of the
issuers of the notes and of Charter Communications Holding Company and Charter
Communications, Inc. Stephen E. Silva, Senior Vice President -- Corporate
Development and Technology of Charter Communications, Inc., and Mr. Savoy, a
member of the boards of directors of Charter Holdings, Charter Communications
Holding Company and Charter Communications, Inc., are all members of the board
of directors of High Speed Access.
WORLDGATE. WorldGate is a provider of Internet access through cable
television systems. On November 7, 1997, Charter Investment, Inc. signed an
affiliation agreement with WorldGate pursuant to which WorldGate's services will
be offered to some of our customers. This agreement was assigned by Charter
Investment, Inc. to Charter Communications Holding Company upon the closing of
Charter Communications, Inc.'s initial public offering. The term of the
agreement is five years unless terminated by either party for failure of the
other party to perform any of its obligations or undertakings required under the
agreement. The agreement automatically renews for additional successive two-year
periods upon expiration of the initial five-year term. All of Charter
Communications Holding Company's operations take place at the subsidiary level
and it is as
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subsidiaries of Charter Communications Holding Company that we derive our rights
and obligations with respect to WorldGate. Pursuant to the agreement, we have
agreed to use our reasonable best efforts to deploy the WorldGate Internet
access service within a portion of our cable television systems and to install
the appropriate headend equipment in all of our major markets in those systems.
Major markets for purposes of this agreement include those in which we have more
than 25,000 customers. We incur the cost for the installation of headend
equipment. In addition, we have agreed to use our reasonable best efforts to
deploy such service in all non-major markets that are technically capable of
providing interactive pay-per-view service, to the extent we determine that it
is economically practical. When WorldGate has a telephone return path service
available, we will, if economically practical, use all reasonable efforts to
install the appropriate headend equipment and deploy the WorldGate service in
our remaining markets. Telephone return path service is the usage of telephone
lines to connect to the Internet to transmit data or receive data. We have also
agreed to market the WorldGate service within our market areas. We pay a monthly
subscriber access fee to WorldGate based on the number of subscribers to the
WorldGate service. We have the discretion to determine what fees, if any, we
will charge our subscribers for access to the WorldGate service. We started
offering WorldGate service in 1998. For the year ended December 31, 1999, we
paid to WorldGate approximately $1,661,000. For the year ended December 31,
1998, we paid to WorldGate approximately $276,000. We charged our subscribers
approximately $263,000 for the year ended December 31, 1999, and approximately
$22,000 for the year ended December 31, 1998.
On November 24, 1997, Charter Investment, Inc. acquired 70,423 shares of
WorldGate's series B preferred stock at a purchase price of $7.10 per share.
These shares of WorldGate's series B preferred stock were assigned to Charter
Communications Holding Company upon the closing of Charter Communications Inc.'s
initial public offering. On February 3, 1999, a subsidiary of Charter Holdings
acquired 90,909 shares of series C preferred stock at a purchase price of $11.00
per share. As a result of a stock split and WorldGate's initial public offering,
each share of series B preferred stock converted into two-thirds of a share of
WorldGate's common stock, and each share of series C preferred stock converted
into two-thirds of a share of WorldGate's common stock.
WINK. Wink offers an enhanced broadcasting system that adds interactivity
and electronic commerce opportunities to traditional programming and
advertising. Viewers can, among other things, find news, weather and sports
information on-demand and order products through use of a remote control. On
October 8, 1997, Charter Investment, Inc. signed a cable affiliation agreement
with Wink to deploy this enhanced broadcasting technology in our systems.
This agreement was assigned by Charter Investment, Inc. to Charter
Communications Holding Company upon the closing of Charter Communications,
Inc.'s initial public offering. The term of the agreement is three years. Either
party has the right to terminate the agreement for the other party's failure to
comply with any of its respective material obligations under the agreement. All
of Charter Communications Holding Company's operations take place at the
subsidiary level and it is as subsidiaries of Charter Communications Holding
Company that we derive our rights and obligations with respect to Wink. Pursuant
to the agreement, Wink granted us the non-exclusive license to use their
software to deliver the enhanced broadcasting to all of our cable systems. We
pay a fixed monthly license fee to Wink. We also supply all server hardware
required for deployment of Wink services. In addition, we agreed to promote and
market the Wink service to our customers within the area of each system in which
such service is being provided. We share in the revenue Wink generates from all
fees collected by Wink for transactions generated by our customers. The amount
of revenue shared is based on the number of transactions per month. As of
December 31, 1999, no revenue or expenses have been recognized as a result of
this agreement.
On November 30, 1998, Vulcan Ventures acquired 1,162,500 shares of Wink's
series C preferred stock for approximately $9.3 million. In connection with such
acquisition, Wink issued to Vulcan
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Ventures warrants to purchase shares of common stock. Additionally, Microsoft
Corporation, of which Mr. Allen is a director, owns an equity interest in Wink.
ZDTV. ZDTV operates a cable television channel which broadcasts shows
about technology and the Internet. Pursuant to a carriage agreement which
Charter Communications Holding Company intends to enter into with ZDTV, ZDTV has
agreed to provide us with programming for broadcast via our cable television
systems at no cost. The term of the proposed carriage agreement, with respect to
each of our cable systems, is from the date of launch of ZDTV on that cable
system until April 30, 2008. The carriage agreement grants us a limited
non-exclusive right to receive and to distribute ZDTV to our subscribers in
digital or analog format. The carriage agreement does not grant us the right to
distribute ZDTV over the Internet. We pay a monthly subscriber fee to ZDTV for
the ZDTV programming based on the number of our subscribers subscribing to ZDTV.
Additionally, we agreed to use commercially reasonable efforts to publicize the
programming schedule of ZDTV in each of our cable systems that offers or will
offer ZDTV. Upon reaching a specified threshold number of ZDTV subscribers,
then, in the event ZDTV inserts any informercials, advertorials and/or home
shopping into in the ZDTV programming, we receive from ZDTV a percentage of net
product revenues resulting from our distribution of these services. ZDTV may not
offer its services to any other cable operator which serves the same or fewer
number of subscribers at a more favorable rate or on more favorable carriage
terms.
On February 5, 1999, Vulcan Programming acquired an approximate one-third
interest in ZDTV. Mr. Allen owns 100% of Vulcan Programming. Mr. Savoy is the
president and director of Vulcan Programming. The remaining approximate
two-thirds interest in ZDTV is owned by Ziff-Davis Inc. Vulcan Ventures owns
approximately 3% of the interests in Ziff-Davis. The total current investment
made by Vulcan Programming and Vulcan Ventures is $104 million. On November 19,
1999, Vulcan Ventures announced that it would acquire an additional 64% in ZDTV
for $204.8 million bringing its interest in ZDTV to 97%. The remaining 3% of
ZDTV would be owned by its management and employees. The purchase was completed
on January 21, 2000.
USA NETWORKS. USA Networks operates USA Network and The Sci-Fi Channel,
which are cable television networks. USA Networks also operates Home Shopping
Network, which is a retail sales program available via cable television systems.
On May 1, 1994, Charter Investment, Inc. signed an affiliation agreement with
USA Networks.
This agreement was assigned by Charter Investment, Inc. to Charter
Communications Holding Company upon the closing of Charter Communications,
Inc.'s initial public offering. Pursuant to this affiliation agreement, USA
Networks has agreed to provide their programming for broadcast via our cable
television systems. The term of the affiliation agreement is until December 30,
1999. The affiliation agreement grants us the nonexclusive right to cablecast
the USA Network programming service. We pay USA Networks a monthly fee for the
USA Network programming service based on the number of subscribers in each of
our systems and the number and percentage of such subscribers receiving the USA
Network programming service. Additionally, we agreed to use best efforts to
publicize the schedule of the USA Network programming service in the television
listings and program guides which we distribute. We have paid to USA Networks
for programming approximately $16,740,000 for the year ended December 31, 1999,
approximately $556,000 for the year ended December 31, 1998, approximately
$204,000 for the year ended December 31, 1997, and approximately $134,000 for
the year ended December 31, 1996. In addition, we received commissions from Home
Shopping Network for sales generated by our customers totaling approximately
$1,826,000 for the year ended December 31, 1999, approximately $121,000 for the
year ended December 31, 1998, approximately $62,000 for the year ended December
31, 1997, and approximately $35,000 for the year ended December 31, 1996.
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Mr. Allen and Mr. Savoy are also directors of USA Networks. As of April
2000, Mr. Allen owned approximately 8.3% and Mr. Savoy owned less than 1% of the
capital stock of USA Networks.
OXYGEN MEDIA, INC. Oxygen Media provides content aimed at the female
audience for distribution over the Internet and cable television systems. Vulcan
Ventures invested $50 million in 1999 in Oxygen Media. In addition, Charter
Communications Holding Company plans to enter into a carriage agreement with
Oxygen Media pursuant to which we will carry Oxygen Media programming content on
certain of our cable systems. Nancy B. Peretsman, a director of Charter
Communications, Inc., serves on the board of directors of Oxygen Media. Mr.
Allen owns an approximate 7% interest in Oxygen.
BROADBAND PARTNERS, INC. Charter Communications, Inc. has entered into a
joint venture with Vulcan Ventures and Go2Net to provide broadband portal
services. See "Business -- Products and Services." Mr. Allen owns approximately
33% of the outstanding equity of Go2Net. Mr. Savoy, a director of Charter
Communications, Inc., is also a director of Go2Net.
RCN CORPORATION. On October 1, 1999, Vulcan Ventures entered into an
agreement to purchase shares of convertible preferred stock of RCN Corporation
for an aggregate purchase price of approximately $1.65 billion. If Vulcan
Ventures immediately converts the RCN preferred stock it has agreed to purchase
into common stock, it will own 27.4% of RCN when combined with the common stock
that Vulcan Ventures already owns. None of Charter Communications, Inc., Charter
Communications Holding Company, Charter Holdings or their respective
stockholders, members or subsidiaries, other than Vulcan Ventures, has any
interest in the RCN investment and none of them is expected to have any interest
in any subsequent investment in RCN that Vulcan Ventures may make. Charter
Communications, Inc.'s certificate of incorporation and Charter Communications
Holding Company's limited liability company agreement provide that the
businesses of RCN are not deemed to be "cable transmission businesses."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description of our indebtedness is qualified in its entirety
by reference to the relevant credit facilities, indentures and related documents
governing the debt.
EXISTING CREDIT FACILITIES
CHARTER OPERATING CREDIT FACILITIES. On March 18, 1999, Charter Operating
entered into senior secured credit facilities arranged by Chase Securities Inc.,
NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc. Obligations
under the Charter Operating credit facilities are guaranteed by Charter
Operating's parent, Charter Holdings, and by Charter Operating's subsidiaries.
The obligations under the Charter Operating credit facilities are secured by
pledges by Charter Operating of intercompany obligations and the ownership
interests of Charter Operating and its subsidiaries, but are not secured by the
other assets of Charter Operating or its subsidiaries. The obligations under the
Charter Operating credit facilities are also secured by pledges of intercompany
obligations and the ownership interests of Charter Holdings in Charter
Operating, but are not secured by the other assets of Charter Holdings or
Charter Operating.
The Charter Operating credit facilities provide for borrowings of up to
$4.7 billion consisting of:
- an eight and one-half year reducing revolving loan in the amount of $1.25
billion;
- an eight and one-half year Tranche A term loan in the amount of $1.0
billion; and
- a nine-year Tranche B term loan in the amount of $2.45 billion.
The Charter Operating credit facilities provide for the amortization of the
principal amount of the Tranche A term loan facility and the reduction of the
revolving loan facility beginning on June 30, 2002 with respect to the Tranche A
term loan and on March 31, 2004 with respect to the revolving credit facility,
with a final maturity date, in each case, of September 18, 2007. The
amortization of the principal amount of the Tranche B term loan facility is
substantially "back-ended," with more than 90% of the principal balance due in
the year of maturity. The final maturity date of the Tranche B term loan
facility is March 18, 2008. The Charter Operating credit facilities also provide
for an incremental term facility of up to $1.0 billion conditioned upon receipt
of additional new commitments from lenders. Up to 50% of the borrowings under it
may be repaid on terms substantially similar to that of the Tranche A term loan
and the remaining portion on terms substantially similar to that of the Tranche
B term loan. In March 2000, $600.0 million of the incremental term facility was
drawn down. The maturity date for this term loan is September 18, 2008.
The Charter Operating credit facilities also contain provisions requiring
mandatory loan prepayments under some circumstances, such as when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of Charter Operating. In the event that any
Existing 8.250% Charter Holdings Notes remain outstanding on the date which is
six months prior to the scheduled final maturity, the term loans under the
Charter Operating credit facility will mature and the revolving credit facility
will terminate on such date.
The Charter Operating credit facilities provide Charter Operating with two
interest rate options, to which a margin is added: a base rate option, generally
the "prime rate" of interest; and an interest rate option based on the interbank
eurodollar rate. Interest rate margins for the Charter Operating credit
facilities depend upon performance measured by a leverage ratio, which is the
ratio of indebtedness to annualized operating cash flow. This leverage ratio is
based on the debt of Charter Operating and its subsidiaries, exclusive of
outstanding notes and other debt for money borrowed,
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including guarantees by Charter Operating and by Charter Holdings. The interest
rate margins for the Charter Operating credit facilities are as follows:
- with respect to the revolving loan and the Tranche A term loan, the
margin ranges from 1.5% to 2.25% for eurodollar loans and from 0.5% to
1.25% for base rate loans; and
- with respect to the Tranche B term loan, the margin ranges from 2.25% to
2.75% for eurodollar loans and from 1.25% to 1.75% for base rate loans.
The Charter Operating credit facilities contain representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants. The events of default include a
cross-default provision that is triggered by the failure of Charter Operating,
Charter Holdings or Charter Operating's subsidiaries to make payment on debt
with an outstanding total principal amount exceeding $50 million, the
acceleration of debt of this amount prior to its maturity or the failure to
comply with specified covenants. The financial covenants, which are generally
tested on a quarterly basis, measure performance against standards set for
leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
The Charter Operating credit facilities also contain a change of control
provision, making it an event of default, and permitting acceleration of the
debt, in the event that either:
- Mr. Allen, including his estate, heirs and other related entities, fails
to maintain a 25% direct or indirect voting and economic interest in
Charter Operating; or
- a change of control occurs under the indentures governing the March 1999
Charter Holdings notes or the notes.
The various negative covenants place limitations on the ability of Charter
Holdings, Charter Operating and their subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Charter Operating credit facilities to Charter
Holdings to pay interest on the March 1999 Charter Holdings notes are generally
permitted. Distributions under the Charter Operating credit facilities to
Charter Holdings to pay interest on the original notes and the new notes are
generally permitted, provided Charter Operating's cash flow for the four
complete quarters preceding the distribution exceeds 1.75 times its cash
interest expense, including the amount of such distribution. In each case, such
distributions to Charter Holdings are not permitted during the existence of a
default under the Charter Operating credit facilities.
As of December 31, 1999, $2.91 billion was outstanding and $1.19 billion
was available for borrowing under the Charter Operating credit facilities.
CREDIT FACILITY TO BE ARRANGED TO FUND A PORTION OF CAPITAL EXPENDITURES
CHARTER HOLDINGS COMMITTED SENIOR BRIDGE LOAN FACILITY. Morgan Stanley
Senior Funding, Inc. has committed to provide Charter Holdings and Charter
Capital with senior increasing rate bridge loans in an aggregate principal
amount of up to $1.0 billion. The commitment to provide the
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bridge loans expires on October 14, 2000. Each bridge loan must be in a
principal amount not less than $400.0 million and the bridge loans mature one
year from the date of the initial loan.
The conditions to closing under the bridge loans include:
- execution and delivery of satisfactory documentation of the bridge loans;
- absence of various types of material adverse changes, including material
adverse changes relative to us as well as adverse changes in the
financial and capital markets;
- the absence of certain litigation;
- our having adequate availability, in Morgan Stanley's judgment, under our
existing credit facilities;
- satisfactory completion by the bridge lenders of a due diligence review
of Charter Holdings and its subsidiaries, including, among other things,
their corporate ownership structure; and
- receipt of required approvals.
Many of these conditions are outside our control. We cannot assure you that
the closing conditions will be met.
The first loan will initially bear interest at an annual rate equal to the
yield corresponding to the bid price on our 10.25% notes less 0.25%, calculated
as of the initial date of funding of the first loan. If the first loan is not
repaid within 90 days following its initial date of funding, the interest rate
will increase by 1.25% at the end of such 90-day period and will increase by an
additional 0.50% at the end of each additional 90-day period. The second loan
will initially bear interest at an annual rate equal to the greater of: (a) the
interest rate on the first loan in effect on the date of funding of the second
loan, (b) the yield corresponding to the bid price on our 10.25% notes as of the
date of funding of the second loan. If the second loan is not repaid in whole by
the last day of each 90-day period following its funding, the interest rate on
the loan will increase on the last day of each 90-day period by an amount equal
to the increase in interest rate on the first loan on such day. Unless
additional default interest is assessed, the interest rate on the bridge loans
will be between 9% and 15% annually.
Charter Holdings and Charter Capital must use the net cash proceeds of any
of the following to pay back the loans in full plus any accrued and unpaid
interest:
- any direct or indirect public offering or private placement of any debt
or equity securities by Charter Holdings and Charter Capital or any
subsidiary;
- any future bank borrowings other than under any of the existing credit
facilities of Charter Holdings and Charter Capital and any subsidiary;
and
- any future asset sales by Charter Holdings and Charter Capital or any
subsidiary.
If the bridge loans have not been repaid in full by the maturity date, and
provided there is no default under the bridge loans or any material
indebtedness, the bridge loans will be automatically converted into nine-year
term loans.
FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the
required percentage of lenders under the senior secured credit facilities of
Falcon Cable Communications agreed to amend and restate the Falcon credit
agreement, which amendment and restatement was effective as of November 12,
1999, the date that Charter Communications Holding Company closed the Falcon
acquisition. The obligations under the Falcon credit facilities are guaranteed
by the direct parent of Falcon Cable Communications, Charter Communications VII,
LLC, and by the subsidiaries of Falcon Cable Communications. The obligations
under the Falcon credit facilities are secured by
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pledges of the ownership interests and intercompany obligations of Falcon Cable
Communications and its subsidiaries, but are not secured by other assets of
Falcon Cable Communications or its subsidiaries.
The Falcon credit facilities have maximum borrowing availability of $1.251
billion consisting of the following:
- a revolving facility in the amount of approximately $646.0 million;
- a term loan B in the amount of approximately $198.0 million;
- a term loan C in the amount of approximately $297.0 million; and
- a supplemental revolving facility of $110.0 million.
In addition to the foregoing, the Falcon credit facilities provide for
supplemental credit facilities when added to the above supplemental revolving
facility not in excess of $700.0 million. These supplemental credit facilities
are available, subject to the borrower's ability to obtain additional
commitments from the lenders. The terms of such additional borrowings are
subject to certain restrictions that may be no more materially restrictive than
the provisions of the Falcon credit facilities and will be determined at the
time of borrowing.
The revolving facility and the supplemental revolving facility amortize
beginning in 2001 and 2003, respectively, and ending on December 29, 2006 and
December 31, 2007, respectively. The term loan B and term loan C facilities
amortize beginning in 1999 and ending on June 29, 2007 and December 31, 2007,
respectively.
The Falcon credit facilities also contain provisions requiring mandatory
loan prepayments under certain circumstances, such as when significant amounts
of assets are sold and the proceeds are not promptly reinvested in assets useful
in the business of Falcon Cable Communications.
The Falcon credit facilities provide Falcon Cable Communications with two
interest rate options, to which a margin is added: a base rate option, generally
the "prime rate" of interest; and an interest rate option based on the interbank
eurodollar rate. Interest rates for these credit facilities, as well as a fee
payable on unborrowed amounts available thereunder, depend upon performance
measured by a "leverage ratio" which is the ratio of indebtedness to annualized
operating cash flow. This leverage ratio is based on the debt of Falcon Cable
Communications and its subsidiaries, exclusive of the Falcon debentures
described below. The interest rate margins for the Falcon credit facilities are
as follows:
- with respect to the revolving loan facility, the margin ranges from 1.0%
to 2.0% for eurodollar loans and from 0.0% to 1.0% for base rate loans;
- with respect to Term Loan B, the margin ranges from 1.75% to 2.25% for
eurodollar loans and from 0.75% to 1.25% for base rate loans; and
- with respect to Term Loan C, the margin ranges from 2.0% to 2.5% for
eurodollar loans and from 1.0% to 1.5% for base rate loans.
The Falcon credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The events of default for the Falcon credit facilities
include a cross-default provision that is triggered by, among other things, the
failure to make payment relating to specified outstanding debt of Falcon Cable
Communications, its direct and indirect parent companies, CC VII Holdings, LLC
and Charter Communications VII, LLC, or specified subsidiary guarantors in a
total amount of principal and accrued interest exceeding $10 million, the
acceleration of debt of this amount prior to its maturity or the failure to
comply with specified covenants. The financial covenants, which are generally
tested on
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a quarterly basis, measure performance against standards set for leverage, debt
service coverage, and operating cash flow coverage of cash interest expense.
The Falcon credit facilities also contain a change of control provision,
making it an event of default, and permitting acceleration of the debt, in the
event that either:
- Mr. Allen, including his estate, heirs and other related entities, fails
to maintain a 25% direct or indirect voting and economic interest in
Falcon Cable Communications; or
- a change of control occurs under the indentures governing the Falcon
debentures or under the terms of other specified debt of Falcon.
The various negative covenants place limitations on the ability of Falcon
Cable Communications and its subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Falcon credit facilities to pay interest on the
Falcon debentures are generally permitted, except during the existence of a
default under the Falcon credit facilities.
Distributions under the Falcon credit facilities to Charter Holdings to pay
interest on the notes and the March 1999 Charter Holdings notes will not be
permitted until CC VII Holdings, LLC is merged with and into Charter Holdings,
which merger Charter Holdings intends to effect on or about the time of the
closing of the Falcon change of control offers. After the merger, distributions
to Charter Holdings to pay interest on the notes and the March 1999 Charter
Holdings notes will generally be permitted, provided Falcon Cable
Communications' cash flow for the most recent fiscal quarter preceding the
distribution exceeds 1.75 times its cash interest expense, including the amount
of such distribution. Distributions to Charter Holdings will also be permitted
if Falcon Cable Communications meets specified financial ratios. In each case,
such distributions to Charter Holdings are not permitted during the existence of
a default under the Falcon credit facilities.
As of December 31, 1999, $865.5 million was outstanding and $385.5 million
was available for borrowing under the Falcon credit facilities. However, debt
covenants limited the amount that could be borrowed to $342.0 million at
December 31, 1999.
FANCH CREDIT FACILITIES. On November 12, 1999, the Fanch acquisition was
closed and CC VI Operating Company, LLC, the parent company of the Fanch cable
systems, entered into senior secured credit facilities arranged by Chase
Securities Inc. and Banc of America Securities LLC. The obligations under the
Fanch credit facilities are guaranteed by CC VI Operating's parent, CC VI
Holdings, LLC, and by the subsidiaries of CC VI Operating. The obligations under
the Fanch credit facilities are secured by pledges of the ownership interests
and intercompany obligations of CC VI Operating and its subsidiaries, but are
not secured by other assets of CC VI Operating or its subsidiaries.
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The Fanch credit facilities have maximum borrowings of $1.2 billion,
consisting of:
- a revolving facility in the amount of approximately $350 million;
- a term loan A in the amount of approximately $450 million; and
- a term loan B in the amount of approximately $400 million.
The revolving facility amortizes beginning in 2004 and ending in May 2008.
The term loan A and term loan B facilities amortize beginning in 2003 and ending
in May 2008 and November 2008, respectively.
In addition to the foregoing, the Fanch credit facilities provide for
supplemental credit facilities in the maximum amount of $300 million. These
supplemental credit facilities may be in the form of an additional term loan or
an aggregate increase in the amount of the term loan A or the revolving
facility. These supplemental credit facilities are available, subject to the
borrower's ability to obtain additional commitments from lenders. The
amortization of the additional term loans under the supplemental credit
facilities prior to May 2009 is limited to 1% per annum of the aggregate
principal amount of such additional term loans.
The Fanch credit facilities also contain provisions requiring mandatory
loan prepayments under specific circumstances, including when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of CC VI Operating.
The Fanch credit facilities provide CC VI Operating with the following two
interest rate options, to which a margin is added: a base rate option, generally
the prime rate of interest; and an interest rate option rate based on the
interbank Eurodollar rate. Interest rates for the Fanch credit facilities, as
well as a fee payable on unborrowed amounts available thereunder, depend upon
performance measured by a leverage ratio, which is the ratio of indebtedness to
annualized operating cash flow. This leverage ratio is based on the debt of CC
VI Operating and its subsidiaries. The interest rate margins for the Fanch
credit facilities are as follows:
- with respect to the revolving loan facility and term loan A, the margin
ranges from 1.0% to 2.25% for eurodollar loans and from 0.0% to 1.25% for
base rate loans; and
- with respect to term loan B, the margin ranges from 2.50% to 3.00% for
eurodollar loans and from 1.50% to 2.00% for base rate loans.
The Fanch credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The events of default for the Fanch credit facilities
include a cross-default provision that is triggered by the failure to make
payment on debt of CC VI Operating, CC VI Holdings and the subsidiaries of CC VI
Operating in a total amount of $25 million, the acceleration of debt of this
amount prior to its maturity or the failure to comply with specified covenants.
The financial covenants, which are generally tested on a quarterly basis,
measure performance against standards set for leverage, debt service coverage,
and operating cash flow coverage of cash interest expense.
The Fanch credit facilities also contain a change of control provision,
making it an event of default, and permitting acceleration of the debt, in the
event of any of the following:
- Mr. Allen, including his estate, heirs and other related entities, fails
to maintain a 25% direct or indirect voting and economic interest in CC
VI Operating;
- CC VI Operating is no longer a direct or indirect subsidiary of Charter
Communications Holding Company; or
- A change of control occurs under specified indebtedness of CC VI
Holdings, CC VI Operating or CC VI Operating's subsidiaries.
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Various negative covenants place limitations on the ability of CC VI
Operating and its subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Fanch credit facilities to Charter Holdings to pay
interest on the notes and the March 1999 Charter Holdings notes are generally
permitted, provided CC VI Operating's cash flow for the four complete quarters
preceding the distribution exceeds 1.75 times its cash interest expense,
including the amount of such distribution. Distributions to Charter Holdings
will also be permitted if CC VI Operating meets specified financial ratios. In
each case, such distributions to Charter Holdings are not permitted during the
existence of a default under the Fanch credit facilities.
As of December 31, 1999, approximately $850 million was outstanding and
$350 million was available for borrowing under the Fanch credit facilities.
AVALON CREDIT FACILITIES. On November 15, 1999 the Avalon acquisition was
closed and CC Michigan, LLC and CC New England, LLC (formerly Avalon Cable of
Michigan, Inc. and Avalon Cable of New England LLC, respectively) entered into
senior secured credit facilities arranged by Bank of Montreal. The obligations
under the Avalon credit facilities are guaranteed by the parent of the Avalon
borrowers, CC V Holdings, LLC (formerly Avalon Cable LLC) and by the
subsidiaries of the Avalon borrowers. The obligations under the Avalon credit
facilities are secured by pledges of the ownership interests and intercompany
obligations of the Avalon borrowers and their subsidiaries, but are not secured
by other assets of the Avalon borrowers or their subsidiaries. The Avalon credit
facilities are also secured by a pledge of CC V Holdings' equity interest in the
Avalon borrowers and intercompany obligations with respect to the Avalon
borrowers.
The Avalon credit facilities have maximum borrowings of $300 million,
consisting of:
- a revolving facility in the amount of approximately $175 million; and
- a term loan B in the amount of approximately $125 million.
We borrowed $165 million under the Avalon credit facilities to fund a
portion of the Avalon purchase price.
Amounts available under the revolving facility reduce annually in specified
percentages beginning in the fourth year following the closing date of the
facility. The term loan B facility amortizes beginning in the fourth year
following the closing date.
In addition to the foregoing, the Avalon credit facilities provide for
supplemental credit facilities in the maximum amount of $75 million. These
supplemental credit facilities may be in the form of an additional term loan or
an aggregate increase in the amount of the revolving facility. These
supplemental credit facilities will be available, subject to the borrowers'
ability to obtain additional commitments from lenders. These supplemental credit
facilities are available to the Avalon borrowers until December 31, 2003, and,
if borrowed, the weighted average life and final maturity will not be less than
that of the revolving facility.
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The Avalon credit facilities also contain provisions requiring mandatory
loan prepayments under specific circumstances, including when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of the Avalon borrowers.
The Avalon credit facilities provide the following two interest rate
options, to which a margin is added: a base rate option, generally the "prime
rate" of interest; and an interest rate option based on the interbank eurodollar
rate. Interest rates for the Avalon credit facilities, as well as a fee payable
on unborrowed amounts available thereunder, will depend upon performance
measured by a leverage ratio, which is the ratio of indebtedness to annualized
operating cash flow. This leverage ratio is based on the debt of the Avalon
borrowers and their subsidiaries. The interest rate margins for the Avalon
credit facilities are as follows:
- with respect to the revolving loan facility, the margin ranges from 1.0%
to 1.875% for eurodollar loans and from 0.0% to 0.875% for base rate
loans; and
- with respect to term loan B, the margin ranges from 2.50% to 2.75% for
eurodollar loans and from 1.50% to 1.750% for base rate loans.
The Avalon credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The events of default for the Avalon credit facilities
include a cross-default provision that is triggered by the failure to make
payment on debt of the Avalon borrowers, CC V Holdings and specified
subsidiaries of the Avalon borrowers in a total amount of $20 million, the
acceleration of debt of this amount prior to its maturity or the failure to
comply with specified covenants. The financial covenants, which are generally
tested on a quarterly basis, measure performance against standards set for
leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
The Avalon credit facilities also contain a change of control provision,
making it an event of default, and permitting acceleration of the debt, in the
event that Mr. Allen, including his estate, heirs and other related entities,
fails to maintain a 25% direct or indirect voting and economic interest in the
Avalon borrowers.
Various negative covenants place limitations on the ability of the Avalon
borrowers and their subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Avalon credit facilities to pay interest on certain
indebtedness of CC V Holdings are generally permitted, except during the
existence of a default under the Avalon credit facilities.
Distributions under the Avalon credit facilities to Charter Holdings to pay
interest on the notes and the March 1999 Charter Holdings notes are generally
permitted, provided the Avalon borrowers' consolidated cash flow for the four
complete quarters preceding the distribution exceeds 2.1 times their combined
cash interest expense, including the amount of such distribution. Distributions
to Charter Holdings will also be permitted if the Avalon borrowers meet
specified financial ratios. In each case, such distributions to Charter Holdings
are not permitted during the existence of a default under the Avalon credit
facilities.
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As of December 31, 1999, there was approximately $170 million outstanding
and $130 million was available for borrowing under the Avalon credit facilities.
BRESNAN CREDIT FACILITIES. In connection with the Bresnan acquisition, our
subsidiary, CC VIII Operating, LLC (formerly Bresnan Telecommunications Company)
amended and restated its previous senior secured credit facilities and increased
the available borrowings under the facilities. At the closing of the Bresnan
acquisition, we borrowed approximately $601.2 million to replace the borrowings
outstanding under the previous credit facilities and an additional $30.0 million
to fund a portion of the Bresnan purchase price.
The obligations under the Bresnan credit facilities are guaranteed by the
parent company of the Bresnan borrower, CC VIII Holdings, LLC (formerly Bresnan
Communications Group LLC), and by the subsidiaries of the Bresnan borrower. The
obligations under the Bresnan credit facilities are secured by pledges of the
ownership interests and intercompany obligations of the Bresnan borrower and its
subsidiaries, but are not secured by other assets of the Bresnan borrower or its
subsidiaries. The Bresnan credit facilities are also secured by a pledge of CC
VIII Holdings' equity interest in the Bresnan borrower and intercompany
obligations with respect to the Bresnan borrower.
The Bresnan credit facilities provide for borrowings of up to $900 million,
consisting of:
- a reducing revolving loan facility in the amount of $200 million;
- a term loan A facility in the amount of $403 million; and
- a term loan B facility in the amount of $297 million.
The Bresnan credit facilities provide for the amortization of the principal
amount of the term loan A facility and the reduction of the revolving loan
facility beginning March 31, 2002, with a final maturity date of June 30, 2007.
The amortization of the term loan B facility is substantially "back-ended", with
more than ninety percent of the principal balance due on the final maturity date
of February 2, 2008. The Bresnan credit facilities also provide for an
incremental facility of up to $200 million, which is conditioned upon receipt of
additional commitments from lenders. If the incremental facility becomes
available, it may be in the form of revolving loans or term loans, but may not
amortize more quickly than the reducing revolving loan facility or the term loan
A facility, and may not have a final maturity date earlier than six calendar
months after the maturity date of the term loan B facility.
The Bresnan credit facilities provide the following two interest rate
options, to which a margin is added: a base rate, generally the "prime rate" of
interest; and an interest rate option based on the interbank eurodollar rate.
Interest rate margins for the Bresnan credit facilities depend upon performance
measured by a leverage ratio, which is the ratio of total debt to annualized
operating cash flow. The leverage ratio is based on the debt of the Bresnan
borrower and its subsidiaries. The interest rate margins for the Bresnan credit
facilities are as follows:
- with respect to the term loan A facility and the revolving loan facility,
the margin ranges from 0.75% to 2.25% for eurodollar loans and from 0.0%
to 1.25% for base rate loans; and
- with respect to the term loan B facility, the margin ranges from 2.5% to
2.75% for eurodollar loans and from 1.5% to 1.75% for base rate loans.
The Bresnan credit facilities contain various representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants. The events of default for the Bresnan credit
facilities include a cross-default provision that is triggered by, among other
things, the failure to make payment on the debt of the Bresnan borrower, its
subsidiaries and CC VIII Holdings in a total amount in excess of $25 million,
the acceleration of debt of this amount prior to its maturity or failure to
comply with specified covenants The financial covenants, which are
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generally tested on a quarterly basis, measure performance against standards set
for leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
Certain negative covenants place limitations on the ability of the Bresnan
borrower and its restricted subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
The Bresnan credit facilities contain a change in control provision making
it an event of default permitting acceleration of the debt in the event of any
of the following:
- Mr. Allen, including his estate, heirs and related entities, fails to
maintain, directly or indirectly, at least 51% voting interest in the
Bresnan borrower, or ceases to own of record or beneficially, directly or
indirectly, at least 25% of the equity interests of the Bresnan borrower;
- a change of control or similar defined term shall occur in any agreement
governing debt of CC VIII Holding or the Bresnan borrower, and such debt
is at least in the amount of $25 million;
- Charter Communications Holding Company shall cease to own, directly or
indirectly, at least 51% of the equity interests in the borrower; or
- the Bresnan borrower shall cease to be a direct wholly owned subsidiary
of CC VIII Holdings.
Distributions under the Bresnan credit facilities to pay interest on
certain indebtedness of CC VIII Holdings are generally permitted, except during
the existence of a default.
Distributions under the Bresnan credit facilities to Charter Holdings to
pay interest on the notes and the March 1999 notes are generally permitted
provided the Bresnan borrower's consolidated cash flow for the four complete
quarters preceding the distribution exceeds 1.75 times the consolidated interest
expense of the Bresnan borrower, including the amount of such distribution. In
each case, such distributions to Charter Holdings are not permitted during the
existence of a default under the Bresnan credit facilities.
As of February 29, 2000, there was $647.9 million outstanding and $252.1
million was available for borrowing under the Bresnan credit facilities.
EXISTING PUBLIC DEBT
THE MARCH 1999 CHARTER HOLDINGS NOTES. The March 1999 Charter Holdings
notes were issued under three separate indentures, each dated as of March 17,
1999, among Charter Holdings and Charter Capital, as the issuers, and Harris
Trust and Savings Bank, as trustee. Charter Holdings and Charter Capital
recently exchanged these notes for new March 1999 Charter Holdings notes with
substantially similar terms, except that the new March 1999 Charter Holdings
notes are registered under the Securities Act and, therefore, do not bear
legends restricting their transfer.
The March 1999 Charter Holdings notes are general unsecured obligations of
the issuers. The March 1999 8.250% Charter Holdings notes mature on April 1,
2007 and as of December 31, 1999, there was $600.0 million in total principal
amount outstanding. The March 1999 8.625% Charter
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Holdings notes mature on April 1, 2009 and as of December 31, 1999, there was
$1.5 billion in total principal amount outstanding. The March 1999 9.920%
Charter Holdings notes mature on April 1, 2011 and as of December 31, 1999, the
total accreted value was $977.8 million. Cash interest on the March 1999 9.920%
Charter Holdings notes will not accrue prior to April 1, 2004.
The March 1999 Charter Holdings notes are senior debts of Charter Holdings
and Charter Capital. They rank equally with the current and future unsecured and
unsubordinated debt of Charter Holdings, including the original notes and the
new notes.
The issuers will not have the right to redeem the March 1999 8.250% Charter
Holdings notes prior to their maturity date on April 1, 2007. Before April 1,
2002, the issuers may redeem up to 35% of each of the March 1999 8.625% Charter
Holdings notes and the March 1999 9.920% Charter Holdings notes, in each case,
at a premium with the proceeds of certain offerings of equity securities. In
addition, on or after April 1, 2004, the issuers may redeem some or all of the
March 1999 8.625% Charter Holdings notes and the March 1999 9.920% Charter
Holdings notes at any time, in each case, at a premium. The optional redemption
price declines to 100% of the principal amount of March 1999 Charter Holdings
notes redeemed, plus accrued and unpaid interest, if any, for redemption on or
after April 1, 2007.
In the event of a specified change of control event, the issuers must offer
to repurchase any then outstanding March 1999 Charter Holdings notes at 101% of
their principal amount or accreted value, as applicable, plus accrued and unpaid
interest, if any.
The indentures governing the March 1999 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the original notes and
the new notes.
RENAISSANCE NOTES. The 10% senior discount notes due 2008 were issued by
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation, with Renaissance Media Group LLC as
guarantor and the United States Trust Company of New York as trustee.
Renaissance Media Group LLC, which is the direct or indirect parent company of
these issuers, is now a subsidiary of Charter Operating. The Renaissance 10%
notes and the Renaissance guarantee are unsecured, unsubordinated debt of the
issuers and the guarantor, respectively. In October 1998, the issuers exchanged
$163.175 million of the original issued and outstanding Renaissance 10% notes
for an equivalent value of new Renaissance 10% notes. The form and terms of the
new Renaissance 10% notes are the same in all material respects as the form and
terms of the original Renaissance 10% notes except that the issuance of the new
10% Renaissance notes was registered under the Securities Act.
There will not be any payment of interest in respect of the Renaissance 10%
notes prior to October 15, 2003. Interest on the Renaissance 10% notes shall be
paid semi-annually in cash at a rate of 10% per annum beginning on October 15,
2003. The Renaissance 10% notes are redeemable at the option of the issuer, in
whole or in part, at any time on or after April 15, 2003, initially at 105% of
their principal amount at maturity, plus accrued interest, declining to 100% of
the principal amount at maturity, plus accrued interest, on or after April 15,
2006. In addition, at any time prior to April 15, 2001, the issuers may redeem
up to 35% of the original total principal amount at maturity of the Renaissance
10% notes with the proceeds of one or more sales of equity interests at 110% of
their accreted value on the redemption date, provided that after any such
redemption at least $106 million total principal amount at maturity of
Renaissance 10% notes remains outstanding.
Our acquisition of Renaissance triggered change of control provisions of
the Renaissance 10% notes that required us to offer to purchase the Renaissance
10% notes at a purchase price equal to 101% of their accreted value on the date
of the purchase, plus accrued interest, if any. In May 1999, we made an offer to
repurchase the Renaissance 10% notes, and holders of Renaissance 10% notes
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representing 30% of the total principal amount outstanding at maturity tendered
their Renaissance 10% notes for repurchase.
The indenture governing the Renaissance 10% notes contains certain
covenants that restrict the ability of the issuers and their restricted
subsidiaries to:
- incur additional debt;
- create liens;
- engage in sale-leaseback transactions;
- pay dividends or make other distributions in respect of their equity
interests;
- redeem capital stock;
- make investments or certain other restricted payments;
- sell assets;
- issue or sell capital stock of restricted subsidiaries;
- enter into transactions with stockholders or affiliates; and
- effect a consolidation or merger.
The Renaissance 10% notes contain events of default that include a
cross-default provision triggered by the failure of Renaissance Media Group LLC
or any of its specified subsidiaries to make payment on debt at maturity with a
total principal amount of $10 million or more or the acceleration of debt of
this amount prior to maturity.
As of December 31, 1999, there was outstanding $114.4 million total
principal amount at maturity of Renaissance 10% notes, with an accreted value of
$83.0 million.
THE FALCON DEBENTURES. The Falcon debentures, consisting of 8.375% series A
senior debentures due 2010 and 9.285% Series A senior discount debentures due
2010, were issued by CC VII Holdings, LLC, formerly known as Falcon
Communications, L.P., and Falcon Funding Corporation on April 3, 1998. On August
5, 1998, the issuers commenced an exchange offer whereby the outstanding $375
million Falcon 8.375% debentures and $435.3 million Falcon 9.285% debentures
were exchanged for an equivalent value of series B senior debentures and series
B senior discount debentures. The form and terms of the new Falcon debentures
are the same as the form and terms of the corresponding original Falcon
debentures, except that the issuance of the new Falcon debentures was registered
under the Securities Act and, therefore, the new Falcon debentures do not bear
legends restricting their transfer.
In the event of specified change of control events, the holders of the
Falcon debentures have the right to require the issuers to purchase their Falcon
debentures at a price equal to 101% of their principal amount or accreted value,
as applicable, plus accrued and unpaid interest, if any, to the date of
purchase. The Falcon acquisition gave rise to this right. On December 10, 1999,
we made offers to repurchase the Falcon debentures and holders of all of the
Falcon 8.375% and 9.285% debentures tendered their debentures for repurchase.
Pursuant to the change of control offers and purchases in the "open market," all
of the 8.375% series debentures were repurchased for $388.0 million, including
unpaid and accrued interest and all of the 9.285% senior discount debentures
were repurchased for $328.1 million in February 2000.
As of December 31, 1999, there was $375 million total principal amount
outstanding on the Falcon 8.375% debentures, and the accreted value of the
Falcon 9.285% debentures was $319.1 million.
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THE AVALON 11.875% NOTES. On December 10, 1998, CC V Holdings, LLC,
formerly known as Avalon Cable LLC, and CC V Holdings Finance, Inc. (formerly
Avalon Cable Holdings Finance, Inc.) jointly issued $196 million total principal
amount at maturity of 11.875% senior discount notes due 2008. On July 22, 1999,
the issuers exchanged $196 million of the original issued and outstanding Avalon
11.875 % notes for an equivalent amount of new Avalon 11.875% notes. The form
and terms of the new Avalon 11.875% notes are substantially identical to the
original Avalon 11.875% notes except that they are registered under the
Securities Act and, therefore, are not subject to the same transfer
restrictions.
The Avalon 11.875% notes are guaranteed by certain subsidiaries of CC V
Holdings.
There will be no current payments of cash interest on the Avalon 11.875%
notes before December 1, 2003. The Avalon 11.875% notes accrete in value at a
rate of 11.875% per annum, compounded semi-annually, to an aggregate principal
amount of $196 million on December 1, 2003. After December 1, 2003, cash
interest on the Avalon 11.875% notes:
- will accrue at the rate of 11.875% per year on the principal amount at
maturity; and
- will be payable semi-annually in arrears on June 1 and December 1 of each
year, commencing June 1, 2004.
On December 1, 2003, the issuers will be required to redeem an amount equal
to $369.79 per $1,000 in principal amount at maturity of each Avalon 11.875%
note, on a pro rata basis, at a redemption price of 100% of the principal amount
then outstanding at maturity of the Avalon 11.875% notes so redeemed.
On or after December 1, 2003, the issuers may redeem the Avalon 11.875%
notes, in whole or in part, at a specified premium. The optional redemption
price declines to 100% of the principal amount of the Avalon 11.875% notes
redeemed, plus accrued and unpaid interest, if any, for redemptions on or after
December 1, 2006. Before December 1, 2001, the issuers may redeem up to 35% of
the total principal amount at maturity of the Avalon 11.875% notes with the
proceeds of one or more equity offerings and/or equity investments.
In the event of specified change of control events, holders of the Avalon
11.875% notes have the right to sell their Avalon 11.875% notes to the issuers
at 101% of:
- the accreted value of the Avalon 11.875% notes in the case of repurchases
of Avalon 11.875% notes prior to December 1, 2003; or
- the total principal amount of the Avalon 11.875% notes in the case of
repurchases of Avalon 11.875% notes on or after December 1, 2003, plus
accrued and unpaid interest and liquidated damages, if any, to the date
of purchase.
Our acquisition of Avalon triggered this right. On December 3, 1999, we
commenced a change of control repurchase offer with respect to the Avalon
11.875% notes. In January 2000, we completed change of control offers in which
we repurchased $16.3 million aggregate principal amount of the 11.875% notes at
a purchase price of 101% of accreted value as of January 28, 2000. The aggregate
repurchase price of $10.5 million was funded with proceeds of the sale of the
original notes.
Among other restrictions, the indenture governing the Avalon 11.875% notes
limits the ability of the issuers and their specified subsidiaries to:
- incur additional debt;
- pay dividends or make specified other restricted payments;
- enter into transactions with affiliates;
- make certain investments;
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- sell assets or subsidiary stock;
- engage in sale-leaseback transactions;
- create liens;
- create or permit to exist restrictions dividends or other payments from
restricted subsidiaries;
- redeem equity interests;
- merge, consolidate or sell all or substantially all of their combined
assets; and
- with respect to restricted subsidiaries, issue capital stock.
The Avalon 11.875% notes contain events of default that include a
cross-default provision triggered by the failure of CC V Operating, CC V
Holdings Finance, Inc. or any specified subsidiary to make payment on debt with
a total principal amount of $5 million or more or the acceleration of debt of
this amount prior to maturity.
As of December 31, 1999, the total accreted value of the outstanding Avalon
11.875% notes was $124.8 million. As of February 29, 2000, subsequent to the
expiration of the Avalon change of control offer for the Avalon 11.875% notes,
the total accreted value of the outstanding Avalon 11.875% notes was $116.4
million.
THE AVALON 9.375% NOTES. On December 10, 1998, CC New England, LLC,
formerly known as Avalon Cable of New England LLC, and CC V Finance Inc.,
formerly known as Avalon Cable Finance, Inc., jointly issued $150 million total
principal amount of 9.375% senior subordinated notes due December 1, 2008. On
July 22, 1999, the issuers exchanged $150 million of the Avalon 9.375% notes for
an equivalent amount of new Avalon 9.375% notes. The form and terms of the new
Avalon 9.375% notes are substantially the same as the form and terms of the
original Avalon 9.375% notes except that the new Avalon 9.375% notes are
registered under the Securities Act and do not bear a legend restricting the
transfer thereof.
Upon the occurrence of specified change of control events or the sale of
certain assets, holders of the Avalon 9.375% notes will have the opportunity to
sell their Avalon 9.375% notes to the issuers at 101% of their face amount, plus
accrued and unpaid interest and liquidated damages, if any, to the date of
purchase. Our acquisition of Avalon triggered this right. On December 3, 1999,
we commenced the Avalon change of control offer with respect to the Avalon
9.375% notes. In January 2000, we completed the change of control offer in which
we repurchased $134.0 million aggregate principal amount of the Avalon 9.375%
notes for 101% of their principal amount, plus accrued and unpaid interest
thereon through January 28, 2000. The aggregate repurchase price was $137.4
million and was funded with proceeds of the sale of the original notes.
In addition to the above change of control repurchase, we repurchased the
remaining Avalon 9.375% notes (including accrued and unpaid interest) in the
"open market" for $16.3 million, also using cash received the proceeds of the
sale of the original notes.
As of December 31, 1999, there was $150 million total principal outstanding
on the Avalon 9.375% notes.
BRESNAN NOTES. On February 2, 1999, Bresnan Communications Group LLC and
Bresnan Capital Corporation jointly issued $170 million total principal amount
of 8% series A senior notes due 2009 and $275 million total principal amount at
maturity of 9.25% series A senior discount notes due 2009. In September 1999,
the issuers of the Bresnan notes completed an exchange offer in which the
Bresnan 8% notes and the Bresnan 9.25% notes representing 100% of the principal
amount of all Bresnan notes outstanding were exchanged for new Bresnan notes.
The form and terms of the new Bresnan notes were the same in all material
respects as the form and terms of the original Bresnan notes except that the new
Bresnan notes were registered under the Securities Act and did not bear a legend
restricting their transfer.
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Upon the occurrence of specified change of control events, each holder of
Bresnan notes had the right to require the issuers to purchase all or any part
of such holder's notes at a purchase price of 101% of the principal amount, plus
accrued and unpaid interest, if any, to the purchase date, in the case of the
Bresnan 8% notes, and 101% of the accreted value thereof in the case of the
Bresnan 9.25% notes. The Bresnan acquisition triggered this right. On February
15, 2000 we commenced a change of control repurchase offer with respect to the
Bresnan notes. In March 2000, we repurchased all of the outstanding principal
amounts of the Bresnan notes plus accrued and unpaid interest or accreted value,
as applicable, for a total of $369.7 million.
As of December 31, 1999, there was $170 million total principal outstanding
on the Bresnan 8% notes and the accreted value of the outstanding Bresnan 9.25%
notes was $190.1 million.
INTERCOMPANY LOANS
For a description of certain intercompany loans made by Charter
Communications, Inc. and Charter Communications Holding Company to certain of
their subsidiaries, see "Certain Relationships and Related
Transactions -- Transactions with Management and Others -- Intercompany Loans."
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions."
The original notes were issued, and the new notes will be issued, under
three separate indentures, each dated as of January 12, 2000, among the issuers
and Harris Trust and Savings Bank, as trustee. The terms of the notes include
those stated in the indentures and those made part of the indentures by
reference to the Trust Indenture Act of 1939, as amended.
The form and terms of the new notes are the same in all material respects
to the form and terms of the original notes, except that the new notes will have
been registered under the Securities Act of 1933 and, therefore, will not bear
legends restricting the transfer thereof. The original notes have not been
registered under the Securities Act of 1933 and are subject to certain transfer
restrictions.
The following description is a summary of the material provisions of the
indentures. It does not restate the indentures in their entirety. We urge you to
read the indentures because they, and not this description, define your rights
as holders of the new notes. Copies of the indentures are available as set forth
under "Business -- Additional Information."
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are general unsecured obligations of the issuers;
- are effectively subordinated in right of payment to all existing and
future secured Indebtedness of the issuers to the extent of the value of
the assets securing such Indebtedness and to all liabilities, including
trade payables, of Charter Holdings' Subsidiaries, other than Charter
Capital;
- are equal in right of payment to all existing and future unsubordinated,
unsecured Indebtedness of the issuers; and
- are senior in right of payment to any future subordinated Indebtedness of
the issuers.
At December 31, 1999, on a pro forma basis giving effect to the offering of
the notes, acquisitions closed since that date, the recent transfers to us of
the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction, the
outstanding Indebtedness of Charter Holdings and its Subsidiaries would have
totaled approximately $11.2 billion, $6.4 billion of which would have been
Indebtedness of our Subsidiaries and effectively senior to the notes.
The notes will rank equally with the senior notes and senior discount notes
of the issuers which were issued in March 1999.
As of the date of the indentures, all the Subsidiaries of Charter Holdings
will be "Restricted Subsidiaries." However, under the circumstances described
below under "-- Certain Covenants -- Investments," we will be permitted to
designate certain of our Subsidiaries as "Unrestricted Subsidiaries."
Unrestricted Subsidiaries will generally not be subject to the restrictive
covenants in the indentures.
PRINCIPAL, MATURITY AND INTEREST OF NOTES
10.00% NOTES
The 10.00% notes are limited in aggregate principal amount to $675 million,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 10.00% notes will mature on April 1, 2009.
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Interest on the 10.00% notes will accrue at the rate of 10.00% per annum
and will be payable semi-annually in arrears on April 1 and October 1,
commencing on April 1, 2000. The issuers will make each interest payment to the
holders of record of the 10.00% notes on the immediately preceding March 15 and
September 15.
Interest on the 10.00% notes will accrue from the date of issuance of the
original notes or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
10.25% NOTES
The 10.25% notes are limited in aggregate principal amount to $325 million,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 10.25% notes will mature on January 15, 2010.
Interest on the 10.25% notes will accrue at the rate of 10.25% per annum
and will be payable semi-annually in arrears on January 15 and July 15,
commencing on July 15, 2000. The issuers will make each interest payment to the
holders of record of the 10.25% notes on the immediately preceding January 1 and
July 1.
Interest on the 10.25% notes will accrue from the date of issuance of the
original notes or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
11.75% NOTES
The 11.75% notes are limited in aggregate principal amount at maturity to
$532 million and originally were issued at an issue price of $564.48 per $1,000
principal amount at maturity, representing a yield to maturity of 11.75%,
calculated on a semi-annual bond equivalent basis, calculated from January 12,
2000. The issuers will issue 11.75% notes, in denominations of $1,000 principal
amount at maturity and integral multiples of $1,000 principal amount at
maturity. The 11.75% notes will mature on January 15, 2010.
Cash interest on the 11.75% notes will not accrue prior to January 15,
2005. Thereafter, cash interest on the 11.75% notes will accrue at a rate of
11.75% per annum and will be payable semi-annually in arrears on January 15 and
July 15, commencing on July 15, 2005. The issuers will make each interest
payment to the holders of record of the 11.75% notes on the immediately
preceding January 1 and July 1. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
The 11.75% notes will accrete at a rate of 11.75% per year to an aggregate
amount of $532 million as of January 15, 2005. For United States federal income
tax purposes, holders of the 11.75% notes will be required to include amounts in
gross income in advance of the receipt of the cash payments to which the income
is attributable. See "Certain United States Federal Tax Considerations."
OPTIONAL REDEMPTION
10.00% NOTES
The 10.00% notes will not be redeemable at the issuers' option prior to
maturity.
10.25% NOTES
At any time prior to January 15, 2003, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the 10.25%
notes on a pro rata basis or nearly as pro
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rata as practicable, at a redemption price of 110.25% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds of one or more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount of 10.25% notes
remains outstanding immediately after the occurrence of such redemption
excluding 10.25% notes held by Charter Holdings and its Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 10.25% notes will not be
redeemable at the issuers' option prior to January 15, 2005.
On or after January 15, 2005, the issuers may redeem all or a part of the
10.25% notes upon not less than 30 nor more than 60 days notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest thereon, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on January 15 of the
years indicated below:
YEAR PERCENTAGE
- - - ---- ----------
2005........................................................ 105.125%
2006........................................................ 103.417%
2007........................................................ 101.708%
2008 and thereafter......................................... 100.000%
11.75% NOTES
At any time prior to January 15, 2003, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount at maturity of the
11.75% notes on a pro rata basis or nearly as pro rata as practicable, at a
redemption price of 111.75% of the Accreted Value thereof, with the net cash
proceeds of one or more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount at maturity of
11.75% notes remains outstanding immediately after the occurrence of such
redemption, excluding 11.75% notes held by Charter Holdings and its
Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 11.75% notes will not be
redeemable at the issuers' option prior to January 15, 2005.
On or after January 15, 2005, the issuers may redeem all or a part of the
11.75% notes upon not less than 30 nor more than 60 days notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest thereon, if any, to the applicable
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redemption date, if redeemed during the twelve-month period beginning on January
15 of the years indicated below:
YEAR PERCENTAGE
- - - ---- ----------
2005........................................................ 105.875%
2006........................................................ 103.917%
2007........................................................ 101.958%
2008 and thereafter......................................... 100.000%
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each holder of new notes will have the right
to require the issuers to repurchase all or any part, equal to $1,000 or an
integral multiple thereof, of that holder's new notes pursuant to a "Change of
Control Offer." In the Change of Control Offer, the issuers will offer a "Change
of Control Payment" in cash equal to
(x) with respect to the 10.00% notes and the 10.25% notes, 101% of the
aggregate principal amount thereof repurchased plus accrued and unpaid interest
thereon, if any, to the date of purchase and
(y) with respect to the 11.75% notes, 101% of the Accreted Value plus, for
any Change of Control offer occurring after the Full Accretion Date, accrued and
unpaid interest, if any, on the date of purchase.
Within ten days following any Change of Control, the issuers will mail a
notice to each holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase notes on a certain date, the
"Change of Control Payment Date", specified in such notice, pursuant to the
procedures required by the indentures and described in such notice. The issuers
will comply with the requirements of Rule 14e-1 under the Securities Exchange
Act of 1934 or any successor rules, and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the notes as a result of a Change of Control.
On the Change of Control Payment Date, the issuers will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control payment in respect of all notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions thereof being purchased by the
issuers.
The paying agent will promptly mail to each holder of notes so tendered the
Change of Control payment for such notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each holder
a new note equal in principal amount or principal amount at maturity, as
applicable, to any unpurchased portion of the notes surrendered, if any;
provided that each such new note will be in a principal amount or principal
amount at maturity, as applicable, of $1,000 or an integral multiple thereof.
The provisions described above that require the issuers to make a Change of
Control offer following a Change of Control will be applicable regardless of
whether or not any other provisions of
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the indentures are applicable. Except as described above with respect to a
Change of Control, the indentures do not contain provisions that permit the
holders of the notes to require that the issuers repurchase or redeem the notes
in the event of a takeover, recapitalization or similar transaction.
The issuers will not be required to make a Change of Control offer upon a
Change of Control if a third party makes the Change of Control offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indentures applicable to a Change of Control offer made by the issuers
and purchases all notes validly tendered and not withdrawn under such Change of
Control offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Charter Holdings and its Subsidiaries, taken as a whole, or of
a Parent and its Subsidiaries, taken as a whole. Although there is a limited
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
the ability of a holder of notes to require the issuers to repurchase such notes
as a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of Charter Holdings and its Subsidiaries, taken as a
whole, or of a Parent and its Subsidiaries, taken as a whole, to another Person
or group may be uncertain.
ASSET SALES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Charter Holdings or a Restricted Subsidiary of Charter Holdings
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by Charter Holdings' board of
directors and evidenced by a resolution of such board of directors set
forth in an officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by Charter
Holdings or such Restricted Subsidiary is in the form of cash, Cash
Equivalents or readily marketable securities.
For purposes of this provision, each of the following shall be deemed to be
cash:
(a) any liabilities, as shown on Charter Holdings' or such Restricted
Subsidiary's most recent balance sheet, other than contingent liabilities
and liabilities that are by their terms subordinated to the notes, that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Charter Holdings or such Restricted
Subsidiary from further liability;
(b) any securities, notes or other obligations received by Charter
Holdings or any such Restricted Subsidiary from such transferee that are
converted by Charter Holdings or such Restricted Subsidiary into cash, Cash
Equivalents or readily marketable securities within 60 days after receipt
thereof, to the extent of the cash, Cash Equivalents or readily marketable
securities received in that conversion; and
(c) Productive Assets.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Charter Holdings or a Restricted Subsidiary of Charter Holdings may apply such
Net Proceeds at its option:
(1) to repay debt under the Credit Facilities or any other
Indebtedness of the Restricted Subsidiaries, other than Indebtedness
represented by a guarantee of a Restricted Subsidiary of Charter Holdings;
or
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(2) to invest in Productive Assets; provided that any Net Proceeds
which Charter Holdings or a Restricted Subsidiary of Charter Holdings has
committed to invest in Productive Assets within 365 days of the applicable
Asset Sale may be invested in Productive Assets within two years of such
Asset Sale.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $25 million, the issuers will make
an Asset Sale Offer to all holders of notes and all holders of other
Indebtedness that is of equal priority with the notes containing provisions
requiring offers to purchase or redeem with the proceeds of sales of assets to
purchase the maximum principal amount of notes and such other Indebtedness of
equal priority that may be purchased out of the Excess Proceeds, which amount
includes the entire amount of the Net Proceeds. The offer price in any Asset
Sale Offer will be payable in cash and equal to:
(x) with respect to the 10.00% notes and the 10.25% notes, 100% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase; and
(y) with respect to the 11.75% notes, 100% of the Accreted Value thereof
plus, after the Full Accretion Date, accrued and unpaid interest, if any, to the
date of purchase.
If any Excess Proceeds remain after consummation of an Asset Sale Offer,
Charter Holdings may use such Excess Proceeds for any purpose not otherwise
prohibited by the indentures. If the aggregate principal amount of notes and
such other Indebtedness of equal priority tendered into such Asset Sale Offer
exceeds the amount of Excess Proceeds, the applicable trustee shall select the
Notes and such other Indebtedness of equal priority to be purchased on a pro
rata basis. Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of
the principal national securities exchange on which the notes are listed;
or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
such method as the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on, or the Accreted Value ceases to increase on, as the case may be,
notes or portions of them called for redemption.
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CERTAIN COVENANTS
Set forth in this section are summaries of certain covenants contained in
the indentures. The covenants summarized are the following:
- Limitations on restricted payments by Charter Holdings and its Restricted
Subsidiaries. Restricted payments include
- dividends and other distributions on equity interests,
- purchases, redemptions on other acquisitions of equity interests, and
- purchases, redemptions, defeasance or other acquisitions of
subordinated debt.
- Limitations on restricted investments by Charter Holdings or its
Restricted Subsidiaries. Restricted investments include investments other
than
- investments in Restricted Subsidiaries, cash equivalents,
- non-cash consideration from an asset sale made in compliance with the
indenture,
- investments with the net cash proceeds of the issuance and sale of
equity interests,
- investments in productive assets not to exceed in the $150 million,
- other investments not exceeding $50 million in any person,
- investments in customers and suppliers which either generate accounts
receivable or are accepted in settlement of bona fide disputes, and
- the investment in Marcus Cable Holdings, LLC.
This covenant also limits Charter Holdings from allowing any Restricted
Subsidiary from becoming an Unrestricted Subsidiary.
- Limitations on the occurrence of Indebtedness and issuance of preferred
stock generally unless the leverage ratio is not greater than 8.75 to 1.0
on a pro forma basis. This does not prohibit the incurrence of permitted
debt which includes:
- borrowings up to $3.5 billion under the credit facilities,
- existing indebtedness,
- capital lease obligations, mortgage financings or purchase money
obligations in an aggregate amount of up to $25 million at any one
time outstanding for the purchase, construction or improvement of
productive assets,
- permitted refinancing indebtedness,
- intercompany indebtedness,
- hedging obligations,
- up to $300 million of additional indebtedness,
- additional indebtedness not exceeding 200% of the net cash proceeds
from the sale of equity interests to the extent not used to make
restricted payments or permitted investments, and
- the accretion or amortization of original issue discount and the write
up of indebtedness in accordance with purchase accounting.
- Prohibitions against the creation of liens except permitted liens.
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- Prohibitions against restrictions on the ability of any Restricted
Subsidiary to pay dividends or make other distributions on its capital
stock to Charter Holdings or any Restricted Subsidiary, make loans or
advances to Charter Holdings or its Restricted Subsidiaries or transfer
properties or assets to Charter Holdings or any of its Restricted
Subsidiaries. This covenant, however, does not prohibit restrictions
under
- existing indebtedness,
- the notes and the indentures,
- applicable law,
- the terms of indebtedness or capital stock of a person acquired by
Charter Holdings or any of its Restricted Subsidiaries,
- customary non-assignment provisions in leases,
- purchase money obligations,
- agreements for the sale or other disposition of a Restricted
Subsidiary restricting distributions pending its sale,
- permitted refinancing indebtedness,
- liens securing indebtedness permitted under the indentures,
- joint venture agreements,
- under ordinary course contracts with customers that restrict cash,
other deposits or net worth,
- indebtedness permitted under the indentures, and
- restrictions that are not materially more restrictive than customary
provisions in comparable financings which management determines will
not materially impair Charter Holdings' ability to make payments
required under the notes.
- Prohibitions against mergers, consolidations or the sale of all or
substantially all of an issuer's assets unless
- the issuer is the surviving corporation or the person formed by the
merger or consolidation or acquiring the assets is organized under the
law of the United States, any state or the District of Columbia,
- such person assumes all obligations under the notes and the
indentures,
- no default or event of default exists, and
- Charter Holdings or the person formed by the merger or consolidation
or acquiring all or substantially all the assets could incur at least
$1.00 of additional indebtedness under the leverage ratio or have a
leverage ratio after giving effect to the transaction no greater than
the leverage ratio of the issuer immediately prior to the transaction.
- Prohibitions against transactions with affiliates, unless Charter
Holdings delivers to the trustee:
- for transactions exceeding $15.0 million a resolution approved by a
majority of the board of directors certifying that the transaction
complies with the covenant; and
- for transactions exceeding $50.0 million a fairness opinion of an
accounting, appraisal or investment banking firm of national
standing.
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Certain transactions are not subject to the covenant including:
- existing employment agreements and new employment agreements
entered into in the ordinary course of business and consistent with
past practice; and
- management fees under agreements existing as of March 17, 1999 or
after March 17, 1999 if the percentage fees are not higher than
those under agreements existing on March 17, 1999.
- Limitations on sale and leaseback transactions exceeding three years.
- Limitations on issuances of guarantees of indebtedness.
- Prohibitions against consent payments to holders of notes unless paid to
all consenting holders.
During any period of time that
(a) either the 10.00% notes, the 10.25% notes or the 11.75% notes have
Investment Grade Ratings from both Rating Agencies, and
(b) no Default or Event of Default has occurred and is continuing under the
applicable indenture,
Charter Holdings and its Restricted Subsidiaries will not be subject to the
provisions of the indenture described under
- "-- Incurrence of Indebtedness and Issuance of preferred stock,"
- "-- Restricted Payments,"
- "-- Asset Sales,"
- "-- Sale and Leaseback Transactions,"
- "-- Dividend and Other Payment Restrictions Affecting Subsidiaries,"
- "-- Transactions with Affiliates,"
- "-- Investments" and
- clause (4) of the first paragraph of "-- Merger, Consolidation and
Sale of Assets."
If Charter Holdings and its Restricted Subsidiaries are not subject to
these covenants for any period of time as a result of the previous sentence and,
subsequently, one, or both, of the Rating Agencies withdraws its ratings or
downgrades the ratings assigned to the applicable notes below the required
Investment Grade Ratings or a Default or Event of Default occurs and is
continuing, then Charter Holdings and its Restricted Subsidiaries will
thereafter again be subject to these covenants. Compliance with the covenant
with respect to Restricted Payments made after the time of such withdrawal,
downgrade, Default or Event of Default will be calculated as if such covenant
had been in effect during the entire period of time from the Issue Date.
The new notes will not have Investment Grade Ratings from the Rating
Agencies when they are issued. Consequently, the covenants listed above remain
applicable to Charter Holdings and its Restricted Subsidiaries.
RESTRICTED PAYMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Charter Holdings' or any of its Restricted
Subsidiaries' Equity Interests, including, without
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limitation, any payment in connection with any merger or consolidation
involving Charter Holdings or any of its Restricted Subsidiaries, or to the
direct or indirect holders of Charter Holdings' or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such, other than
dividends or distributions payable in Equity Interests, other than
Disqualified Stock, of Charter Holdings or, in the case of Charter Holdings
and its Restricted Subsidiaries, to Charter Holdings or a Restricted
Subsidiary of Charter Holdings;
(2) purchase, redeem or otherwise acquire or retire for value,
including, without limitation, in connection with any merger or
consolidation involving Charter Holdings, any Equity Interests of Charter
Holdings or any direct or indirect parent of Charter Holdings or any
Restricted Subsidiary of Charter Holdings, other than, in the case of
Charter Holdings and its Restricted Subsidiaries, any such Equity Interests
owned by Charter Holdings or any Restricted Subsidiary of Charter Holdings;
or
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Indebtedness that is
subordinated to the notes, other than the notes, except a payment of
interest or principal at the Stated Maturity thereof.
All such payments and other actions set forth in clauses (1) through (3)
above are collectively referred to as "Restricted Payments," unless, at the time
of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(2) Charter Holdings would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Leverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of preferred stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Charter Holdings and each of its
Restricted Subsidiaries after the date of the indenture, excluding
Restricted Payments permitted by clauses (2), (3), (4), (5), (6), (7) and
(8) of the next succeeding paragraph, shall not exceed, at the date of
determination, the sum of:
(a) an amount equal to 100% of the Consolidated EBITDA of Charter
Holdings since the date of the indenture to the end of Charter Holdings'
most recently ended full fiscal quarter for which internal financial
statements are available, taken as a single accounting period, less the
product of 1.2 times the combined Consolidated Interest Expense of
Charter Holdings since the date of the indenture to the end of Charter
Holdings' most recently ended full fiscal quarter for which internal
financial statements are available, taken as a single accounting period,
plus
(b) an amount equal to 100% of Capital Stock Sale Proceeds less any
such Capital Stock Sale Proceeds used in connection with
(i) an Investment made pursuant to clause (6) of the definition
of "Permitted Investments" or
(ii) the incurrence of Indebtedness pursuant to clause (10) of
the covenant described under the caption "-- Incurrence of
Indebtedness and Issuance of preferred stock," plus
(c) $100 million.
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So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the indentures;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of Charter Holdings in
exchange for, or out of the net proceeds of, the substantially concurrent
sale, other than to a Subsidiary of Charter Holdings, of Equity Interests
of Charter Holdings, other than Disqualified Stock; provided that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) regardless of whether a Default then exists, the payment of any
dividend or distribution to the extent necessary to permit direct or
indirect beneficial owners of shares of Capital Stock of Charter Holdings
to pay federal, state or local income tax liabilities that would arise
solely from income of Charter Holdings or any of its Restricted
Subsidiaries, as the case may be, for the relevant taxable period and
attributable to them solely as a result of Charter Holdings, and any
intermediate entity through which the holder owns such shares or any of its
Restricted Subsidiaries being a limited liability company, partnership or
similar entity for federal income tax purposes;
(5) regardless of whether a Default then exists, the payment of any
dividend by a Restricted Subsidiary of Charter Holdings to the holders of
its common Equity Interests on a pro rata basis;
(6) the payment of any dividend on the Helicon Preferred Stock or the
redemption, repurchase, retirement or other acquisition of the Helicon
Preferred Stock in an amount not in excess of its aggregate liquidation
value;
(7) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Charter Holdings held by any member of
Charter Holdings' management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the
indenture; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $10 million
in any fiscal year of Charter Holdings; and
(8) payment of fees in connection with any acquisition, merger or
similar transaction in an amount that does not exceed an amount equal to
1.25% of the transaction value of such acquisition, merger or similar
transaction.
The amount of all Restricted Payments, other than cash, shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Charter Holdings or any of its
Restricted Subsidiaries pursuant to the Restricted Payment. The fair market
value of any assets or securities that are required to be valued by this
covenant shall be determined by the board of directors of Charter Holdings whose
resolution with respect thereto shall be delivered to the trustee. Such board of
directors' determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $100 million.
Not later than the date of making any Restricted Payment, Charter Holdings
shall deliver to the trustee an officers' certificate stating that such
Restricted Payment is permitted and setting forth the
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basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the indentures.
INVESTMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) make any Restricted Investment; or
(2) allow any Restricted Subsidiary of Charter Holdings to become an
Unrestricted Subsidiary, unless, in each case:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) Charter Holdings would, at the time of, and after giving effect
to, such Restricted Investment or such designation of a Restricted
Subsidiary as an unrestricted Subsidiary, have been permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Leverage Ratio
test set forth in the first paragraph of the covenant described below
under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock."
An Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary
if such redesignation would not cause a Default.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
(a) Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness, including Acquired
Debt, and Charter Holdings will not issue any Disqualified Stock and will not
permit any of its Restricted Subsidiaries to issue any shares of preferred stock
unless the Leverage Ratio would have been not greater than 8.75 to 1.0
determined on a pro forma basis, including a pro forma application of the net
proceeds therefrom, as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of the
most recently ended fiscal quarter.
So long as no Default shall have occurred and be continuing or would be
caused thereby, the first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by Charter Holdings and its Restricted Subsidiaries
of Indebtedness under Credit Facilities; provided that the aggregate
principal amount of all Indebtedness of Charter Holdings and its Restricted
Subsidiaries outstanding under all Credit Facilities, after giving effect
to such incurrence, does not exceed an amount equal to $3.5 billion less
the aggregate amount of all Net Proceeds of Asset Sales applied by Charter
Holdings or any of its Subsidiaries in the case of an Asset Sale since the
date of the indenture to repay Indebtedness under a Credit Facility
pursuant to the covenant described above under the caption "-- Asset
Sales";
(2) the incurrence by Charter Holdings and its Restricted Subsidiaries
of Existing Indebtedness, other than the Credit Facilities;
(3) the incurrence on the January 12, 2000 by Charter Holdings and its
Restricted Subsidiaries of Indebtedness represented by the notes;
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(4) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement, including, without limitation, the cost of
design, development, construction, acquisition, transportation,
installation, improvement, and migration, of Productive Assets of Charter
Holdings or any of its Restricted Subsidiaries in an aggregate principal
amount not to exceed $75 million at any time outstanding;
(5) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace, in whole or
in part, Indebtedness, other than intercompany Indebtedness, that was
permitted by the indentures to be incurred under the first paragraph of
this covenant or clauses (2) or (3) of this paragraph;
(6) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among Charter Holdings
and any of its Wholly Owned Restricted Subsidiaries; provided that this
clause does not permit Indebtedness between Charter Holdings or any of its
Restricted Subsidiaries, as creditor or debtor, as the case may be, unless
otherwise permitted by the indentures; provided, further, that:
(a) if Charter Holdings is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior payment in full
in cash of all obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
Charter Holdings or a Wholly Owned Restricted Subsidiary thereof and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either Charter Holdings or a Wholly Owned Restricted
Subsidiary thereof, shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Charter Holdings or any of its
Restricted Subsidiaries that was not permitted by this clause (6);
(7) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the indentures to be
outstanding;
(8) the guarantee by Charter Holdings of Indebtedness of a Restricted
Subsidiary of Charter Holdings that was permitted to be incurred by another
provision of this covenant;
(9) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount at
any time outstanding, not to exceed $300 million;
(10) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount at
any time outstanding not to exceed 200% of the net cash proceeds received
by Charter Holdings from the sale of its Equity Interests, other than
Disqualified Stock, after the date of the indentures to the extent such net
cash proceeds have not been applied to make Restricted Payments or to
effect other transactions pursuant to the covenant described above under
the subheading "-- Restricted Payments" or to make Permitted Investments
pursuant to clause (6) of the definition thereof; and
(11) the accretion or amortization of original issue discount and the
write up of Indebtedness in accordance with purchase accounting.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness
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(a) meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (11) above, or
(b) is entitled to be incurred pursuant to the first paragraph of this
covenant,
Charter Holdings will be permitted to classify and from time to time to
reclassify such item of Indebtedness on the date of its incurrence in any manner
that complies with this covenant. For avoidance of doubt, Indebtedness incurred
pursuant to a single agreement, instrument, program, facility or line of credit
may be classified as Indebtedness arising in part under one of the clauses
listed above, and in part under any one or more of the clauses listed above, to
the extent that such Indebtedness satisfies the criteria for such clauses.
(b) Notwithstanding the foregoing, in no event shall any Restricted
Subsidiary of Charter Holdings consummate a Subordinated Debt Financing or a
preferred stock Financing. A "Subordinated Debt Financing" or a "preferred stock
Financing", as the case may be, with respect to any Restricted Subsidiary of
Charter Holdings shall mean a public offering or private placement, whether
pursuant to Rule 144A under the Securities Act or otherwise, of Subordinated
Notes or preferred stock, whether or not such preferred stock constitutes
Disqualified Stock, as the case may be, of such Restricted Subsidiary to one or
more purchasers, other than to one or more Affiliates of Charter Holdings.
"Subordinated Notes" with respect to any Restricted Subsidiary of Charter
Holdings shall mean Indebtedness of such Restricted Subsidiary that is
contractually subordinated in right of payment to any other Indebtedness of such
Restricted Subsidiary, including, without limitation, Indebtedness under the
Credit Facilities. The foregoing limitation shall not apply to
(i) any Indebtedness or preferred stock of any Person existing at the
time such Person is merged with or into or became a Subsidiary of Charter
Holdings; provided that such Indebtedness or preferred stock was not
incurred or issued in connection with, or in contemplation of, such Person
merging with or into, or becoming a Subsidiary of, Charter Holdings, and
(ii) any Indebtedness or preferred stock of a Restricted Subsidiary
issued in connection with, and as part of the consideration for, an
acquisition, whether by stock purchase, asset sale, merger or otherwise, in
each case involving such Restricted Subsidiary, which Indebtedness or
preferred stock is issued to the seller or sellers of such stock or assets;
provided that such Restricted Subsidiary is not obligated to register such
Indebtedness or preferred stock under the Securities Act or obligated to
provide information pursuant to Rule 144A under the Securities Act.
LIENS
Charter Holdings will not, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or
trade payables on any asset now owned or hereafter acquired, except Permitted
Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
Charter Holdings will not, directly or indirectly, create or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of Charter Holdings to:
(1) pay dividends or make any other distributions on its Capital Stock
to Charter Holdings or any of its Restricted Subsidiaries, or with respect
to any other interest or participation in, or measured by, its profits, or
pay any Indebtedness owed to Charter Holdings or any of its Restricted
Subsidiaries;
(2) make loans or advances to Charter Holdings or any of its
Restricted Subsidiaries; or
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(3) transfer any of its properties or assets to Charter Holdings or
any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indentures,
including, without limitation, the Credit Facilities, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a whole,
with respect to such dividend and other payment restrictions than those
contained in such Existing Indebtedness, as in effect on the date of the
indentures;
(2) the indentures and the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Charter Holdings or any of its Restricted Subsidiaries as in
effect at the time of such acquisition, except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired; provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indentures to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary of Charter Holdings that restricts distributions by such
Restricted Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "-- Liens" that limit the right of Charter Holdings or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) restrictions contained in the terms of Indebtedness permitted to
be incurred under the covenant described under the caption "-- Incurrence
of Indebtedness and Issuance of preferred stock"; provided that such
restrictions are no more restrictive than the terms contained in the Credit
Facilities as in effect on January 12, 2000; and
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(13) restrictions that are not materially more restrictive than
customary provisions in comparable financings and the management of Charter
Holdings determines that such restrictions will not materially impair
Charter Holdings' ability to make payments as required under the notes.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
Neither of the issuers may, directly or indirectly:
(1) consolidate or merge with or into another Person, whether or not
such Issuer is the surviving corporation; or
(2) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(A) either:
(1) such issuer is the surviving corporation; or
(2) the Person formed by or surviving any such consolidation or
merger, if other than such Issuer, or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made is a
Person organized or existing under the laws of the United States, any
state thereof or the District of Columbia, provided that if the Person
formed by or surviving any such consolidation or merger with either
Issuer is a limited liability company or other Person other than a
corporation, a corporate co-issuer shall also be an obligor with respect
to the notes;
(B) the Person formed by or surviving any such consolidation or
merger, if other than Charter Holdings, or the Person to which such
sale, assignment, transfer, conveyance or other disposition shall have
been made assumes all the obligations of Charter Holdings under the
notes and the indentures pursuant to agreements reasonably satisfactory
to the trustee;
(C) immediately after such transaction no Default or Event of
Default exists; and
(D) Charter Holdings or the Person formed by or surviving any such
consolidation or merger, if other than Charter Holdings, will, on the
date of such transaction after giving pro forma effect thereto and any
related financing transactions as if the same had occurred at the
beginning of the applicable four-quarter period, either
(1) be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Leverage Ratio test set forth in the
first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of preferred stock" or
(2) have a Leverage Ratio immediately after giving effect to
such consolidation or merger no greater than the Leverage Ratio
immediately prior to such consolidation or merger.
In addition, Charter Holdings may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Charter Holdings and any of its
Wholly Owned Subsidiaries.
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TRANSACTIONS WITH AFFILIATES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to Charter Holdings or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Charter Holdings or
such Restricted Subsidiary with an unrelated Person; and
(2) Charter Holdings delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$15 million, a resolution of the board of directors of Charter Holdings
set forth in an officers' certificate certifying that such Affiliate
Transaction complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the members of the board
of directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$50 million, an opinion as to the fairness to the holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any existing employment agreement entered into by Charter Holdings
or any of its Subsidiaries and any employment agreement entered into by
Charter Holdings or any of its Restricted Subsidiaries in the ordinary
course of business and consistent with the past practice of Charter
Holdings or such Restricted Subsidiary;
(2) transactions between or among Charter Holdings and/or its
Restricted Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of Charter Holdings, and customary indemnification and
insurance arrangements in favor of directors, regardless of affiliation
with Charter Holdings or any of its Restricted Subsidiaries;
(4) payment of management fees pursuant to management agreements
either
(A) existing on January 12, 2000 or
(B) entered into after January 12, 2000,
to the extent that such management agreements provide for percentage
fees no higher than the percentage fees existing under the management
agreements existing on January 12, 2000;
(5) Restricted Payments that are permitted by the provisions of the
covenant described above under the caption "-- Restricted Payments" and
Restricted Investments that are permitted by the provisions of the
indentures described above under the caption "Restricted Payments --
Investments"; and
(6) Permitted Investments.
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SALE AND LEASEBACK TRANSACTIONS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Charter Holdings may enter into a sale and leaseback transaction if:
(1) Charter Holdings could have
(a) incurred Indebtedness in an amount equal to the Attributable
Debt relating to such sale and leaseback transaction under the Leverage
Ratio test in the first paragraph of the covenant described above under
the caption "-- Incurrence of Additional Indebtedness and Issuance of
preferred stock" and
(b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "-- Liens"; and
(2) the transfer of assets in that sale and leaseback transaction is
permitted by, and Charter Holdings applies the proceeds of such transaction
in compliance with, the covenant described above under the caption
"-- Asset Sales."
The foregoing restrictions do not apply to a sale and leaseback transaction
if the lease is for a period, including renewal rights, of not in excess of
three years.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
Charter Holdings will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee or pledge any assets to secure the payment
of any other Indebtedness of Charter Holdings, except in respect of the Credit
Facilities (the "Guaranteed Indebtedness") unless
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for the Guarantee (a "Subsidiary Guarantee") of
the payment of the notes by such Restricted Subsidiary, and
(2) until one year after all the notes have been paid in full in cash, such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against Charter Holdings or any other Restricted
Subsidiary of Charter Holdings as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall
not be applicable to any Guarantee or any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary.
If the Guaranteed Indebtedness is subordinated to the notes, then the
Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the notes.
PAYMENTS FOR CONSENT
Charter Holdings will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the indentures or the notes
unless such consideration is offered to be paid and is paid to all holders of
the notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
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REPORTS
Whether or not required by the Securities and Exchange Commission, so long
as any notes are outstanding, Charter Holdings will furnish to the holders of
notes, within the time periods specified in the Securities and Exchange
Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Securities and Exchange
Commission on Forms 10-Q and 10-K if Charter Holdings were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and, with respect to the
annual information only, a report on the annual financial statements by
Charter Holdings' independent public accountants; and
(2) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if Charter Holdings were
required to file such reports.
If Charter Holdings has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Charter
Holdings and its Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of Charter Holdings.
In addition, whether or not required by the Securities and Exchange
Commission, Charter Holdings will file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the Securities and
Exchange Commission for public availability within the time periods specified in
the Securities and Exchange Commission's rules and regulations, unless the
Securities and Exchange Commission will not accept such a filing, and make such
information available to securities analysts and prospective investors upon
request.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default with respect to the notes of
each series:
(1) default for 30 days in the payment when due of interest on the
notes;
(2) default in payment when due of the principal of or premium, if
any, on the notes;
(3) failure by Charter Holdings or any of its Restricted Subsidiaries
to comply with the provisions described under the captions "-- Change of
Control" or "-- Merger, Consolidation, or Sale of Assets";
(4) failure by Charter Holdings or any of its Restricted Subsidiaries
for 30 days after written notice thereof has been given to Charter Holdings
by the trustee or to Charter Holdings and the trustee by holders of at
least 25% of the aggregate principal amount of the notes outstanding to
comply with any of their other covenants or agreements in the indentures;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Charter Holdings or any of its
Restricted Subsidiaries, or the payment of which is guaranteed by Charter
Holdings or any of its Restricted Subsidiaries, whether such Indebtedness
or guarantee now exists, or is created after the date of the indentures, if
that default:
(a) is caused by a failure to pay at final stated maturity the
principal amount on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
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(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $100 million or
more;
(6) failure by Charter Holdings or any of its Restricted Subsidiaries
to pay final judgments which are non-appealable aggregating in excess of
$100 million, net of applicable insurance which has not been denied in
writing by the insurer, which judgments are not paid, discharged or stayed
for a period of 60 days; and
(7) Charter Holdings or any of its Significant Subsidiaries pursuant
to or within the meaning of bankruptcy law:
(a) commences a voluntary case,
(b) consents to the entry of an order for relief against it in an
involuntary case,
(c) consents to the appointment of a custodian of it or for all or
substantially all of its property, or
(d) makes a general assignment for the benefit of its creditors; or
(8) a court of competent jurisdiction enters an order or decree under
any bankruptcy law that:
(a) is for relief against Charter Holdings or any of its
Significant Subsidiaries in an involuntary case;
(b) appoints a custodian of Charter Holdings or any of its
Significant Subsidiaries or for all or substantially all of the property
of Charter Holdings or any of its Significant Subsidiaries; or
(c) orders the liquidation of Charter Holdings or any of its
Significant Subsidiaries;
and the order or decree remains unstayed and in effect for 60 consecutive
days.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Charter Holdings, all outstanding
notes will become due and payable immediately without further action or notice.
If any other Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes of
each series may declare their respective notes to be due and payable
immediately.
Holders of the notes may not enforce the indentures or the notes except as
provided in the indentures. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes of each series may
direct the trustee in its exercise of any trust or power. The trustee may
withhold from holders of the notes notice of any continuing Default or Event of
Default, except a Default or Event of Default relating to the payment of
principal or interest, if it determines that withholding notice is in their
interest.
The holders of a majority in aggregate principal amount of the notes of
each series then outstanding by notice to the trustee may on behalf of the
holders of all of the notes waive any existing Default or Event of Default and
its consequences under the indentures except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the notes.
Charter Holdings will be required to deliver to the trustee annually a
statement regarding compliance with the indentures. Upon becoming aware of any
Default or Event of Default, Charter Holdings will be required to deliver to the
trustee a statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, MEMBERS AND
STOCKHOLDERS
No director, officer, employee, incorporator, member or stockholder of
Charter Holdings, as such, shall have any liability for any obligations of
Charter Holdings under the notes or the indentures, or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each holder
of notes by accepting a note waives and releases all such liability. The waiver
and release will be part of the consideration for issuance of the notes. The
waiver may not be effective to waive liabilities under the federal securities
laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Charter Holdings may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding Notes to receive payments in
respect of the Accreted Value or principal of, premium, if any, and
interest on such Notes when such payments are due from the trust referred
to below;
(2) Charter Holdings' obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Charter Holdings' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indentures.
In addition, Charter Holdings may, at its option and at any time, elect to
have the obligations of Charter Holdings released with respect to certain
covenants that are described in the indentures ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Charter Holdings must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding notes on the stated maturity or on
the applicable redemption date, as the case may be, and Charter Holdings
must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, Charter Holdings shall have
delivered to the trustee an opinion of counsel reasonably acceptable to the
trustee confirming that
(a) Charter Holdings has received from, or there has been published
by, the Internal Revenue Service a ruling or
(b) since the date of the indentures, there has been a change in
the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on
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the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Charter Holdings shall have
delivered to the trustee an opinion of counsel reasonably acceptable to the
trustee confirming that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either:
(a) on the date of such deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit; or
(b) insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, other than the indentures, to which Charter
Holdings or any of its Restricted Subsidiaries is a party or by which
Charter Holdings or any of its Restricted Subsidiaries is bound;
(6) Charter Holdings must have delivered to the trustee an opinion of
counsel to the effect that after the 91st day, assuming no intervening
bankruptcy, that no holder is an insider of Charter Holdings following the
deposit and that such deposit would not be deemed by a court of competent
jurisdiction a transfer for the benefit of either issuer in its capacity as
such, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally;
(7) Charter Holdings must deliver to the trustee an officers'
certificate stating that the deposit was not made by Charter Holdings with
the intent of preferring the holders of notes over the other creditors of
Charter Holdings with the intent of defeating, hindering, delaying or
defrauding creditors of Charter Holdings or others; and
(8) Charter Holdings must deliver to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
Notwithstanding the foregoing, the opinion of counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all notes
not theretofore delivered to the trustee for cancellation
(a) have become due and payable or
(b) will become due and payable on the maturity date within one year under
arrangements satisfactory to the trustee for the giving of notice of redemption
by the trustee in the name, and at the expense, of the issuers.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided below, the indentures or the notes of each series may be
amended or supplemented with the consent of the holders of at least a majority
in aggregate principal amount, in the case of the 10.00% notes and the 10.25%
notes, and aggregate principal amount at maturity, in the case of the 11.75%
notes, of the then outstanding notes of each series. This includes consents
obtained in connection with a purchase of notes, a tender offer for notes, or an
exchange offer for notes. Any existing Default or compliance with any provision
of the indentures or the notes may be
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waived with the consent of the holders of a majority in aggregate principal
amount, in the case of the 10.00% notes and the 10.25% notes, and aggregate
principal amount at maturity, in the case of the 11.75% notes, of the then
outstanding notes of each series. This includes consents obtained in connection
with a purchase of notes, a tender offer for notes, or an exchange offer for
notes. Without the consent of each holder affected, an amendment or waiver may
not, with respect to any notes held by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the payment provisions with respect to the redemption of the
notes, other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders";
(3) reduce the rate of or extend the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the notes, except a rescission of
acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment default
that resulted from such acceleration;
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indentures relating to
waivers of past Defaults or the rights of holders of notes to receive
payments of Accreted Value or principal of, or premium, if any, or interest
on the notes;
(7) waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders";
(8) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
the issuers and the trustee may amend or supplement the indentures or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of either issuer's obligations to
holders of notes in the case of a merger or consolidation or sale of all or
substantially all of such issuer's assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect the
legal rights under the indentures of any such holder; or
(5) to comply with requirements of the Securities and Exchange
Commission in order to effect or maintain the qualification of the
indentures under the Trust Indenture Act or otherwise as necessary to
comply with applicable law.
GOVERNING LAW
The indentures and the notes will be governed by the laws of the State of
New York.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Charter Holdings, the indentures limit
its right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such
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claim as security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Securities and Exchange Commission
for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indentures provide that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indentures at the request of any
holder of notes, unless such holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indentures
without charge by writing to Charter Communications Holdings, LLC, 12444
Powerscourt Drive, Suite 100, St. Louis, Missouri 63131, Attention: Corporate
Secretary.
BOOK-ENTRY, DELIVERY AND FORM
The notes will initially be issued in the form of global securities held in
book-entry form. The notes will be deposited with the trustee as custodian for
the Depository Trust Company, and the Depository Trust Company or its nominee
will initially be the sole registered holder of the notes for all purposes under
the indentures. Unless it is exchanged in whole or in part for debt securities
in definitive form as described below, a global security may not be transferred.
However, transfers of the whole security between the Depository Trust Company
and its nominee or their respective successors are permitted.
Upon the issuance of a global security, the Depository Trust Company or its
nominee will credit on its internal system the principal amount at maturity of
the individual beneficial interest represented by the global security acquired
by the persons in sale of the original notes. Ownership of beneficial interests
in a global security will be limited to persons that have accounts with the
Depository Trust Company or persons that hold interests through participants.
Ownership of beneficial interests will be shown on, and the transfer of that the
Depository Trust Company or its nominee relating to interests of participants
and the records of participants relating to interests of persons other than
participants. The laws of some jurisdictions require that some purchasers of
securities take physical delivery of the securities in definitive form. These
limits and laws may impair the ability to transfer beneficial interests in a
global security.
Principal and interest payments on global securities registered in the name
of the Depository Trust Company's nominee will be made in immediate available
funds to the Depository Trust Company's nominee as the registered owner of the
global securities. The issuers and the trustee will treat the Depository Trust
Company's nominee as the owner of the global securities for all other purposes
as well. Accordingly, the issuers, the trustee, any paying agent and the initial
purchasers will have no direct responsibility or liability for any aspect of the
records relating to payments made on account of beneficial interests in the
global securities or for maintaining, supervising or reviewing any records
relating to these beneficial interests. It is the Depository Trust Company's
current practice, upon receipt of any payment of principal or interest, to
credit direct participants' accounts on the payment date according to their
respective holdings of beneficial interests in the global securities. These
payments will be the responsibility of the direct and indirect participants and
not of the Depository Trust Company, the issuers, the trustee or the initial
purchasers.
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So long as the Depository Trust Company or its nominee is the registered
owner or holder of the global security, the Depository Trust Company or its
nominee, as the case may be, will be considered the sole owner or holder of the
notes represented by the global security for the purposes of:
(1) receiving payment on the notes;
(2) receiving notices; and
(3) for all other purposes under the indentures and the notes.
Beneficial interests in the notes will be evidenced only by, and transfers of
the notes will be effected only through, records maintained by the Depository
Trust Company and its participants.
Except as described above, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of certificated notes
in definitive form and will not be considered the holders of the global security
for any purposes under the indentures. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of the
Depository Trust Company. And, if that person is not a participant, the person
must rely on the procedures of the participant through which that person owns
its interest, to exercise any rights of a holder under the indentures. Under
existing industry practices, if the issuers request any action of holders or an
owner of a beneficial interest in a global security desires to take any action
under the indentures, the Depository Trust Company would authorize the
participants holding the relevant beneficial interest to take that action. The
participants then would authorize beneficial owners owning through the
participants to take the action or would otherwise act upon the instructions of
beneficial owners owning through them.
The Depository Trust Company has advised the issuers that it will take any
action permitted to be taken by a holder of notes only at the direction of one
or more participants to whose account with the Depository Trust Company
interests in the global security are credited. Further, the Depository Trust
Company will take action only as to the portion of the aggregate principal
amount at maturity of the notes as to which the participant or participants has
or have given the direction.
Although the Depository Trust Company has agreed to the procedures
described above in order to facilitate transfers of interests in global
securities among participants of the Depository Trust Company, it is under no
obligation to perform these procedures, and the procedures may be discontinued
at any time. None of the issuers, the trustee, any agent of the issuers or the
initial purchasers will have any responsibility for the performance by the
Depository Trust Company or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
The Depository Trust Company has provided the following information to us.
The Depository Trust Company is a:
(1) limited-purpose trust company organized under the New York Banking Law;
(2) a banking organization within the meaning of the New York Banking Law;
(3) a member of the United States Federal Reserve System;
(4) a clearing corporation within the meaning of the New York Uniform
Commercial Code; and
(5) a clearing agency registered under the provisions of Section 17A of the
Securities Exchange Act.
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CERTIFICATED NOTES
Notes represented by a global security are exchangeable for certificated
notes only if:
(1) the Depository Trust Company notifies the issuers that it is unwilling
or unable to continue as depository or if the Depository Trust Company
ceases to be a registered clearing agency, and a successor depository
is not appointed by the issuers within 90 days;
(2) the issuers determine not to require all of the notes to be represented
by a global security and notifies the trustee of its decision; or
(3) an Event of Default or an event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default relating
to the notes represented by the global security has occurred and is
continuing.
Any global security that is exchangeable for certificated notes in
accordance with the preceding sentence will be transferred to, and registered
and exchanged for, certificated notes in authorized denominations and registered
in the names as the Depository Trust Company or its nominee may direct. However,
a global security is only exchangeable for a global security of like
denomination to be registered in the name of the Depository Trust Company or its
nominee. If a global security becomes exchangeable for certificated notes:
(1) certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
(2) payment of principal, premium, if any, and interest on the certificated
notes will be payable, and the transfer of the certificated notes will
be registrable, at the office or agency of the issuers maintained for
these purposes; and
(3) no service charge will be made for any issuance of the certificated
notes, although the issuers may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection with the
issuance.
CERTAIN DEFINITIONS
This section sets forth certain defined terms used in the indentures.
Reference is made to the indentures for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
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"ACCRETED VALUE" is defined to mean, for any Specific Date, the amount
calculated pursuant to (1), (2), (3) or (4) for each $1,000 of principal amount
at maturity of the 11.75% notes:
(1) if the Specified Date occurs on one or more of the following dates
(each a "Semi-Annual Accrual Date") the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL
ACCRUAL DATE ACCRETED VALUE
- - - ------------ --------------
Issue Date............................................... $ 564.48
January 15, 2000......................................... 565.02
July 15, 2000............................................ 598.21
January 15, 2001......................................... 633.36
July 15, 2001............................................ 670.57
January 15, 2002......................................... 709.96
July 15, 2002............................................ 751.67
January 15, 2003......................................... 795.84
July 15, 2003............................................ 842.59
January 15, 2004......................................... 892.09
July 15, 2004............................................ 944.51
January 15, 2005......................................... $1,000.00
(2) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of
(a) $564.48 and
(b) an amount equal to the product of
(x) the Accreted Value for the first Semi-Annual Accrual Date
less $564.48 multiplied by
(y) a fraction, the numerator of which is the number of days
from the Issue Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is the number of
days elapsed from the Issue Date to the first Semi-Annual Accrual
Date, using a 360-day year of twelve 30-day months;
(3) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of
(a) the Accreted Value for the Semi-Annual Accrual Date immediately
preceding such Specified Date and
(b) an amount equal to the product of
(1) the Accreted Value for the immediately following Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding
Semi-Annual Accrual Date multiplied by
(2) a fraction, the numerator of which is the number of days
from the immediately preceding Semi-Annual Accrual Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180; or
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(4) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control",
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"ASSET ACQUISITION" means
(a) an Investment by Charter Holdings or any of its Restricted Subsidiaries
in any other Person pursuant to which such Person shall become a Restricted
Subsidiary of Charter Holdings or any of its Restricted Subsidiaries or shall be
merged with or into Charter Holdings or any of its Restricted Subsidiaries, or
(b) the acquisition by Charter Holdings or any of its Restricted
Subsidiaries of the assets of any Person which constitute all or substantially
all of the assets of such Person, any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of Charter Holdings
and its Subsidiaries, taken as a whole, will be governed by the provisions
of the indentures described above under the caption "-- Change of Control"
and/or the provisions described above under the caption "-- Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant; and
(2) the issuance of Equity Interests by any of Charter Holdings'
Restricted Subsidiaries or the sale of Equity Interests in any of Charter
Holdings' Restricted Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $100
million; or
(b) results in net proceeds to Charter Holdings and its Restricted
Subsidiaries of less than $100 million;
(2) a transfer of assets between or among Charter Holdings and its
Restricted Subsidiaries;
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(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary of Charter Holdings to Charter Holdings or to another Wholly
Owned Restricted Subsidiary of Charter Holdings;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments" and a
Restricted Investment that is permitted by the covenant described above
under the caption "-- Certain Covenants -- Investments"; and
(5) the incurrence of Permitted Liens and the disposition of assets
related to such Permitted Liens by the secured party pursuant to a
foreclosure.
"ASSET SALE OFFER" means a situation in which the issuers commence an offer
to all holders to purchase notes pursuant to Section 4.11 of the indentures.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessee, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person," as such term is used in Section 13(d)(3)
of the Exchange Act, such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"CABLE RELATED BUSINESS" means the business of owning cable television
systems and businesses ancillary, complementary and related thereto.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
(4) any other interest, other than any debt obligation, or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate net cash proceeds,
including the fair market value of the non-cash proceeds, as determined by an
independent appraisal firm, received by Charter Holdings since the date of the
indentures
(x) as a contribution to the common equity capital or from the issue
or sale of Equity Interests of Charter Holdings, other than Disqualified
Stock or
(y) from the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of Charter Holdings
that have been converted into or exchanged
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for such Equity Interests other than Equity Interests, or Disqualified
Stock or debt securities, sold to a Subsidiary of Charter Holdings.
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged in
support thereof, having maturities of not more than twelve months from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of twelve months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having combined
capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating at the time of acquisition of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having a rating of at least "P-1" from Moody's or
at least "A-1" from S&P and in each case maturing within twelve months
after the date of acquisition;
(6) corporate debt obligations maturing within twelve months after the
date of acquisition thereof, rated at the time of acquisition at least
"Aaa" or "P-1" by Moody's or "AAA" or "A-1" by S&P;
(7) auction-rate preferred stocks of any corporation maturing not
later than 45 days after the date of acquisition thereof, rated at the time
of acquisition at least "Aaa" by Moody's or "AAA" by S&P;
(8) securities issued by any state, commonwealth or territory of the
United States, or by any political subdivision or taxing authority thereof,
maturing not later than six months after the date of acquisition thereof,
rated at the time of acquisition at least "A" by Moody's or S&P; and
(9) money market or mutual funds at least 90% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(8) of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition, other than by
way of merger or consolidation, in one or a series of related transactions,
of all or substantially all of the assets of Charter Holdings and its
Subsidiaries, taken as a whole, or of a Parent and its Subsidiaries, taken
as a whole, to any "person," as such term is used in Section 13(d)(3) of
the Exchange Act, other than Paul G. Allen or a Related Party;
(2) the adoption of a plan relating to the liquidation or dissolution
of Charter Holdings or a Parent;
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which is that any
"person," as defined above, other than Paul G. Allen and Related Parties,
becomes the Beneficial Owner, directly or indirectly, of more than 35% of
the Voting Stock of Charter Holdings or a Parent, measured by voting power
rather than the number of shares, unless Paul G. Allen or a Related Party
Beneficially Owns, directly or indirectly, a greater percentage of Voting
Stock of Charter Holdings or such Parent, as the case may be, measured by
voting power rather than the number of shares, than such person;
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(4) after the date of the indentures, the first day on which a
majority of the members of the board of directors of Charter Holdings or a
Parent are not Continuing Directors; or
(5) Charter Holdings or a Parent consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges with or into,
Charter Holdings or a Parent, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of Charter Holdings or such
Parent is converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting Stock of Charter
Holdings or such Parent outstanding immediately prior to such transaction
is converted into or exchanged for Voting Stock, other than Disqualified
Stock, of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee
Person immediately after giving effect to such issuance.
"CONSOLIDATED EBITDA" means with respect to any Person, for any period, the
net income of such Person and its Restricted Subsidiaries for such period plus,
to the extent such amount was deducted in calculating such net income:
(1) Consolidated Interest Expense;
(2) income taxes;
(3) depreciation expense;
(4) amortization expense;
(5) all other non-cash items, extraordinary items, nonrecurring and
unusual items and the cumulative effects of changes in accounting
principles reducing such net income, less all non-cash items, extraordinary
items, nonrecurring and unusual items and cumulative effects of changes in
accounting principles increasing such net income, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in
conformity with GAAP;
(6) amounts actually paid during such period pursuant to a deferred
compensation plan; and
(7) for purposes of the covenant described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" only, Management Fees;
provided that Consolidated EBITDA shall not include:
(x) the net income, or net loss, of any Person that is not a
Restricted Subsidiary ("Other Person"), except
(i) with respect to net income, to the extent of the amount of
dividends or other distributions actually paid to such Person or any
of its Restricted Subsidiaries by such Other Person during such
period and
(ii) with respect to net losses, to the extent of the amount of
investments made by such Person or any Restricted Subsidiary of such
Person in such Other Person during such period;
(y) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (3) of the covenant
described under the subheading "-- Certain Covenants -- Restricted
Payments," and in such case, except to the extent includable pursuant to
clause (x) above, the net income, or net loss, of any Other Person
accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with such Person or any Restricted
Subsidiaries or all or substantially all of the property and assets of
such Other Person are acquired by such Person or any of its Restricted
Subsidiaries; and
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(z) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary, other than any agreement or
instrument evidencing Indebtedness or preferred stock outstanding on the
date of the indentures or incurred or issued thereafter in compliance
with the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of preferred
stock," provided that
(a) the terms of any such agreement restricting the declaration
and payment of dividends or similar distributions apply only in the
event of a default with respect to a financial covenant or a covenant
relating to payment, beyond any applicable period of grace, contained
in such agreement or instrument,
(b) such terms are determined by such Person to be customary in
comparable financings and
(c) such restrictions are determined by the Charter Holdings not
to materially affect the issuers' ability to make principal or
interest payments on the notes when due.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person as of any
date of determination, the sum, without duplication, of:
(1) the total amount of outstanding Indebtedness of such Person and
its Restricted Subsidiaries, plus
(2) the total amount of Indebtedness of any other Person, that has
been Guaranteed by the referent Person or one or more of its Restricted
Subsidiaries, plus
(3) the aggregate liquidation value of all Disqualified Stock of such
Person and all preferred stock of Restricted Subsidiaries of such Person,
in each case, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, without duplication, the sum of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization or original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments, if any, pursuant to Hedging Obligations; and
(2) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and
(3) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon;
excluding, however, any amount of such interest of any Restricted Subsidiary if
the net income of such Restricted Subsidiary is excluded in the calculation of
Consolidated EBITDA pursuant to clause (z) of the definition thereof, but only
in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Consolidated EBITDA pursuant to clause (z) of
the definition thereof, in each case, on a consolidated basis and in accordance
with GAAP.
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"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the board of directors of Charter Holdings who:
(1) was a member of such board of directors on the date of the
indentures; or
(2) was nominated for election or elected to such board of directors
with the approval of a majority of the Continuing Directors who were
members of such board of directors at the time of such nomination or
election or whose election or appointment was previously so approved.
"CREDIT FACILITIES" means, with respect to Charter Holdings and/or its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing, including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables, or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person, whether or not such Person
is the Surviving Person, or the sale, assignment, or transfer, lease conveyance
or other disposition of all or substantially all of such Person's assets or
Capital Stock.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof, or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Charter Holdings to repurchase such
Capital Stock upon the occurrence of a change of control or an asset sale shall
not constitute Disqualified Stock if the terms of such Capital Stock provide
that Charter Holdings may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "-- Certain Covenants --
Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"EQUITY OFFERING" means any private or underwritten public offering of
Qualified Capital Stock of Charter Holdings of which the gross proceeds to
Charter Holdings are at least $25 million.
"EXISTING INDEBTEDNESS" means Indebtedness of Charter Holdings and its
Restricted Subsidiaries in existence on the date of the indentures, until such
amounts are repaid.
"FULL ACCRETION DATE" means January 15, 2005, the first date on which the
Accreted Value of the 11.75% notes has accreted to an amount equal to the
principal amount at maturity of the 11.75% notes.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on January 12, 2000.
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"GUARANTEE" or "GUARANTEE" means a guarantee other than by endorsement of
negotiable instruments for collection in the ordinary course of business, direct
or indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness, measured as the lesser of the
aggregate outstanding amount of the Indebtedness so guaranteed and the face
amount of the guarantee.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) interest rate option agreements, foreign currency exchange
agreements, foreign currency swap agreements; and
(3) other agreements or arrangements designed to protect such Person
against fluctuations in interest and currency exchange rates.
"HELICON PREFERRED STOCK" means the preferred limited liability company
interest of Charter-Helicon LLC with an aggregate liquidation value of $25
million.
"INDEBTEDNESS" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit, or reimbursement agreements in respect thereof;
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) in respect of the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing the notional amount of any Hedging Obligations,
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations, would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person, whether or not such Indebtedness is assumed by
the specified Person, and, to the extent not otherwise included, the guarantee
by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's and BBB- (or the equivalent) by S&P.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions, excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business, and
purchases or
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other acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP.
"LEVERAGE RATIO" means, as of any date, the ratio of:
(1) the Consolidated Indebtedness of Charter Holdings on such date to
(2) the aggregate amount of Consolidated EBITDA for Charter Holdings
for the most recently ended fiscal quarter for which internal financial
statements are available multiplied by four (the "Reference Period").
In addition to the foregoing, for purposes of this definition,
"Consolidated EBITDA" shall be calculated on a pro forma basis after giving
effect to
(1) the issuance of the notes;
(2) the incurrence of the Indebtedness or the issuance of the
Disqualified Stock or other preferred stock of a Restricted Subsidiary, and
the application of the proceeds therefrom, giving rise to the need to make
such calculation and any incurrence or issuance, and the application of the
proceeds therefrom, or repayment of other Indebtedness or Disqualified
Stock or other preferred stock of a Restricted Subsidiary, other than the
incurrence or repayment of Indebtedness for ordinary working capital
purposes, at any time subsequent to the beginning of the Reference Period
and on or prior to the date of determination, as if such incurrence, and
the application of the proceeds thereof, or the repayment, as the case may
be, occurred on the first day of the Reference Period;
(3) any Dispositions or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted
Subsidiaries, including any person that becomes a Restricted Subsidiary as
a result of such Asset Acquisition, incurring, assuming or otherwise
becoming liable for or issuing Indebtedness, Disqualified Stock or
preferred stock, made on or subsequent to the first day of the Reference
Period and on or prior to the date of determination, as if such Disposition
or Asset Acquisition, including the incurrence, assumption or liability for
any such Indebtedness, Disqualified Stock or preferred stock and also
including any Consolidated EBITDA associated with such Asset Acquisition,
including any cost savings adjustments in compliance with Regulation S-X
promulgated by the Securities and Exchange Commission, had occurred on the
first day of the Reference Period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code, or equivalent statutes, of any jurisdiction.
"MANAGEMENT FEES" means the fees payable to Charter Communications, Inc.
pursuant to the management agreements between Charter Communications, Inc. and
Charter Communications Operating, LLC and between Charter Communications, Inc.
and Restricted Subsidiaries of Charter Holdings, including any Person that
becomes a Restricted Subsidiary of Charter Holdings in connection with the
acquisition of Bresnan Communications Company Limited Partnership, as such
agreements exist on the January 12, 2000, or on the date of such acquisition in
the case of the aforementioned Bresnan acquisition, including any amendment or
replacement thereof, provided that any such amendment or replacement is not more
disadvantageous to the holders of the notes in any material respect from such
management agreements existing on the January 12, 2000.
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"MARCH 1999 NOTES ISSUE DATE" means March 17, 1999.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"NET PROCEEDS" means the aggregate cash proceeds received by Charter
Holdings or any of its Restricted Subsidiaries in respect of any Asset Sale,
including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale, net of the
direct costs relating to such Asset Sale, including, without limitation, legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof or taxes paid or payable as a
result thereof, including amounts distributable in respect of owners', partners'
or members' tax liabilities resulting from such sale, in each case after taking
into account any available tax credits or deductions and any tax sharing
arrangements and amounts required to be applied to the repayment of
Indebtedness.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither Charter Holdings nor any of its Restricted
Subsidiaries
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness,
(b) is directly or indirectly liable as a guarantor or otherwise,
or
(c) constitutes the lender;
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder of
any other Indebtedness, other than the notes, of Charter Holdings or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of Charter Holdings or
any of its Restricted Subsidiaries.
"PARENT" means Charter Communications, Inc. and/or Charter Communications
Holding Company, LLC, as applicable, and any successor Person or any Person
succeeding to the direct or indirect ownership of Charter Holdings.
"PERMITTED INVESTMENTS" means:
(1) any Investment by Charter Holdings in a Restricted Subsidiary of
Charter Holdings or any Investment by a Restricted Subsidiary of Charter
Holdings in Charter Holdings;
(2) any Investment in Cash Equivalents;
(3) any Investment by Charter Holdings or any Restricted Subsidiary of
Charter Holdings in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Charter
Holdings; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Charter Holdings or a Restricted Subsidiary of Charter
Holdings;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
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(5) any Investment made out of the net cash proceeds of the issue and
sale since the Existing Notes Issue Date, other than to a Subsidiary of
Charter Holdings, of Equity Interests, other than Disqualified Stock, of
Charter Holdings to the extent that
(a) such net cash proceeds have not been applied to make a
Restricted Payment or to effect other transactions pursuant to the
covenant described above under the caption "--Restricted Payments," or
(b) such net cash proceeds have not been used to incur Indebtedness
pursuant to clause (10) of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of preferred stock";
(6) Investments in Productive Assets having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together with all
other Investments made pursuant to this clause (6) since the March 1999
Charter Holdings notes issue date, not to exceed $150 million; provided
that either Charter Holdings or any of its Restricted Subsidiaries, after
giving effect to such Investments, will own at least 20% of the Voting
Stock of such Person;
(7) other Investments in any Person having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together with all
other Investments made pursuant to this clause (7) since the March 1999
Charter Holdings notes issue date, not to exceed $50 million; and
(8) Investments in customers and suppliers in the ordinary course of
business which either
(A) generate accounts receivable, or
(B) are accepted in settlement of bona fide disputes.
"PERMITTED LIENS" means:
(1) Liens on the assets of Charter Holdings securing Indebtedness and
other Obligations under clause (1) of the covenant "--Incurrence of
Indebtedness and Issuance of preferred stock";
(2) Liens in favor of Charter Holdings;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Charter Holdings; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with Charter Holdings;
(4) Liens on property existing at the time of acquisition thereof by
Charter Holdings; provided that such Liens were in existence prior to the
contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) purchase money mortgages or other purchase money liens, including
without limitation any Capitalized Lease Obligations, incurred by Charter
Holdings upon any fixed or capital assets acquired after the Issue Date or
purchase money mortgages, including without limitation Capitalized Lease
Obligations, on any such assets, whether or not assumed, existing at the
time of acquisition of such assets, whether or not assumed, so long as
(a) such mortgage or lien does not extend to or cover any of the
assets of Charter Holdings, except the asset so developed, constructed,
or acquired, and directly related assets
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such as enhancements and modifications thereto, substitutions,
replacements, proceeds, including insurance proceeds, products, rents
and profits thereof, and
(b) such mortgage or lien secures the obligation to pay the
purchase price of such asset, interest thereon and other charges, costs
and expenses, including, without limitation, the cost of design,
development, construction, acquisition, transportation, installation,
improvement, and migration, and incurred in connection therewith, or the
obligation under such Capitalized Lease Obligation, only;
(7) Liens existing on the date of the indentures, other than in
connection with the Credit Facilities;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(10) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(11) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligation, bankers'
acceptance, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business, exclusive of obligations for the payment
of borrowed money;
(12) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of Charter
Holdings or any of its Restricted Subsidiaries;
(13) Liens of franchisors or other regulatory bodies arising in the
ordinary course of business;
(14) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code financing
statements for precautionary purposes relating to arrangements not
constituting Indebtedness;
(15) Liens arising from the rendering of a final judgment or order
against Charter Holdings or any of its Restricted Subsidiaries that does
not give rise to an Event of Default;
(16) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(17) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Hedging Obligations and forward contracts,
options, future contracts, future options or similar agreements or
arrangements designed solely to protect Charter Holdings or any of its
Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
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(18) Liens consisting of any interest or title of licensor in the
property subject to a license;
(19) Liens on the Capital Stock of Unrestricted Subsidiaries;
(20) Liens arising from sales or other transfers of accounts
receivable which are past due or otherwise doubtful of collection in the
ordinary course of business;
(21) Liens incurred in the ordinary course of business of Charter
Holdings, with respect to obligations which in the aggregate do not exceed
$50 million at any one time outstanding;
(22) Liens in favor of the trustee arising under the provisions in the
indentures under the subheading "-- Compensation and Indemnity"; and
(23) Liens in favor of the trustee for its benefit and the benefit of
holders of the Notes, as their respective interests appear.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Charter
Holdings or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries, other than intercompany Indebtedness; provided that unless
permitted otherwise by the indentures, no Indebtedness of Charter Holdings or
any of its Restricted Subsidiaries may be issued in exchange for, or the net
proceeds of are used to extend, refinance, renew, replace, defease or refund
Indebtedness of Charter Holdings or any of its Restricted Subsidiaries;
provided, further, that:
(1) the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount of,
or accreted value, if applicable, plus accrued interest and premium, if
any, on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded, plus the amount of reasonable expenses incurred in
connection therewith;
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Charter Holdings or by any
of its Restricted Subsidiaries who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"PRODUCTIVE ASSETS" means assets, including assets of a referent Person
owned directly or indirectly through ownership of Capital Stock, of a kind used
or useful in the Cable Related Business.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Stock.
"RATING AGENCIES" means Moody's and S&P.
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"RELATED PARTY" means:
(1) the spouse or an immediate family member, estate or heir of Paul
G. Allen; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of Paul G.
Allen and/or such other Persons referred to in the immediately preceding
clause (1).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED PAYMENTS" are set forth above under the caption "Certain
Covenants- Restricted Payments."
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of the
McGraw-Hill Companies, Inc. or any successor to the rating agency business
thereof.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of Charter
Holdings which is a "Significant Subsidiary" as defined in Rule 1-02(w) of
Regulation S-X under the Securities Act.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness on the January 12, 2000, or, if none, the original
documentation governing such Indebtedness, and shall not include any contingent
obligations to repay, redeem or repurchase any such interest or principal prior
to the date originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which at
least 50% of the total voting power of shares of Capital Stock entitled
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person or a combination thereof, and, in the
case of any such entity of which 50% of the total voting power of shares of
Capital Stock is so owned or controlled by such Person or one or more of
the other Subsidiaries of such Person, such Person and its Subsidiaries
also has the right to control the management of such entity pursuant to
contract or otherwise; and
(2) any partnership
(a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person, or
(b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person, or any combination thereof.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of Charter Holdings that is
designated by the board of directors of Charter Holdings as an Unrestricted
Subsidiary pursuant to a board resolution, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Charter Holdings or any Restricted Subsidiary of Charter
Holdings unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Charter Holdings or any Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of Charter Holdings unless such terms constitute
Investments permitted by the covenant described above under the caption
"-- Certain Covenants -- Investments";
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(3) is a Person with respect to which neither Charter Holdings nor any
of its Restricted Subsidiaries has any direct or indirect obligation
(a) to subscribe for additional Equity Interests or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Charter Holdings or any of its
Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Charter Holdings or any of its Restricted
Subsidiaries or has at least one executive officer that is not a director
or executive officer of Charter Holdings or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Charter Holdings as an Unrestricted
Subsidiary shall be evidenced to the trustee by filing with the trustee a
certified copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Investments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indentures and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of Charter Holdings as of such
date and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption "Certain Covenants -- Incurrence
of Indebtedness and Issuance of preferred stock", Charter Holdings shall be in
default of such covenant. The board of directors of Charter Holdings may at any
time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of Charter Holdings of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if:
(1) such Indebtedness is permitted under the covenant described under
the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of preferred stock," calculated on a pro forma basis as if such designation
had occurred at the beginning of the four-quarter reference period; and
(2) no Default or Event of Default would be in existence following
such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the board of
directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth,
that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which, other than directors' qualifying shares, shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following sets forth the opinion of Paul, Hastings, Janofsky & Walker
LLP, our legal counsel, as to the material United States federal income tax
consequences of
(1) the exchange offer relevant to U.S. holders, and
(2) the ownership and disposition of the new notes relevant to U.S. holders
and, in certain circumstances, non-U.S. holders.
The following deals only with notes held as capital assets within the
meaning of section 1221 of the Internal Revenue Code of 1986, as amended. The
following does not address special situations, such as those of broker-dealers,
tax-exempt organizations, individual retirement accounts and other tax deferred
accounts, financial institutions, insurance companies, or persons holding notes
as part of a hedging or conversion transaction, a straddle or a constructive
sale. Furthermore, the following is based upon the provisions of the Internal
Revenue Code and regulations, rulings and judicial decisions promulgated under
the Internal Revenue Code and judicial decisions as of the date hereof. Such
authorities may be repealed, revoked, or modified, possibly with retroactive
effect, so as to result in United States federal income tax consequences
different from those discussed below. In addition, except as otherwise
indicated, the following does not consider the effect of any applicable foreign,
state, local or other tax laws or estate or gift tax considerations.
We have not sought, and will not seek, any rulings from the IRS with
respect to the positions discussed below. There can be no assurance that the IRS
will not take a different position concerning the tax consequences of the
exchange offer and ownership or disposition of the original notes or new notes,
or that any such position would not be sustained.
As used herein, a "United States person" is
(1) a citizen or resident of the U.S.,
(2) a corporation, partnership or other entity created or organized in or
under the laws of the U.S. or any political subdivision thereof,
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source,
(4) a trust if
(A) a United States court is able to exercise primary supervision over
the administration of the trust, and
(B) one or more United States persons have the authority to control
all substantial decisions of the trust,
(5) a certain type of trust in existence on August 20, 1996, which was
treated as a United States person under the Internal Revenue Code in effect
immediately prior to such date and which has made a valid election to be treated
as a United States person under the Internal Revenue Code, and
(6) any person otherwise subject to U.S. federal income tax on a net income
basis in respect of its worldwide taxable income.
A U.S. holder is a beneficial owner of a note who is a United States
person. A non-U.S. holder is a beneficial owner of a note that is not a U.S.
holder.
THE EXCHANGE OFFER
Pursuant to the exchange offer, holders are entitled to exchange the
original notes for new notes that will be substantially identical in all
material respects to the original notes, except that the new
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notes will be registered with the Securities and Exchange Commission and
therefore will not be subject to transfer restrictions. The exchange pursuant to
the exchange offer as described above will not result in a taxable event.
Accordingly,
(1) no gain or loss will be realized by a U.S. holder upon receipt of a new
note,
(2) the holding period of the new note will include the holding period of
the original note exchanged therefor and
(3) the adjusted tax basis of the new notes will be the same as the
adjusted tax basis of the original notes exchanged at the time of such exchange.
UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS
PAYMENTS OF INTEREST ON THE 10.00% NOTES AND THE 10.25% NOTES
Interest on a 10.00% note or a 10.25% note, as the case may be, will be
taxable to a U.S. Holder as ordinary income from domestic sources at the time it
is paid or accrued in accordance with the U.S. Holder's regular method of
accounting for tax purposes.
ORIGINAL ISSUE DISCOUNT ON THE 11.75% NOTES
The 11.75% notes will be issued with original issue discount. Such notes
will be issued with original issue discount because they will be issued at an
issue price which is substantially less than their stated principal amount at
maturity, and because interest on such notes will not be payable until July 15,
2005. Each U.S. Holder will be required to include in income in each year, in
advance of receipt of cash payments on such Senior Discount Notes to which such
income is attributable, original issue discount income as described below.
The amount of original issue discount with respect to the 11.75% notes will
be equal to the excess of
(1) note's "stated redemption price at maturity" over
(2) its "issue price."
The issue price of the 11.75% notes will be equal to the price to the
public, at which a substantial amount of such notes is initially sold for money
excluding any sales to a bond house, broker or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler. The
stated redemption price at maturity of such a note is the total of all payments
provided by the 11.75% note, including stated interest payments.
A U.S. holder of such a note is required to include in gross income for
U.S. federal income tax purposes an amount equal to the sum of the "daily
portions" of such original issue discount for all days during the taxable year
on which the holder holds such note. The daily portions of original issue
discount required to be included in such holder's gross income in a taxable year
will be determined on a constant yield basis. A pro rata portion of the original
issue discount on such note which is attributable to the "accrual period" in
which such day is included will be allocated to each day during the taxable year
in which the holder holds the 11.75% notes. Accrual periods with respect to such
a note may be of any length and may vary in length over the term of the 11.75%
notes as long as
(1) no accrual period is longer than one year, and
(2) each scheduled payment of interest or principal on such note occurs on
either the first or final day of an accrual period.
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The amount of original issue discount attributable to each accrual period
will be equal to the product of
(1) the "adjusted issue price" at the beginning of such accrual period, and
(2) the "yield to maturity" of the instrument, stated in a manner
appropriately taking into account the length of the accrual period.
The yield to maturity is the discount rate that, when used in computing the
present value of all payments to be made under the 11.75% notes, produces an
amount equal to the issue price of such notes. The adjusted issue price of such
a note at the beginning of an accrual period is generally defined as the issue
price of such note plus the aggregate amount of original issue discount that
accrued in all prior accrual periods, less any cash payments made on the 11.75%
notes. Accordingly, a U.S. holder of such a note will be required to include
original issue discount in gross income for United States federal income tax
purposes in advance of the receipt of cash attributable to such income. The
amount of original issue discount allocable to an initial short accrual period
may be computed using any reasonable method if all other accrual periods, other
than a final short accrual period, are of equal length. The amount of original
issue discount allocable to the final accrual period at maturity of a 11.75%
note is the difference between
(A) the amount payable at the maturity of such note, and
(B) such note's adjusted issue price as of the beginning of the final
accrual period.
Payments on the 11.75% notes, including principal and stated interest
payments, are not separately included in a U.S. holder's income. Such payments
are treated first as payments of accrued original issue discount to the extent
of such accrued original issue discount and the excess as payments of principal,
which reduce the U.S. holder's adjusted tax basis in such notes.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON ORIGINAL ISSUE DISCOUNT
In the event of a change of control, we will be required to offer to redeem
all of the notes, at redemption prices specified elsewhere in this prospectus.
If we receive net proceeds from one or more equity offerings, we may, at our
option, use all or a portion of such net proceeds to redeem in the aggregate up
to 35% of the aggregate principal amount at maturity of the 10.25% notes and up
to 35% of the aggregate principal amount at maturity of the 11.75% notes at
redemption prices specified elsewhere herein, provided that at least 65% of the
aggregate principal amount at maturity of the 10.25% notes and the 11.75% notes,
respectively, remains outstanding after each such redemption. Computation of the
yield and maturity of the notes is not affected by such redemption rights and
obligations if, based on all the facts and circumstances as of January 12, 2000,
the stated payment schedule of the notes, that does not reflect the change of
control event or equity offering event, is significantly more likely than not to
occur. We have determined that, based on all of the facts and circumstances as
of the issue date, it is significantly more likely than not that the notes will
be paid according to their stated schedule.
We may redeem the 10.25% notes and the 11.75% notes, in whole or in part,
at any time on or after February 1, 2005, at redemption prices specified
elsewhere herein plus accrued and unpaid stated interest, if any, on the notes
so redeemed but excluding the date of redemption. The United States Treasury
Regulations contain rules for determining the "maturity date" and the stated
redemption price at maturity of an instrument that may be redeemed prior to its
stated maturity date at the option of the issuer. Under United States Treasury
Regulations, solely for the purposes of the accrual of original issue discount,
it is assumed that an issuer will exercise any option to redeem a debt
instrument if such exercise would lower the yield to maturity of the debt
instrument. We will not be presumed to redeem the notes prior to their stated
maturity under these rules because the exercise of such options would not lower
the yield to maturity of the notes.
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U.S. Holders may wish to consult their own tax advisors regarding the
treatment of such contingencies.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
Because the 11.75% notes constitute "applicable high yield discount
obligations", referred to as "AHYDOs", the portion of each 11.75% note that is
allocable to beneficial owners of Charter Holdings that are C corporations, such
as Charter Communications, Inc., will be treated as an AHYDO for U.S. federal
income tax purposes. The 11.75% notes constitute AHYDOs because they have a
yield to maturity that is at least five percentage points above the applicable
federal rate at the time of issuance of the 11.75% notes and the 11.75% notes
are issued with "significant original issue discount." An 11.75% note is treated
as having significant original issue discount because the aggregate amount that
will be includable in gross income with respect to such 11.75% note for periods
before the close of any accrual period ending after the date that is five years
after the date of issue exceeds the sum of (1) the aggregate amount of interest
to be paid in cash under the 11.75% note before the close of such accrual period
and (2) the product of the initial issue price of such 11.75% note and its yield
to maturity.
Because the 11.75% notes constitute AHYDOs, to the extent that the 11.75%
notes are allocable to beneficial owners of Charter Holdings that are C
corporations, such as Charter Communications, Inc.,
(1) the "disqualified portion" of the original issue discount that accrues
on the 11.75% notes allocable to beneficial owners of Charter Holdings that are
C corporations, such as Charter Communications, Inc., may be treated as a
dividend generally eligible for the dividends received deduction in the case of
corporate U.S. Holders,
(2) beneficial owners of Charter Holdings that are C corporations, such as
Charter Communications, Inc., will not be entitled to deduct their distributive
share of the disqualified portion of original issue discount that accrues on the
11.75% notes, and
(3) beneficial owners of Charter Holdings that are C corporations, such as
Charter Communications, Inc., will be allowed to deduct the remainder of their
distributive share of original issue discount only when Charter Holdings pays
amounts attributable to such original issue discount in cash.
The disqualified portion of original issue discount is equal to the lesser
of the amount of original issue discount or the portion of the "total return"
with respect to the 11.75% notes in excess of the applicable federal rate plus
six percentage points. The total return is the excess of all payments to be made
with respect to a 11.75% note over its issue price.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange, retirement or other taxable disposition of a note,
the holder will recognize gain or loss in an amount equal to the difference
between
(1) the amount of cash and the fair market value of other property received
in the exchange and
(2) the holder's adjusted tax basis in such note.
Amounts attributable to accrued but unpaid interest on the 10.00% notes and
the 10.25% notes will be treated as ordinary interest income. A holder's
adjusted tax basis in a note will equal the purchase price paid by such holder
for the note increased by the amount of any market discount, and in the case of
a 11.75% note by any original issue discount previously included in income by
such holder with respect to such note and decreased by the amount of any
amortizable bond premium
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applied to reduce interest on the notes and, in the case of a 11.75% note, by
any payments received thereon.
Gain or loss realized on the sale, exchange, retirement or other taxable
disposition of a note will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange, retirement, or other taxable
disposition, the note has been held for more than 12 months. The maximum rate of
tax on long-term capital gains with respect to notes held by an individual is
20%. The deductibility of capital losses is subject to certain limitations.
MARKET DISCOUNT
A holder receives a "market discount" when he/she
(1) purchases a 10.00% note or a 10.25% note for an amount below the issue
price, or
(2) purchases a 11.75% note for an amount below the adjusted issue price on
the date of purchase, as determined in accordance with the original issue
discount rules above.
Under the market discount rules, a U.S. holder will be required to treat
any partial principal payment on, or any gain on the sale, exchange, retirement
or other disposition of, a note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such note at the time of such payment or disposition. In
addition, the U.S. holder may be required to defer, until the maturity of the
note or its earlier disposition in a taxable transaction, the deduction of a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the note, unless the U.S.
holder elects to accrue such discount on a constant interest rate method. A U.S.
holder may elect to include market discount in income currently as it accrues,
on either a ratable or constant interest rate method. If this election is made,
the holder's basis in the note will be increased to reflect the amount of income
recognized and the rules described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service.
AMORTIZABLE BOND PREMIUM; ACQUISITION PREMIUM
A U.S. holder that
(1) purchases a 10.00% note or a 10.25% note for an amount in excess of the
principal amount, or
(2) purchases a 11.75% note for an amount in excess of the stated
redemption price will be considered to have purchased such note with
"amortizable bond premium." A U.S. holder generally may elect to amortize the
premium over the remaining term of the note on a constant yield method as
applied with respect to each accrual period of the note, and allocated ratably
to each day within an accrual period in a manner substantially similar to the
method of calculating daily portions of original issue discount, as described
above. However, because the notes may be optionally redeemed for an amount that
is in excess of their principal amount, special rules apply that could result in
a deferral of the amortization of bond premium until later in the term of the
note. The amount amortized in any year will be treated as a reduction of the
U.S. holder's interest income, including original issue discount income, from
the note. Bond premium on a note held by a U.S. holder that does not make such
an election will decrease the gain or increase the loss otherwise recognized
upon disposition of the note. The election to amortize premium on a constant
yield method, once made, applies to all
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debt obligations held or subsequently acquired by the electing U.S. holder on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the Internal Revenue Service.
A U.S. Holder that purchases a 11.75% note for an amount that is greater
than the adjusted issue price of the 11.75% note on the date of purchase, as
determined in accordance with the original issue discount rules, above, will be
considered to have purchased such 11.75% note at an "acquisition premium." A
holder of a 11.75% note that is purchased at an acquisition premium may reduce
the amount of the original issue discount otherwise includible in income with
respect to the 11.75% note by the "acquisition premium fraction." The
acquisition premium fraction is that fraction the numerator of which is the
excess of the holder's adjusted tax basis in the 11.75% note immediately after
its acquisition over the adjusted issue price of the 11.75% note and the
denominator of which is the excess of the sum of all amounts payable on the
11.75% note after the purchase date over the adjusted issue price of the 11.75%
note. Alternatively, a holder of a 11.75% note that is purchased at an
acquisition premium may elect to compute the original issue discount accrual on
the 11.75% note by treating the purchase as a purchase of the 11.75% note at
original issuance, treating the purchase price as the issue price, and applying
the original issue discount rules thereto using a constant yield method.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
The payment to a non-U.S. holder of interest on a note, will not be subject
to U.S. federal withholding tax pursuant to the "portfolio interest exception,"
provided that
(1) the non-U.S. holder does not actually or constructively own 10% or more
of the capital or profits interest in the issuers and is not a controlled
foreign corporation that is related to the issuers within the meaning of the
Code and
(2) either
(A) the beneficial owner of the notes certifies to the issuers or their
agent, under penalties of perjury, that it is not a U.S. holder and provides its
name and address on U.S. Treasury Form W-8, or a suitable substitute form, or
(B) a securities clearing organization, bank or other financial institution
that holds the notes on behalf of such non-U.S. holder in the ordinary course of
its trade or business certifies under penalties of perjury that such Form W-8,
or suitable substitute form, has been received from the beneficial owner by it
or by a financial institution between it and the beneficial owner and furnishes
the payor with a copy thereof.
Recently adopted Treasury Regulations that will be effective January 1,
2001, provide alternative methods for satisfying the certification requirement
described in (2) above. These regulations will generally require, in the case of
notes held by a foreign partnership, that the certificate described in (2) above
be provided by the partners rather than by the foreign partnership, and that the
partnership provide certain information including a U.S. tax identification
number. For purposes of the United States federal withholding tax, payment of
interest includes the amount of any payment that is attributable to original
issue discount that accrued while such non-U.S. holder held the note.
If a non-U.S. holder cannot satisfy the requirements of the portfolio
interest exception described above, payments of interest, including the amount
of any payment that is attributable to original issue discount that accrued
while such non-U.S. holder held the note, made to such non-U.S. holder will
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be subject to a 30% withholding tax, unless the beneficial owner of the note
provides us or our paying agent, as the case may be, with a properly executed
(1) Internal Revenue Service Form 1001, or successor form, claiming an
exemption from or reduction in the rate of withholding under the benefit of a
tax treaty or
(2) Internal Revenue Service Form 4224, or successor form, stating that
interest paid on the note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or business
in the United States.
If a non-U.S. holder of a note is engaged in a trade or business in the
United States and interest on the note is effectively connected with the conduct
of such trade or business, such non-U.S. holder, will be subject to U.S. federal
income tax on such interest, including original issue discount, in the same
manner as if it were a U.S. holder. In addition, if such non-U.S. holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% of
its effectively connected earnings and profits, subject to adjustment, for that
taxable year unless it qualifies for a lower rate under an applicable income tax
treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a person other than a U.S. holder generally
will not be subject to U.S. federal income tax provided
(1) such gain is not effectively connected with the conduct by such holder
of a trade or business in the United States,
(2) in the case of gains derived by an individual, such individual is not
present in the United States for 183 days or more in the taxable year of the
disposition and certain other conditions are met and
(3) the non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. federal income tax law applicable to certain expatriates.
FEDERAL ESTATE TAX
Subject to applicable estate tax treaty provisions, notes held by an
individual who is not a citizen or resident of the United States for federal
estate tax purposes at the time of his or her death will not be subject to U.S.
federal estate tax if the interest on the notes qualifies for the portfolio
interest exemption from U.S. federal income tax under the rules described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest, and accruals of
original issue discount, on a note, and to the proceeds of the sale or
redemption of a note before maturity. We, our agent, a broker, the trustee or
the paying agent, as the case may be, will be required to withhold from any
payment that is subject to backup withholding a tax equal to 31% of such payment
if a U.S. holder fails to furnish his taxpayer identification number, certify
that such number is correct, certify that such holder is not subject to backup
withholding or otherwise comply with the applicable backup withholding rules.
Certain U.S. holders, including all corporations, are not subject to backup
withholding and information reporting requirements.
Non-U.S. holders other than corporations may be subject to backup
withholding and information reporting requirements. However, backup withholding
and information reporting requirements do not apply to payments of portfolio
interest, including original issue discount, made by us or a paying agent to
non-U.S. holders if the appropriate certification is received, provided that the
payor does not have actual knowledge that the holder is a U.S. holder. If any
payments of principal and interest are made
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to the beneficial owner of a note by or through the foreign office of a foreign
custodian, foreign nominee or other foreign agent of such beneficial owner, or
if the foreign office of a foreign "broker", as defined in the applicable
Treasury Regulations, pays the proceeds of the sale, redemption or other
disposition of note or a coupon to the seller thereof, backup withholding and
information reporting requirements will not apply. Information reporting
requirements, but not backup withholding, will apply, however, to a payment by a
foreign office of a broker that is a United States person or is a foreign person
that derives 50% of more of its gross income for certain period from the conduct
of a trade or business in the United States, or that is a "controlled foreign
corporation", that is, a foreign corporation controlled by certain U.S.
shareholders, with respect to the United States unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met or the holder otherwise establishes an
exemption. Payment by a U.S. office of a broker is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a non-U.S. holder or otherwise
establishes an exemption.
In October 1997, Treasury regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a note or proceeds from the sale of a note that are made after
December 31, 2000. Among other things, such regulations expand the number of
foreign intermediaries that are potentially subject to information reporting and
address certain documentary evidence requirements relating to exemption from the
backup withholding requirements. Holders of the notes should consult their tax
advisers concerning the possible application of such regulations to any payments
made on or with respect to the notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder of the notes will be allowed as a refund or a credit against such
holder's United States federal income tax liability, provided that the required
information is furnished to the IRS.
We must report annually to the IRS and to each non-U.S. holder any interest
that is subject to withholding, or that is exempt from United States withholding
tax pursuant to a tax treaty, or interest that is exempt from United States
federal withholding tax under the portfolio interest exception. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
non-U.S. holder resides.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of original notes that were acquired for
the account of such broker-dealer as a result of market-making or other trading
activities, other than original notes acquired directly from us or any of our
affiliates may exchange such original notes for new notes pursuant to the
exchange offer. This is true so long as each broker-dealer that receives new
notes for its own account in exchange for original notes, where such original
notes were acquired by such broker-dealer as a result of market-making or other
trading activities acknowledges that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for original notes where such
original notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period of 180 days after
consummation of the exchange offer or such time as any broker-dealer no longer
owns any registrable securities, we will make this prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. All dealers effecting transactions in
the new notes will be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers or any other holder of new notes. New notes received by
broker-dealers for their own account in the exchange
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offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such new notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 180 days after consummation of the exchange offer or until
such time as any broker-dealer no longer owns any registrable securities, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer and to our performance of, or compliance with, the registration
rights agreements (other than commissions or concessions of any brokers or
dealers) and will indemnify the holders of the notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the notes offered in this prospectus and other matters will
be passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New
York.
EXPERTS
The consolidated financial statements of Charter Communications Holdings,
LLC and subsidiaries, the combined financial statements of CCA Group, the
consolidated financial statements of CharterComm Holdings, L.P. and
subsidiaries, the combined financial statements of Greater Media Cablevision
Systems, the financial statements of Sonic Communications Cable Television
Systems and Long Beach Acquisition Corp., the combined financial statements of
Helicon Partners I, L.P. and affiliates for the seven months ended July 30,
1999, the consolidated financial statements of Marcus Cable Holdings, LLC and
subsidiaries for the three months ended March 31, 1999 and the consolidated
financial statements of CC V Holdings, LLC and subsidiaries, included in this
prospectus, to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included in this
prospectus in reliance upon the authority of said firm as experts in giving said
reports.
The combined financial statements of TCI Falcon Systems as of September 30,
1998 and December 31, 1997 and for the nine-month period ended September 30,
1998, and for each of the years in the two-year period ended December 31, 1997,
the consolidated financial statements of Bresnan Communications Group LLC as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, the consolidated financial statements of Marcus Cable
Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998, and the combined
financial statements of Helicon Partners I, L.P. and affiliates as of December
31, 1997 and 1998 and for each of the years in the three-year period ended
December 31, 1998, have been included herein in reliance upon the reports
206
210
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Renaissance Media Group LLC, the
combined financial statements of the Picayune, MS, LaFourche, LA, St. Tammany,
LA, St. Landry, LA, Pointe Coupee, LA, and Jackson, TN cable television systems,
the financial statements of Indiana Cable Associates, Ltd. as of December 31,
1997 and 1998 and for each of the years in the three-year period ended December
31, 1998, the consolidated financial statements of R/N South Florida Cable
Management Limited Partnership as of December 31, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998, the combined
financial statements of Fanch Cable Systems Sold to Charter Communications, Inc.
and the consolidated financial statements of Falcon Communications, L.P.
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
The audited combined financial statements of InterMedia Cable Systems
(comprised of components of InterMedia Partners and InterMedia Capital Partners
IV, L.P.), the audited financial statements of Rifkin Cable Income Partners
L.P., the audited consolidated financial statements of Rifkin Acquisition
Partners, L.L.L.P., the audited financial statements of Indiana Cable
Associates, Ltd. as of September 13, 1999 and for the period from January 1,
1999 to September 13, 1999, the audited consolidated financial statements of R/N
South Florida Cable Management Limited Partnership as of September 13, 1999 and
for the period from January 1, 1999 to September 13, 1999 the audited
consolidated financial statements of Avalon Cable of Michigan Holdings, Inc. and
subsidiaries, the audited consolidated financial statements of Cable Michigan
Inc. and subsidiaries, the audited consolidated financial statements of Avalon
Cable LLC and subsidiaries, the audited financial statements of Amrac Clear
View, a Limited Partnership as of May 28, 1998 and for the period from January
1, 1998 through May 28, 1998, the audited combined financial statements of The
Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the
Massachusetts Operations of Pegasus Cable Television, Inc., included in this
registration statement, have been audited by PricewaterhouseCoopers LLP,
independent accountants. The entities and periods covered by these audits are
indicated in their reports. The financial statements have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, included in this prospectus, have been so included in
reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
207
211
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
$1,532,000,000
OFFER TO PURCHASE
10.00% SENIOR NOTES DUE 2009,
10.25% SENIOR NOTES DUE 2010, AND
11.75% SENIOR DISCOUNT NOTES DUE 2010,
FOR ANY AND ALL OUTSTANDING
10.00% SENIOR NOTES DUE 2009,
10.25% SENIOR NOTES DUE 2010, AND
11.75% SENIOR DISCOUNT NOTES DUE 2010,
RESPECTIVELY, OF
CHARTER COMMUNICATIONS
HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS
HOLDINGS CAPITAL CORPORATION
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
AN OFFER TO ISSUE ONLY THE NEW NOTES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
212
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-8
Consolidated Balance Sheets as of December 31, 1999 and
1998.................................................... F-9
Consolidated Statements of Operations for the Year ended
December 31, 1999, and for the Period from December 24,
1998, through December 31, 1998......................... F-10
Consolidated Statements of Changes in Member's Equity for
the Year ended December 31, 1999, and for the Period
from December 24, 1998, through December 31, 1998....... F-11
Consolidated Statements of Cash Flows for the Year ended
December 31, 1999, and for the Period from December 24,
1998, through December 31, 1998......................... F-12
Notes to Consolidated Financial Statements................ F-13
Report of Independent Public Accountants.................. F-33
Consolidated Statements of Operations for the Period from
January 1, 1998, through December 23, 1998 and for the
Year ended December 31, 1997............................ F-34
Consolidated Statements of Changes in Shareholder's
Investment for the Period from January 1, 1998, through
December 23, 1998 and for the Year ended December 31,
1997.................................................... F-35
Consolidated Statements of Cash Flows for the Period from
January 1, 1998, through December 23, 1998 and for the
Year ended December 31, 1997............................ F-36
Notes to Consolidated Financial Statements................ F-37
CCA GROUP:
Report of Independent Public Accountants.................. F-44
Combined Balance Sheet as of December 31, 1997............ F-45
Combined Statements of Operations for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-46
Combined Statements of Shareholders' Deficit for the
Period from January 1, 1998, through December 23, 1998
and for the Years Ended December 31, 1997 and 1996...... F-47
Combined Statements of Cash Flows for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-48
Notes to Combined Financial Statements.................... F-49
CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-63
Consolidated Balance Sheet as of December 31, 1997........ F-64
Consolidated Statements of Operations for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-65
Consolidated Statements of Partners' Capital for the
Period from January 1, 1998, through December 23, 1998
and for the Years Ended December 31, 1997 and 1996...... F-66
Consolidated Statements of Cash Flows for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-67
Notes to Consolidated Financial Statements................ F-68
F-1
213
PAGE
-----
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-81
Consolidated Statement of Operations for the Three Months
Ended March 31, 1999.................................... F-82
Consolidated Statement of Members' Deficit for the Three
Months Ended March 31, 1999............................. F-83
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999.................................... F-84
Notes to Consolidated Financial Statements................ F-85
Independent Auditors' Report.............................. F-91
Consolidated Balance Sheets as of December 31, 1998 and
1997.................................................... F-92
Consolidated Statements of Operations for Each of the
Years in the Three-Year Period Ended December 31,
1998.................................................... F-93
Consolidated Statements of Members' Equity/Partners'
Capital for Each of the Years in the Three-Year Period
Ended December 31, 1998................................. F-94
Consolidated Statements of Cash Flows for Each of the
Years in the Three-Year Period Ended December 31,
1998.................................................... F-95
Notes to Consolidated Financial Statements................ F-96
RENAISSANCE MEDIA GROUP LLC:
Report of Independent Auditors............................ F-107
Consolidated Balance Sheet as of April 30, 1999........... F-108
Consolidated Statement of Operations for the Four Months
Ended April 30, 1999.................................... F-109
Consolidated Statement of Changes in Members' Equity for
the Four Months Ended April 30, 1999.................... F-110
Consolidated Statement of Cash Flows for the Four Months
Ended April 30, 1999.................................... F-111
Notes to Consolidated Financial Statements................ F-112
Report of Independent Auditors............................ F-120
Consolidated Balance Sheet as of December 31, 1998........ F-121
Consolidated Statement of Operations for the Year Ended
December 31, 1998....................................... F-122
Consolidated Statement of Changes in Members' Equity for
the Year Ended December 31, 1998........................ F-123
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998....................................... F-124
Notes to Consolidated Financial Statements for the Year
Ended December 31, 1998................................. F-125
PICAYUNE, MS, LAFOURCHE, LA, ST. TAMMANY, LA, ST. LANDRY,
LA, POINTE COUPEE, LA AND JACKSON, TN CABLE TELEVISION
SYSTEMS:
Report of Independent Auditors............................ F-135
Combined Balance Sheet as of April 8, 1998................ F-136
Combined Statement of Operations for the Period from
January 1, 1998 through April 8, 1998................... F-137
Combined Statement of Changes in Net Assets for the Period
from January 1, 1998 through April 8, 1998.............. F-138
Combined Statement of Cash Flows for the Period from
January 1, 1998 through April 8, 1998................... F-139
Notes to Combined Financial Statements.................... F-140
Report of Independent Auditors............................ F-147
Combined Balance Sheets as of December 31, 1996 and
1997.................................................... F-148
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997........................ F-149
Combined Statements of Changes in Net Assets for the Years
Ended December 31, 1996 and 1997........................ F-150
Combined Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997........................ F-151
Notes to Combined Financial Statements.................... F-152
F-2
214
PAGE
-----
GREATER MEDIA CABLEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-159
Combined Statement of Income for the Nine Months Ended
June 30, 1999........................................... F-160
Combined Statement of Changes in Net Assets for the Nine
Months Ended June 30, 1999.............................. F-161
Combined Statement of Cash Flows for the Nine Months Ended
June 30, 1999........................................... F-162
Notes to Combined Financial Statements.................... F-163
Report of Independent Public Accountants.................. F-167
Combined Balance Sheets as of September 30, 1998 and
1997.................................................... F-168
Combined Statements of Income for the Years Ended
September 30, 1996, 1997 and 1998....................... F-169
Combined Statements of Changes in Net Assets for the Years
Ended September 30, 1996, 1997 and 1998................. F-170
Combined Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998....................... F-171
Notes to Combined Financial Statements.................... F-172
HELICON PARTNERS I, L.P. AND AFFILIATES:
Report of Independent Public Accountants.................. F-178
Combined Statement of Operations for the Seven Months
Ended July 30, 1999..................................... F-179
Combined Statement of Changes in Partners' Deficit for the
Seven Months Ended July 30, 1999........................ F-180
Combined Statement of Cash Flows for the Seven Months
Ended July 30, 1999..................................... F-181
Notes to Combined Financial Statements.................... F-182
Independent Auditors' Report.............................. F-187
Combined Balance Sheets as of December 31, 1997 and
1998.................................................... F-188
Combined Statements of Operations for Each of the Years in
the Three-Year Period Ended December 31, 1998........... F-189
Combined Statements of Changes in Partners' Deficit for
Each of the Years in the Three-Year Period Ended
December 31, 1998....................................... F-190
Combined Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1998........... F-191
Notes to Combined Financial Statements.................... F-192
RIFKIN CABLE INCOME PARTNERS L.P.:
Report of Independent Accountants......................... F-204
Balance Sheet as of September 13, 1999.................... F-205
Statement of Operations for the period January 1, 1999 to
September 13, 1999...................................... F-206
Statement of Equity for the period January 1, 1999 to
September 13, 1999...................................... F-207
Statement of Cash Flows for the period January 1, 1999 to
September 13, 1999...................................... F-208
Notes to Financial Statements............................. F-209
Report of Independent Accountants......................... F-213
Balance Sheet at December 31, 1997 and 1998............... F-214
Statement of Operations for Each of the Three Years in the
Period Ended December 31, 1998.......................... F-215
Statement of Partners' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998....... F-216
Statement of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998.......................... F-217
Notes to Financial Statements............................. F-218
F-3
215
PAGE
-----
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Report of Independent Accountants......................... F-222
Consolidated Balance Sheet as of September 13, 1999....... F-223
Consolidated Statement of Operations for the period
January 1, 1999 through September 13, 1999.............. F-224
Consolidated Statement of Partners' Capital for the period
January 1, 1999 through September 13, 1999.............. F-225
Consolidated Statement of Cash Flows for the period
January 1, 1999 through September 13, 1999.............. F-226
Notes to Consolidated Financial Statements................ F-227
Report of Independent Accountants......................... F-236
Consolidated Balance Sheet at December 31, 1998 and
1997.................................................... F-237
Consolidated Statement of Operations for Each of the Three
Years in the Period Ended December 31, 1998............. F-238
Consolidated Statement of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............. F-239
Consolidated Statement of Partners' Capital (Deficit) for
Each of the Three Years in the Period Ended December 31,
1998.................................................... F-240
Notes to Consolidated Financial Statements................ F-241
INDIANA CABLE ASSOCIATES, LTD.:
Report of Independent Accountants......................... F-255
Balance Sheet as of September 13, 1999.................... F-256
Statement of Operations for the period January 1, 1999 to
September 13, 1999...................................... F-257
Statement of Equity for the period January 1, 1999 to
September 13, 1999...................................... F-258
Statement of Cash Flows for the period January 1, 1999 to
September 13, 1999...................................... F-259
Notes to Financial Statements............................. F-260
Report of Independent Auditors............................ F-264
Balance Sheet as of December 31, 1997 and 1998............ F-265
Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998..................................... F-266
Statement of Partners' Deficit for the Years Ended
December 31, 1996, 1997 and 1998........................ F-267
Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................... F-268
Notes to Financial Statements............................. F-269
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP:
Report of Independent Accountants......................... F-273
Consolidated Balance Sheet as of September 13, 1999....... F-274
Consolidated Statement of Operations for the period
January 1, 1999 to September 13, 1999................... F-275
Consolidated Statement of Equity for the period January 1,
1999 to September 13, 1999.............................. F-276
Consolidated Statement of Cash Flows for the period
January 1, 1999 to September 13, 1999................... F-277
Notes to Consolidated Financial Statements................ F-278
Report of Independent Auditors............................ F-282
Consolidated Balance Sheet as of December 31, 1997 and
1998.................................................... F-283
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998........................ F-284
Consolidated Statement of Partners' Equity (Deficit) for
the Years Ended December 31, 1996, 1997 and 1998........ F-285
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998........................ F-286
Notes to Consolidated Financial Statements................ F-287
F-4
216
PAGE
-----
INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF
INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV,
L.P.):
Report of Independent Accountants......................... F-291
Combined Balance Sheets as of September 30, 1999 and
December 31, 1998....................................... F-292
Combined Statements of Operations for the Nine Months
Ended September 30, 1999 and for the Years ended
December 31, 1998 and 1997.............................. F-293
Combined Statements of Changes in Equity for the Nine
Months Ended September 30, 1999 and for the Years ended
December 31, 1998 and 1997.............................. F-294
Combined Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and for the Years ended
December 31, 1998 and 1997.............................. F-295
Notes to Combined Financial Statements.................... F-296
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-307
Statement of Operations and Changes in Net Assets for the
Period from April 1, 1998, through May 20, 1998......... F-308
Statement of Cash Flows for the Period from April 1, 1998,
through May 20, 1998.................................... F-309
Notes to Financial Statements............................. F-310
LONG BEACH ACQUISITION CORP.:
Report of Independent Public Accountants.................. F-313
Statement of Operations for the Period from April 1, 1997,
through May 23, 1997.................................... F-314
Statement of Stockholder's Equity for the Period from
April 1, 1997, through May 23, 1997..................... F-315
Statement of Cash Flows for the Period from April 1, 1997,
through May 23, 1997.................................... F-316
Notes to Financial Statements............................. F-317
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.:
Report of Independent Auditors............................ F-321
Report of Independent Auditors............................ F-322
Report of Independent Auditors............................ F-323
Report of Independent Auditors............................ F-324
Combined Balance Sheets as of November 11, 1999 and
December 31, 1998....................................... F-325
Combined Statements of Operations for the Period from
January 1, 1999 to November 11, 1999 and for the Years
Ended December 31, 1998 and 1997........................ F-326
Combined Statements of Net Assets for the Period from
January 1, 1999 to November 11, 1999 and for the Years
Ended December 31, 1998 and 1997........................ F-327
Combined Statements of Cash Flows for the Period from
January 1, 1999 to November 11, 1999 and for the Years
Ended December 31, 1998 and 1997........................ F-328
Notes to Combined Financial Statements.................... F-329
FALCON COMMUNICATIONS, L.P.:
Report of Independent Auditors............................ F-334
Consolidated Balance Sheets as of December 31, 1998 and
November 12, 1999....................................... F-335
Consolidated Statements of Operations for each of the two
years in the period ended December 31, 1998 and for the
Period from January 1, 1999 to November 12, 1999........ F-336
Consolidated Statements of Partners' Equity (Deficit) for
the each of the two years in the period ended December
31, 1998 and for the Period from January 1, 1999 to
November 12, 1999....................................... F-337
Consolidated Statements of Cash Flows for each of the two
years in the period ended December 31, 1998 and for the
Period from January 1, 1999 to November 12, 1999........ F-338
Notes to Consolidated Financial Statements................ F-340
F-5
217
PAGE
-----
TCI FALCON SYSTEMS:
Independent Auditors' Report.............................. F-360
Combined Balance Sheets at September 30, 1998 and December
31, 1997................................................ F-361
Combined Statements of Operations and Parent's Investment
for the period from January 1, 1998 through September
30, 1998 and for the years ended December 31, 1997 and
1996.................................................... F-362
Combined Statements of Cash Flows for the period from
January 1, 1998 through September 30, 1998 and for the
years ended December 31, 1997 and 1996.................. F-363
Notes to Combined Financial Statements for the period from
January 1, 1998 through September 30, 1998 and for the
years ended December 31, 1997 and 1996.................. F-364
CC V HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-371
Consolidated Balance Sheet as of December 31, 1999........ F-372
Consolidated Statements of Operations for the Period from
November 15, 1999, through December 31, 1999, and for
the Period from January 1, 1999, through November 14,
1999.................................................... F-373
Consolidated Statement of Changes in Shareholders' Equity
for the Period from January 1, 1999, through November
14, 1999................................................ F-374
Consolidated Statements of Cash Flows for the Period from
November 15, 1999, through December 31, 1999, and for
the Period from January 1, 1999, through November 14,
1999.................................................... F-375
Notes to Consolidated Financial Statements................ F-376
AVALON CABLE LLC AND SUBSIDIARIES:
Report of Independent Accountants......................... F-388
Consolidated Balance Sheet as of December 31, 1998 and
1997.................................................... F-389
Consolidated Statement of Operations for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-390
Consolidated Statement of Changes in Members' Interest
from September 4, 1997 (inception) through December 31,
1998.................................................... F-391
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-392
Notes to Consolidated Financial Statements................ F-393
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES:
Report of Independent Accountants......................... F-407
Consolidated Balance Sheet as of December 31, 1998 and
1997.................................................... F-408
Consolidated Statements of Operations for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-409
Consolidated Statement of Changes in Shareholders' Equity
for the period from September 4, 1997 (inception)
through December 31, 1998............................... F-410
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-411
Notes to Consolidated Financial Statements................ F-412
CABLE MICHIGAN, INC. AND SUBSIDIARIES:
Report of Independent Accountants......................... F-425
Consolidated Balance Sheets as of December 31, 1997 and
November 5, 1998........................................ F-426
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997 and for the period from
January 1, 1998 to November 5, 1998..................... F-427
Consolidated Statements of Changes in Shareholders'
Deficit for the years ended December 31, 1996 and 1997
and for the period from January 1, 1998 to November 5,
1998.................................................... F-428
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997 and for the period from
January 1, 1998 to November 5, 1998..................... F-429
Notes to Consolidated Financial Statements................ F-430
F-6
218
PAGE
-----
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP:
Report of Independent Accountants......................... F-444
Balance Sheet as of May 28, 1998.......................... F-445
Statement of Operations for the period from January 1,
1998 through May 28, 1998............................... F-446
Statement of Changes in Partners' Equity (Deficit) for the
period from January 1, 1998 through May 28, 1998........ F-447
Statement of Cash Flows for the period from January 1,
1998 through May 28, 1998............................... F-448
Notes to Financial Statements............................. F-449
Independent Auditors' Report.............................. F-453
Balance Sheets at December 31, 1996 and 1997.............. F-454
Statements of Net Earnings for the years ended December
31, 1995, 1996 and 1997................................. F-455
Statements of Changes in Partners' Equity (Deficit) for
the years ended December 31, 1995, 1996 and 1997........ F-456
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997..................................... F-457
Notes to Financial Statements............................. F-458
PEGASUS CABLE TELEVISION, INC.:
Report of Independent Accountants......................... F-461
Combined Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998....................................... F-462
Combined Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998..................................... F-463
Combined Statements of Changes in Stockholder's Deficit
for the three years ended December 31, 1997 and for the
six months ended June 30, 1998.......................... F-464
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998..................................... F-465
Notes to Combined Financial Statements.................... F-466
BRESNAN COMMUNICATIONS GROUP LLC:
Independent Auditors' Report.............................. F-472
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-473
Consolidated Statements of Operations and Members' Equity
(Deficit) for the Years Ended December 31, 1997, 1998
and 1999................................................ F-474
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999........................ F-475
Notes to Consolidated Financial Statements................ F-476
F-7
219
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheets of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, changes in member's
equity and cash flows for the year ended December 31, 1999, and for the period
from December 24, 1998, through December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications
Holdings, LLC and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the year ended December 31, 1999,
and for the period from December 24, 1998, through December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 16, 2000
F-8
220
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
DECEMBER 31,
-------------------------
1999 1998
----------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 84,305 $ 9,573
Accounts receivable, net of allowance for doubtful
accounts of $8,604 and $1,728, respectively............ 68,522 15,108
Receivables from manager of cable systems -- related
parties................................................ 14,500 --
Prepaid expenses and other................................ 15,082 2,519
----------- ----------
Total current assets................................... 182,409 27,200
----------- ----------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment............................. 2,525,854 716,242
Franchises................................................ 9,162,331 3,590,054
----------- ----------
11,688,185 4,306,296
----------- ----------
OTHER ASSETS................................................ 134,603 2,031
----------- ----------
$12,005,197 $4,335,527
=========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ -- $ 10,450
Accounts payable and accrued expenses..................... 553,174 127,586
Payables to manager of cable systems -- related parties... 6,713 4,334
----------- ----------
Total current liabilities.............................. 559,887 142,370
----------- ----------
LONG-TERM DEBT, less current maturities..................... 6,065,612 1,991,756
----------- ----------
LOANS PAYABLE -- RELATED PARTIES............................ 906,000 --
----------- ----------
DEFERRED MANAGEMENT FEES -- RELATED PARTIES................. 19,831 15,561
----------- ----------
OTHER LONG-TERM LIABILITIES................................. 109,605 38,461
----------- ----------
MEMBER'S EQUITY
Member's equity (217,585,246 and 100 units issued and
outstanding at December 31, 1999 and 1998,
respectively).......................................... 4,342,046 2,147,379
Accumulated other comprehensive income.................... 2,216 --
----------- ----------
Total member's equity.................................. 4,344,262 2,147,379
----------- ----------
$12,005,197 $4,335,527
=========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-9
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
REVENUES.................................................... $1,325,830 $13,713
---------- -------
OPERATING EXPENSES:
Operating, general and administrative..................... 683,646 7,134
Depreciation and amortization............................. 675,786 8,318
Option compensation expense............................... 79,979 845
Corporate expense charges -- related parties.............. 48,158 473
---------- -------
1,487,569 16,770
---------- -------
Loss from operations................................... (161,739) (3,057)
---------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (434,995) (2,353)
Interest income........................................... 18,821 133
Other, net................................................ (217) --
---------- -------
(416,391) (2,220)
---------- -------
Loss before extraordinary item......................... (578,130) (5,277)
EXTRAORDINARY ITEM -- Loss from early extinguishment of
debt...................................................... (7,794) --
---------- -------
Net loss............................................... $ (585,924) $(5,277)
========== =======
The accompanying notes are an integral part of these consolidated statements.
F-10
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER TOTAL
MEMBER'S COMPREHENSIVE MEMBER'S
EQUITY INCOME EQUITY
---------- ------------- ----------
BALANCE, December 24, 1998.......................... $2,151,811 $ -- $2,151,811
Option compensation expense....................... 845 -- 845
Net loss.......................................... (5,277) -- (5,277)
---------- ------ ----------
BALANCE, December 31, 1998.......................... 2,147,379 -- 2,147,379
Capital contributions............................. 2,710,682 -- 2,710,682
Distributions to Charter Investment and Charter... (10,070) -- (10,070)
Option compensation expense....................... 79,979 -- 79,979
Net loss.......................................... (585,924) -- (585,924)
Unrealized gain on marketable securities available
for sale....................................... -- 2,216 2,216
---------- ------ ----------
BALANCE, December 31, 1999.......................... $4,342,046 $2,216 $4,344,262
========== ====== ==========
The accompanying notes are an integral part of these consolidated statements.
F-11
223
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (585,924) $ (5,277)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization.......................... 675,786 8,318
Option compensation expense............................ 79,979 845
Noncash interest expense............................... 93,073 --
Loss from early extinguishment of debt................. 7,794 --
Changes in assets and liabilities, net of effects from
acquisitions-
Accounts receivable.................................... (24,478) (8,753)
Prepaid expenses and other............................. (3,672) (211)
Accounts payable and accrued expenses.................. 136,016 10,227
Receivables from and payables to manager of cable
systems, including deferred management fees.......... 4,891 473
Other operating activities................................ (1,245) 2,022
----------- ---------
Net cash provided by operating activities............ 382,220 7,644
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (709,731) (13,672)
Payments for acquisitions, net of cash acquired........... (3,560,241) --
Loan to Marcus Cable Holdings............................. (1,680,142) --
Other investing activities................................ (12,583) --
----------- ---------
Net cash used in investing activities................ (5,962,697) (13,672)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt, including proceeds from
Charter Holdings Notes................................. 9,237,188 14,200
Repayments of long-term debt.............................. (5,515,125) --
Borrowings from related parties........................... 906,000 --
Payments for debt issuance costs.......................... (107,562) --
Capital contributions..................................... 1,144,290 --
Distributions to Charter Investment and Charter........... (10,070) --
Other financing activities................................ 488 --
----------- ---------
Net cash provided by financing activities............ 5,655,209 14,200
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 74,732 8,172
CASH AND CASH EQUIVALENTS, beginning of period.............. 9,573 1,401
----------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 84,305 $ 9,573
=========== =========
CASH PAID FOR INTEREST...................................... $ 307,255 $ 5,538
=========== =========
NONCASH TRANSACTIONS:
Transfer of operating subsidiaries to the Company......... $ 1,252,370 $ --
Transfer of equity interests to the Company............... 314,022 --
The accompanying notes are an integral part of these consolidated statements.
F-12
224
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
GENERAL
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, owns and operates cable systems serving approximately 6.1
million (unaudited) customers, including cable systems acquired and transferred
to the Company (see Note 17). Charter Holdings offers a full range of
traditional cable television services and has begun to offer digital cable
television services, interactive video programming and high-speed Internet
access. Charter Holdings is a subsidiary of Charter Communications Holding
Company, LLC (Charter Holdco), which is a subsidiary of Charter Communications,
Inc. (Charter). In November 1999, Charter completed an initial public offering
of the sale for 195.5 million shares of Class A common stock. Proceeds from the
offering were used by Charter to purchase membership units in Charter Holdco,
which used the funds received from Charter for the acquisition of additional
cable television systems.
ORGANIZATION AND BASIS OF PRESENTATION
Charter Holdings was formed in February 1999 as a wholly owned subsidiary
of Charter Investment, Inc. (Charter Investment). Charter Investment, through
its wholly owned subsidiary, Charter Communications Properties Holdings, LLC
(CCPH), commenced operations with the acquisition of a cable system on September
30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter Investment for an aggregate purchase
price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter
Investment acquired, for fair value from unrelated third parties, all of the
interests it did not already own in CharterComm Holdings, LLC (CharterComm
Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and
Charter Communications Long Beach, Inc.), all cable operating companies, for
$2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment
previously managed and owned minority interests in these companies. These
acquisitions were accounted for using the purchase method of accounting, and
accordingly, results of operations of CharterComm Holdings and CCA Group are
included in the consolidated financial statements from the date of acquisition.
In February 1999, Charter Investment transferred all of its cable operating
subsidiaries to Charter Communications Operating, LLC (Charter Operating), a
wholly owned subsidiary of Charter Holdings. This transfer was accounted for as
a reorganization of entities under common control similar to a pooling of
interests.
As a result of the change in ownership of CCPH, CharterComm Holdings and
CCA Group, Charter Holdings has applied push-down accounting in the preparation
of its consolidated financial statements. Accordingly, on December 23, 1998,
Charter Holdings increased its member's equity by $2.2 billion to reflect the
amounts paid by Mr. Allen and Charter Investment. The purchase price was
allocated to assets acquired and liabilities assumed based on their relative
fair values, including amounts assigned to franchises of $3.6 billion.
On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen,
(collectively, the "Mr. Allen Companies") purchased substantially all of the
outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable)
for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of
the remaining partnership interest retained voting control of Marcus Cable. In
February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and
F-13
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on
March 15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership
interests in Marcus Cable, including voting control. On April 7, 1999, Marcus
Holdings was merged into Charter Holdings and Marcus Cable was transferred to
Charter Holdings. For financial reporting purposes, the merger was accounted for
as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen
obtained voting control of Marcus Cable. Accordingly, the results of operations
of Marcus Cable have been included in the consolidated financial statements from
April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in
the consolidated financial statements using historical carrying values reflected
in the accounts of the Mr. Allen Companies. Total member's equity increased by
$1.3 billion as a result of the Marcus Cable acquisition. Previously, on April
23, 1998, the Mr. Allen Companies recorded the assets acquired and liabilities
assumed of Marcus Cable based on their relative fair values.
The consolidated financial statements of Charter Holdings include the
accounts of Charter Operating and CCPH, the accounts of CharterComm Holdings and
CCA Group and their subsidiaries since December 23, 1998 (date acquired by
Charter Investment), and the accounts of Marcus Cable since March 31, 1999, and
are collectively referred to as the "Company" herein. All subsidiaries are,
directly or indirectly, wholly owned by Charter Holdings. All material
intercompany transactions and balances have been eliminated.
Pursuant to a membership interests purchase agreement, as amended, Vulcan
Cable III Inc. (Vulcan), a company controlled by Mr. Allen, contributed $500
million in cash in August 1999 to Charter Holdco, contributed an additional
$180.7 million in certain equity interests acquired in connection with Charter
Holdings' acquisition of Rifkin Acquisitions Partners, L.L.L.P. and InterLink
Communications Partners, LLLP (collectively, "Rifkin") in September 1999, and
contributed $644.3 million in cash in September 1999 to Charter Holdco. All
funds and equity interests were contributed by Charter Holdco to Charter
Holdings to finance certain acquisitions. In addition, certain Rifkin sellers
received $133.3 million of the purchase price in the form of preferred equity in
Charter Holdco.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, while equipment replacement and betterments are
capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
F-14
226
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company. Accumulated
amortization related to franchises was $598.4 million and $5.3 million, as of
December 31, 1999 and 1998, respectively. Amortization expense related to
franchises for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, was $467.9 million and $5.3
million, respectively.
DEFERRED FINANCING COSTS
Costs related to borrowings are deferred and amortized to interest expense
using the effective interest method over the terms of the related borrowings. As
of December 31, 1999, other assets include $114.8 million of deferred financing
costs, net of accumulated amortization of $10.2 million.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted net cash flows
related to the asset over its remaining life, the carrying value of such asset
is reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 31, 1999 and 1998, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Local governmental authorities impose franchise fees on the Company ranging
up to a federally mandated maximum of 5.0% of gross revenues. Such fees are
collected on a monthly basis from the Company's customers and are periodically
remitted to local franchise authorities. Franchise fees collected and paid are
reported as revenues and expenses.
CHANNEL LAUNCH PAYMENTS
The Company receives upfront payments from certain programmers to launch
and promote new cable television channels. A portion of these payments
represents reimbursement of advertising costs paid by the Company to promote the
new channels. These reimbursements have been immaterial. The remaining portion
is being amortized as an offset to programming expense over the respective terms
of the program agreements, which range from one to 20 years. For the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, the Company amortized and recorded as a reduction of
F-15
227
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
programming costs $3.4 million and $12, respectively. As of December 31, 1999,
the unamortized portion of payments received totaled $13.4 million and is
included in other long-term liabilities.
DIRECT RESPONSE ADVERTISING
The Company expenses the production costs of advertising as incurred,
except for direct response advertising, which is deferred and amortized over its
expected period of future benefits. Direct response advertising consists
primarily of direct mailings and radio, newspaper and cross-channel television
advertisements that include a phone number for use in ordering the Company's
products and services. The deferred advertising costs are amortized to
advertising expense over the periods during which the future benefits are
expected to be received. These periods range from two to four years depending on
the type of service the customer subscribes to and represents the period the
customer is expected to remain connected to the cable system. As of December 31,
1999, $700 of deferred advertising costs is included in other assets.
Advertising expense was $29.7 million for the year ended December 31, 1999,
including amortization of deferred advertising costs totaling $87.
INVESTMENTS AND OTHER COMPREHENSIVE INCOME
Investments in equity securities are accounted for in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The
Company owns common stock of WorldGate Communications, Inc. (WorldGate) that is
classified as "available for sale" and reported at market value with unrealized
gains and losses recorded as accumulated other comprehensive income. Based on
quoted market prices, the investment was valued at $3.2 million as of December
31, 1999 and is included in other assets. Comprehensive loss for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, is $583.7 million and $5.3 million, respectively.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
INCOME TAXES
Income taxes are the responsibility of the individual member and are not
provided for in the accompanying consolidated financial statements. In addition,
certain subsidiaries are corporations subject to income taxes but have no
operations and, therefore, no material income tax liabilities or assets.
F-16
228
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SEGMENTS
In 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. Segments have been identified based upon
management responsibility. The individual segments have been aggregated into one
segment, cable services.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS:
During 1999, the Company acquired cable systems in eight separate
transactions for an aggregate purchase price of $3.6 billion, net of cash
acquired, excluding debt assumed of $354.0 million and equity issued of $314.0
million. In connection with the Rifkin acquisition, Charter Holdco issued equity
interests totaling $133.3 million to certain sellers. In addition, Vulcan
purchased $180.7 million of equity interests Rifkin and then contributed the
equity interests to Charter Holdings. The purchase prices were allocated to
assets acquired and liabilities assumed based on their relative fair values,
including amounts assigned to franchises of $3.9 billion. The allocation of the
purchase prices for these acquisitions are based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information. Management believes that finalization of the purchase prices and
allocations will not have a material impact on the consolidated results of
operations or financial position of the Company.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition.
Unaudited pro forma operating results as though the acquisitions discussed
above, including the Paul Allen Transaction and the acquisition of Marcus
Holdings, and the March 1999 refinancing discussed herein, had occurred on
January 1, 1998, with adjustments to give effect to amortization of franchises,
interest expense and certain other adjustments are as follows:
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(UNAUDITED)
Revenues.................................................... $1,843,986 $1,657,353
Loss from operations........................................ (218,189) (204,189)
Loss before extraordinary item.............................. (771,780) (776,710)
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations had these transactions been completed as of the assumed date or which
may be obtained in the future.
F-17
229
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows:
PERIOD FROM
DECEMBER 24,
FOR THE YEAR 1998, THROUGH
ENDED DECEMBER
DECEMBER 31, 31,
1999 1998
------------ -------------
Balance, beginning of period................................ $ 1,728 $1,702
Acquisitions of cable systems............................... 4,414 --
Charged to expense.......................................... 19,384 26
Uncollected balances written off, net of recoveries......... (16,922) --
-------- ------
Balance, end of period...................................... $ 8,604 $1,728
======== ======
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31:
1999 1998
---------- --------
Cable distribution systems.................................. $2,591,527 $661,749
Land, buildings and leasehold improvements.................. 74,812 26,670
Vehicles and equipment...................................... 144,521 30,590
---------- --------
2,810,860 719,009
Less -- Accumulated depreciation............................ (285,006) (2,767)
---------- --------
$2,525,854 $716,242
========== ========
For the year ended December 31, 1999, and for the period from December 24,
1998, through December 31, 1998, depreciation expense was $207.9 million and
$2.8 million, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31:
1999 1998
-------- --------
Accounts payable............................................ $ 94,450 $ 7,439
Liability for pending transfer of cable system.............. 88,200 --
Accrued interest............................................ 68,004 30,809
Capital expenditures........................................ 66,713 15,560
Programming costs........................................... 41,966 11,856
Accrued general and administrative.......................... 38,753 6,688
Franchise fees.............................................. 34,689 12,534
Accrued income taxes........................................ 4,381 15,205
Other accrued liabilities................................... 116,018 27,495
-------- --------
$553,174 $127,586
======== ========
The liability for pending transfer of cable system represents the fair
value of a cable system to be transferred upon obtaining necessary regulatory
approvals in connection with the transaction with InterMedia Capital Partners IV
L. P., InterMedia Partners and their affiliates.
F-18
230
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Such approvals were subsequently obtained and the system assets were transferred
subsequent to December 31, 1999.
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
1999 1998
---------- ----------
Charter Holdings:
Credit Agreements (including CCPH, CCA Group and
CharterComm Holdings).................................. $ -- $1,726,500
14.000% Senior Secured Discount Debentures................ -- 109,152
11.250% Senior Notes...................................... -- 125,000
8.250% Senior Notes....................................... 600,000 --
8.625% Senior Notes....................................... 1,500,000 --
9.920% Senior Discount Notes.............................. 1,475,000 --
Charter Operating Credit Facilities......................... 2,906,000 --
Renaissance:
10.000% Senior Discount Notes............................. 114,413 --
Rifkin:
11.125% Senior Subordinated Notes......................... 900 --
---------- ----------
6,596,313 1,960,652
Current maturities........................................ -- (10,450)
Unamortized net (discount) premium........................ (530,701) 41,554
---------- ----------
$6,065,612 $1,991,756
========== ==========
In March 1999, the Company extinguished substantially all existing
long-term debt, excluding borrowings of the Company under its credit agreements,
and refinanced substantially all existing credit agreements at various
subsidiaries with a new credit agreement entered into by Charter Operating (the
"Charter Operating Credit Facilities"). The excess of the amount paid over the
carrying value, net of deferred financing costs, of the Company's long-term debt
of $7.8 million was recorded as an extraordinary item-loss from early
extinguishment of debt in the accompanying consolidated statements of
operations.
CHARTER HOLDINGS NOTES
In March 1999, the Company issued $600.0 million 8.250% Senior Notes due
2007 (the "8.250% Senior Notes") for net proceeds of $598.4 million, $1.5
billion 8.625% Senior Notes due 2009 (the "8.625% Senior Notes") for net
proceeds of $1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes
due 2011 (the "9.920% Senior Discount Notes") for net proceeds of $905.5
million, (collectively with the 8.250% Senior Notes and the 8.625% Senior Notes,
referred to as the "Charter Holdings Notes").
The 8.250% Senior Notes are not redeemable prior to maturity. Interest is
payable semiannually in arrears on April 1 and October 1, beginning October 1,
1999 until maturity.
The 8.625% Senior Notes are redeemable at the option of the Company at
amounts decreasing from 104.313% to 100% of par value beginning on April 1,
2004, plus accrued and unpaid interest, to the date of redemption. At any time
prior to April 1, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of
the principal amount under certain conditions. Interest is payable semi-
annually in arrears on April 1 and October 1, beginning October 1, 1999, until
maturity.
F-19
231
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The 9.920% Senior Discount Notes are redeemable at the option of the
Company at amounts decreasing from 104.960% to 100% of accreted value beginning
April 1, 2004. At any time prior to April 1, 2002, the Company may redeem up to
35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a
redemption price of 109.920% of the accreted value under certain conditions. No
interest will be payable until April 1, 2004. Thereafter, cash interest is
payable semi-annually in arrears on April 1 and October 1 beginning April 1,
2004, until maturity. The discount on the 9.920% Senior Discount Notes is being
accreted using the effective interest method. The unamortized discount was
$497.2 million at December 31, 1999.
The Charter Holdings Notes rank equally with current and future unsecured
and unsubordinated indebtedness (including accounts payables of the Company).
The Company is required to make an offer to repurchase all of the Charter
Holdings Notes, at a price equal to 101% of the aggregate principal or 101% of
the accreted value, together with accrued and unpaid interest, upon a change of
control of the Company, as defined.
RENAISSANCE NOTES
In connection with the acquisition of Renaissance Media Group LLC
(Renaissance) during the second quarter of 1999, the Company assumed $163.2
million principal amount at maturity of senior discount notes due April 2008
(the "Renaissance Notes"). As a result of the change in control of Renaissance,
the Company was required to make an offer to repurchase the Renaissance Notes at
101% of their accreted value. In May 1999, the Company made an offer to
repurchase the Renaissance Notes pursuant to this requirement, and the holders
of the Renaissance Notes tendered an amount representing 30% of the total
outstanding principal amount at maturity for repurchase. These notes were
repurchased using a portion of the proceeds from the Charter Holdings Notes.
As of December 31, 1999, $114.4 million aggregate principal amount at
maturity of Renaissance Notes with a carrying value of $86.5 million remain
outstanding. Interest on the Renaissance Notes shall be paid semi-annually at a
rate of 10% per annum beginning on October 15, 2003.
The Renaissance Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after April 15, 2003, initially at 105% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100% of the principal amount at maturity, plus accrued and unpaid interest, on
or after April 15, 2006. In addition, at any time prior to April 15, 2001, the
Company may redeem up to 35% of the original principal amount at maturity with
the proceeds of one or more sales of membership units at 110% of their accreted
value, plus accrued and unpaid interest on the redemption date, provided that
after any such redemption, at least $106 million aggregate principal amount at
maturity remains outstanding.
RIFKIN NOTES
The Company acquired Rifkin in September 1999 and assumed Rifkin's 11.125%
Senior Subordinated Notes due 2006 together with a $3.0 million promissory note
payable to Monroe Rifkin, (the "Rifkin Notes"). Interest on the Rifkin Notes is
payable semi-annually on January 15 and July 15 of each year. In September 1999,
the Company commenced an offer to repurchase any and all of the outstanding
Rifkin Notes, for cash at a premium over the principal amounts. In conjunction
with this tender offer, the Company sought and obtained the consent of a
majority in principal amount of the note holders of the outstanding Rifkin Notes
to proposed amendments to the indenture governing the Rifkin Notes, which
eliminated substantially all of the restrictive covenants. In October 1999, the
Company repurchased a portion of the Rifkin Notes with a total
F-20
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
outstanding principal amount of $124.1 million for a total of $140.6 million,
including a consent fee to the holders who delivered timely consents amending
the indenture, and repurchased the promissory note issued to Monroe Rifkin for
$3.4 million. These notes were paid using borrowings from the Charter Operating
Credit Facilities. At December 31, 1999, $900 aggregate principal of Rifkin
Notes remain outstanding.
HELICON NOTES
The Company acquired Helicon I, L.P. and affiliates (collectively,
"Helicon") in July 1999 and assumed Helicon's 11% Senior Secured Notes due 2003
(the "Helicon Notes"). On November 1, 1999, the Company redeemed all of the
Helicon Notes at a purchase price equal to 103% of their principal amount, plus
accrued and unpaid interest, for $124.8 million using borrowings from the
Charter Operating Credit Facilities.
CHARTER OPERATING CREDIT FACILITIES
The Charter Operating Credit Facilities provide for two term facilities,
one with a principal amount of $1.0 billion that matures September 2007 (Term
A), and the other with the principal amount of $1.85 billion that matures March
2008 (Term B). The Charter Operating Credit Facilities also provides for a $1.25
billion revolving credit facility with a maturity date of September 2007 and at
the option of the lenders, supplemental credit facilities, in the amount of
$500.0 million available until March 18, 2002. Amounts under the Charter
Operating Credit Facilities bear interest at the Base Rate or the Eurodollar
rate, as defined, plus a margin of up to 2.75%. The variable interest rates
ranged from 8.22% to 9.25% at December 31, 1999. A quarterly commitment fee of
between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term
A and the revolving credit facility. As of December 31, 1999, the unused
availability was $1.2 billion. In March 2000, the credit agreement was amended
to increase the amount of the supplemental credit facility to $1.0 billion. In
connection with this amendment, $600.0 million of the supplemental credit
facility (the "Incremental Term Loan") was drawn down. The Incremental Term Loan
maturity date is September 18, 2008.
The indentures governing the debt agreements require the Company and/or its
subsidiaries to comply with various financial and other covenants, including the
maintenance of certain operating and financial ratios. These debt instruments
also contain substantial limitations on, or prohibitions of distributions,
additional indebtedness, liens, asset sales and certain other items. As a result
of limitations and prohibitions of distributions, substantially all of the net
assets of the consolidated subsidiaries are restricted for distribution to
Charter Holdings, the parent company.
F-21
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Based upon outstanding indebtedness at December 31, 1999, the amortization
of term loans, scheduled reductions in available borrowings of the revolving
credit facility, and the maturity dates for all senior and subordinated notes,
aggregate future principal payments on the total borrowings under all debt
agreements at December 31, 1999, are as follows:
YEAR AMOUNT
- - - ---- ----------
2000...................................................... $ --
2001...................................................... --
2002...................................................... 88,875
2003...................................................... 156,000
2004...................................................... 168,500
Thereafter................................................ 6,182,938
----------
$6,596,313
==========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1999, is as follows:
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
---------- ---------- ----------
DEBT
8.250% Senior Notes................................ $ 598,557 $ -- $ 558,000
8.625% Senior Notes................................ 1,495,787 -- 1,395,000
9.920% Senior Discount Notes....................... 977,807 -- 881,313
Charter Operating Credit Facilities................ 2,906,000 -- 2,906,000
Loans payable to related parties................... 906,000 -- 906,000
Renaissance:
10.000% Senior Discount Notes.................... 86,507 -- 79,517
Rifkin:
11.125% Senior Subordinated Notes................ 954 -- 990
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
---------- ---------- ----------
INTEREST RATE HEDGE AGREEMENTS
Swaps.............................................. $ 15,554 $3,315,000 $ (17,951)
Collars............................................ 1,361 240,000 (199)
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of debt and the related interest rate hedge agreements at
December 31, 1998, is as follows:
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
---------- ---------- ----------
DEBT
Credit Agreements (including CCPH, CCA Group and
CharterComm Holdings)............................ $1,726,500 $ -- $1,726,500
14.000% Senior Secured Discount Debentures......... 138,102 -- 138,102
11.250% Senior Notes............................... 137,604 -- 137,604
INTEREST RATE HEDGE AGREEMENTS
Swaps.............................................. $ 23,216 $1,105,000 $ 23,216
Caps............................................... -- 15,000 --
Collars............................................ 4,174 310,000 4,174
As the long-term debt under the credit facilities bears interest at current
market rates, their carrying amount approximates market value at December 31,
1999 and 1998. The fair values of the notes are based on quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 8.35% and 7.66% at December 31, 1999 and 1998, respectively.
During 1999, the cap interest rate agreements expired and were not renewed. At
December 31, 1998, the weighted average interest rate for the cap interest
agreements was 8.55%. The weighted average interest rate for the Company's
interest rate collar agreements were 9.13% and 7.74%, for the cap and floor
components, respectively, at December 31, 1999, and 8.61% and 7.31%,
respectively, at December 31, 1998.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would (receive) or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's credit facilities, thereby reducing the exposure to
credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-23
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. REVENUES:
Revenues consist of the following:
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
Basic....................................................... $ 927,726 $ 9,347
Premium..................................................... 117,396 1,415
Pay-per-view................................................ 26,627 260
Digital video............................................... 7,664 10
Advertising sales........................................... 67,918 493
Cable modem................................................. 9,991 55
Other....................................................... 168,508 2,133
---------- -------
$1,325,830 $13,713
========== =======
10. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating, general and administrative expenses consist of the following:
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
Programming................................................. $304,103 $ 3,137
General and administrative.................................. 222,283 2,377
Service..................................................... 89,969 847
Advertising................................................. 29,683 344
Marketing................................................... 22,504 225
Other....................................................... 15,104 204
-------- --------
$683,646 $ 7,134
======== ========
11. RELATED PARTY TRANSACTIONS:
Charter Investment and Charter provide management services to the Company
including centralized customer billing services, data processing and related
support, benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These billings are
allocated based on the number of basic customers. Such costs totaled $16.1
million and $128 for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, respectively. All other costs
incurred by Charter Investment and Charter on behalf of the Company are recorded
as expenses in the accompanying consolidated financial statements and are
included in corporate expense charges-related parties. Management believes that
costs incurred by Charter Investment and Charter on the Company's behalf and
included in the accompanying financial statements are not materially different
than costs the Company would have incurred as a stand-alone entity.
F-24
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company pays certain costs on behalf of Charter Investment and Charter.
These costs are reimbursed by Charter Investment and Charter and are recorded as
receivables from manager of cable systems-related parties in the accompanying
consolidated financial statements.
Charter Investment utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to the Company as determined by independent actuaries
at the present value of the actuarially computed present and future liabilities
for such benefits. Medical coverage provides for $1.0 million aggregate stop
loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $1.0 million aggregate stop loss protection
and a loss limitation of $250 per person per year.
The Company is charged a management fee as stipulated in the management
agreements between Charter Investment, Charter and the Company. As of December
31, 1999 and 1998, management fees currently payable of $5.6 million and $473,
respectively, are included in payables to manager of cable television
systems-related parties. To the extent management fees charged to the Company
are greater (less) than the corporate expenses incurred by Charter Investment
and Charter, the Company will record distributions to (capital contributions
from) Charter Investment and Charter. For the year ended December 31, 1999, the
Company recorded distributions of $10.1 million. For the period from December
24, 1998, through December 31, 1998, the management fee charged to the Company
approximated the corporate expenses incurred by Charter Investment and Charter
on behalf of the Company. The Charter Operating Credit Facilities and notes
outstanding prohibit payments of management fees in excess of 3.5% of revenues
until repayment of the outstanding indebtedness. Any amount in excess of 3.5% of
revenues owed to Charter Investment or Charter based on the management agreement
is recorded as deferred management fees-related parties.
Charter, Mr. Allen and certain affiliates of Mr. Allen own equity interests
or warrants to purchase equity interests in various entities that provide
services or programming to the Company, including High Speed Access Corp. (High
Speed Access), WorldGate, Wink Communications, Inc. (Wink), ZDTV, LLC (ZDTV),
USA Networks, Inc. (USA Networks) and Oxygen Media Inc. (Oxygen Media). In
addition, certain officers of the Company or directors of Charter also serve as
directors of High Speed Access and USA Networks. The Company and its affiliates
do not hold controlling interests in any of these companies.
Certain of the Company's cable customers receive cable modem-based Internet
access through High Speed Access and TV-based Internet access through WorldGate.
For the year ended December 31, 1999, and for the period from December 24, 1998,
through December 31, 1998, revenues attributable to these services were less
than 1% of total revenues.
The Company receives or will receive programming and certain interactive
features embedded into the programming for broadcast via its cable systems from
Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee for the
programming service generally based on the number of subscribers receiving the
service. Such fees for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, were approximately 1% of total
operating costs. In addition, the Company receives commissions from USA Networks
for home shopping sales generated by its customers. Such revenues for the year
ended December 31, 1999, and for the period from December 24, 1998, through
December 31, 1998, were less than 1% of total revenues.
In the second quarter of 1999, Charter Holdings loaned $50 million to
Charter Holdco. The promissory note bears interest at 7.5% compounded annually.
For the year ended December 31,
F-25
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1999, Charter Holdings recognized $1.2 million of interest income pertaining to
this promissory note. This note was repaid in November 1999.
In connection with the issuance of the Charter Holdings Notes in March
1999, the Company extinguished substantially all existing long-term debt
including debt at Marcus Cable. Prior to the merger with Marcus Cable in March
1999, the Company loaned Marcus Cable $1.7 billion. In April 1999, the loan was
repaid.
During November 1999, the Company received $906 million from Charter and
Charter Holdco that was used to pay down the Charter Operating Credit
Facilities. The Company recorded the funds as loans payable-related parties. The
loans will be repaid with additional long-term borrowings made in connection
with the Bresnan acquisition (See Note 17) and accordingly, the loans have been
classified as long-term. The loans carry interest rates from 7.82% to 7.91%.
Interest expense on the loans totaled $11.6 million for the year ended December
31, 1999.
12. OPTION PLAN:
In accordance with an employment agreement between Charter Investment and
the President and Chief Executive Officer of Charter and a related option
agreement with the President and Chief Executive Officer, an option to purchase
7,044,127 Charter HoldCo membership interests, was issued to the President and
Chief Executive Officer. The option vests over a four year period from the date
of grant and expires ten years from the date of grant.
In February 1999, Charter Holdings adopted an option plan providing for the
grant of options. The plan was assumed by Charter Holdco. The option plan
provides for grants of options to employees, officers and directors of Charter
Holdco and its affiliates and consultants who provide services to Charter
Holdco. Options granted vest over five years from the grant date, commencing 15
months after the date of grant. Options not exercised accumulate and are
exercisable, in whole or in part, in any subsequent period, but not later than
ten years from the date of grant.
Membership units received upon exercise of the options are automatically
exchanged for shares of Class A common stock of Charter on a one-for-one basis.
F-26
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the activity for the Company's option plan for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998 is as follows:
1999 1998
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- -------- ---------- --------
Options outstanding, beginning of
period.................................. 7,044,127 $20.00 -- $ --
Granted:
December 23, 1998....................... -- -- 7,044,127 20.00
February 9, 1999........................ 9,111,681 20.00 -- --
April 5, 1999........................... 473,000 20.73 -- --
November 8, 1999........................ 4,741,400 19.00 -- --
Cancelled................................. (612,600) 19.95 -- --
----------- ------ ---------- ------
Options outstanding, end of period........ 20,757,608 $19.79 7,044,127 $20.00
=========== ====== ========== ======
Weighted Average Remaining Contractual
Life.................................... 9.2 years 10.0 years
=========== ==========
Options Exercisable, end of period........ 2,091,032 $19.90 1,761,032 $20.00
=========== ====== ========== ======
Weighted average fair value of options
granted................................. $ 12.59 $ 12.50
=========== ==========
In February 2000, the Company granted 5.7 million options at $19.47 per
share.
The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to
account for the option plans. Option compensation expense of $80.0 million and
$845 for the year ended December 31, 1999, and for the period from December 24,
1998, to December 31, 1998, respectively, has been recorded in the consolidated
financial statements since the exercise prices were less than the estimated fair
values of the underlying membership interests on the date of grant. Estimated
fair values were determined by the Company using the valuation inherent in the
Paul Allen Transaction and valuations of public companies in the cable
television industry adjusted for factors specific to the Company. Compensation
expense is being recorded over the vesting period of each grant that varies from
four to five years. As of December 31, 1999, deferred compensation remaining to
be recognized in future periods totaled $79.4 million. No option compensation
expense was recorded for the options granted on November 8, 1999, since the
exercise price is equal to the estimated fair value of the underlying membership
interests on the date of grant. Since the membership units are exchangeable into
Class A common stock of Charter on a one-for-one basis, the estimated fair value
was equal to the initial offering price of Class A common stock.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), requires pro forma disclosure of the impact
on earnings as if the compensation costs for these plans had been determined
consistent with the fair value
F-27
239
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
methodology of this statement. The Company's net loss would have been increased
to the following unaudited pro forma amounts under SFAS 123:
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
Net loss:
As reported............................................... $(585,924) $(5,277)
Pro forma (unaudited)..................................... (610,258) (5,495)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants during the year ended December 31, 1999, and
for the period from December 24, 1998, through December 31, 1998, respectively:
risk-free interest rates of 5.5% and 4.8%; expected volatility of 43.8% and
43.7%; and expected lives of 10 years. The valuations assume no dividends are
paid.
13. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, were $10.3 million and $70, respectively. As of December 31, 1999,
future minimum lease payments are as follows:
2000........................................................ $6,132
2001........................................................ 4,614
2002........................................................ 2,511
2003........................................................ 1,921
2004........................................................ 1,441
Thereafter.................................................. 5,379
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
year ended December 31, 1999, and for the period from December 24, 1998, through
December 31, 1998, was $13.3 million and $137, respectively.
LITIGATION
The Company is a party to lawsuits and claims that arose in the ordinary
course of conducting its business. In the opinion of management, after
consulting with legal counsel, the outcome of these lawsuits and claims will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and
F-28
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
regulation of cable television systems. The Federal Communications Commission
(FCC) has principal responsibility for implementing the policies of the Cable
Acts. Many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. Legislation and
regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. During 1999, the
amounts refunded by the Company have been insignificant. The Company may be
required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. As of
December 31, 1999, approximately 18% of the Company's local franchising
authorities are certified to regulate basic tier rates. The Company is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
14. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in 401(k) plans (the "401(k)
Plans"). Employees that qualify for participation can contribute up to 15% of
their salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches 50% of the first
5% of participant contributions. The Company made contributions to the 401(k)
Plans totaling $2.9 million and $20 for the year ended December 31, 1999, and
for the period from December 24, 1998, through December 31, 1998, respectively.
F-29
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
The Company is required to adopt Statement of Financial Accounting
Standards Board No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) on January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company has not yet quantified
the impact of adopting SFAS No. 133 on the consolidated financial statements nor
has the Company determined the timing of the adoption of SFAS No. 133. However,
SFAS No. 133 could increase the volatility in earnings (losses).
16. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
As the result of limitations on and prohibition of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company. The
following parent company only financial statements of Charter Holdings account
for the investment in Charter Operating under the equity method of accounting.
The financial statements should be read in conjunction with the consolidated
financial statements of the Company and notes thereto.
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
ASSETS
Cash and cash equivalents................................... $ 9,762 $ --
Investment in Charter Operating............................. 7,387,183 2,147,379
Other assets................................................ 69,793 --
---------- ----------
$7,466,738 $2,147,379
========== ==========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities......................................... $ 47,365 $ --
Payables to manager of cable systems -- related parties..... 2,960 --
Long-term debt.............................................. 3,072,151 --
Member's equity............................................. 4,344,262 2,147,379
---------- ----------
$7,466,738 $2,147,379
========== ==========
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
Interest expense............................................ $(221,925) $ --
Interest income............................................. 11,833 --
Equity in loss of Charter Operating......................... (375,832) (5,277)
--------- -------
Net loss.................................................. $(585,924) $(5,277)
========= =======
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (585,924) $(5,277)
Noncash interest expense.................................. 78,473 --
Equity in losses of Charter Operating..................... 375,832 5,277
Changes in assets and liabilities......................... 48,825 --
----------- -------
Net cash used in operating activities.................. (82,794) --
----------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Charter Operating........................... (1,730,466) --
Loans to Marcus Cable Holdings, LLC....................... (1,680,142)
Repayment of debt on behalf of Charter Operating.......... (663,259)
Distributions received from Charter Operating............. 96,748 --
----------- -------
Net cash used in investing activities.................. (3,977,119) --
----------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from debt offering........................... 2,999,385 --
Payments for debt issuance costs.......................... (74,000) --
Capital contributions..................................... 1,144,290 --
----------- -------
Net cash used in financing activities.................. 4,069,675 --
----------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 9,762 --
CASH AND CASH EQUIVALENTS, beginning of period.............. -- --
----------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 9,762 $ --
=========== =======
F-31
243
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. SUBSEQUENT EVENTS:
On January 1, 2000, Charter Holdco and Charter Holdings effected a number
of transactions in which cable systems acquired by Charter Holdco in November
1999 were contributed to Charter Holdings (the "Transferred Systems"). The
Company intends to account for the contribution of the Transferred Systems to
Charter Holdings as a reorganization of entities under common control in a
manner similar to pooling of interests effective January 1, 2000. Charter
Holdings will revise its financial statements as of and for the year ended
December 31, 1999, to reflect the reorganization. The accounts of the
Transferred Systems will be included in Charter Holdings' financial statements
from the date the Transferred Systems were acquired by Charter Holdco. This
revision will occur in connection with the filing of Charter Holdings' Quarterly
Report on Form 10-Q for the quarter ending March 31, 2000.
On January 6, 2000, Charter Holdings issued notes with a principal amount
of $1.5 billion (January 2000 Charter Holdings Notes). The January 2000 Charter
Holdings Notes are comprised of $675.0 million 10.00% Senior Notes due 2009,
$325.0 million 10.25% Senior Notes due 2010, and $532.0 million 11.75% Senior
Discount Notes due 2010. The net proceeds were approximately $1.3 billion, after
giving effect to discounts, commissions and expenses. The proceeds from the
January 2000 Charter Holdings Notes were used to finance the repurchases of debt
assumed in the above transfers and the Bresnan acquisition (as defined below).
On February 14, 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan Communications Company Limited Partnership (Bresnan).
Prior to the acquisition, Charter Holdco assigned a portion of its rights to
purchase Bresnan to Charter Holdings. Charter Holdco and Charter Holdings
purchased 52% of Bresnan from certain sellers for cash and certain sellers
contributed 18% of Bresnan to Charter Holdco for 14.8 million Class C common
membership units of Charter Holdco, an approximate 2.6% equity interest in
Charter Holdco. Charter Holdco then transferred its ownership interest to
Charter Holdings. Thereafter, Charter Holdings and certain sellers contributed
all of the outstanding interests in Bresnan to CC VIII, LLC (CC VIII), a
subsidiary of Charter Holdings and Bresnan was dissolved. In exchange for the
contribution of their interests in Bresnan, the sellers received approximately
24.2 million Class A preferred membership units in CC VIII representing 30% of
the equity of CC VIII and are entitled to a 2% annual return on their preferred
membership units. The purchase price for Bresnan was approximately $3.1 billion
subject to adjustment and was comprised of $1.1 billion in cash, $384.6 million
and $629.5 million in equity in Charter Holdco and CC VIII, respectively, and
approximately $1.0 billion in assumed debt. All the membership units received by
the sellers are exchangeable on a one-for-one basis for Class A common stock of
Charter. The Bresnan cable systems acquired are located in Michigan, Minnesota,
Wisconsin and Nebraska, and serve approximately 686,000 (unaudited) customers.
Subsequent to the completion of the Bresnan acquisition, Charter
repurchased all of the outstanding Bresnan 9.25% Senior Discount Notes Due 2009
with an accreted value of $192.1 million and Bresnan 8.00% Senior Notes Due 2009
with a principal amount of $170.0 million for a total of $369.7 million. The
notes were repurchased using a portion of the proceeds of the January 2000
Charter Holdings Notes.
F-32
244
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated statements of operations,
changes in shareholder's investment and cash flows of Charter Communications
Holdings, LLC and subsidiaries for the period from January 1, 1998, through
December 23, 1998, and for the year ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the operations and the cash flows of
Charter Communications Holdings, LLC and subsidiaries for the period from
January 1, 1998, through December 23, 1998, and for the year ended December 31,
1997, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-33
245
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1,
1998, THROUGH
DECEMBER YEAR ENDED
23, DECEMBER 31,
1998 1997
------------- ------------
REVENUES.................................................... $ 49,731 $18,867
-------- -------
OPERATING EXPENSES:
Operating, general and administrative..................... 25,952 11,767
Depreciation and amortization............................. 16,864 6,103
Corporate expense allocation -- related party............. 6,176 566
-------- -------
48,992 18,436
-------- -------
Income from operations................................. 739 431
-------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (17,277) (5,120)
Interest income........................................... 44 41
Other, net................................................ (728) 25
-------- -------
(17,961) (5,054)
-------- -------
Net loss............................................... $(17,222) $(4,623)
======== =======
The accompanying notes are an integral part of these consolidated statements.
F-34
246
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S INVESTMENT
(DOLLARS IN THOUSANDS)
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
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