UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the quarterly period ended March 31, 2009
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the transition period from ________ to _________
Commission
file number: 333-112593
333-112593-01
CCO Holdings,
LLC
CCO Holdings Capital
Corp.
(Exact name of registrants as
specified in their charters)
(Debtors-In-Possession
as of March 27, 2009)
|
Delaware
|
86-1067239
|
|
|
Delaware
|
20-0257904
|
|
|
(State or other jurisdiction
of incorporation or organization)
|
(I.R.S.
Employer Identification
Number)
|
12405
Powerscourt Drive
St. Louis, Missouri
63131
(Address of principal executive
offices including zip code)
(314)
965-0555
(Registrants’ telephone number,
including area code)
Indicate
by check mark whether the registrants (1) have filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the registrants have submitted electronically and posted
on their corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrants were required to submit and post such files). YES [ ] NO
[ ]
Indicate
by check mark whether the registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or smaller reporting companies. See definition
of “accelerated filer,” “large accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated
filer o Non-accelerated
filer þ Smaller
reporting company o
Indicate
by check mark whether the registrants are shell companies (as defined in Rule
12b-2 of the Act). Yes oNo þ
Number of
shares of common stock of CCO Holdings Capital Corporation outstanding as of May
14, 2009: 1
CCO
Holdings, LLC
CCO
Holdings Capital Corp.
Quarterly
Report on Form 10-Q for the Period ended March 31, 2009
Table
of Contents
|
PART
I. FINANCIAL INFORMATION
|
Page
|
|
Item
1. Financial Statements - CCO Holdings, LLC and
Subsidiaries
|
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2009
|
|
|
and
December 31, 2008
|
4
|
|
Condensed
Consolidated Statements of Operations for the three
|
|
|
months
ended March 31, 2009 and 2008
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
|
three
months ended March 31, 2009 and 2008
|
6
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
19
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
30
|
|
Item
4. Controls and Procedures
|
30
|
|
PART
II. OTHER INFORMATION
|
|
|
Item
1. Legal Proceedings
|
31
|
|
Item
1A. Risk Factors
|
31
|
|
Item
6. Exhibits
|
36
|
|
SIGNATURES
|
S-1
|
|
EXHIBIT
INDEX
|
E-1
|
This
quarterly report on Form 10-Q is for the three months ended March 31,
2009. The Securities and Exchange Commission ("SEC") allows us
to "incorporate by reference" information that we file with the SEC, which means
that we can disclose important information to you by referring you directly to
those documents. Information incorporated by reference is considered
to be part of this quarterly report. In addition, information that we
file with the SEC in the future will automatically update and supersede
information contained in this quarterly report. In this quarterly
report, "we," "us" and "our" refer to CCO Holdings, LLC and its
subsidiaries.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This
quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the "Results of Operations" and
"Liquidity and Capital Resources" sections under Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" in
this quarterly report. 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 including, without
limitation, the factors described under "Risk Factors" under Part II, Item 1A
and the factors described under “Risk Factors” under Part I, Item 1A of our most
recent Form 10-K filed with the SEC. Many of the forward-looking
statements contained in this quarterly report may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "will," "may," "intend," "estimated," "aim," "on track," "target,"
"opportunity," and "potential," among others. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make in this quarterly report are set forth in this quarterly
report and in other reports or documents that we file from time to time with the
SEC, and include, but are not limited to:
|
|
·
|
the
completion of our and our parent companies’ restructuring including the
outcome and impact on our business of the proceedings under Chapter 11 of
the Bankruptcy Code;
|
|
|
·
|
our
and our parent companies’ ability to satisfy closing conditions under the
agreements-in-principle with certain of our parent companies’ bondholders
and pre-arranged Joint Plan of Reorganization (“the Plan”) and related
documents and to have the Plan confirmed by the bankruptcy
court;
|
|
|
·
|
the
availability and access, in general, of funds to meet interest payment
obligations under our and our parent companies’ debt and to fund our
operations and necessary capital expenditures, either through cash on
hand, cash flows from operating activities, further borrowings or other
sources and, in particular, our and our parent companies’ ability to fund
debt obligations (by dividend, investment or otherwise) to the applicable
obligor of such debt;
|
|
|
·
|
our
and our parent companies’ ability to comply with all covenants in our and
our parent companies’ indentures and credit facilities, any violation of
which, if not cured in a timely manner, could trigger a default of our and
our parent companies’ other obligations under cross-default
provisions;
|
|
|
·
|
our
and our parent companies’ ability to repay debt prior to or when it
becomes due and/or successfully access the capital or credit markets to
refinance that debt through new issuances, exchange offers or otherwise,
including restructuring our and our parent companies’ balance sheet and
leverage position, especially given recent volatility and disruption in
the capital and credit markets;
|
| · | the impact of competition from other distributors, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband providers, and digital subscriber line (“DSL”) providers; | |
| · | difficulties in growing and operating our telephone services, while adequately meeting customer expectations for the reliability of voice services; | |
| · | our ability to adequately meet demand for installations and customer service; |
|
|
·
|
our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and other
services, and to maintain and grow our customer base, particularly in the
face of increasingly aggressive
competition;
|
|
|
·
|
our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
|
|
|
·
|
general
business conditions, economic uncertainty or downturn, including the
recent volatility and disruption in the capital and credit markets and the
significant downturn in the housing sector and overall economy;
and
|
|
|
·
|
the
effects of governmental regulation on our
business.
|
All
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by this cautionary
statement. We are under no duty or obligation to update any of the
forward-looking statements after the date of this quarterly
report.
3
PART
I. FINANCIAL INFORMATION.
|
Item
1.
|
Financial
Statements.
|
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONDENSED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN
MILLIONS)
|
March
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 816 | $ | 948 | ||||
|
Accounts
receivable, less allowance for doubtful accounts of $16 and $18,
respectively
|
187 | 221 | ||||||
|
Prepaid
expenses and other current assets
|
84 | 23 | ||||||
|
Total
current assets
|
1,087 | 1,192 | ||||||
|
INVESTMENT
IN CABLE PROPERTIES:
|
||||||||
|
Property,
plant and equipment, net of accumulated depreciation
|
4,901 | 4,959 | ||||||
|
Franchises,
net
|
7,377 | 7,384 | ||||||
|
Total
investment in cable properties, net
|
12,278 | 12,343 | ||||||
|
OTHER
NONCURRENT ASSETS
|
208 | 211 | ||||||
|
Total
assets
|
$ | 13,573 | $ | 13,746 | ||||
|
LIABILITIES
AND MEMBER’S DEFICIT
|
||||||||
|
LIABILITIES
NOT SUBJECT TO COMPROMISE:
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 1,232 | $ | 909 | ||||
|
Payables
to related party
|
115 | 236 | ||||||
|
Current
portion of long-term debt
|
11,774 | 70 | ||||||
|
Total
current liabilities
|
13,121 | 1,215 | ||||||
|
LONG-TERM
DEBT
|
-- | 11,719 | ||||||
|
LOANS
PAYABLE – RELATED PARTY
|
252 | 240 | ||||||
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
-- | 14 | ||||||
|
OTHER
LONG-TERM LIABILITIES
|
240 | 695 | ||||||
|
LIABILITIES
SUBJECT TO COMPROMISE (INCLUDING AMOUNTS DUE TO
|
||||||||
|
RELATED
PARTY OF $25 AND $0, RESPECTIVELY)
|
70 | -- | ||||||
|
TEMPORARY
EQUITY
|
207 | 203 | ||||||
|
MEMBER’S
DEFICIT:
|
||||||||
|
Member’s
deficit
|
(485 | ) | (510 | ) | ||||
|
Accumulated
other comprehensive loss
|
(312 | ) | (303 | ) | ||||
|
Total
member’s deficit – CCO Holdings, LLC
|
(797 | ) | (813 | ) | ||||
|
Noncontrolling
interest
|
480 | 473 | ||||||
|
Total
member’s deficit
|
(317 | ) | (340 | ) | ||||
|
Total
liabilities and member’s deficit
|
$ | 13,573 | $ | 13,746 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(DOLLARS
IN MILLIONS)
Unaudited
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
REVENUES
|
$ | 1,662 | $ | 1,564 | ||||
|
COSTS
AND EXPENSES:
|
||||||||
|
Operating
(excluding depreciation and amortization)
|
713 | 681 | ||||||
|
Selling,
general and administrative
|
344 | 346 | ||||||
|
Depreciation
and amortization
|
321 | 321 | ||||||
|
Other
operating (income) expenses, net
|
(50 | ) | 11 | |||||
| 1,328 | 1,359 | |||||||
|
Income
from operations
|
334 | 205 | ||||||
|
OTHER
INCOME (EXPENSES):
|
||||||||
|
Interest
expense, net
|
(200 | ) | (193 | ) | ||||
|
Change
in value of derivatives
|
(4 | ) | (30 | ) | ||||
|
Reorganization
items, net
|
(92 | ) | -- | |||||
|
Other
income (expense), net
|
1 | (1 | ) | |||||
| (295 | ) | (224 | ) | |||||
|
Income
(loss) before income taxes
|
39 | (19 | ) | |||||
|
INCOME
TAX EXPENSE
|
(3 | ) | (2 | ) | ||||
|
Consolidated
net income (loss)
|
36 | (21 | ) | |||||
|
Less:
Net income – noncontrolling interest
|
(11 | ) | (6 | ) | ||||
|
Net
income (loss) – CCO Holdings, LLC
|
$ | 25 | $ | (27 | ) | |||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
(DEBTOR-IN-POSSESSION)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
income (loss)
|
$ | 25 | $ | (27 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash flows from
operating
activities:
|
||||||||
|
Depreciation
and amortization
|
321 | 321 | ||||||
|
Noncash
interest expense
|
6 | 4 | ||||||
|
Change
in value of derivatives
|
4 | 30 | ||||||
|
Reorganization
items, net
|
60 | -- | ||||||
|
Noncontrolling
interest
|
11 | 6 | ||||||
|
Other,
net
|
14 | 13 | ||||||
|
Changes
in operating assets and liabilities, net of effects from
dispositions:
|
||||||||
|
Accounts
receivable
|
34 | 20 | ||||||
|
Prepaid
expenses and other assets
|
(61 | ) | (2 | ) | ||||
|
Accounts
payable, accrued expenses and other
|
(117 | ) | 29 | |||||
|
Receivables
from and payables to related party, including deferred
management
fees
|
(119 | ) | (6 | ) | ||||
|
Net
cash flows from operating activities
|
178 | 388 | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases
of property, plant and equipment
|
(269 | ) | (334 | ) | ||||
|
Change
in accrued expenses related to capital expenditures
|
(27 | ) | (31 | ) | ||||
|
Purchases
of short-term investments
|
-- | (2 | ) | |||||
|
Other,
net
|
4 | 3 | ||||||
|
Net
cash flows from investing activities
|
(292 | ) | (364 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Borrowings
of long-term debt
|
-- | 1,765 | ||||||
|
Repayments
of long-term debt
|
(17 | ) | (1,102 | ) | ||||
|
Payments
for debt issuance costs
|
-- | (39 | ) | |||||
|
Distributions
|
-- | (186 | ) | |||||
|
Other,
net
|
(1 | ) | -- | |||||
|
Net
cash flows from financing activities
|
(18 | ) | 438 | |||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(132 | ) | 462 | |||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
948 | 2 | ||||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 816 | $ | 464 | ||||
|
CASH
PAID FOR INTEREST
|
$ | 149 | $ | 137 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
|
Organization,
Basis of Presentation and Bankruptcy
Proceedings
|
Organization
CCO
Holdings, LLC ("CCO Holdings") is a holding company whose principal assets at
March 31, 2009 are the equity interests in its operating
subsidiaries. CCO Holdings is a direct subsidiary of CCH II, LLC
(“CCH II”), which is an indirect subsidiary of Charter Communications Holdings,
LLC (“Charter Holdings”). Charter Holdings is an indirect subsidiary
of Charter Communications, Inc. (“Charter”). The consolidated
financial statements include the accounts of CCO Holdings and all of its
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." All significant intercompany
accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (basic and digital video), high-speed
Internet services, and telephone services, as well as advanced broadband
services such as high definition television, Charter OnDemand™, and digital
video recorder (“DVR”) service. The Company sells its cable video
programming, high-speed Internet, telephone, and advanced broadband services
primarily on a subscription basis. The Company also sells local
advertising on cable networks.
Basis
of Presentation
The
accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Accordingly,
certain information and footnote disclosures typically included in the Company’s
Annual Report on Form 10-K have been condensed or omitted for this quarterly
report. The accompanying condensed consolidated financial statements
are unaudited and are subject to review by regulatory
authorities. However, in the opinion of management, such financial
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results
for a full year.
The
condensed consolidated financial statements have also been prepared in
accordance with Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code (“SOP 90-7”), and on a going
concern basis, which assumes the continuity of operations and reflects the
realization of assets and satisfaction of liabilities in the ordinary course of
business. Continuation of the Company as a going concern is
contingent upon, among other things, the Company’s ability (i) to obtain
confirmation of a plan of reorganization under the U.S. Bankruptcy Code; (ii) to
generate sufficient cash flow from operations; and (iii) to obtain financing
sources to meet the Company’s future obligations. These matters raise
substantial doubt about the Company’s ability to continue as a going
concern. The condensed consolidated financial statements reflect
adjustments to record amounts in accordance with SOP 90-7. However,
they do not reflect all adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the outcome of these
uncertainties. Additionally, a plan of reorganization could
materially change amounts reported in the condensed consolidated financial
statements, which do not give effect to all adjustments of the carrying value of
assets and liabilities that are necessary as a consequence of reorganization
under Chapter 11.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) 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. Areas involving significant judgments
and estimates include capitalization of labor and overhead costs; depreciation
and amortization costs; impairments of property, plant and equipment, franchises
and goodwill; income taxes; and contingencies. Actual results could
differ from those estimates.
7
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
Certain
prior year amounts have been reclassified to conform with the 2009
presentation.
Bankruptcy
Proceedings
On March
27, 2009, the Company, its parent companies, and certain affiliates
(collectively, the “Debtors”) filed voluntary petitions in the United States
Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”)
seeking relief under the provisions of Chapter 11 of Title 11 of the United
States Code (the “Bankruptcy Code”). The Chapter 11 cases are being
jointly administered under the caption In re Charter Communications, Inc.,
et al., Case No. 09-11435 (the “Chapter 11 Cases”). The
Debtors will continue to operate their businesses and manage their properties as
debtors in possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code.
The
filing was made to allow the Company and its parent companies to implement a
restructuring pursuant to a pre-arranged joint plan of reorganization (the
“Plan”) aimed at improving the Company’s and its parent companies’ capital
structure (the “Proposed Restructuring”). The Plan essentially
provides for a balance sheet restructuring that will leave intact the Company’s
operations.
Under
Chapter 11, the Company is operating its business as a debtor-in-possession
(“DIP”) under bankruptcy court protection from creditors and
claimants. The Company and its parent companies obtained “first day”
orders from the Bankruptcy Court, which provided, among other things,
flexibility in cash management, the ability to use cash collateral, and the
ability to pay certain pre-petition claims. During these Chapter 11
Cases, all transactions outside the ordinary course of business will require the
prior approval of the Bankruptcy Court. As a consequence of the
Chapter 11 filing, pending litigation against the Company and its parent
companies is subject to the automatic stay, and consequently no party may take
any action to collect pre-petition claims except pursuant to order of the
Bankruptcy Court.
On May 5,
2009, the Bankruptcy Court approved the disclosure statement filed in connection
with the Plan and authorized the Debtors to begin soliciting votes on the Plan.
The Debtors’ confirmation hearing, at which the Bankruptcy Court will consider
approval of the Plan, has been scheduled for July 20, 2009.
The
Proposed Restructuring is expected to be funded with cash from operations, an
exchange of debt of CCH II for other debt at CCH II, the issuance of $267
million aggregate principal amount of additional debt and estimated proceeds of
$1.6 billion of an equity rights offering (the “Rights Offering”) for which
Charter has received a back-stop commitment from certain holders of certain of
the Company’s parent companies’ notes (the “Noteholders”). In
addition to separate restructuring agreements entered into with each Noteholder
(the “Restructuring Agreements”) pursuant to which the Company and its parent
companies expect to implement the Proposed Restructuring, the Noteholders have
entered into commitment letters with Charter (the “Commitment Letters”) pursuant
to which they have agreed to exchange and/or purchase, as applicable, certain of
the Company’s parent companies’ securities.
The
Restructuring Agreements contemplate that upon consummation of the Plan (i) the
notes and credit facilities of Charter’s subsidiaries, Charter Communications
Operating, LLC (“Charter Operating”) and CCO Holdings will remain outstanding,
(ii) holders of notes issued by CCH II will receive new CCH II notes and/or
cash, (iii) holders of notes issued by CCH I, LLC (“CCH I”) will receive shares
of Charter’s new Class A Common Stock, (iv) holders of notes issued by CCH I
Holdings, LLC (“CIH”) will receive warrants to purchase shares of Charter’s new
Class A Common Stock, (v) holders of notes of Charter Holdings will receive
warrants to purchase shares of Charter’s new Class A Common Stock, (vi) holders
of convertible notes issued by Charter will receive cash and preferred stock
issued by Charter, (vii) holders of existing common stock will not
receive any amounts on account of their common stock, which will be cancelled,
and (viii) trade creditors will be paid in full. In addition, as part
of the Proposed Restructuring, it is expected that consideration will be paid by
holders of CCH I notes to other entities participating in the financial
restructuring.
8
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
Pursuant
to a separate restructuring agreement among Charter, Mr. Paul G. Allen,
Charter’s chairman and primary shareholder, and an entity controlled by Mr.
Allen (the “Allen Agreement”), in settlement and compromise of their legal,
contractual, and equitable rights, claims and remedies against Charter and its
subsidiaries, and in addition to any amounts received by virtue of their holding
any claims of the type set forth above, upon consummation of the Plan, Mr. Allen
or his affiliates will be issued a number of shares of the new Class B Common
Stock of Charter such that the aggregate voting power of such shares of new
Class B Common Stock shall be equal to 35% of the total voting power of all new
capital stock of Charter. Each share of new Class B Common Stock will be
convertible, at the option of the holder, into one share of new Class A Common
Stock, and will be subject to significant restrictions on
transfer. Certain holders of new Class A Common Stock and new Class B
Common Stock will receive certain customary registration rights with respect to
their shares. Upon consummation of the Plan, Mr. Allen or his
affiliates will also receive (i) warrants to purchase shares of new Class A
Common Stock of Charter in an aggregate amount equal to 4% of the equity value
of reorganized Charter, after giving effect to the Rights Offering, but prior to
the issuance of warrants and equity-based awards provided for by the Plan, (ii)
$85 million principal amount of new CCH II notes, (iii) $25 million in cash for
amounts owing to Charter Investment, Inc. (“CII”) under a management
agreement, (iv) up to $20 million in cash for reimbursement of fees and expenses
in connection with the Proposed Restructuring, and (v) an additional $150
million in cash. The warrants described above shall have an exercise
price per share based on a total equity value equal to the sum of the equity
value of reorganized Charter, plus the gross proceeds of the Rights Offering,
and shall expire seven years after the date of issuance. In addition, on the
effective date of the Plan, CII will retain a 1% equity interest in reorganized
Charter Communications Holding Company, LLC (“Charter Holdco”) and a right to
exchange such interest into new Class A Common Stock of Charter. The Proposed
Restructuring would result in the reduction of the Company’s parent companies’
debt by approximately $8 billion.
The Allen
Agreement contains similar provisions to those provisions of the Restructuring
Agreements. There is no assurance that the treatment of creditors
outlined above will not change significantly. For example, because
the Proposed Restructuring is contingent on reinstatement of the Company’s
credit facilities and notes, failure to reinstate such debt would require the
Company and its parent companies to revise the Proposed Restructuring.
Moreover, if reinstatement does not occur and current capital market
conditions persist, the Company and its parent companies may not be able to
secure adequate new financing and the cost of new financing would likely be
materially higher.
Interest
Payments
Two of
the Company’s parent companies, CIH and Charter Holdings, did not make scheduled
payments of interest due on January 15, 2009 (the “January Interest Payment”) on
certain of their outstanding senior notes (the “Overdue Payment Notes”).
Each of the respective governing indentures (the “Indentures”) for the Overdue
Payment Notes permits a 30-day grace period for such interest payments through
(and including) February 15, 2009. On February 11, 2009, in connection
with the Commitment Letters and Restructuring Agreements, Charter and certain of
its subsidiaries also entered into an Escrow Agreement with members of the
ad-hoc committee of holders of the Overdue Payment Notes (“Ad-Hoc Holders”) and
Wells Fargo Bank, National Association, as Escrow Agent (the “Escrow
Agreement”). On February 13, 2009, the full amount of the January
Interest Payment was paid to the Paying Agent for the Ad-Hoc Holders on their
Overdue Payment Notes, which constitutes payment under the
Indentures. As required under the Indentures, Charter set a special
record date for payment of such interest payments of February 28,
2009. Under the Escrow Agreement, the Ad-Hoc Holders agreed to
deposit into an escrow account the amounts they receive in respect of the
January Interest Payment of approximately $47 million (the "Escrow Amount") and
the Escrow Agent will hold such amounts subject to the terms of the Escrow
Agreement. Under the Escrow Agreement, if the transactions
contemplated by the Restructuring Agreements are consummated on or before
December 15, 2009 or such transactions are not consummated on or before December
15, 2009 due to material breach of the Restructuring Agreements by Charter or
its direct or indirect subsidiaries, then the Ad-Hoc Holders will be entitled to
receive their pro-rata share of the Escrow Amount. If the
transactions contemplated by the Restructuring Agreements are not consummated on
or prior to December 15, 2009 for any reason other than material breach of the
Restructuring Agreements by Charter or its direct or indirect subsidiaries, then
Charter, Charter Holdings, CIH or their designee shall be entitled to receive
the Escrow Amount. No amount has been recorded on the Company’s or
its parent companies’ condensed consolidated balance sheets for the Escrow
Amount.
9
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
One of
the Company’s parent companies, CCH II, did not make its scheduled payment of
interest on March 16, 2009 on certain of its outstanding senior notes. The
governing indenture for such notes permits a 30-day grace period for such
interest payments, and Charter and its subsidiaries, including CCH II, filed
voluntary Chapter 11 Bankruptcy prior to the expiration of the grace
period.
Charter
Operating Credit Facility
On
February 3, 2009, Charter Operating made a request to the administrative agent
under its Amended and Restated Credit Agreement, dated as of March 18, 1999, as
amended and restated as of March 6, 2007 (the “Credit Agreement”), to borrow
additional revolving loans under the Credit Agreement. Such borrowing
request complied with the provisions of the Credit Agreement including section
2.2 (“Procedure for Borrowing”) thereof. Subsequently, Charter
received a notice from the administrative agent asserting that one or more
Events of Default (as defined in the Credit Agreement) had occurred and was
continuing under the Credit Agreement. In response, Charter sent a
letter to the administrative agent, among other things, stating that no event of
default under the Credit Agreement occurred or was continuing and requesting the
administrative agent to rescind its notice of default and fund Charter
Operating’s borrowing request. The administrative agent subsequently
sent a letter stating that it continues to believe that one or more Events of
Default occurred and was continuing. As a result, with the
exception of one lender who funded approximately $0.4 million, the lenders under
the Credit Agreement have failed to fund Charter Operating’s borrowing
request.
Upon
filing bankruptcy, Charter Operating no longer has access to its revolving
credit facility and relies on cash on hand and cash flows from operating
activities to fund its projected cash needs. The Company’s projected
cash needs and projected sources of liquidity depend upon, among other things,
its actual results, the timing and amount of its expenditures, and the outcome
of various matters in its Chapter 11 Cases and financial
restructuring. The outcome of the Proposed Restructuring is subject
to substantial risks. See Note 14 for more information on the
JPMorgan Adversary Proceeding.
2. Liabilities
Subject to Compromise and Reorganization Items, Net
Liabilities
Subject to Compromise
Under the
Bankruptcy Code, certain claims against the Company in existence prior to the
filling of the petitions for relief under the federal bankruptcy laws are stayed
while the Company continues business operations as a DIP. These
estimated claims are reflected in condensed consolidated balance sheets as
liabilities subject to compromise at the expected allowed claim amount as of
March 31, 2009 and are summarized in the table below. Such claims
remain subject to future adjustments. Adjustments may result from
actions of the Bankruptcy Court, negotiations, rejection or acceptance of
executory contracts, determination as to the value of any collateral securing
claims, proofs of claim or other events.
As of
March 31, 2009, the amounts subject to compromise consisted of the following
items.
|
Accrued
Expenses
|
$ | 45 | ||
|
Deferred
Management Fees – Related Party
|
25 | |||
|
Total
Liabilities Subject To Compromise
|
$ | 70 |
10
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
Reorganization
Items, Net
Reorganization
items, net is presented separately in the condensed consolidated statements of
operations and represents items of income, expense, gain or loss that are
realized or incurred by the Company because it is in reorganization under
Chapter 11 of the U.S. Bankruptcy Code.
Reorganization
items, net consisted of the following items for the three months ended March 31,
2009.
|
Loss
on interest rate swap liabilities at allowed claim amount
|
$ | 49 | ||
|
Management
fee expense
|
29 | |||
|
Paul
Allen management fee settlement – related party
|
11 | |||
|
Other
|
3 | |||
|
Total
Reorganization Items, Net
|
$ | 92 |
Reorganization
items, net consist of adjustments to record liabilities at the allowed claim
amount, and other expenses directly related to the Company’s bankruptcy
proceedings.
3. Franchises,
Goodwill and Other Intangible Assets
Franchise
rights represent the value attributed to agreements or authorizations with local
and state authorities that allow access to homes in cable service
areas. Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite life or an
indefinite-life as defined by Statement of Financial Accounting Standards
(“SFAS”) No. 142, Goodwill and
Other Intangible Assets. Franchises that qualify for
indefinite-life treatment under SFAS No. 142 are tested for impairment
annually based on valuations, or more frequently as warranted by events or
changes in circumstances. Franchises are aggregated into essentially
inseparable units of accounting to conduct the valuations. The units
of accounting generally represent clustering of the Company’s cable systems into
groups by which such systems are managed. Management believes such
grouping represents the highest and best use of those assets.
As of
March 31, 2009 and December 31, 2008, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
March
31, 2009
|
December 31,
2008
|
|||||||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||||||||||||||
|
Indefinite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with indefinite lives
|
$ | 7,371 | $ | -- | $ | 7,371 | $ | 7,377 | $ | -- | $ | 7,377 | ||||||||||||
|
Goodwill
|
68 | -- | 68 | 68 | -- | 68 | ||||||||||||||||||
| $ | 7,439 | $ | -- | $ | 7,439 | $ | 7,445 | $ | -- | $ | 7,445 | |||||||||||||
|
Finite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with finite lives
|
$ | 16 | $ | 10 | $ | 6 | $ | 16 | $ | 9 | $ | 7 | ||||||||||||
|
Other
intangible assets
|
74 | 42 | 32 | 71 | 41 | 30 | ||||||||||||||||||
| $ | 90 | $ | 52 | $ | 38 | $ | 87 | $ | 50 | $ | 37 | |||||||||||||
Franchise
amortization expense represents the amortization relating to franchises that did
not qualify for indefinite-life treatment under SFAS No. 142, including costs
associated with franchise renewals. During the three months
ended
11
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
March 31,
2009, the net carrying amount of indefinite-lived franchises was reduced by $6
million related to cable asset sales completed in 2009.
Franchise
amortization expense for each of the three months ended March 31, 2009 and 2008
was approximately $1 million. Other intangible assets amortization
expense for the three months ended March 31, 2009 and 2008 was approximately $2
million and $1 million, respectively. The Company expects that
amortization expense on franchise assets and other intangible assets will be
approximately $7 million annually for each of the next five
years. Actual amortization expense in future periods could differ
from these estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives and other relevant factors.
4. Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses not subject to compromise consist of the following
as of March 31, 2009 and December 31, 2008:
|
March
31,
2009
|
December 31,
2008
|
|||||||
|
Accounts
payable – trade
|
$ | 91 | $ | 86 | ||||
|
Accrued
capital expenditures
|
29 | 56 | ||||||
|
Accrued
expenses:
|
||||||||
|
Terminated
interest rate swap liability
|
497 | -- | ||||||
|
Interest
|
139 | 122 | ||||||
|
Programming
costs
|
241 | 305 | ||||||
|
Compensation
|
65 | 80 | ||||||
|
Franchise-related
fees
|
49 | 60 | ||||||
|
Other
|
121 | 200 | ||||||
| $ | 1,232 | $ | 909 | |||||
5. Debt
Debt
consists of the following as of March 31, 2009 and December 31,
2008:
|
March
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Principal
Amount
|
Accreted
Value
|
Principal
Amount
|
Accreted
Value
|
|||||||||||||
|
CCO
Holdings, LLC:
|
||||||||||||||||
|
8
¾% senior notes due November 15, 2013
|
$ | 800 | $ | 797 | $ | 800 | $ | 796 | ||||||||
|
Credit
facility
|
350 | 350 | 350 | 350 | ||||||||||||
|
Charter
Communications Operating, LLC:
|
||||||||||||||||
|
8.000%
senior second-lien notes due April 30, 2012
|
1,100 | 1,100 | 1,100 | 1,100 | ||||||||||||
|
8
3/8% senior second-lien notes due April 30, 2014
|
770 | 770 | 770 | 770 | ||||||||||||
|
10.875%
senior second-lien notes due September 15, 2014
|
546 | 528 | 546 | 527 | ||||||||||||
|
Credit
facilities
|
8,229 | 8,229 | 8,246 | 8,246 | ||||||||||||
|
Total
Debt
|
$ | 11,795 | $ | 11,774 | $ | 11,812 | $ | 11,789 | ||||||||
The
accreted values presented above generally represent the principal amount of the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, the current accreted value for
legal
12
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
purposes
and notes indenture purposes (the amount that is currently payable if the debt
becomes immediately due) is equal to the principal amount of notes.
Filing
for bankruptcy is an event of default under the Company’s credit facilities and
the indentures governing its debt. Therefore, in accordance SFAS No. 78, Classification of Obligations That
Are Callable by the Creditor, debt has been classified as current as of
March 31, 2009. The Company does not intend to repay the current portion
of long-term debt with current assets but intends to reinstate this debt through
the Proposed Restructuring. Accordingly, should the Company's Proposed
Restructuring be successful, upon the effective date of such Proposed
Restructuring, $11.8 billion of the debt classified as current per SFAS No. 78
will be reclassified as long-term. See Note 1.
Upon
filing bankruptcy, the Company is not able to elect the Eurodollar rate on
credit facilities but must pay interest at the prime rate plus the applicable
margin plus 2% per annum penalty interest.
6. Loans
Payable-Related Party
Loans
payable-related party as of March 31, 2009 consists of loans from Charter Holdco
and CCH II to the Company of $13 million and $239 million,
respectively. Loans payable-related party as of December 31, 2008
consists of loans from Charter Holdco and CCH II to the Company of $13 million
and $227 million, respectively.
7. Temporary
Equity
Temporary
equity represents Mr. Allen’s 5.6% preferred membership interests in CC VIII,
LLC (“CC VIII”), an indirect subsidiary of the Company, of $207 million and $203
million as of March 31, 2009 and December 31, 2008, respectively. Mr.
Allen’s CC VIII interest is classified as temporary equity as a result of Mr.
Allen’s ability to put his interest to the Company upon a change in control.
8. Noncontrolling
Interest
Noncontrolling
interest represents CCH I’s 13% preferred membership interests in CC VIII of
$480 million and $473 million as of March 31, 2009 and December 31, 2008,
respectively. Noncontrolling interest in the accompanying condensed
consolidated statements of operations represents the 2% accretion of the
preferred membership interest in CC VIII plus approximately 18.6% of CC VIII’s
income.
|
9.
|
Comprehensive
Income (Loss)
|
The
Company reports changes in the fair value of interest rate agreements designated
as hedging the variability of cash flows associated with floating-rate debt
obligations, that meet the effectiveness criteria of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, in accumulated other comprehensive
loss. Comprehensive income was $16 million for the three months ended
March 31, 2009 and comprehensive loss was $131 million for the three months
ended March 31, 2008.
10. Accounting
for Derivative Instruments and Hedging Activities
The
Company used interest rate swap agreements to manage its interest costs and
reduce the Company’s exposure to increases in floating interest
rates. The Company’s policy is to manage its exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, the Company
agreed to exchange, at specified intervals through 2013, the difference between
fixed and variable interest amounts calculated by reference to agreed-upon
notional principal amounts. At the banks’ option, certain interest
rate swap agreements could have been extended through 2014.
Upon
filing for Chapter 11 bankruptcy, the counterparties to the interest rate swap
agreements terminated the underlying contracts and, upon emergence from
bankruptcy, will receive payment for the market value of the interest rate
swap
13
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
agreement
as measured on the date the counterparties terminated. At March 31,
2009, the terminated interest rate swap liabilities of $497 million are
reflected at settlement amounts and were recorded in current liabilities in the
condensed consolidated balance sheets. The terminated interest rate
swap liabilities were classified as not subject to compromise in the condensed
consolidated balance sheets at March 31, 2009 as they are fully secured by the
Company’s assets. The amount remaining in accumulated other
comprehensive loss related to these interest rate swap agreements will be
amortized over the original life of the interest rate agreements until emergence
from Chapter 11 bankruptcy.
The
Company’s hedging policy does not permit it to hold or issue derivative
instruments for speculative trading purposes. The Company did,
however, have certain interest rate derivative instruments that were designated
as cash flow hedging instruments. Such instruments effectively
converted variable interest payments on certain debt instruments into fixed
payments. For qualifying hedges, SFAS No. 133 allows derivative gains
and losses to offset related results on hedged items in the consolidated
statements of operations. The Company formally documented, designated
and assessed the effectiveness of transactions that received hedge
accounting.
Changes
in the fair value of interest rate agreements that were designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that met the effectiveness criteria specified by SFAS No. 133
were reported in accumulated other comprehensive loss. The amounts
were subsequently reclassified as an increase or decrease to interest expense in
the same periods in which the related interest on the floating-rate debt
obligations affected earnings (losses).
Certain
interest rate derivative instruments were not designated as hedges as they did
not meet the effectiveness criteria specified by SFAS No.
133. However, management believes such instruments were closely
correlated with the respective debt, thus managing associated
risk. Interest rate derivative instruments not designated as hedges
were marked to fair value, with the impact recorded as a change in value of
derivatives in the Company’s consolidated statements of operations.
As of
December 31, 2008, the Company had outstanding $4.3 billion in notional amounts
of interest rate swaps outstanding. The notional amounts of interest
rate instruments do not represent amounts exchanged by the parties and, thus,
are not a measure of exposure to credit loss. The amounts exchanged
were determined by reference to the notional amount and the other terms of the
contracts.
The
effect of derivative instruments on the Company’s consolidated statement of
operations is presented in the table below.
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Change
in value of derivatives:
|
||||||||
|
Loss
on interest rate derivatives not designated as hedges
|
$ | (4 | ) | $ | (30 | ) | ||
| $ | (4 | ) | $ | (30 | ) | |||
|
Accumulated
other comprehensive loss:
|
||||||||
|
Loss
on interest rate derivatives designated as hedges (effective
portion)
|
$ | (9 | ) | $ | (104 | ) | ||
| $ | (9 | ) | $ | (104 | ) | |||
|
Amount
of loss reclassified from accumulated
other
comprehensive loss into interest expense
|
$ | (33 | ) | $ | (11 | ) | ||
The
Company adopted SFAS No. 157, Fair Value Measurements, on
its financial assets and liabilities effective January 1, 2008, and has an
established process for determining fair value. As permitted by FASB
Staff Position (“FSP”) 157-2, the Company adopted SFAS No. 157 effective January
1, 2009 on its nonfinancial assets and liabilities
14
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
including
fair value measurements under SFAS No. 142 and SFAS No. 144 of franchises,
goodwill, property, plant, and equipment, and other long-term
assets. Fair value is based upon quoted market prices, where
available. If such valuation methods are not available, fair value is
based on internally or externally developed models using market-based or
independently-sourced market parameters, where available. Fair value
may be subsequently adjusted to ensure that those assets and liabilities are
recorded at fair value. The Company’s methodology may produce a fair
value that may not be indicative of net realizable value or reflective of future
fair values, but the Company believes its methods are appropriate and consistent
with other market peers. The use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different fair value estimate as of the Company’s reporting
date.
SFAS No.
157 establishes a three-level hierarchy for disclosure of fair value
measurements, based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date, as follows:
|
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
Interest
rate derivatives were valued at December 31, 2008 using a present value
calculation based on an implied forward LIBOR curve (adjusted for Charter
Operating’s credit risk) and were classified within level 2 of the valuation
hierarchy.
The
Company has no financial liabilities accounted for at fair value at March 31,
2009 due to the termination of the interest rate swap agreements. At
December 31, 2008, the Company’s financial liabilities that were accounted for
at fair value on a recurring basis are presented in the table
below:
|
Fair
Value as of December 31, 2008
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Other
long-term liabilities:
|
||||||||||||||||
|
Interest
rate derivatives designated as hedges
|
$ | -- | $ | 303 | $ | -- | $ | 303 | ||||||||
|
Interest
rate derivatives not designated as hedges
|
-- | 108 | -- | 108 | ||||||||||||
| $ | -- | $ | 411 | $ | -- | $ | 411 | |||||||||
The
weighted average interest pay rate for the Company’s interest rate swap
agreements was 4.93% at December 31, 2008.
11. Other
Operating (Income) Expenses, Net
Other
operating (income) expenses, net consist of the following for the three months
ended March 31, 2009 and 2008:
|
Three
Months
Ended
March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Loss
on sale of assets, net
|
$ | 2 | $ | 2 | ||||
|
Special
charges, net
|
(52 | ) | 9 | |||||
| $ | (50 | ) | $ | 11 | ||||
15
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
Loss
on sale of assets, net
Loss on
sale of assets represents the loss recognized on the sale of fixed assets and
cable systems.
Special
charges, net
Special
charges, net for the three months ended March 31, 2009 primarily includes
favorable litigation settlements. Special charges, net for the three
months ended March 31, 2008 primarily represent severance charges and litigation
settlements.
12. Income
Taxes
CCO
Holdings is a single member limited liability company not subject to income
tax. CCO Holdings holds all operations through indirect
subsidiaries. The majority of these indirect subsidiaries are
generally limited liability companies that are also not subject to income
tax. However, certain of the limited liability companies are subject
to state income tax. In addition, certain of CCO Holdings’ indirect
subsidiaries are corporations that are subject to income tax.
As of
March 31, 2009 and December 31, 2008, the Company had net deferred income tax
liabilities of approximately $181 million and $179 million,
respectively. The deferred tax liabilities relate to certain of the
Company’s indirect subsidiaries, which file separate income tax
returns.
During
the three months ended March 31, 2009 and 2008, the Company recorded $3 million
and $2 million of income tax expense. Income tax expense is
recognized through current federal and state income tax expense as well as
increases to the deferred tax liabilities of certain of the Company’s indirect
corporate subsidiaries.
No tax
years for Charter or Charter Holdco are currently under examination by the
Internal Revenue Service. Tax years ending 2006, 2007 and 2008 remain
subject to examination.
13. Related
Party Transactions
The
following sets forth certain transactions in which the Company and the
directors, executive officers, and affiliates of the Company are
involved. See also Note 6 for information regarding Loans Payable –
Related Party. Unless otherwise disclosed, management believes each
of the transactions described below was on terms no less favorable to the
Company than could have been obtained from independent third
parties.
Digeo,
Inc.
Mr.
Allen, through his 100% ownership of Vulcan Ventures Incorporated (“Vulcan
Ventures”), owns a majority interest in Digeo, Inc. on a fully-converted
fully-diluted basis. Ms. Jo Allen Patton is a director of Charter and
a director and Vice President of Vulcan Ventures. Mr. Lance Conn is a
director of Charter and is Executive Vice President of Vulcan
Ventures. Currently, Charter Operating owns 1.8% of Digeo, Inc.’s
common stock.
In May
2008, Charter Operating entered into an agreement with Digeo Interactive, LLC, a
subsidiary of Digeo, Inc., for the minimum purchase of high-definition DVR units
for approximately $21 million. This minimum purchase commitment is
subject to reduction as a result of certain specified events such as the failure
to deliver units timely and catastrophic failure. The software
for these units is being supplied under a software license agreement with Digeo
Interactive, LLC; the cost of which is expected to be approximately $2 million
for the initial licenses and on-going maintenance fees of approximately $0.3
million annually, subject to reduction to coincide with any reduction in the
minimum purchase commitment. For the three months ended March 31,
2009, the Company purchased approximately $5 million of DVR units from Digeo
Interactive, LLC under these agreements.
16
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
For the
three months ended March 31, 2009, pursuant to indemnification provisions in the
October 2005 settlement with Mr. Allen regarding the CC VIII interest, the
Company reimbursed Vulcan Inc. approximately $3 million in legal
expenses.
In
connection with the Company’s Proposed Restructuring, Charter, Mr. Allen and an
entity controlled by Mr. Allen entered into the Allen Agreement in settlement of
their rights, claims and remedies against Charter and its
subsidiaries. See Note 1.
14. Contingencies
In the
ordinary course of business, the Company may face employment law claims,
including claims under the Fair Labor Standards Act and wage and hour laws of
the states in which we operate. On August 15, 2007, a complaint was
filed, on behalf of both nationwide and state of Wisconsin classes of certain
categories of current and former Charter technicians, against Charter in the
United States District Court for the Western District of Wisconsin (Sjoblom v. Charter Communications,
LLC and Charter Communications, Inc.), alleging that Charter violated the
Fair Labor Standards Act and Wisconsin wage and hour laws by failing to pay
technicians for certain hours claimed to have been worked. The Company
accrued settlement costs associated with the Sjoblom case in 2008 and such
amounts were substantially paid in the first quarter of 2009. The
Company has been subjected, in the normal course of business, to the assertion
of other similar claims and could be subjected to additional such
claims. The Company can not predict the ultimate outcome of any such
claims.
On March
27, 2009, JPMorgan Chase Bank, N.A., for itself and as Administrative Agent
under the Credit Agreement, filed an adversary proceeding (the “JPMorgan
Adversary Proceeding”) in Bankruptcy Court against Charter Operating and CCO
Holdings seeking a declaration that there have been events of default under the
Credit Agreement. Such a judgment may prevent Charter Operating and
CCO Holdings from reinstating the terms and provisions of the Credit Agreement
through the bankruptcy proceeding. On April 10, 2009, Charter
Operating and CCO Holdings filed a motion to dismiss (the “Motion to Dismiss”)
the JPMorgan Adversary Proceeding and argued that dismissal was proper because
the JPMorgan Adversary Proceeding (i) is a core proceeding that is properly
heard by the Bankruptcy Court; and (ii) fails to state a claim for default under
the Credit Agreement. On May 5, 2009, the Bankruptcy Court ruled that
the JPMorgan Adversary Proceeding is a core proceeding, and that it will decide
whether to dismiss the JPMorgan Adversary Proceeding for failure to state a
claim at a later date. If the JPMorgan Adversary Proceeding is not
dismissed, it will be heard and decided by the Bankruptcy Court as a part of the
hearing scheduled on July 20, 2009 to consider the confirmation of the
Plan. Charter denies the allegations made by JPMorgan and intends to
vigorously contest this matter.
The
Company and its parent companies are party to lawsuits and claims that arise in
the ordinary course of conducting its business. The ultimate outcome
of these other legal matters pending against the Company or its parent companies
cannot be predicted, and although such lawsuits and claims are not expected
individually to have a material adverse effect on the Company’s consolidated
financial condition, results of operations or liquidity, such lawsuits could
have, in the aggregate, a material adverse effect on the Company’s consolidated
financial condition, results of operations or liquidity.
15. Stock
Compensation Plans
Charter
has stock compensation plans (the “Plans”) which provide for the grant of
non-qualified stock options, stock appreciation rights, dividend equivalent
rights, performance units and performance shares, share awards, phantom stock
and/or shares of restricted stock (shares of restricted stock not to exceed 20.0
million shares of Charter Class A common stock), as each term is defined in the
Plans. Employees, officers, consultants and directors of Charter and
its subsidiaries and affiliates are eligible to receive grants under the
Plans. Options granted generally vest over four years from the grant
date, with 25% generally vesting on the first anniversary of the grant date and
ratably thereafter. Generally, options expire 10 years from the
grant date. Restricted stock vests annually over a one to three-year
period
17
CCO
HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
beginning
from the date of grant. The 2001 Stock Incentive Plan allows for the
issuance of up to a total of 90.0 million shares of Charter Class A common
stock (or units convertible into Charter Class A common stock). In
March 2008, Charter adopted an incentive program to allow for performance
cash. Under the incentive program, subject to meeting performance
criteria, performance units under the 2001 Stock Incentive Plan and performance
cash are deposited into a performance bank of which one-third of the balance is
paid out each year. During the three months ended March 31, 2009, no
equity awards were granted however, Charter granted $11 million of performance
cash and restricted cash under Charter’s 2009 incentive program. In
the first quarter of 2009, the majority of restricted stock and performance
units and shares were voluntarily forfeited by participants without termination
of the service period, and the remaining, along with all stock options, will be
cancelled in connection with the Proposed Restructuring. The Proposed
Restructuring includes an allocation of not less than 3% of new equity for
employee grants with 50% of the allocation to be granted within thirty days of
the Company's emergence from bankruptcy. Such
grant of new awards is deemed to be a modification of old awards and will be
accounted for as a modification of the original awards. See Note
1.
The
Company recorded $11 million and $8 million of stock compensation expense for
the three months ended March 31, 2009 and 2008, respectively, which is included
in selling, general, and administrative expense.
16. Recently
Issued Accounting Standards
In April
2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies, which addresses application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. FSP
FAS 141(R)-1 is effective for assets or liabilities arising from contingencies
in business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The
Company adopted FSP FAS 141(R)-1 effective January 1, 2009. The
adoption of FSP FAS 141(R)-1 did not have a material impact on the Company’s
financial statements.
In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability has Significantly
Decreased and Identifying Transactions That Are Not Orderly, which
provides additional guidance for estimating fair value in accordance with SFAS
No. 157 when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying
circumstances that indicate a transaction is not orderly. FSP FAS
157-4 is effective for reporting periods ending after June 15, 2009. The Company will adopt
FSP FAS 157-4 effective June 30, 2009. The Company does not expect
that the adoption of FSP FAS 157-4 will have a material impact on the Company’s
financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, which amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial
Reporting, to require those disclosures in summarized financial
information at interim reporting periods. FSP FAS 107-1 and APB 28-1
are effective for reporting periods ending after June 15, 2009. The Company will adopt
FSP FAS 107-1 and APB 28-1 effective June 30, 2009. The Company does
not expect that the adoption of FSP FAS 107-1 and APB 28-1 will have a material
impact on the Company’s financial statements.
The
Company does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on its
accompanying financial statements.
18
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
General
CCO
Holdings, LLC (“CCO Holdings”) is a holding company whose principal assets at
March 31, 2009 are the equity interests in its operating
subsidiaries. CCO Holdings is a direct subsidiary of CCH II, LLC
(“CCH II”), which is an indirect subsidiary of Charter Communications Holdings,
LLC (“Charter Holdings”). Charter Holdings is an indirect subsidiary
of Charter Communications, Inc. (“Charter”).
We are a
broadband communications company operating in the United States with
approximately 5.4 million customers at March 31, 2009. Through our
hybrid fiber and coaxial cable network, we offer our customers traditional cable
video programming (basic and digital, which we refer to as “video” services),
high-speed Internet services, and telephone services, as well as advanced
broadband services (such as Charter OnDemand™ (“OnDemand”) high definition
television service, and digital video recorder (“DVR”) service).
The
following table summarizes our customer statistics for basic video, digital
video, residential high-speed Internet, and telephone as of March 31, 2009 and
2008:
|
Approximate
as of
|
||||||||
|
March
31,
|
March
31,
|
|||||||
|
2009
(a)
|
2008
(a)
|
|||||||
|
Video
Cable Services:
|
||||||||
|
Basic
Video:
|
||||||||
|
Residential
(non-bulk) basic video customers (b)
|
4,746,000 | 4,949,100 | ||||||
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
267,700 | 258,900 | ||||||
|
Total
basic video customers (b)(c)
|
5,013,700 | 5,208,000 | ||||||
|
Digital
Video:
|
||||||||
|
Digital
video customers (d)
|
3,157,700 | 3,023,200 | ||||||
|
Non-Video
Cable Services:
|
||||||||
|
Residential
high-speed Internet customers (e)
|
2,947,100 | 2,768,200 | ||||||
|
Telephone
customers (f)
|
1,423,100 | 1,085,000 | ||||||
|
Total
Revenue Generating Units (g)
|
12,541,600 | 12,084,400 | ||||||
After
giving effect to sales of cable systems in 2008 and 2009, basic video customers,
digital video customers, high-speed Internet customers and telephone customers
would have been approximately 5,181,400, 3,014,200, 2,762,400, and 1,085,000,
respectively, as of March 31, 2008.
|
(a)
|
"Customers"
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts. At March 31, 2009 and 2008, "customers" include
approximately 30,600 and 30,600 persons, respectively, whose accounts were
over 60 days past due in payment, approximately 4,400 and 4,700 persons,
respectively, whose accounts were over 90 days past due in payment, and
approximately 2,700 and 3,200 persons, respectively, of which were over
120 days past due in payment.
|
|
(b)
|
"Basic
video customers" include all residential customers who receive video cable
services.
|
|
(c)
|
Included
within "basic video customers" are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit ("EBU")
basis. EBU is calculated for a system by dividing the bulk
price charged to accounts in an area by the most prevalent price charged
to non-bulk residential customers in that market for the comparable tier
of service. The EBU method of estimating basic video customers
is consistent with the methodology used in determining costs paid to
programmers and has been used consistently each reporting
period.
|
19
|
(d)
|
"Digital
video customers" include all basic video customers that have one or more
digital set-top boxes or cable cards
deployed.
|
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers who
subscribe to our high-speed Internet
service.
|
|
(f)
|
“Telephone
customers" include all customers receiving telephone
service.
|
|
(g)
|
"Revenue
generating units" represent the sum total of all basic video, digital
video, high-speed Internet and telephone customers, not counting
additional outlets within one household. For example, a
customer who receives two types of service (such as basic video and
digital video) would be treated as two revenue generating units and, if
that customer added on high-speed Internet service, the customer would be
treated as three revenue generating units. This statistic is
computed in accordance with the guidelines of the National Cable &
Telecommunications Association
(“NCTA”).
|
Overview
Charter
and its subsidiaries have filed petitions under Chapter 11 of the United States
Bankruptcy Code on March 27, 2009. See “—Bankruptcy Proceedings,” for
more information on our financial restructuring. Information
concerning status of the ongoing bankruptcy proceedings may be obtained from
Charter’s website at www.charter.com and at www.kccllc.net/charter.
For the
three months ended March 31, 2009 and 2008, our income from operations was $334
million and $205 million, respectively. We had operating margins of
20% and 13% for the three months ended March 31, 2009 and 2008. The
increase in income from operations and operating margins for the three months
ended March 31, 2009 compared to the three months ended March 31, 2008 was
principally due to increased sales of our bundled services, improved cost
efficiencies and favorable litigation settlements in 2009. The
favorable litigation settlements in 2009 increased operating margin for the
three months ended March 31, 2009 by 3%.
We cannot
assure you that we will be able to continue to grow revenues at historical
rates, if at all. Dramatic declines in the housing market over the
past year, including falling home prices and increasing foreclosures, together
with significant increases in unemployment, have severely affected consumer
confidence and may cause increased delinquencies or cancellations by our
customers or lead to unfavorable changes in the mix of products
purchased. The general economic downturn also may affect advertising
sales, as companies seek to reduce expenditures and conserve cash. Any of these
events may adversely affect our cash flow, results of operations and financial
condition.
We have a
history of net losses. Our net losses are principally attributable to
insufficient revenue to cover the combination of operating expenses and interest
expenses we incur because of our debt, and depreciation expenses resulting from
the capital investments we have made and continue to make in our cable
properties.
Critical
Accounting Policies and Estimates
For a
discussion of our critical accounting policies and the means by which we develop
estimates therefore, see "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations" in Charter’s 2008 Annual Report
on Form 10-K.
20
RESULTS
OF OPERATIONS
The
following table sets forth the percentages of revenues that items in the
accompanying condensed consolidated statements of operations constituted for the
periods presented (dollars in millions):
|
Three
Months Ended March 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
REVENUES
|
$ | 1,662 | 100 | % | $ | 1,564 | 100 | % | ||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||
|
Operating
(excluding depreciation and amortization)
|
713 | 43 | % | 681 | 44 | % | ||||||||||
|
Selling,
general and administrative
|
344 | 21 | % | 346 | 22 | % | ||||||||||
|
Depreciation
and amortization
|
321 | 19 | % | 321 | 21 | % | ||||||||||
|
Other
operating (income) expenses, net
|
(50 | ) | (3 | %) | 11 | -- | ||||||||||
| 1,328 | 80 | % | 1,359 | 87 | % | |||||||||||
|
Income
from operations
|
334 | 20 | % | 205 | 13 | % | ||||||||||
|
OTHER
INCOME (EXPENSES):
|
||||||||||||||||
|
Interest
expense, net
|
(200 | ) | (193 | ) | ||||||||||||
|
Change
in value of derivatives
|
(4 | ) | (30 | ) | ||||||||||||
|
Reorganization
items, net
|
(92 | ) | -- | |||||||||||||
|
Other
income (expense), net
|
1 | (1 | ) | |||||||||||||
| (295 | ) | (224 | ) | |||||||||||||
|
Income
(loss) before income taxes
|
39 | (19 | ) | |||||||||||||
|
INCOME
TAX EXPENSE
|
(3 | ) | (2 | ) | ||||||||||||
|
Consolidated
net income (loss)
|
36 | (21 | ) | |||||||||||||
|
Less: Net
income – noncontrolling interest
|
(11 | ) | (6 | ) | ||||||||||||
|
Net
income (loss) – CCO Holdings
|
$ | 25 | $ | (27 | ) | |||||||||||
Revenues. Average
monthly revenue per basic video customer increased to $110 for the three months
ended March 31, 2009 from $100 for the three months ended March 31,
2008. Average monthly revenue per basic video customer represents
total revenue, divided by three, divided by the average number of basic video
customers during the respective period. Revenue growth primarily
reflects increases in the number of telephone, high-speed Internet, and digital
video customers, price increases, and incremental video revenues from OnDemand,
DVR, and high-definition television services, offset by a decrease in basic
video customers. Cable system sales in 2008 and 2009 reduced the
increase in revenues for the three months ended March 31, 2009 as compared to
the three months ended March 31, 2008 by approximately $3 million.
21
Revenues
by service offering were as follows (dollars in millions):
|
Three
Months Ended March 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2009
over 2008
|
||||||||||||||||||||||
|
Revenues
|
%
of
Revenues
|
Revenues
|
%
of
Revenues
|
Change
|
%
Change
|
|||||||||||||||||||
|
Video
|
$ | 872 | 53 | % | $ | 858 | 55 | % | $ | 14 | 2 | % | ||||||||||||
|
High-speed
Internet
|
360 | 22 | % | 328 | 21 | % | 32 | 10 | % | |||||||||||||||
|
Telephone
|
169 | 10 | % | 121 | 8 | % | 48 | 40 | % | |||||||||||||||
|
Commercial
|
107 | 6 | % | 92 | 6 | % | 15 | 16 | % | |||||||||||||||
|
Advertising
sales
|
54 | 3 | % | 67 | 4 | % | (13 | ) | (19 | %) | ||||||||||||||
|
Other
|
100 | 6 | % | 98 | 6 | % | 2 | 2 | % | |||||||||||||||
| $ | 1,662 | 100 | % | $ | 1,564 | 100 | % | $ | 98 | 6 | % | |||||||||||||
Video
revenues consist primarily of revenues from basic and digital video services
provided to our non-commercial customers. Basic video customers
decreased by 194,300 customers from March 31, 2008 compared to March 31, 2009,
26,600 of which were related to asset sales. Digital video customers
increased by 134,500 during the same period, reduced by the sale of 9,000
customers. The increases in video revenues are attributable to the
following (dollars in millions):
|
Three
months ended
March
31, 2009
compared
to
three
months ended
March
31, 2008
Increase
/ (Decrease)
|
||||
|
Incremental
video services and rate adjustments
|
$ | 20 | ||
|
Increase
in digital video customers
|
16 | |||
|
Decrease
in basic video customers
|
(20 | ) | ||
|
Asset
sales
|
(2 | ) | ||
| $ | 14 | |||
High-speed
Internet customers grew by 178,900 customers, reduced by asset sales of 5,800
customers, from March 31, 2008 to March 31, 2009. The increase in
high-speed Internet revenues from our residential customers is attributable to
the following (dollars in millions):
|
Three
months ended
March
31, 2009
compared
to
three
months ended
March
31, 2008
Increase
/ (Decrease)
|
||||
|
Increase
in high-speed Internet customers
|
$ | 23 | ||
|
Rate
adjustments and service upgrades
|
10 | |||
|
Asset
sales
|
(1 | ) | ||
| $ | 32 | |||
Revenues
from telephone services increased by $46 million for the three months ended
March 31, 2009, as a result of an increase of 338,100 telephone customers and by
$2 million related to higher average rates.
22
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of
increased sales of the Charter Business Bundle® primarily to small and
medium-sized businesses, as well as growth in our fiber-based data
services.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers, and other vendors. Advertising sales revenues
for the three months ended March 31, 2009 decreased primarily as a result of
significant decreases in revenues from the political and automotive
sectors. For the three months ended March 31, 2009 and 2008, we
received $8 million and $7 million, respectively, in advertising sales revenues
from vendors.
Other
revenues consist of franchise fees, regulatory fees, customer installations,
home shopping, late payment fees, wire maintenance fees and other miscellaneous
revenues. For each of the three months ended March 31, 2009 and 2008,
franchise fees represented approximately 46% of total other
revenues. The increase in other revenues for the three months ended
March 31, 2009 was primarily the result of increases in franchise and other
regulatory fees and wire maintenance fees.
Operating
expenses. The increase in
operating expenses is attributable to the following (dollars in
millions):
|
Three
months ended
March
31, 2009
compared
to
three
months ended
March
31, 2008
Increase
/ (Decrease)
|
||||
|
Programming
costs
|
$ | 25 | ||
|
Maintenance
costs
|
4 | |||
|
Labor
costs
|
3 | |||
|
Other,
net
|
1 | |||
|
Asset
sales
|
(1 | ) | ||
| $ | 32 | |||
Programming
costs were approximately $432 million and $409 million, representing 61% and 60%
of total operating expenses for the three months ended March 31, 2009 and 2008,
respectively. Programming costs consist primarily of costs paid to
programmers for basic, premium, digital, OnDemand, and pay-per-view
programming. The increase in programming costs is primarily a result
of annual contractual rate adjustments, offset in part by asset sales and
customer losses. Programming costs were also offset by the
amortization of payments received from programmers of $7 million and $5 million
for the three months ended March 31, 2009 and 2008, respectively. We
expect programming expenses to continue to increase, and at a higher rate than
2008, due to a variety of factors, including amounts paid for retransmission
consent, annual increases imposed by programmers, and additional programming,
including high-definition, OnDemand, and pay-per-view programming, being
provided to our customers.
23
Selling, general
and administrative expenses. The decrease in
selling, general and administrative expenses is attributable to the following
(dollars in millions):
|
Three
months ended
March
31, 2009
compared
to
three
months ended
March
31, 2008
Increase
/ (Decrease)
|
||||
|
Marketing
costs
|
$ | 4 | ||
|
Stock
compensation costs
|
3 | |||
|
Employee
costs
|
(4 | ) | ||
|
Customer
care costs
|
(2 | ) | ||
|
Other,
net
|
(3 | ) | ||
| $ | (2 | ) | ||
Depreciation and
amortization. Depreciation and
amortization expense was $321 million for each of the three months ended March
31, 2009 and March 31, 2008 primarily representing depreciation on capital
expenditures.
Other operating
(income) expenses, net. For the three months ended March 31,
2009 compared to March 31, 2008, the increase in other operating income was
primarily attributable to a $61 million increase in special charges primarily
related to favorable litigation settlements in 2009. For more
information, see Note 11 to the accompanying condensed consolidated financial
statements contained in “Item 1. Financial Statements.”
Interest expense,
net. For
the three months ended March 31, 2009 compared to March 31, 2008, net interest
expense increased by $7 million, which was a result of average debt outstanding
increasing from $10.2 billion for the first quarter of 2008 to $11.8 billion for
the first quarter of 2009, offset by a decrease in our average borrowing rate
from 6.8% in the first quarter of 2008 to 6.6% in the first quarter of
2009.
Change in value
of derivatives. Interest rate swaps
were held to manage our interest costs and reduce our exposure to increases in
floating interest rates. We expensed the change in fair value of
derivatives that did not qualify for hedge accounting and cash flow hedge
ineffectiveness on interest rate swap agreements. Upon filing for Chapter 11
bankruptcy, the counterparties to the interest rate swap agreements terminated
the underlying contracts and, upon emergence from bankruptcy, will receive
payment for the market value of the interest rate swap agreement as measured on
the date the counterparties terminated. The loss from the
change in value of the interest rate swaps decreased from $30 million for the
first quarter of 2008 to $4 million for the first quarter of 2009.
Reorganizations
items, net. Reorganization items, net of $92 million for the
three months ended March 31, 2009 represent items of income, expense, gain or
loss that we realized or incurred because we are in reorganization under Chapter
11 of the U.S. Bankruptcy Code. For more information, see Note 2 to
the accompanying condensed consolidated financial statements contained in “Item
1. Financial Statements.”
Income tax
expense. Income tax expense was
recognized for the three months ended March 31, 2009 and 2008, through increases
in deferred tax liabilities and current federal and state income tax expense of
certain of our indirect subsidiaries.
Net income –
noncontrolling interest. Noncontrolling interest includes the
2% accretion of the preferred membership interests in CC VIII, LLC (“CC VIII”)
plus approximately 18.6% of CC VIII’s income, net of accretion.
Net income
(loss). Net
income of $25 million for the three months ended March 31, 2009 compared to net
loss of $27 million for the three months ended March 31, 2008 was primarily a
result of the factors described above.
24
Bankruptcy
Proceedings
On March
27, 2009, we, our parent companies and certain affiliates (collectively, the
“Debtors”) filed voluntary petitions in the United States Bankruptcy Court for
the Southern District of New York (the “Bankruptcy Court”) seeking relief under
the provisions of Chapter 11 of Title 11 of the United States Code (the
“Bankruptcy Code”). The Chapter 11 cases are being jointly
administered under the caption In re Charter Communications, Inc.,
et al., Case No. 09-11435 (the “Chapter 11 Cases”). The
Debtors will continue to operate their businesses and manage their properties as
debtors in possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code.
The
filing was made to allow us and our parent companies to implement a
restructuring pursuant to a pre-arranged joint plan of reorganization (the
“Plan”) aimed at improving our and our parent companies’ capital structure (the
“Proposed Restructuring”). The Plan essentially provides for a balance sheet
restructuring that will leave intact our operations.
Under
Chapter 11, we are operating our business as a debtor-in-possession (“DIP”)
under bankruptcy court protection from creditors and claimants. We
obtained “first day” orders from the Bankruptcy Court, which provided, among
other things, flexibility in cash management, the ability to use cash
collateral, and the ability to pay certain pre-petition
claims. During these Chapter 11 Cases, all transactions outside the
ordinary course of business will require the prior approval of the Bankruptcy
Court. As a consequence of the Chapter 11 filing, pending litigation
against us and our parent companies is subject to the automatic stay, and
consequently no party may take any action to collect pre-petition claims except
pursuant to order of the Bankruptcy Court.
On May 5,
2009, the Bankruptcy Court approved the disclosure statement filed in connection
with the Plan and authorized the Debtors to begin soliciting votes on the Plan.
The Debtors’ confirmation hearing, at which the Bankruptcy Court will consider
approval of the Plan, has been scheduled for July 20, 2009.
The
Proposed Restructuring is expected to be funded with cash from operations, an
exchange of debt of CCH II, LLC (“CCH II”) for other debt at CCH II (the “Notes
Exchange”), the issuance of additional debt (the “New Debt Commitment”), and the
proceeds of an equity offering (the “Rights Offering”) for which Charter has
received a back-stop commitment (the “Back-Stop Commitment”) from certain
holders of certain of our parent companies’ notes (the
“Noteholders”). In addition to separate restructuring agreements
entered into with each Noteholder (the “Restructuring Agreements”) pursuant to
which we and our parent companies expect to implement the Proposed
Restructuring, the Noteholders have entered into commitment letters (the
“Commitment Letters”), pursuant to which they have agreed to exchange and/or
purchase, as applicable, certain of our parent companies’ securities, as
described in more detail below.
Under the
Notes Exchange, existing holders of senior notes of CCH II and CCH II Capital
Corp. (“CCH II Notes”) will be entitled to exchange their CCH II Notes for new
13.5% Senior Notes of CCH II and CCH II Capital Corp. (the “New CCH II
Notes”). CCH II Notes that are not exchanged in the Notes Exchange
will be paid in cash in an amount equal to the outstanding principal amount of
such CCH II Notes plus accrued but unpaid interest to the bankruptcy petition
date plus post-petition interest, but excluding any call premiums or prepayment
penalties and for the avoidance of doubt, any unmatured interest. The
aggregate principal amount of New CCH II Notes to be issued pursuant to the Plan
is expected to be approximately $1.5 billion plus accrued but unpaid interest to
the bankruptcy petition date plus post-petition interest, but excluding any call
premiums or prepayment penalties (collectively, the “Target Amount”), plus an
additional $85 million.
Under the
Commitment Letters, certain holders of CCH II Notes have committed to exchange,
pursuant to the Notes Exchange, an aggregate of approximately $1.2 billion in
aggregate principal amount of CCH II Notes, plus accrued but unpaid interest to
the bankruptcy petition date plus post-petition interest, but excluding any call
premiums or any prepayment penalties. In the event that the aggregate
principal amount of New CCH II Notes to be issued pursuant to the Notes Exchange
would exceed the Target Amount, each Noteholder participating in the Notes
Exchange will receive a pro rata portion of such Target Amount of New CCH II
Notes, based upon the ratio of (i) the aggregate principal amount of CCH II
Notes it has tendered into the Notes Exchange to (ii) the total aggregate
principal amount of CCH II Notes tendered into the Notes
Exchange. Participants in the Notes Exchange will receive a
commitment fee equal to 1.5% of the principal amount plus interest on the CCH II
Notes exchanged by such participant in the Notes Exchange.
25
Under the
New Debt Commitment, certain holders of CCH II Notes have committed to purchase
an additional amount of New CCH II Notes in an aggregate principal amount of up
to $267 million. Participants in the New Debt Commitment will receive
a commitment fee equal to the greater of (i) 3.0% of their respective portion of
the New Debt Commitment or (ii) 0.83% of its respective portion of the New Debt
Commitment for each month beginning April 1, 2009 during which its New Debt
Commitment remains outstanding.
Under the
Rights Offering, Charter will offer to existing holders of senior notes of CCH
I, LLC (“CCH I Notes”) that are accredited investors (as defined in Regulation D
promulgated under the Securities Act) or qualified institutional buyers (as
defined under Rule 144A of the Securities Act), the right (the “Rights”) to
purchase shares of the new Class A Common Stock of Charter, to be issued upon
our and our parents companies’ emergence from bankruptcy, in exchange for a
cash payment at a discount to the equity value of Charter upon
emergence. Upon emergence from bankruptcy, Charter’s new Class A
Common Stock is not expected to be listed on any public or over-the-counter
exchange or quotation system and will be subject to transfer
restrictions. It is expected, however, that Charter will thereafter
apply for listing of Charter’s new Class A Common Stock on the NASDAQ Stock
Market as provided in a term sheet describing the Proposed Restructuring (the
“Term Sheet”). The Rights Offering is expected to generate proceeds
of up to approximately $1.6 billion and will be used to pay holders of CCH II
Notes that do not participate in the Notes Exchange, repayment of certain
amounts relating to the satisfaction of certain swap agreement claims against
Charter Communications Operating, LLC (“Charter Operating”) and for general
corporate purposes.
Under the
Commitment Letters, certain Noteholders (the “Backstop Parties”) have agreed to
subscribe for their respective pro rata portions of the Rights Offering, and
certain of the Backstop Parties have, in addition, agreed to subscribe for a pro
rata portion of any Rights that are not purchased by other holders of CCH I
Notes in the Rights Offering (the “Excess Backstop”). Noteholders who
have committed to participate in the Excess Backstop will be offered the option
to purchase a pro rata portion of additional shares of Charter’s new Class A
Common Stock, at the same price at which shares of the new Class A Common Stock
will be offered in the Rights Offering, in an amount equal to $400 million less
the aggregate dollar amount of shares purchased pursuant to the Excess
Backstop. The Backstop Parties will receive a commitment fee equal to
3% of their respective equity backstop.
The
Restructuring Agreements further contemplate that upon consummation of the Plan
(i) CCO Holdings’ and Charter Operating’s notes and credit facilities will
remain outstanding, (ii) holders of notes issued by CCH II will receive New CCH
II Notes pursuant to the Notes Exchange and/or cash, (iii) holders of notes
issued by CCH I, LLC will receive shares of Charter’s new Class A Common Stock,
(iv) holders of notes issued by CCH I Holdings, LLC (“CIH”) will receive
warrants to purchase shares of Charter’s new Class A Common Stock, (v) holders
of notes of Charter Holdings will receive warrants to purchase shares of
Charter’s new Class A Common Stock, (vi) holders of convertible notes issued by
Charter will receive cash and preferred stock issued by
Charter, (vii) holders of existing common stock will not receive any
amounts on account of their common stock, which will be cancelled, and (viii)
trade creditors will be paid in full. In addition, as part of the
Proposed Restructuring, it is expected that consideration will be paid by
holders of CCH I Notes to other entities participating in the financial
restructuring. The recoveries summarized above are more fully
described in the Term Sheet.
Pursuant
to a separate restructuring agreement among Charter, Mr. Allen, and an entity
controlled by Mr. Allen (the “Allen Agreement”), in settlement of their rights,
claims and remedies against Charter and its subsidiaries, and in addition to any
amounts received by virtue of their holding any claims of the type set forth
above, upon consummation of the Plan, Mr. Allen or his affiliates will be issued
a number of shares of the new Class B Common Stock of Charter such that the
aggregate voting power of such shares of new Class B Common Stock shall be equal
to 35% of the total voting power of all new capital stock of
Charter. Each share of new Class B Common Stock will be convertible,
at the option of the holder, into one share of new Class A Common Stock, and
will be subject to significant restrictions on transfer. Certain
holders of new Class A Common Stock and new Class B Common Stock will receive
certain customary registration rights with respect to their
shares. Upon consummation of the Plan, Mr. Allen or his affiliates
will also receive (i) warrants to purchase shares of new Class A Common Stock of
Charter in an aggregate amount equal to 4% of the equity value of reorganized
Charter, after giving effect to the Rights Offering, but prior to the issuance
of warrants and equity-based awards provided for by the Plan, (ii) $85 million
principal amount of New CCH II Notes, (iii) $25 million in cash for amounts
owing to Charter Investment, Inc. (“CII”) under a management agreement, (iv) up
to $20 million in cash for reimbursement of fees and expenses in connection with
the Proposed Restructuring, and (v) an additional $150 million in
cash. The warrants described above shall have an exercise price per
share based on a total equity value equal to the sum of the equity value of
reorganized Charter, plus the gross proceeds of the Rights Offering, and shall
expire seven years after the date of
26
issuance. In
addition, on the effective date of the Plan, CII will retain a 1% equity
interest in reorganized Charter Communications Holding Company, LLC (“Charter
Holdco”) and a right to exchange such interest into new Class A Common Stock of
Charter. The Proposed Restructuring would result in the reduction of our parent
companies’debt by approximately $8 billion.
The
Restructuring Agreements also contemplate that upon emergence from bankruptcy
each holder of 10% or more of the voting power of Charter will have the right to
nominate one member of the initial board of directors for each 10% of voting
power; and that at least Charter’s current Chief Executive Officer and Chief
Operating Officer will continue in their same positions. The
Restructuring Agreements require Noteholders to cast their votes in favor of the
Plan and generally support the Plan and contain certain customary restrictions
on the transfer of claims by the Noteholders.
The
Restructuring Agreements and Commitment Letters are subject to certain
termination events, including, among others:
|
·
|
the
commitments set forth in the respective Noteholder’s Commitment Letter
shall have expired or been
terminated;
|
|
·
|
Charter’s
board of directors shall have been advised in writing by its outside
counsel that continued pursuit of the Plan is inconsistent with its
fiduciary duties, and the board of directors determines in good faith
that, (A) a proposal or offer from a third party is reasonably likely to
be more favorable to us than is proposed under the Term Sheet, taking into
account, among other factors, the identity of the third party, the
likelihood that any such proposal or offer will be negotiated to finality
within a reasonable time, and the potential loss to the company if the
proposal or offer were not accepted and consummated, or (B) the Plan is no
longer confirmable or feasible;
|
|
·
|
the
Plan or any subsequent plan filed by us with the Bankruptcy Court (or a
plan supported or endorsed by us) is not reasonably consistent in all
material respects with the terms of the Restructuring
Agreements;
|
|
·
|
a
disclosure statement order reasonably acceptable to Charter, the holders
of a majority of the CCH I Notes held by the ad-hoc committee of
certain Noteholders (the “Requisite Holders”) and Mr. Allen has not been
entered by the Bankruptcy Court on or before the 50th day following the
bankruptcy petition date;
|
|
·
|
a
confirmation order reasonably acceptable to Charter, the Requisite Holders
and Mr. Allen is not entered by the Bankruptcy Court on or before the
130th day following the bankruptcy petition
date;
|
|
·
|
any
of the Chapter 11 Cases of Charter is converted to cases under Chapter 7
of the Bankruptcy Code if as a result of such conversion the Plan is not
confirmable;
|
|
·
|
any
Chapter 11 Cases of Charter is dismissed if as a result of such dismissal
the Plan is not confirmable;
|
|
·
|
the
order confirming the Plan is reversed on appeal or vacated;
and
|
|
·
|
any
Restructuring Agreement or the Allen Agreement has terminated or been
breached in any material respect subject to notice and cure
provisions.
|
The Allen
Agreement contains similar provisions to those provisions of the Restructuring
Agreements. There is no assurance that the treatment of creditors
outlined above will not change significantly. For example, because
the Proposed Restructuring is contingent on reinstatement of the credit
facilities and certain notes of Charter Operating and CCO Holdings, failure to
reinstate such debt would require us to revise the Proposed
Restructuring. Moreover, if reinstatement does not occur and current
capital market conditions persist, we and our parent companies may not be able
to secure adequate new financing and the cost of new financing would likely be
materially higher.
The above
summary of the Restructuring Agreements, Commitment Letters, Term Sheet and
Allen Agreement is qualified in its entirety by the full text of the
Restructuring Agreements, Commitment Letters, Term Sheet and Allen Agreement,
copies of which are filed as Exhibits 10.1, 10.2, 10.3 and 10.4, respectively,
to our 2008 Annual Report on Form 10-K. See “Part II. Item 1A - Risk
Factors – Risks Relating to Bankruptcy.”
Interest
Payments
Two of
our parent companies, CIH and Charter Holdings, did not make scheduled payments
of interest due on January 15, 2009 (the “January Interest Payment”) on certain
of their outstanding senior notes (the “Overdue Payment Notes”). Each
of the respective governing indentures (the “Indentures”) for the Overdue
Payment Notes permits a 30-day grace period for such interest payments through
(and including) February 15, 2009. On February 11, 2009, in
connection with the Commitment Letters and Restructuring Agreements, Charter and
certain of its
27
subsidiaries
also entered into an Escrow Agreement with members of the ad-hoc committee of
holders of the Overdue Payment Notes (“Ad-Hoc Holders”) and Wells Fargo Bank,
National Association, as Escrow Agent (the “Escrow Agreement”). On
February 13, 2009, the full amount of the January Interest Payment was paid to
the Paying Agent for the Ad-Hoc Holders on their Overdue Payment Notes, which
constitutes payment under the Indentures. As required under the
Indentures, Charter set a special record date for payment of such interest
payments of February 28, 2009. Under the Escrow Agreement, the Ad-Hoc
Holders agreed to deposit into an escrow account the amounts they receive in
respect of the January Interest Payment (the "Escrow Amount") and the Escrow
Agent will hold such amounts subject to the terms of the Escrow
Agreement. Under the Escrow Agreement, if the transactions
contemplated by the Restructuring Agreements are consummated on or before
December 15, 2009 or such transactions are not consummated on or before December
15, 2009 due to material breach of the Restructuring Agreements by us or our
parent companies, then the Ad-Hoc Holders will be entitled to receive their
pro-rata share of the Escrow Amount. If the transactions contemplated
by the Restructuring Agreements are not consummated on or prior to December 15,
2009 for any reason other than material breach of the Restructuring Agreements
by us or our parent companies, then Charter, Charter Holdings, CIH or their
designee shall be entitled to receive the Escrow Amount. No amount
has been recorded on our or our parent companies’ condensed consolidated balance
sheets for the Escrow Amount.
One of
our parent companies, CCH II, did not make its scheduled payment of interest on
March 16, 2009 on certain of its outstanding senior notes. The
governing indenture for such notes permits a 30-day grace period for such
interest payments, and Charter and its subsidiaries, including CCH II, filed
voluntary Chapter 11 Bankruptcy prior to the expiration of the grace
period.
Charter
Operating Credit Facility
On
February 3, 2009, Charter Operating made a request to the administrative agent
under its Amended and Restated Credit Agreement, dated as of March 18, 1999, as
amended and restated as of March 6, 2007 (the “Credit Agreement”), to borrow
additional revolving loans under the Credit Agreement. Such borrowing
request complied with the provisions of the Credit Agreement including section
2.2 (“Procedure for Borrowing”) thereof. On February 5, 2009, we
received a notice from the administrative agent asserting that one or more
Events of Default (as defined in the Credit Agreement) had occurred and was
continuing under the Credit Agreement. In response, we sent a letter
to the administrative agent on February 9, 2009, among other things, stating
that no event of default under the Credit Agreement occurred or was continuing
and requesting the administrative agent to rescind its notice of default and
fund Charter Operating’s borrowing request. The administrative agent
sent a letter to us on February 11, 2009, stating that it continues to believe
that one or more Events of Default occurred and was
continuing. As a result, with the exception of one lender who
funded approximately $0.4 million, the lenders under the Credit Agreement have
failed to fund Charter Operating’s borrowing request.
Upon
filing bankruptcy, Charter Operating no longer has access to its revolving
credit facility and relies on cash on hand and cash flows from operating
activities to fund its projected cash needs. Our projected cash needs
and projected sources of liquidity depend upon, among other things, our actual
results, the timing and amount of our expenditures, and the outcome of various
matters in our Chapter 11 Cases and financial restructuring. The
outcome of the Proposed Restructuring is subject to substantial
risks. See “Part II. Item 1. Legal Proceedings” for more information
on the JPMorgan Adversary Proceeding.
Historical
Operating, Investing and Financing Activities
Cash and Cash
Equivalents. We held $816 million in cash and cash equivalents
as of March 31, 2009 compared to $948 million as of December 31,
2008.
Operating
Activities. Net cash provided by
operating activities decreased $210 million, or 54%, from $388 million for the
three months ended March 31, 2008 to $178 million for the three months ended
March 31, 2009, primarily as a result of changes in operating assets and
liabilities that provided $304 million less cash during the three months ended
March 31, 2009 than the corresponding period in 2008 offset by revenues
increasing at a faster rate than cash expenses.
Investing
Activities. Net cash used in
investing activities was $292 million and $364 million for the three months
ended March 31, 2009 and 2008, respectively. The decrease is
primarily due to a decrease of $65 million in purchases of property, plant, and
equipment.
28
Financing
Activities. Net cash used in
financing activities was $18 million for the three months ended March 31, 2009
and net cash provided by financing activities was $438 million for the three
months ended March 31, 2008. The decrease in cash provided during the
three months ended March 31, 2009 as compared to the corresponding period in
2008, was primarily the result of no borrowings of long-term debt during the
quarter.
Capital
Expenditures
We have
significant ongoing capital expenditure requirements. Capital
expenditures were $269 million and $334 million for the three months ended March
31, 2009 and 2008, respectively. See the table below for more
details.
Our
capital expenditures are funded primarily from cash flows from operating
activities and the issuance of debt. In addition, our liabilities
related to capital expenditures decreased $27 million and $31 million for the
three months ended March 31, 2009 and 2008 compared to year end,
respectively.
During
2009, we expect capital expenditures to be approximately $1.2
billion. We expect the nature of these expenditures will continue to
be composed primarily of purchases of customer premise equipment related to
telephone and other advanced services, support capital, and scalable
infrastructure. The actual amount of our capital expenditures depends
on the deployment of advanced broadband services and offerings. We
may need additional capital if there is accelerated growth in high-speed
Internet, telephone or digital customers or there is an increased need to
respond to competitive pressures by expanding the delivery of other advanced
services.
We have
adopted capital expenditure disclosure guidance, which was developed by eleven
then publicly traded cable system operators, including Charter, with the support
of the National Cable & Telecommunications Association
("NCTA"). The disclosure is intended to provide more consistency in
the reporting of capital expenditures among peer companies in the cable
industry. These disclosure guidelines are not required disclosures
under GAAP, nor do they impact our accounting for capital expenditures under
GAAP.
The
following table presents our major capital expenditures categories in accordance
with NCTA disclosure guidelines for the three months ended March 31, 2009 and
2008 (dollars in millions):
|
Three
Months Ended
March
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Customer
premise equipment (a)
|
$ | 167 | $ | 165 | ||||
|
Scalable
infrastructure (b)
|
45 | 81 | ||||||
|
Line
extensions (c)
|
14 | 21 | ||||||
|
Upgrade/Rebuild
(d)
|
5 | 17 | ||||||
|
Support
capital (e)
|
38 | 50 | ||||||
|
Total
capital expenditures
|
$ | 269 | $ | 334 | ||||
|
(a)
|
Customer
premise equipment includes costs incurred at the customer residence to
secure new customers, revenue units and additional bandwidth
revenues. It also includes customer installation costs in
accordance with SFAS No. 51, Financial Reporting by Cable
Television Companies, and customer premise equipment (e.g., set-top
boxes and cable modems, etc.).
|
|
(b)
|
Scalable
infrastructure includes costs not related to customer premise equipment or
our network, to secure growth of new customers, revenue units, and
additional bandwidth revenues, or provide service enhancements (e.g.,
headend equipment).
|
|
(c)
|
Line
extensions include network costs associated with entering new service
areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment,
make-ready and design engineering).
|
|
(d)
|
Upgrade/rebuild
includes costs to modify or replace existing fiber/coaxial cable networks,
including betterments.
|
|
(e)
|
Support
capital includes costs associated with the replacement or enhancement of
non-network assets due to technological and physical obsolescence (e.g.,
non-network equipment, land, buildings and
vehicles).
|
29
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
No
material changes in reported market risks have occurred since the filing of our
December 31, 2008 Form 10-K.
As of
March 31, 2009 and December 31, 2008, our total debt was approximately
$11.8 billion and $11.8 billion, respectively. As of March 31, 2009
and December 31, 2008, the weighted average interest rate on the credit facility
debt was approximately 6.4% and 5.5%, respectively, including 2% penalty
interest as of March 31, 2009. As of March 31, 2009 and December 31,
2008, the weighted average interest rate on the high-yield notes was
approximately 10.8% and 8.8%, respectively, including 2% penalty interest as of
March 31, 2009. As of March 31, 2009, the interest rate on
approximately 27% of the total principal amount of our debt was fixed. Upon
filing for Chapter 11 bankruptcy, the interest rate hedge agreements were
terminated. For more information, see Note 10 to the accompanying
condensed consolidated financial statements contained in “Item 1. Financial
Statements.”
Item
4. Controls and Procedures.
As of the
end of the period covered by this report, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures with respect to the
information generated for use in this quarterly report. The
evaluation was based in part upon reports and certifications provided by a
number of executives. Based upon, and as of the date of that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based upon the above evaluation, we believe that our
controls provide such reasonable assurances.
There was
no change in our internal control over financial reporting during the quarter
ended March 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
30
PART
II. OTHER INFORMATION.
|
Legal
Proceedings.
|
On August
28, 2008, a complaint, which was subsequently amended, was filed against Charter
and Charter Communications, LLC (“Charter LLC”) in the United States District
Court for the Western District of Wisconsin (now entitled, Marc Goodell et al. v.
Charter Communications, LLC and Charter Communications, Inc.). The
plaintiffs seek to represent a class of current and former broadband, system,
and other types of technicians who are or were employed by Charter or Charter
LLC in the states of Michigan, Minnesota, Missouri or
California. They allege that Charter and Charter LLC violated certain
wage and hour statutes of those four states by failing to pay technicians for
all hours worked. Charter and Charter LLC continue to deny all
liability, believes that they have substantial defenses, and intend, if the
action resumes active litigation following Charter’s bankruptcy proceedings, to
vigorously contest the claims asserted. We have been subjected, in
the normal course of business, to the assertion of other similar claims and
could be subjected to additional such claims. We cannot predict the
outcome of any such claims.
On or
about March 16, 2009, Gerald Paul Bodet, Jr. filed, but did not appropriately
serve, a class action against Charter and Charter Holdco (Gerald Paul Bodet, Jr. v. Charter
Communications, Inc. and Charter Communications Holding Company,
LLC). The plaintiff alleges that the defendants violated the
Sherman Act and Louisiana Unfair Trade Practices Act by tying the provision of
premium cable programming to the purchase or rental of a set top box from
us. We understand similar claims have been made against other
multiple system cable operators. At the appropriate time, Charter and
Charter Holdco intend to deny any liability, are advised that they have
substantial defenses, and intend to vigorously defend this case.
On March
27, 2009, JPMorgan Chase Bank, N.A., for itself and as Administrative Agent
under the Credit Agreement, filed an adversary proceeding (the “JPMorgan
Adversary Proceeding”) in Bankruptcy Court against Charter Operating and CCO
Holdings seeking a declaration that there have been events of default under the
Credit Agreement. Such a judgment may prevent Charter Operating and
CCO Holdings from reinstating the terms and provisions of the Credit Agreement
through the bankruptcy proceeding. On April 10, 2009, Charter
Operating and CCO Holdings filed a motion to dismiss (the “Motion to Dismiss”)
the JPMorgan Adversary Proceeding and argued that dismissal was proper because
the JPMorgan Adversary Proceeding (i) is a core proceeding that is properly
heard by the Bankruptcy Court; and (ii) fails to state a claim for default under
the Credit Agreement. On May 5, 2009, the Bankruptcy Court ruled that
the JPMorgan Adversary Proceeding is a core proceeding, and that it will decide
whether to dismiss the JPMorgan Adversary Proceeding for failure to state a
claim at a later date. If the JPMorgan Adversary Proceeding is not
dismissed, it will be heard and decided by the Bankruptcy Court as a part of the
hearing scheduled on July 20, 2009 to consider the confirmation of the
Plan. Charter denies the allegations made by JPMorgan and intends to
vigorously contest this matter.
We and
our parent companies are party to lawsuits and claims that arise in the ordinary
course of conducting their business. The ultimate outcome of these
other legal matters pending against us cannot be predicted, and although such
lawsuits and claims are not expected individually to have a material adverse
effect on our consolidated financial condition, results of operations or
liquidity, such lawsuits could have, in the aggregate, a material adverse effect
on our consolidated financial condition, results of operations or
liquidity.
|
Item
1A.
|
Risk
Factors.
|
Our
Annual Report on Form 10-K for the year ended December 31, 2008 includes “Risk
Factors” under Item 1A of Part I. Except for the updated risk factors
described below, there have been no material changes from the risk factors
described in our Form 10-K. The information below updates, and should
be read in conjunction with, the risk factors and information disclosed in our
Form 10-K.
Risks
Relating to Bankruptcy
As
mentioned above, we and our parent companies filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code on March 27, 2009, in order to
implement what we refer to herein as our Plan with certain of our and our parent
companies’ bondholders. A Chapter 11 filing involves many risks
including, but not limited to the following.
31
We
may not be able to obtain confirmation of the Plan.
To emerge
successfully from Chapter 11 bankruptcy protection as a viable entity, we, like
any debtor, must obtain approval of a plan of reorganization from our creditors,
confirmation of the plan through the Bankruptcy Court and successfully implement
this confirmed plan. The foregoing process requires us to
(a) meet certain statutory requirements with respect to the adequacy of
disclosure with respect to the Plan, (b) solicit and obtain creditor acceptances
of the Plan and (c) fulfill other statutory conditions with respect to plan
confirmation.
With
regard to any proposed plan of reorganization, we may not receive the requisite
acceptances to confirm a plan. If the requisite acceptances of the Plan are
received, we intend to seek confirmation of the Plan by the Bankruptcy
Court. If the requisite acceptances are not received, we may
nevertheless seek confirmation of the Plan notwithstanding the dissent of
certain classes of claims. The Bankruptcy Court may confirm the Plan pursuant to
the “cramdown” provisions of the Bankruptcy Code, which allow the Bankruptcy
Court to confirm a plan that has been rejected by an impaired class of claims if
it determines that the plan satisfies section 1129(b) of the Bankruptcy
Code. In order to confirm a plan against a dissenting class, the
Bankruptcy Court also must find that at least one impaired class has accepted
the plan, with such acceptance being determined without including the acceptance
of any “insider” in such class.
We will
seek under the Plan to reinstate and render unimpaired certain classes of claims
based on notes and credit facilities pursuant to section 1124 of the Bankruptcy
Code. The creditor banks and/or other interested parties are expected
to challenge reinstatement and unimpairment. In particular, the
JPMorgan Adversary Proceeding was commenced seeking a declaratory judgment that
certain defaults and events of default have occurred and are continuing under
the Credit Agreement. JPMorgan, the Administrative Agent under the
Credit Agreement, contends that the alleged existence of such defaults and
events of default prevent reinstatement of the claims arising under the Credit
Agreement, and other parties have asserted that the alleged defaults and events
of default would prevent the notes issued by Charter Operating and CCO Holdings
and CCO Holding’s credit facility from being reinstated. Such parties
have made additional arguments against reinstatement including that the Plan
results in a change of control as defined in the governing debt
agreements. Because the Plan is contingent on reinstatement and
unimpairment, failure to reinstate the credit facilities, indentures and certain
notes would require us to revise or abandon the Plan. Moreover, if
reinstatement and unimpairment does not occur and current capital market
conditions persist, we may not be able to secure adequate new financing and the
cost of any such new financing would likely be materially higher.
Even if
the requisite acceptances of a proposed plan are received, the Bankruptcy Court
may not confirm the plan as proposed. A dissenting holder of a claim
against us could challenge the balloting procedures and results as not being in
compliance with the Bankruptcy Code. Finally, even if the Bankruptcy
Court determined that the balloting procedures and results were appropriate, the
Bankruptcy Court could still decline to confirm a proposed plan if it found that
any of the statutory requirements for confirmation had not been
met. Specifically, section 1129 of the Bankruptcy Code sets forth the
requirements for confirmation and requires, among other things, a finding by the
Bankruptcy Court that (a) the debtor’s plan “does not unfairly discriminate” and
is “fair and equitable” with respect to any non-accepting classes, (b)
confirmation of the debtor’s plan is not likely to be followed by a liquidation
or a need for further financial reorganization and (c) the value of
distributions to non-accepting holders of claims within a particular class under
the debtor’s plan will not be less than the value of distributions such holders
would receive if the debtor was liquidated under Chapter 7 of the Bankruptcy
Code. The Bankruptcy Court may determine that a proposed plan does
not satisfy one or more of these requirements, in which case the proposed plan
would not be confirmed by the Bankruptcy Court.
If the
Plan is not confirmed by the Bankruptcy Court, it is unclear whether we would be
able to reorganize our businesses and what, if any, distributions holders of
claims against or holders of our common stock or other equity interests
ultimately would receive with respect to their claims or equity interests. There
also can be no assurance that we will be able to successfully develop,
prosecute, confirm, and consummate an alternative plan of reorganization with
respect to the Chapter 11 Cases that is acceptable to the Bankruptcy Court and
our creditors, equity holders and other parties in interest. Additionally, it is
possible that third parties may seek and obtain approval to terminate or shorten
the exclusivity period during which only we may propose and confirm a plan of
reorganization. Finally, our emergence from bankruptcy is not assured. While we
expect to emerge from bankruptcy in the future, there can be no assurance that
we will successfully reorganize or when this reorganization will
occur.
32
The
Restructuring Agreements and the separate restructuring agreement among Charter,
Mr. Allen and CII may terminate.
Pursuant
to the Restructuring Agreements and the separate restructuring agreement among
Charter, Mr. Allen and CII, the various bondholders and Mr. Allen have agreed to
support the Plan; subject, however to certain termination events not having
occurred, including, without limitation:
|
·
|
Charter’s
board of directors shall have been advised in writing by its outside
counsel that continued pursuit of the Plan is inconsistent with its
fiduciary duties because, and the board of directors determines in good
faith that, (A) a proposal or offer from a third party is reasonably
likely to be more favorable to us than is proposed under the Plan, taking
into account, among other factors, the identity of the third party, the
likelihood that any such proposal or offer will be negotiated to finality
within a reasonable time, and the potential loss to us if the proposal or
offer were not accepted and consummated, or (B) the Plan is no longer
confirmable or feasible;
|
|
·
|
the
Plan or any subsequent plan filed by us with the Bankruptcy Court (or a
plan supported or endorsed by us) is not reasonably consistent in all
material respects with the terms of the Restructuring
Agreements;
|
|
·
|
a
confirmation order reasonably acceptable to us, the Requisite Holders and
Mr. Allen is not entered by the bankruptcy court on or before August 4,
2009, the 130th day following the date of our bankruptcy petition, March
27, 2009 (the “Petition Date”);
|
|
·
|
the
effective date of the Plan (the “Effective Date”) shall not have occurred
on or before August 24, 2009, the 150th day following the Petition Date,
or before December 15, 2009 in the case that certain consents, approvals
or waivers required to be obtained from governmental authorities have not
been obtained on or before the 150th day following the Petition Date, and
all other conditions precedent to the Effective Date shall have been
satisfied before the 150th day following the Petition Date or waived by
the Requisite Holders (other than those conditions that by their nature
are to be satisfied on the Effective
Date);
|
|
·
|
any
of our Chapter 11 Cases is converted to cases under Chapter 7 of the
Bankruptcy Code if as a result of such conversion the Plan is not
confirmable;
|
|
·
|
the
Bankruptcy Court enters an order in any of our Chapter 11 Cases appointing
(i) a trustee under Chapter 7 or Chapter 11 of the Bankruptcy Code, (ii) a
responsible officer or (iii) an examiner, in each case with enlarged
powers relating to the operation of the business under the Bankruptcy
Code;
|
|
·
|
any
of our Chapter 11 Cases is dismissed if as a result of such dismissal the
Plan is not confirmable;
|
|
·
|
the
order confirming the Plan is reversed on appeal or
vacated;
|
|
·
|
any
party breaches any material provision of the Restructuring Agreements or
the Plan and any such breach has not been duly waived or cured after a
period of five days;
|
|
·
|
Charter
withdraws the Plan or publicly announces its intention not to support the
Plan; and
|
|
·
|
any
Restructuring Agreement or the separate restructuring agreement among
Charter, Mr. Allen and CII has terminated or been breached in any material
respect, subject to notice and cure
provisions.
|
To the
extent the terms or conditions of the Restructuring Agreements and the separate
restructuring agreement among Charter, Mr. Allen and CII are not satisfied, or
to the extent events of termination arise under the agreements, the
Restructuring Agreements and the separate restructuring agreement among Charter,
Mr. Allen and CII may terminate prior to the confirmation or consummation of the
Plan, which could result in the loss of support for the Plan by important
creditor constituents. Any such loss of support could adversely
affect our ability to confirm and consummate the Plan.
Our operations will be subject to the
risks and uncertainties of bankruptcy.
For the
duration of the bankruptcy, our operations will be subject to the risks and
uncertainties associated with bankruptcy which include, among other
things:
|
·
|
The
actions and decisions of our and our parent companies’ creditors and other
third parties with interests in our bankruptcy, including official and
unofficial committees of creditors, which may be inconsistent with our
plans;
|
|
·
|
objections
to or limitations on our ability to obtain Bankruptcy Court approval with
respect to motions in the bankruptcy that we may seek from time to time or
potentially adverse decisions by the Bankruptcy Court with respect to such
motions;
|
33
|
·
|
objections
to or limitations on our ability to avoid or reject contracts or leases
that are burdensome or
uneconomical;
|
|
·
|
our
ability to obtain customers and obtain and maintain normal terms with
regulators, franchise authorities, vendors and service
providers;
|
|
·
|
our
ability to maintain contracts and leases that are critical to our
operations; and
|
|
·
|
our
ability to retain key employees.
|
These
risks and uncertainties could negatively affect our business and operations in
various ways. For example, negative events or publicity associated with our
bankruptcy filings and events during the bankruptcy could adversely affect our
relationships with franchise authorities, customers, vendors and employees,
which in turn could adversely affect our operations and financial condition,
particularly if the bankruptcy is protracted. Also, transactions by us and our
parent companies will generally be subject to the prior approval of the
applicable Bankruptcy Court, which may limit our ability to respond on a timely
basis to certain events or take advantage of certain opportunities.
Because
of the risks and uncertainties associated with our and our parent companies’
bankruptcy, the ultimate impact the events that occur during these cases will
have on our business, financial condition and results of operations cannot be
accurately predicted or quantified at this time.
The
bankruptcy may adversely affect our operations going forward. Our seeking
bankruptcy protection may adversely affect our ability to negotiate favorable
terms from suppliers, landlords, contract or trading counterparties and others
and to attract and retain customers and counterparties. The failure to obtain
such favorable terms and to attract and retain customers and employees, as well
as other contract or trading counterparties could adversely affect our financial
performance. In addition, we expect to incur substantial professional
and other fees related to our restructuring.
Transfers of Charter’s equity, or
issuances of equity by Charter in connection with our restructuring, may impair
Charter’s ability to utilize its federal income tax net operating loss
carryforwards in the future.
Under
federal income tax law, a corporation is generally permitted to deduct from
taxable income in any year net operating losses carried forward from prior
years. Charter has net operating loss carryforwards of approximately $8.8
billion as of March 31, 2009. Charter’s ability to deduct net operating loss
carryforwards will be subject to a significant limitation if it were to undergo
an “ownership change” for purposes of Section 382 of the Internal Revenue Code
of 1986, as amended, during or as a result of the bankruptcy and would be
reduced by the amount of any cancellation of debt income resulting from the
Proposed Restructuring that is allocable to Charter. See “—For tax
purposes, it is anticipated that Charter will experience a deemed ownership
change upon emergence from Chapter 11 bankruptcy, resulting in a material
limitation on Charter’s future ability to use a substantial amount of Charter’s
existing net operating loss carryforwards.”
Our
successful reorganization will depend on our ability to motivate key
employees.
Our
success is largely dependent on the skills, experience and efforts of our
people. In particular, the successful implementation of our business plan and
our ability to successfully consummate a plan of reorganization will be highly
dependent upon our management. Our ability to attract, motivate and retain key
employees is restricted by provisions of the Bankruptcy Code, which limit or
prevent our ability to implement a retention program or take other measures
intended to motivate key employees to remain with the Company during the
pendency of the bankruptcy. In addition, we must obtain Bankruptcy Court
approval of employment contracts and other employee compensation
programs. The loss of the services of such individuals or other key
personnel could have a material adverse effect upon the implementation of our
business plan, including our restructuring program, and on our ability to
successfully reorganize and emerge from bankruptcy.
The
prices of our debt securities are volatile and, in connection with our
reorganization, holders of our securities may receive no payment, or payment
that is less than the face value or purchase price of such
securities.
Prices
for our debt securities are volatile and prices for such securities have
generally been substantially below par. We can make no assurance that
the price of our securities will not fluctuate or decrease substantially in the
future. Trading in our securities is highly speculative and poses
substantial risks to purchasers of such securities, as holders may not be able
to resell such securities or, in connection with our reorganization, may receive
no payment, or a payment or other consideration that is less than the par value
or the purchase price of such securities.
34
Our
emergence from bankruptcy is not assured, including on what terms we
emerge.
While we
expect the terms of our emergence from bankruptcy will reflect our filed Plan,
there is no assurance that we will be able to consummate the Plan, which is
subject to numerous closing conditions. For example, because the
Proposed Restructuring is contingent on reinstatement of the credit facilities
and certain of CCO Holdings’ and Charter Operating’s notes, failure to reinstate
such debt would require us to revise the Proposed Restructuring. Moreover,
if reinstatement does not occur and current capital market conditions persist,
we may not be able to secure adequate new financing and the cost of new
financing would likely be materially higher. In addition, as set
forth above, a Chapter 11 proceeding is subject to numerous factors which could
interfere with our ability to effectuate the Plan.
Risks Related to Our
Business
We
operate in a very competitive business environment, which affects our ability to
attract and retain customers and can adversely affect our business and
operations.
The
industry in which we operate is highly competitive and has become more so in
recent years. In some instances, we compete against companies with
fewer regulatory burdens, easier access to financing, greater personnel
resources, greater resources for marketing, greater and more favorable brand
name recognition, and long-established relationships with regulatory authorities
and customers. Increasing consolidation in the cable industry and the
repeal of certain ownership rules have provided additional benefits to certain
of our competitors, either through access to financing, resources, or
efficiencies of scale.
Our
principal competitors for video services throughout our territory are DBS
providers. The two largest DBS providers are DirecTV and
Echostar. Competition from DBS, including intensive marketing efforts
with aggressive pricing, exclusive programming and increased high definition
broadcasting has had an adverse impact on our ability to retain customers. DBS
has grown rapidly over the last several years. DBS companies have
also recently announced plans and technical actions to expand their activities
in the multi-dwelling unit (“MDU”) market. The cable industry,
including us, has lost a significant number of video customers to DBS
competition, and we face serious challenges in this area in the
future.
Telephone
companies, including AT&T and Verizon, and utility companies can offer video
and other services in competition with us, and we expect they will increasingly
do so in the future. Upgraded portions of these networks carry
two-way video and data services and digital voice services that are similar
to ours. In the case of Verizon, high-speed data services operate at
speeds as high as or higher than ours. These services are offered at
prices similar to those for comparable Charter services. Based on our
internal estimates, we believe that AT&T and Verizon are offering these
services in areas serving approximately 17% to 20% of our estimated homes passed
as of March 31, 2009. AT&T and Verizon have also launched campaigns to
capture more of the MDU market. Additional upgrades and product
launches are expected in markets in which we operate. With respect to our
Internet access services, we face competition, including intensive marketing
efforts and aggressive pricing, from telephone companies and other providers of
DSL. DSL service is competitive with high-speed Internet service and
is often offered at prices lower than our Internet services, although often at
speeds lower than the speeds we offer. In addition, in many of our
markets, these companies have entered into co-marketing arrangements with DBS
providers to offer service bundles combining video services provided by a DBS
provider with DSL and traditional telephone and wireless services offered by the
telephone companies and their affiliates. These service bundles
substantially resemble our bundles. Moreover, as we expand our
telephone offerings, we will face considerable competition from established
telephone companies and other carriers.
The
existence of more than one cable system operating in the same territory is
referred to as an overbuild. Overbuilds could adversely affect our
growth, financial condition, and results of operations, by creating or
increasing competition. Based on internal estimates and excluding
telephone companies, as of March 31, 2009, we are aware of traditional overbuild
situations impacting approximately 8% to 10% of our estimated homes passed, and
potential traditional overbuild situations in areas servicing approximately an
additional 1% of our estimated homes passed. Additional overbuild
situations may occur in other systems.
In order
to attract new customers, from time to time we make promotional offers,
including offers of temporarily reduced price or free service. These
promotional programs result in significant advertising, programming
and
35
operating
expenses, and also require us to make capital expenditures to acquire and
install customer premise equipment. Customers who subscribe to our
services as a result of these offerings may not remain customers following the
end of the promotional period. A failure to retain customers could
have a material adverse effect on our business.
Mergers,
joint ventures, and alliances among franchised, wireless, or private cable
operators, DBS providers, local exchange carriers, and others, may provide
additional benefits to some of our competitors, either through access to
financing, resources, or efficiencies of scale, or the ability to provide
multiple services in direct competition with us.
In
addition to the various competitive factors discussed above, our business is
subject to risks relating to increasing competition for the leisure and
entertainment time of consumers. Our business competes with all other sources of
entertainment and information delivery, including broadcast television, movies,
live events, radio broadcasts, home video products, console games, print media,
and the Internet. Technological advancements, such as
video-on-demand, new video formats, and Internet streaming and downloading, have
increased the number of entertainment and information delivery choices available
to consumers, and intensified the challenges posed by audience fragmentation.
The increasing number of choices available to audiences could also negatively
impact advertisers’ willingness to purchase advertising from us, as well as the
price they are willing to pay for advertising. If we do not respond
appropriately to further increases in the leisure and entertainment choices
available to consumers, our competitive position could deteriorate, and our
financial results could suffer.
We cannot
assure you that the services we provide will allow us to compete
effectively. Additionally, as we expand our offerings to include
other telecommunications services, and to introduce new and enhanced services,
we will be subject to competition from other providers of the services we
offer. Competition may reduce our expected growth of future cash
flows. We cannot predict the extent to which competition may affect
our business and results of operations.
For
tax purposes, it is anticipated that Charter will experience a deemed ownership
change upon emergence from Chapter 11 bankruptcy, resulting in a material
limitation on Charter’s future ability to use a substantial amount of Charter’s
existing net operating loss carryforwards.
As of
March 31, 2009, Charter had approximately $8.8 billion of federal tax net
operating losses, resulting in a gross deferred tax asset of approximately $3.1
billion, expiring in the years 2009 through 2028. In addition, Charter
also has state tax net operating losses, resulting in a gross deferred tax asset
(net of federal tax benefit) of approximately $327 million, generally expiring
in years 2009 through 2028. Due to uncertainties in projected future
taxable income and the bankruptcy filing, valuation allowances have been
established against the gross deferred tax assets for book accounting purposes,
except for deferred benefits available to offset certain deferred tax
liabilities. Currently, such tax net operating losses can accumulate and be used
to offset most of Charter’s future taxable income. However, an “ownership
change” as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, would place significant annual limitations on the use of such net
operating losses to offset future taxable income Charter may
generate. Most notably, the bankruptcy filing will generate an
ownership change upon emergence from Chapter 11 for purposes of Section 382 and
Charter’s net operating loss carryforwards will be reduced by the amount of any
cancellation of debt income resulting from the Proposed Restructuring that is
allocable to Charter. A limitation on Charter’s ability to use its
net operating losses, in conjunction with the net operating loss expiration
provisions, could reduce its ability to use a significant portion of
Charter’s net operating losses to offset any future taxable income.
|
Exhibits.
|
The index
to the exhibits begins on page E-1 of this quarterly report.
36
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, CCO
Holdings, LLC and CCO Holdings Capital3 Corp. have duly caused this quarterly
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CCO
HOLDINGS, LLC
Registrant
By:
CHARTER COMMUNICATIONS INC., Sole Manager
|
Dated:
May 14, 2009
|
By:
/s/ Kevin D.
Howard
|
|
|
Name:
|
Kevin
D. Howard
|
|
|
Title:
|
Vice
President, Controller and Chief Accounting
Officer
|
|
CCO HOLDINGS CAPITAL
CORP.
Registrant
|
Dated:
May 14, 2009
|
By:
/s/ Kevin D.
Howard
|
|
|
Name:
|
Kevin
D. Howard
|
|
|
Title:
|
Vice
President, Controller and Chief Accounting
Officer
|
|
S-1
|
Exhibit
Number
|
Description
of Document
|
|
|
12.1*
|
CCO
Holdings, LLC’s Computation of Ratio of Earnings to Fixed
Charges.
|
|
|
31.1*
|
Certificate
of Chief Executive Officer of CCO Holdings, LLC pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934.
|
|
|
31.2*
|
Certificate
of Chief Financial Officer of CCO Holdings, LLC pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934.
|
|
|
32.1*
|
Certification
of CCO Holdings, LLC pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
|
|
|
32.2*
|
Certification
of CCO Holdings, LLC pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
|
|
*
Document attached
E-1
Exhibit
12.1
|
CCO
HOLDINGS, LLC AND SUBSIDIARIES
|
||||||||
|
RATIO
OF EARNINGS TO FIXED CHARGES CALCULATION
|
||||||||
|
(In
millions)
|
||||||||
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Earnings
|
||||||||
|
Income
(loss) from Operations before Noncontrolling Interest and Income
Taxes
|
$ | 39 | $ | (19 | ) | |||
|
Fixed
Charges
|
202 | 195 | ||||||
|
Total
Earnings
|
$ | 241 | $ | 176 | ||||
|
Fixed
Charges
|
||||||||
|
Interest
Expense
|
$ | 195 | $ | 189 | ||||
|
Amortization
of Debt Costs
|
5 | 4 | ||||||
|
Interest
Element of Rentals
|
2 | 2 | ||||||
|
Total
Fixed Charges
|
$ | 202 | $ | 195 | ||||
|
Ratio
of Earnings to Fixed Charges (1)
|
1.19 | - | ||||||
|
(1) Earnings
for the three months ended March 31, 2008 were insufficient to cover fixed
charges by $19 million. As a result of such
|
||||||||
|
deficiencies,
the ratios are not presented above.
|
||||||||
Exhibit
31.1
I, Neil
Smit, certify that:
|
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of CCO Holdings, LLC
and CCO Holdings Capital Corp.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrants as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrants’ other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrants and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrants, including their
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
||
|
(b)
|
[Reserved];
|
||
|
(c)
|
Evaluated
the effectiveness of the registrants’ disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
||
|
(d)
|
Disclosed
in this report any change in the registrants’ internal control over
financial reporting that occurred during the registrants’ most recent
fiscal quarter (the registrants’ fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants’ internal control over financial
reporting.
|
|
5.
|
The
registrants’ other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants’ auditors and the audit committee of the registrants’
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants’ ability to record,
process, summarize and report financial information;
and
|
||
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants’ internal control
over financial reporting.
|
Date: May
14, 2009
/s/ Neil
Smit
Neil
Smit
President
and Chief Executive Officer
Exhibit
31.2
I, Eloise
E. Schmitz, certify that:
|
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of CCO Holdings, LLC
and CCO Holdings Capital Corp.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrants as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrants’ other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrants and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrants, including their
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
||
|
(b)
|
[Reserved];
|
||
|
(c)
|
Evaluated
the effectiveness of the registrants’ disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
||
|
(d)
|
Disclosed
in this report any change in the registrants’ internal control over
financial reporting that occurred during the registrants’ most recent
fiscal quarter (the registrants’ fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants’ internal control over financial
reporting.
|
|
5.
|
The
registrants’ other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants’ auditors and the audit committee of the registrants’
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants’ ability to record,
process, summarize and report financial information;
and
|
||
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants’ internal control
over financial reporting.
|
Date: May
14, 2009
/s/ Eloise E.
Schmitz
Eloise E.
Schmitz
Chief
Financial Officer
(Principal
Financial Officer)
Exhibit
32.1
CERTIFICATION
OF CHIEF EXECUTIVE
OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL
STATEMENTS
I, Neil
Smit, the President and Chief Executive Officer of CCO Holdings, LLC and CCO
Holdings Capital Corp. (the "Company") in compliance with 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
hereby certify that, the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2009 (the "Report") filed with the Securities and
Exchange Commission:
|
·
|
fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934; and
|
|
·
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/ Neil
Smit
Neil
Smit
President and Chief
Executive Officer
May 14,
2009
Exhibit
32.2
CERTIFICATION
OF CHIEF FINANCIAL
OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL
STATEMENTS
I, Eloise
E. Schmitz, the Chief Financial Officer of CCO Holdings, LLC and CCO Holdings
Capital Corp. (the "Company") in compliance with 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby
certify that, the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2009 (the "Report") filed with the Securities and Exchange
Commission:
|
·
|
fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934; and
|
|
·
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/ Eloise E.
Schmitz
Eloise E.
Schmitz
Chief Financial
Officer
(Principal Financial
Officer)
May 14,
2009