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, 2006
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: 333-111423
333-111423-01
CCH
II, LLC *
CCH
II Capital Corp.*
(Exact
name of registrants as specified in their charters)
|
Delaware
Delaware
|
03-0511293
13-4257703
|
|
|
(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 are large accelerated filers, accelerated
filers, or non-accelerated filers. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer þ
Indicate
the number of shares outstanding of each of the issuers' classes of common
stock, as of the latest practicable date:
All
of
the issued and outstanding shares of capital stock of CCH II Capital Corp.
are
held by CCH II, LLC. All of the limited liability company membership interests
of CCH II, LLC are held by CCH I, LLC (an indirect wholly owned subsidiary
of
Charter Communications Holdings, LLC, a reporting company under the Exchange
Act). There is no public trading market for any of the aforementioned limited
liability company membership interests of shares of capital stock.
*
CCH II,
LLC and CCH II Capital Corp. meet the conditions set forth in General
Instruction H(1)(a) and (b) to Form 10-Q and are therefore filing with the
reduced disclosure format.
CCH
II, LLC
CCH
II Capital Corp.
Quarterly
Report on Form 10-Q for the Period ended March 31, 2006
Table
of Contents
|
|
Page
|
| PART I. FINANCIAL INFORMATION | |
|
Item
1. Financial
Statements - CCH II, LLC and Subsidiaries
|
|
|
Condensed
Consolidated Balance Sheets as of March
31, 2006
|
|
|
and
December 31, 2005
|
4
|
|
Condensed
Consolidated Statements of Operations for the three
|
|
|
months
ended March
31, 2006 and
2005
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
|
three
months ended March
31, 2006
and 2005
|
6
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
18
|
|
Item
4. Controls
and Procedures
|
27
|
|
PART
II. OTHER INFORMATION
|
|
|
Item
1. Legal
Proceedings
|
29
|
|
Item
1A. Risk Factors
|
29
|
|
Item
5. Other Information
|
39
|
|
Item
6. Exhibits
|
39
|
|
SIGNATURES
|
40
|
|
EXHIBIT
INDEX
|
41
|
This
quarterly report on Form 10-Q is for the three months ended March 31, 2006.
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 CCH
II, 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
"Certain
Trends and Uncertainties"
under
Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of
Operations"
in this
quarterly
report.
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"
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
availability, 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 flows from operating
activities, further borrowings or other sources and, in particular,
our
and our parent companies’ ability to be able to provide under the
applicable debt instruments such funds (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 would result in a violation of the applicable facility or indenture and could trigger a default of other obligations under cross-default provisions; |
|
·
|
our
and our parent companies’ ability to pay or refinance debt prior to or
when it becomes due and/or to take advantage of market opportunities
and
market windows to refinance that debt through new issuances, exchange
offers or otherwise, including restructuring our and our parent companies’
balance sheet and leverage
position;
|
|
·
|
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 a stable customer base, particularly
in
the face of increasingly aggressive competition from other service
providers;
|
|
·
|
our
ability to obtain programming at reasonable prices or to pass programming
cost increases on to our customers;
|
|
·
|
general
business conditions, economic uncertainty or slowdown;
and
|
|
·
|
the
effects of governmental regulation, including but not limited to
local
franchise authorities, 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.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(DOLLARS
IN MILLIONS)
|
March
31,
|
December
31,
|
||||||
|
2006
|
2005
|
||||||
|
(Unaudited)
|
|||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
26
|
$
|
3
|
|||
|
Accounts
receivable, less allowance for doubtful accounts of
|
|||||||
|
$15
and $17, respectively
|
148
|
212
|
|||||
|
Prepaid
expenses and other current assets
|
23
|
22
|
|||||
|
Assets
held for sale
|
754
|
--
|
|||||
|
Total
current assets
|
951
|
237
|
|||||
|
INVESTMENT
IN CABLE PROPERTIES:
|
|||||||
|
Property,
plant and equipment, net of accumulated
|
|||||||
|
depreciation
of $6,679 and $6,712, respectively
|
5,402
|
5,800
|
|||||
|
Franchises,
net
|
9,287
|
9,826
|
|||||
|
Total
investment in cable properties, net
|
14,689
|
15,626
|
|||||
|
OTHER
NONCURRENT ASSETS
|
249
|
238
|
|||||
|
Total
assets
|
$
|
15,889
|
$
|
16,101
|
|||
|
LIABILITIES
AND MEMBER’S EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
871
|
$
|
923
|
|||
|
Payables
to related party
|
99
|
102
|
|||||
|
Liabilities
held for sale
|
19
|
--
|
|||||
|
Total
current liabilities
|
989
|
1,025
|
|||||
|
LONG-TERM
DEBT
|
10,720
|
10,624
|
|||||
|
LOANS
PAYABLE - RELATED PARTY
|
129
|
22
|
|||||
|
DEFERRED
MANAGEMENT FEES - RELATED PARTY
|
14
|
14
|
|||||
|
OTHER
LONG-TERM LIABILITIES
|
369
|
392
|
|||||
|
MINORITY
INTEREST
|
626
|
622
|
|||||
|
MEMBER’S
EQUITY:
|
|||||||
|
Member’s
equity
|
3,041
|
3,400
|
|||||
|
Accumulated
other comprehensive income
|
1
|
2
|
|||||
|
Total
member’s equity
|
3,042
|
3,402
|
|||||
|
Total
liabilities and member’s equity
|
$
|
15,889
|
$
|
16,101
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CCH
II, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS
IN MILLIONS)
Unaudited
|
Three
Months Ended March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
REVENUES
|
$
|
1,374
|
$
|
1,271
|
|||
|
COSTS
AND EXPENSES:
|
|||||||
|
Operating
(excluding depreciation and amortization)
|
626
|
559
|
|||||
|
Selling,
general and administrative
|
281
|
241
|
|||||
|
Depreciation
and amortization
|
358
|
381
|
|||||
|
Asset
impairment charges
|
99
|
31
|
|||||
|
Other
operating expenses, net
|
3
|
8
|
|||||
|
1,367
|
1,220
|
||||||
|
Income
from operations
|
7
|
51
|
|||||
|
OTHER
INCOME AND (EXPENSES):
|
|||||||
|
Interest
expense, net
|
(239
|
)
|
(198
|
)
|
|||
|
Other
income, net
|
6
|
20
|
|||||
|
(233
|
)
|
(178
|
)
|
||||
|
Loss
before income taxes
|
(226
|
)
|
(127
|
)
|
|||
|
INCOME
TAX EXPENSE
|
(2
|
)
|
(6
|
)
|
|||
|
Net
loss
|
$
|
(228
|
)
|
$
|
(133
|
)
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
Three
Months Ended March
31,
|
|||||||
|
2006
|
2005
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(228
|
)
|
$
|
(133
|
)
|
|
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|||||||
|
Depreciation
and amortization
|
358
|
381
|
|||||
|
Asset
impairment charges
|
99
|
31
|
|||||
|
Noncash
interest expense
|
9
|
7
|
|||||
|
Deferred
income taxes
|
--
|
5
|
|||||
|
Other,
net
|
(2
|
)
|
(17
|
)
|
|||
|
Changes
in operating assets and liabilities, net of effects from acquisitions
and
dispositions:
|
|||||||
|
Accounts
receivable
|
60
|
33
|
|||||
|
Prepaid
expenses and other assets
|
(2
|
)
|
(2
|
)
|
|||
|
Accounts
payable, accrued expenses and other
|
(52
|
)
|
(113
|
)
|
|||
|
Receivables
from and payables to related party, including management
fees
|
(3
|
)
|
(5
|
)
|
|||
|
Net
cash flows from operating activities
|
239
|
187
|
|||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of property, plant and equipment
|
(241
|
)
|
(211
|
)
|
|||
|
Change
in accrued expenses related to capital expenditures
|
(7
|
)
|
16
|
||||
|
Proceeds
from sale of assets
|
9
|
6
|
|||||
|
Purchase
of cable system
|
(42
|
)
|
--
|
||||
|
Purchases
of investments
|
--
|
(1
|
)
|
||||
|
Proceeds
from investments
|
5
|
--
|
|||||
|
Net
cash flows from investing activities
|
(276
|
)
|
(190
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Borrowings
of long-term debt
|
415
|
200
|
|||||
|
Borrowings
from related parties
|
--
|
139
|
|||||
|
Repayments
of long-term debt
|
(759
|
)
|
(740
|
)
|
|||
|
Repayments
to related parties
|
--
|
(7
|
)
|
||||
|
Proceeds
from issuance of debt
|
440
|
--
|
|||||
|
Payments
for debt issuance costs
|
(10
|
)
|
(3
|
)
|
|||
|
Distributions
|
(26
|
)
|
(106
|
)
|
|||
|
Net
cash flows from financing activities
|
60
|
(517
|
)
|
||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
23
|
(520
|
)
|
||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
3
|
546
|
|||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
|
26
|
$
|
26
|
|||
|
CASH
PAID FOR INTEREST
|
$
|
214
|
$
|
188
|
|||
|
NONCASH
TRANSACTIONS:
|
|||||||
|
Issuance
of debt by Charter Communications Operating, LLC
|
$
|
37
|
$
|
271
|
|||
|
Retirement
of Renaissance Media Group LLC debt
|
$
|
(37
|
)
|
$
|
--
|
||
|
Distribution
of intercompany note to related party
|
$ | (105 | ) | $ | -- | ||
|
Retirement
of Charter Communications Holdings, LLC notes and accrued
interest
|
$
|
--
|
$
|
(280
|
)
|
||
|
Transfer
of property, plant and equipment from parent company
|
$
|
--
|
$
|
139
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
|
Organization
and Basis of Presentation
|
CCH
II,
LLC ("CCH II") is a holding company whose principal assets at March 31, 2006
are
equity interests in its operating subsidiaries. CCH II is a direct subsidiary
of
CCH I, LLC ("CCH I"), which is an indirect subsidiary of Charter Communications
Holdings, LLC ("Charter Holdings"). Charter Holdings is an indirect subsidiary
of Charter Communications, Inc. ("Charter"). The condensed consolidated
financial statements include the accounts of CCH II 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 its
customers traditional cable video programming (analog and digital video) as
well
as high-speed Internet services and, in some areas, advanced broadband services
such as high definition television, video on demand and telephone. The Company
sells its cable video programming, high-speed Internet and advanced broadband
services on a subscription basis. The Company also sells local advertising
on
satellite-delivered networks.
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 CCH II’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
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. 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.
Reclassifications
Certain
2005 amounts have been reclassified to conform with the 2006
presentation.
|
2.
|
Liquidity
and Capital Resources
|
The
Company had net loss of $228 million and $133 million for the three months
ended
March 31, 2006 and 2005, respectively. The Company’s net cash flows from
operating activities were $239 million and $187 million for the three months
ended March 31, 2006 and 2005, respectively.
Recent
Financing Transactions
On
January 30, 2006, CCH II and CCH II Capital Corp. issued $450 million in debt
securities, the proceeds of which were provided, directly or indirectly, to
Charter Communications Operating, LLC ("Charter Operating"), which used such
funds to reduce borrowings, but not commitments, under the revolving portion
of
its credit facilities.
In
April
2006, Charter Operating completed a $6.85 billion refinancing of its credit
facilities including a new $350 million revolving/term facility (which converts
to a term loan in one year), a $5.0 billion term loan due in 2013 and certain
amendments to the existing $1.5 billion revolving credit facility. In addition,
the refinancing reduced margins on Eurodollar rate Term A & B loans to
2.625% from a weighted average of 3.15% previously and margins on base rate
term
loans to 1.625% from a weighted average of 2.15% previously. Concurrent with
this refinancing, the CCO Holdings, LLC ("CCO Holdings") bridge loan was
terminated.
7
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
The
Company's long-term financing as of March 31, 2006 consists of $5.4 billion of
credit facility debt and $5.3 billion accreted value of high-yield notes. Pro
forma for the completion of the credit facility refinancing discussed above,
none of the Company’s debt matures in the remainder of 2006, and in 2007 and
2008, $25 million and $128 million mature, respectively. In 2009 and beyond,
significant additional amounts will become due under the Company’s remaining
long-term debt obligations.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically funded these
requirements through cash flows from operating activities, borrowings under
its
credit facilities, equity contributions from its parent companies, sales of
assets, issuances of debt securities and cash on hand. However, the mix of
funding sources changes from period to period. For the three months ended March
31, 2006, the Company generated $239 million of net cash flows from operating
activities, after paying cash interest of $214 million. In addition, the Company
used approximately $241 million for purchases of property, plant and equipment.
Finally, the Company had net cash flows from financing activities of $60
million.
The
Company expects that cash on hand, cash flows from operating activities,
proceeds from sales of assets and the amounts available under its credit
facilities will be adequate to meet its and its parent companies’ cash needs
through 2007. The Company believes that cash flows from operating activities
and
amounts available under the Company’s credit facilities may not be sufficient to
fund the Company’s operations and satisfy its and its parent companies’ interest
and debt repayment obligations in 2008 and will not be sufficient to fund such
needs in 2009 and beyond. The Company has been advised that Charter continues
to
work with its financial advisors in its approach to addressing liquidity, debt
maturities and the Company’s overall balance sheet leverage.
Debt
Covenants
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with the Company’s
indentures, contain certain restrictive covenants, some of which require the
Company to maintain specified financial ratios and meet financial tests and
to
provide annual audited financial statements with an unqualified opinion from
the
Company’s independent auditors. As of March 31, 2006, the Company is in
compliance with the covenants under its indentures and credit facilities, and
the Company expects to remain in compliance with those covenants for the next
twelve months. As of March 31, 2006, the
Company’s potential availability under its credit facilities totaled
approximately $904 million, although the actual availability at that time was
only $516 million because of limits imposed by covenant restrictions.
However, pro forma for the completion of the credit facility refinancing
discussed above, the Company’s potential availability under its credit
facilities as of March 31, 2006 would have been approximately $1.3 billion,
although actual covenanted
availability
of $516 million would remain unchanged. Continued
access to the Company’s credit facilities is subject to the Company remaining in
compliance with these covenants, including covenants tied to the Company’s
operating performance. If any events of non-compliance occur, funding under
the
credit facilities may not be available and defaults on some or potentially
all
of the Company’s debt obligations could occur. An event of default under any of
the Company’s debt instruments could result in the acceleration of its payment
obligations under that debt and, under certain circumstances, in cross-defaults
under its other debt obligations, which could have a material adverse effect
on
the Company’s consolidated financial condition and results of
operations.
Parent
Company Debt Obligations
Any
financial or liquidity problems of the Company’s parent companies could cause
serious disruption to the Company's business and have a material adverse effect
on the Company’s business and results of operations. A failure by Charter
Holdings, CCH I Holdings, LLC ("CIH") or CCH I to satisfy their debt payment
obligations or a bankruptcy filing with respect to Charter Holdings, CIH or
CCH
I would give the lenders under the Company’s credit facilities the right to
accelerate the payment obligations under these facilities. Any such acceleration
would be a default under the indenture governing the Company’s
notes.
On a
consolidated basis, the Company’s parent companies have a significant level of
debt, which, including the Company’s debt, totaled approximately $19.5 billion
as of March 31, 2006, as discussed below.
8
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
Charter’s
ability to make interest payments on its convertible senior notes, and, in
2006
and 2009, to repay the outstanding principal of its convertible senior notes
of
$20 million and $863 million, respectively, will depend on its ability to raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco and its subsidiaries. As
of
March
31,
2006,
Charter
Holdco was owed $24 million in intercompany loans from its subsidiaries, which
were available to pay interest and principal on Charter's convertible senior
notes. In
addition, Charter
has $99 million of governmental securities pledged as security for the next
four
scheduled semi-annual interest payments on Charter’s 5.875% convertible senior
notes.
As
of
March 31, 2006, Charter Holdings, CIH and CCH I had approximately $7.8 billion
principal amount of high-yield notes outstanding with approximately $105
million, $0, $684 million and $7.0 billion maturing in 2007, 2008, 2009 and
thereafter, respectively. Charter, Charter Holdings, CIH and CCH I will need
to
raise additional capital or receive distributions or payments from the Company
in order to satisfy their debt obligations. However, because of their
significant indebtedness, the Company’s ability and the ability of the parent
companies to raise additional capital at reasonable rates or at all is
uncertain.
During
the three months ended March 31, 2006, the Company distributed $26 million
of
cash to its parent company.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, CCHC, LLC
(“CCHC”), Charter Holdco, Charter Holdings, CIH and CCH I) for
payment of principal on parent company notes are
restricted under the indentures governing the CIH notes, CCH I notes, CCH II
notes, CCO Holdings notes and Charter Operating notes unless
there is no default, each applicable subsidiary’s leverage ratio test is met at
the time of such distribution and, in the case of Charter’s
convertible
senior notes, other specified tests are met. For
the
quarter ended March 31, 2006, there was no default under any of these indentures
and the other specified tests were met. However, certain of the Company’s
subsidiaries did not meet their respective leverage ratio tests based on March
31, 2006 financial results.
As a
result, distributions from certain of the Company’s subsidiaries to their parent
companies have been restricted and will continue to be restricted until those
tests are met. Distributions
by Charter Operating for payment of principal on parent company notes are
further restricted by the covenants in the credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures. However, distributions for payment of
interest on Charter’s
convertible
senior notes are further limited to when each applicable subsidiary’s leverage
ratio test is met and other specified tests are met. There can be no assurance
that they will satisfy these tests at the time of such
distribution.
Specific
Limitations
at Charter Holdings
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures and
other specified tests are met. For the quarter ended March
31,
2006, there
was
no default under Charter Holdings’ indentures and
the
other specified tests were met. However, Charter Holdings did not meet the
leverage ratio test of 8.75 to 1.0 based on March 31, 2006 financial
results.
As
a
result, distributions from Charter Holdings to Charter or Charter Holdco have
been restricted and will continue to be restricted until that test is met.
During
this restriction period,
the
indentures governing the Charter Holdings notes permit Charter Holdings and
its
subsidiaries to make specified investments (that are not restricted payments)
in
Charter Holdco or Charter up to an amount determined by a formula, as long
as
there is no default under the indentures.
|
3.
|
Sale
of Assets
|
In
February 2006, the Company signed three separate definitive agreements to sell
certain cable television systems serving a total of approximately 360,000 analog
video customers in West Virginia, Virginia, Illinois, Kentucky,
Nevada,
Colorado, New Mexico and Utah
for a
total of approximately $971 million. As of March 31, 2006, those cable systems
met the criteria for assets held for sale under Statement of Financial
Accounting Standards ("SFAS")
9
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
No.
144,
Accounting
for the Impairment or Disposal of Long-Lived Assets.
As
such, the assets were written down to fair value less estimated costs to sell
resulting in asset impairment charges during the three months ended March 31,
2006 of approximately $99 million. In addition, assets and liabilities to be
sold were reclassified as held for sale. Assets held for sale on the Company's
balance sheet as of March 31, 2006 included current assets of approximately
$5
million, property, plant and equipment of approximately $312 million and
franchises of approximately $437 million. Liabilities held for sale on the
Company's balance sheet as of March 31, 2006 included current liabilities of
approximately $6 million and other long-term liabilities of approximately $13
million.
In
2005,
the Company closed the sale of certain cable systems in Texas, West Virginia
and
Nebraska representing a total of approximately 33,000 analog video customers.
During the three months ended March 31, 2005, certain of those cable systems
met
the criteria for assets held for sale. As such, the assets were written down
to
fair value less estimated costs to sell resulting in asset impairment charges
during the three months ended March 31, 2005 of approximately $31 million.
|
4.
|
Franchises
and Goodwill
|
Franchise
rights represent the value attributed to agreements with local authorities
that
allow access to homes in cable service areas acquired through the purchase
of
cable systems. 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 SFAS No. 142, Goodwill
and Other Intangible Assets.
Franchises
that qualify for indefinite-life treatment under SFAS No. 142 are tested
for impairment annually each October 1 based on valuations, or more frequently
as warranted by events or changes in circumstances. Franchises are aggregated
into essentially inseparable asset groups to conduct the valuations. The asset
groups generally represent geographic 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, 2006 and December 31, 2005, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
March
31, 2006
|
December 31,
2005
|
||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||||||||
|
Indefinite-lived
intangible assets:
|
|||||||||||||||||||
|
Franchises
with indefinite lives
|
$
|
9,270
|
$
|
--
|
$
|
9,270
|
$
|
9,806
|
$
|
--
|
$
|
9,806
|
|||||||
|
Goodwill
|
52
|
--
|
52
|
52
|
--
|
52
|
|||||||||||||
|
$
|
9,322
|
$
|
--
|
$
|
9,322
|
$
|
9,858
|
$
|
--
|
$
|
9,858
|
||||||||
|
Finite-lived
intangible assets:
|
|||||||||||||||||||
|
Franchises
with finite lives
|
$
|
23
|
$
|
6
|
$
|
17
|
$
|
27
|
$
|
7
|
$
|
20
|
|||||||
For
the
three months ended March 31, 2006, the net carrying amount of indefinite-lived
and finite-lived franchises was reduced by $434 million and $3 million,
respectively, related to franchises reclassified as assets held for sale. For
the three months ended March 31, 2006, franchises with indefinite lives also
decreased $3 million related to a cable asset sale completed in the first
quarter of 2006 and $99 million as a result of the asset impairment charges
recorded related to assets held for sale (see Note 3). Franchise amortization
expense for the three months ended March 31, 2006 and 2005 was approximately
$0
and $1 million, respectively, which represents the amortization relating to
franchises that did not qualify for indefinite-life treatment under SFAS No.
142, including costs associated with franchise renewals. The Company expects
that amortization expense on franchise assets will be approximately $2 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.
10
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
|
5.
|
Accounts
Payable and Accrued
Expenses
|
Accounts
payable and accrued expenses consist of the following as of March 31, 2006
and
December 31, 2005:
|
March
31,
2006
|
December 31,
2005
|
||||||
|
Accounts
payable - trade
|
$
|
81
|
$
|
100
|
|||
|
Accrued
capital expenditures
|
66
|
73
|
|||||
|
Accrued
expenses:
|
|||||||
|
Interest
|
180
|
166
|
|||||
|
Programming
costs
|
288
|
272
|
|||||
|
Franchise-related
fees
|
44
|
67
|
|||||
|
Compensation
|
54
|
60
|
|||||
|
Other
|
158
|
185
|
|||||
|
$
|
871
|
$
|
923
|
||||
|
6.
|
Long-Term
Debt
|
Long-term
debt consists of the following as of March
31,
2006 and
December 31, 2005:
|
March
31, 2006
|
December
31, 2005
|
||||||||||||
|
Principal
Amount
|
Accreted
Value
|
Principal
Amount
|
Accreted
Value
|
||||||||||
|
Long-Term
Debt
|
|||||||||||||
|
CCH
II, LLC:
|
|||||||||||||
|
10.250%
senior notes due 2010
|
$
|
2,051
|
$
|
2,041
|
$
|
1,601
|
$
|
1,601
|
|||||
|
CCO
Holdings, LLC:
|
|||||||||||||
|
8¾%
senior notes due 2013
|
800
|
795
|
800
|
794
|
|||||||||
|
Senior
floating notes due 2010
|
550
|
550
|
550
|
550
|
|||||||||
|
Charter
Communications Operating, LLC:
|
|||||||||||||
|
8%
senior second lien notes due 2012
|
1,100
|
1,100
|
1,100
|
1,100
|
|||||||||
|
8
3/8% senior second lien notes due 2014
|
770
|
770
|
733
|
733
|
|||||||||
|
Renaissance
Media Group LLC:
|
|||||||||||||
|
10.000%
senior discount notes due 2008
|
77
|
78
|
114
|
115
|
|||||||||
|
Credit
Facilities
|
|||||||||||||
|
Charter
Operating
|
5,386
|
5,386
|
5,731
|
5,731
|
|||||||||
|
$
|
10,734
|
$
|
10,720
|
$
|
10,629
|
$
|
10,624
|
||||||
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.
On
January 30, 2006, CCH II and CCH II Capital Corp. issued $450 million in debt
securities, the proceeds of which were provided, directly or indirectly, to
Charter Operating, which used such funds to reduce borrowings, but not
commitments, under the revolving portion of its credit facilities.
On
March
13, 2006, the Company exchanged $37 million of Renaissance Media Group LLC
10%
senior discount notes due 2008 for $37 million principal amount of new Charter
Operating 8 3/8% senior second-lien notes due 2014 issued in a private
transaction under Rule 144A. The terms and conditions of the new Charter
Operating 8 3/8% senior
11
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
second-lien
notes due 2014 are identical to Charter Operating’s currently outstanding 8 3/8%
senior second-lien notes due 2014.
In
March
2005, Charter Operating consummated exchange transactions with a small number
of
institutional holders of Charter Holdings 8.25% senior notes due 2007 pursuant
to which Charter Operating issued, in private placements, approximately $271
million principal amount of new notes with terms identical to Charter
Operating's 8.375% senior second lien notes due 2014 in exchange for
approximately $284 million of the Charter Holdings 8.25% senior notes due 2007.
The Charter Holdings notes received in the exchange were thereafter distributed
to Charter Holdings and canceled.
Loss
on extinguishment of debt
In
March
2005, CCH II’s subsidiary, CC V Holdings, LLC, redeemed all of its 11.875% notes
due 2008, at 103.958% of principal amount, plus accrued and unpaid interest
to
the date of redemption. The total cost of redemption was approximately $122
million and was funded through borrowings under the Charter Operating credit
facilities. The redemption resulted in a loss on extinguishment of debt for
the
three months ended March
31,
2005 of
approximately $5 million included
in other expense on the Company’s condensed consolidated statements of
operations.
|
7.
|
Loans
Payable-Related Party
|
Loans
payable-related party as of March 31, 2006 consists of loans from Charter Holdco
and Charter Holdings to the Company of $24 million and $105 million,
respectively. Loans payable-related party as of December 31, 2005 consists
of loans from Charter Holdco to the Company of $22 million. These loans
bear interest at a rate of LIBOR plus 3.0%, reset quarterly. These loans
are subject to certain limitations and may be repaid with borrowings under
the
Company’s revolving credit facility.
|
8.
|
Minority
Interest
|
Minority
interest on the Company’s consolidated balance sheets as of March 31, 2006 and
December 31, 2005 primarily represents preferred membership interests in CC
VIII, LLC ("CC VIII"), an indirect subsidiary of CCH II, of $626 million and
$622 million, respectively. As
more
fully described in Note 19, this preferred interest is held by CCHC and Mr.
Allen, Charter’s Chairman and controlling shareholder. Minority interest in the
accompanying condensed consolidated statements of operations includes the 2%
accretion of the preferred membership interests plus approximately 18.6% of
CC
VIII’s income, net of accretion.
|
9.
|
Comprehensive
Loss
|
Certain
marketable equity securities are classified as available-for-sale and reported
at market value with unrealized gains and losses recorded as accumulated other
comprehensive loss on the accompanying condensed consolidated balance sheets.
Additionally, 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 loss for the three months
ended March 31, 2006 and 2005 was $229 million and $124 million,
respectively.
|
10.
|
Accounting
for Derivative Instruments and Hedging
Activities
|
The
Company uses interest rate risk management derivative instruments, such as
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) to manage its interest costs.
The Company’s policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, the Company has agreed
to exchange, at specified intervals through 2007, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon notional
principal amount. Interest rate collar
12
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
agreements
are used to limit the Company’s exposure to and benefits from interest rate
fluctuations on variable rate debt to within a certain range of rates.
The
Company does not hold or issue derivative instruments for trading purposes.
The
Company does, however, have certain interest rate derivative instruments that
have been designated as cash flow hedging instruments. Such instruments
effectively convert 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 statement
of operations. The Company has formally documented, designated and assessed
the
effectiveness of transactions that receive hedge accounting. For the three
months ended March 31, 2006 and 2005, other income includes gains of $2 million
and $1 million, respectively, which represent cash flow hedge ineffectiveness
on
interest rate hedge agreements arising from differences between the critical
terms of the agreements and the related hedged obligations. Changes in the
fair
value of interest rate agreements designated as hedging instruments of the
variability of cash flows associated with floating-rate debt obligations that
meet the effectiveness criteria of SFAS No. 133 are reported in accumulated
other comprehensive loss. For the three months ended March 31, 2006 and 2005,
a
loss of $1 million and a gain $9 million, respectively, related to derivative
instruments designated as cash flow hedges, was recorded in accumulated other
comprehensive loss. The amounts are subsequently reclassified into interest
expense as a yield adjustment in the same period in which the related interest
on the floating-rate debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do
not
meet the effectiveness criteria specified by SFAS No. 133. However, management
believes such instruments are closely correlated with the respective debt,
thus
managing associated risk. Interest rate derivative instruments not designated
as
hedges are marked to fair value, with the impact recorded as other income in
the
Company’s condensed consolidated statements of operations. For the three months
ended March 31, 2006 and 2005, other income includes gains of $6 million and
$26
million, respectively, for interest rate derivative instruments not designated
as hedges.
As
of
March 31, 2006 and December 31, 2005, the Company had outstanding $1.8 billion
and $1.8 billion and $20 million and $20 million, respectively, in notional
amounts of interest rate swaps and collars, respectively. 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
are determined by reference to the notional amount and the other terms of the
contracts.
|
11.
|
Revenues
|
Revenues
consist of the following for the three months ended March 31, 2006 and
2005:
|
Three
Months
Ended
March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Video
|
$
|
869
|
$
|
842
|
|||
|
High-speed
Internet
|
254
|
215
|
|||||
|
Telephone
|
20
|
6
|
|||||
|
Advertising
sales
|
70
|
64
|
|||||
|
Commercial
|
76
|
65
|
|||||
|
Other
|
85
|
79
|
|||||
|
$
|
1,374
|
$
|
1,271
|
||||
13
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
|
12.
|
Operating
Expenses
|
Operating
expenses consist of the following for the three months ended March 31, 2006
and
2005:
|
Three
Months
Ended
March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Programming
|
$
|
391
|
$
|
358
|
|||
|
Service
|
209
|
176
|
|||||
|
Advertising
sales
|
26
|
25
|
|||||
|
$
|
626
|
$
|
559
|
||||
|
13.
|
Selling,
General and Administrative
Expenses
|
Selling,
general and administrative expenses consist of the following for the three
months ended March 31, 2006 and 2005:
|
Three
Months
Ended
March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
General
and administrative
|
$
|
243
|
$
|
206
|
|||
|
Marketing
|
38
|
35
|
|||||
|
$
|
281
|
$
|
241
|
||||
Components
of selling expense are included in general and administrative and marketing
expense.
|
14.
|
Other
Operating Expenses
|
Other
operating expenses consist of the following for the three months ended March
31,
2006 and 2005:
|
Three
Months
Ended
March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Loss
on sale of assets, net
|
$
|
--
|
$
|
4
|
|||
|
Special
charges, net
|
3
|
4
|
|||||
|
$
|
3
|
$
|
8
|
||||
Special
charges for the three months ended March 31, 2006 and 2005 primarily represent
severance costs as a result of reducing workforce, consolidating administrative
offices and executive severance.
14
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
|
15.
|
Other
Income
|
Other
income consists of the following for the three months ended March 31, 2006
and
2005:
|
Three
Months
Ended
March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Gain
on derivative instruments and hedging activities, net
|
$
|
8
|
$
|
27
|
|||
|
Loss
on extinguishment of debt
|
--
|
(5
|
)
|
||||
|
Minority
interest
|
(4
|
)
|
(3
|
)
|
|||
|
Other,
net
|
2
|
1
|
|||||
|
$
|
6
|
$
|
20
|
||||
|
16.
|
Income
Taxes
|
CCH
II is
a single member limited liability company not subject to income tax. CCH II
holds all operations through indirect subsidiaries. The majority of these
indirect subsidiaries are limited liability companies that are also not subject
to income tax. However, certain of CCH II’s indirect subsidiaries are
corporations that are subject to income tax.
As
of
March 31, 2006 and December 31, 2005, the Company had net deferred income tax
liabilities of approximately $213
million. The
net
deferred income tax liabilities relate to certain of the Company’s indirect
subsidiaries, which file separate income tax returns.
During
the three months ended March 31, 2006 and 2005, the Company recorded $2 million
and $6 million of income tax expense, respectively. The 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.
Charter
Holdco is currently under examination by the Internal Revenue Service for the
tax years ending December 31, 2002 and 2003. The results of the Company
(excluding the indirect corporate subsidiaries) for these years are subject
to
this examination. Management does not expect the results of this examination
to
have a material adverse effect on the Company’s condensed consolidated financial
condition or results of operations.
|
17.
|
Contingencies
|
The
Company is a party to lawsuits and claims that arise in the ordinary course
of
conducting its business. In the opinion of management, after taking into account
recorded liabilities, the outcome of these lawsuits and claims are not expected
to have a material adverse effect on the Company’s consolidated financial
condition, results of operations or its liquidity.
|
18.
|
Stock
Compensation Plans
|
Charter
has stock option 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 (not to exceed 20,000,000), 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 to five years from the grant
date, with 25% generally vesting on the anniversary of the grant date and
ratably thereafter. Generally, options expire 10 years from the grant date.
The Plans allow for the issuance of up to a total of 90,000,000 shares of
Charter Class A common stock (or units convertible into Charter Class A
common stock).
15
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
The
fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used for grants during the three months ended March 31, 2006 and 2005,
respectively: risk-free interest rates of 4.5% and 3.7%; expected volatility
of
91.8% and 72.5%; and expected lives of 6.25 years and 4.5 years, respectively.
The valuations assume no dividends are paid. During the three months ended
March
31, 2006, Charter granted 4.8 million stock options with a weighted average
exercise price of $1.07. As of March 31, 2006, Charter had 30.7 million and
10.7
million options outstanding and exercisable, respectively, with weighted average
exercise prices of $3.96 and $7.39, respectively, and weighted average remaining
contractual lives of 8 years and 7 years, respectively.
On
January 1, 2006, the Company adopted revised SFAS No. 123, Share
- Based payment,
which
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for (a) equity instruments of that
company or (b) liabilities that are based on the fair value of the company’s
equity instruments or that may be settled by the issuance of such equity
instruments. Because the Company adopted the fair value recognition provisions
of SFAS No. 123 on January 1, 2003, the revised standard did not have a material
impact on its financial statements. The Company recorded $4 million of option
compensation expense which is included in general and administrative expense
for
each of the three months ended March 31, 2006 and 2005, respectively.
In
February 2006, the Compensation Committee of Charter’s Board of Directors
approved a modification to the financial performance measures under Charter's
Long-Term Incentive Program ("LTIP") required to be met for the performance
shares to vest. After the modification, management believes that approximately
2.5 million of the performance shares are likely to vest. As such, expense
of
approximately $3 million will be amortized over the remaining two year service
period. During the three months ended March 31, 2006, Charter granted an
additional 7.9 million performance shares under the LTIP. The impacts of such
grant and the modification of the 2005 awards were de minimis to the Company’s
results of operations for the three months ended March 31, 2006.
|
19.
|
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. Unless
otherwise disclosed, management believes that each of the transactions described
below was on terms no less favorable to the Company than could have been
obtained from independent third parties.
CC
VIII, LLC
As
part
of the acquisition of the cable systems owned by Bresnan Communications Company
Limited Partnership in February 2000, CC VIII, CCH II’s indirect limited
liability company subsidiary, issued, after adjustments, 24,273,943 Class A
preferred membership units (collectively, the "CC VIII interest") with a
value and an initial capital account of approximately $630 million to certain
sellers affiliated with AT&T Broadband, subsequently owned by Comcast
Corporation (the "Comcast sellers"). Mr. Allen granted the Comcast
sellers the right to sell to him the CC VIII interest for approximately
$630 million plus 4.5% interest annually from February 2000 (the "Comcast
put right"). In April 2002, the Comcast sellers exercised the Comcast put right
in full, and this transaction was consummated on June 6, 2003. Accordingly,
Mr. Allen has become the holder of the CC VIII interest, indirectly
through an affiliate. In
the
event of a liquidation of CC VIII, Mr. Allen would be entitled to a priority
distribution with respect to a 2% priority return (which will continue to
accrete). Any remaining distributions in liquidation would be distributed to
CC
V Holdings, LLC and Mr. Allen in proportion to CC V Holdings, LLC's capital
account and Mr. Allen's capital account (which would have equaled the initial
capital account of the Comcast sellers of approximately $630 million, increased
or decreased by Mr. Allen's pro rata share of CC VIII’s profits or losses (as
computed for capital account purposes) after June 6, 2003).
An
issue
arose as to whether the documentation for the Bresnan transaction was correct
and complete with regard to the ultimate ownership of the CC VIII interest
following consummation of the Comcast put right. Thereafter, the board of
directors of Charter formed a Special Committee of independent directors to
investigate the matter and take any other appropriate action on behalf of
Charter with respect to this matter. After conducting an investigation of the
16
CCH
II, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except where indicated)
relevant
facts and circumstances, the Special Committee determined that a "scrivener’s
error" had occurred in February 2000 in connection with the preparation of
the
last-minute revisions to the Bresnan transaction documents and that, as a
result, Charter should seek the reformation of the Charter Holdco limited
liability company agreement, or alternative relief, in order to restore and
ensure the obligation that the CC VIII interest be automatically exchanged
for
Charter Holdco units.
As
of
October 31, 2005, Mr. Allen, the Special Committee, Charter, Charter Holdco
and
certain of their affiliates, agreed to settle the dispute, and execute certain
permanent and irrevocable releases pursuant to the Settlement Agreement and
Mutual Release agreement dated October 31, 2005 (the "Settlement"). Pursuant
to
the Settlement, CII has retained 30% of its CC VIII interest (the "Remaining
Interests"). The Remaining Interests are subject to certain drag along, tag
along and transfer restrictions as detailed in the revised CC VIII Limited
Liability Company Agreement. CII transferred the other 70% of the CC VIII
interest directly and indirectly, through Charter Holdco, to a newly formed
entity, CCHC (a direct subsidiary of Charter Holdco and the direct parent of
Charter Holdings). Of the 70% of the CC VIII preferred interests, 7.4% has
been
transferred by CII to CCHC for a subordinated exchangeable note with an initial
accreted value of $48 million, accreting at 14%, compounded quarterly, with
a
15-year maturity (the "Note"). The remaining 62.6% has been transferred by
CII
to Charter Holdco, in accordance with the terms of the settlement for no
additional monetary consideration. Charter Holdco contributed the 62.6% interest
to CCHC.
As
part
of the Settlement, CC VIII issued approximately 49 million additional Class
B
units to CC V in consideration for prior capital contributions to CC VIII by
CC
V, with respect to transactions that were unrelated to the dispute in connection
with CII’s membership units in CC VIII. As a result, Mr. Allen’s pro rata share
of the profits and losses of CC VIII attributable to the Remaining Interests
is
approximately 5.6%.
The
Note
is exchangeable, at CII’s option, at any time, for Charter Holdco Class A Common
units at a rate equal to the then accreted value, divided by $2.00 (the
"Exchange Rate"). Customary anti-dilution protections have been provided that
could cause future changes to the Exchange Rate. Additionally, the Charter
Holdco Class A Common units received will be exchangeable by the holder into
Charter common stock in accordance with existing agreements between CII, Charter
and certain other parties signatory thereto. Beginning February 28, 2009, if
the
closing price of Charter common stock is at or above the Exchange Rate for
a
certain period of time as specified in the Exchange Agreement, Charter Holdco
may require the exchange of the Note for Charter Holdco Class A Common units
at
the Exchange Rate.
CCHC
has
the right to redeem the Note under certain circumstances, for cash in an amount
equal to the then accreted value, such amount, if redeemed prior to February
28,
2009, would also include a make whole up to the accreted value through February
28, 2009. CCHC must redeem the Note at its maturity for cash in an amount equal
to the initial stated value plus the accreted return through maturity.
Charter’s
Board of Directors has determined that the transferred CC VIII interests remain
at CCHC.
17
General
CCH
II,
LLC ("CCH II") is a holding company whose principal assets as of March
31,
2006 are
equity interests in its operating subsidiaries. CCH
II is
a direct subsidiary of CCH I, LLC ("CCH I"), which is an indirect subsidiary
of
Charter Communications Holdings, LLC ("Charter Holdings"). Charter Holdings
is
an indirect subsidiary of Charter Communications, Inc. ("Charter").
"We," "us"
and
"our"
refer to
CCH II and/or its subsidiaries.
We
are a
broadband communications company operating in the United States. We offer our
customers traditional cable video programming (analog and digital video) as
well
as high-speed Internet services and, in some areas, advanced broadband services
such as high definition television, video on demand, telephone and interactive
television. We sell our cable video programming, high-speed Internet and
advanced broadband services on a subscription basis.
The
following table summarizes our customer statistics for analog and digital video,
residential high-speed Internet and residential telephone as of March
31,
2006
and
2005:
|
Approximate
as of
|
|||||||
|
March
31,
|
March
31,
|
||||||
|
2006
(a)
|
2005
(a)
|
||||||
|
Cable
Video Services:
|
|||||||
|
Analog
Video:
|
|||||||
|
Residential
(non-bulk) analog video customers (b)
|
5,640,200
|
5,732,600
|
|||||
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
273,700
|
252,200
|
|||||
|
Total
analog video customers (b)(c)
|
5,913,900
|
5,984,800
|
|||||
|
Digital
Video:
|
|||||||
|
Digital
video customers (d)
|
2,866,400
|
2,694,600
|
|||||
|
Non-Video
Cable Services:
|
|||||||
|
Residential
high-speed Internet customers (e)
|
2,322,400
|
1,978,400
|
|||||
|
Residential
telephone customers (f)
|
191,100
|
55,300
|
|||||
Included
in the 70,900 net loss of analog video customers is approximately 15,800 of
net
losses related to systems impacted by hurricanes Katrina and Rita.
After
giving effect to the acquisition of cable systems in January 2006 and the sale
of certain non-strategic cable systems in July 2005, March 31, 2005 analog
video
customers, digital video customers, high-speed Internet customers and telephone
customers would have been 5,974,600, 2,690,300, 1,990,200 and 70,300,
respectively.
|
(a)
|
"Customers"
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts (such as our employees). At March 31, 2006 and 2005, "customers"
include approximately 48,500 and 43,100 persons whose accounts were
over
60 days past due in payment, approximately 11,900 and 7,000 persons
whose
accounts were over 90 days past due in payment, and approximately
7,800
and 3,600 of which were over 120 days past due in payment, respectively.
|
| (b) |
"Analog
video customers" include all customers who receive video services
(including those who also purchase high-speed Internet and telephone
services) but excludes approximately 287,700 and 241,700 customers
at
March 31, 2006 and 2005, respectively, who receive high-speed Internet
service only or telephone service only and who are only counted as
high-speed Internet customers or telephone
customers.
|
|
(c)
|
Included
within "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 analog video customers is
|
18
|
|
consistent
with the methodology used in determining costs paid to programmers
and has
been consistently applied year over year. As we increase our effective
analog prices to residential customers without a corresponding
increase in
the prices charged to commercial service or multi-dwelling customers,
our
EBU count will decline even if there is no real loss in commercial
service
or multi-dwelling customers.
|
|
(d)
|
"Digital
video customers" include all households that have one or more digital
set-top terminals. Included in "digital video customers" on March
31, 2006
and 2005 are approximately 8,500 and 10,000 customers, respectively,
that
receive digital video service directly through satellite transmission.
|
|
(e)
|
"Residential
high-speed Internet customers" represent those customers who subscribe
to
our high-speed Internet service.
|
|
(f)
|
"Residential
telephone customers" include all households receiving telephone
service.
|
Overview
of Operations
We
have a
history of net losses. Our net losses are principally attributable to
insufficient revenue to cover the combination
of operating costs and interest
costs we incur because of our debt and depreciation expenses that we incur
resulting from the capital investments we have made and continue to make in
our
cable properties. We expect that these expenses will remain significant, and
we
therefore expect to continue to report net losses for the foreseeable future.
For
the
three months ended March 31, 2006 and 2005, our income from operations, which
includes depreciation and amortization expense and asset impairment charges
but
excludes interest expense, was $7 million and $51 million, respectively. We
had
operating margins of 1% and 4% for the three months ended March 31, 2006 and
2005, respectively. The decrease in income from operations and operating margins
for the three months ended March 31, 2006 compared to 2005 was principally
due
to an increase in operating costs and asset impairment charges of $68
million.
Historically,
our ability to fund operations and investing activities has depended on our
continued access to credit under our credit facilities. We expect we will
continue to borrow under our credit facilities from time to time to fund cash
needs. The occurrence of an event of default under our credit facilities could
result in borrowings from these credit facilities being unavailable to us and
could, in the event of a payment default or acceleration, also trigger events
of
default under the indentures governing our outstanding notes and would have
a
material adverse effect on us. Approximately $22 million of indebtedness under
our credit facilities is scheduled to mature during the remainder of 2006,
which
we expect to fund through borrowings under our revolving credit facility. See
"—
Liquidity and Capital Resources."
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 our 2005 Annual Report on
Form
10-K.
19
RESULTS
OF OPERATIONS
Three
Months Ended March
31, 2006
Compared to Three Months Ended March
31, 2005
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,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Revenues
|
$
|
1,374
|
100
|
%
|
$
|
1,271
|
100
|
%
|
|||||
|
Costs
and expenses:
|
|||||||||||||
|
Operating
(excluding depreciation and amortization)
|
626
|
46
|
%
|
559
|
44
|
%
|
|||||||
|
Selling,
general and administrative
|
281
|
20
|
%
|
241
|
19
|
%
|
|||||||
|
Depreciation
and amortization
|
358
|
26
|
%
|
381
|
30
|
%
|
|||||||
|
Asset
impairment charges
|
99
|
7
|
%
|
31
|
2
|
%
|
|||||||
|
Other
operating expenses, net
|
3
|
--
|
8
|
1
|
%
|
||||||||
|
1,367
|
99
|
%
|
1,220
|
96
|
%
|
||||||||
|
Income
from operations
|
7
|
1
|
%
|
51
|
4
|
%
|
|||||||
|
Interest
expense, net
|
(239
|
)
|
(198
|
)
|
|||||||||
|
Other
income, net
|
6
|
20
|
|||||||||||
|
(233
|
)
|
(178
|
)
|
||||||||||
|
Loss
before income taxes
|
(226
|
)
|
(127
|
)
|
|||||||||
|
Income
tax expense
|
(2
|
)
|
(6
|
)
|
|||||||||
|
Net
loss
|
$
|
(228
|
)
|
$
|
(133
|
)
|
|||||||
Revenues.
The
overall increase in revenues in 2006 compared to 2005 is principally the result
of an increase of 344,000 high-speed Internet customers and 171,800 digital
video customers, as well as price increases for video and high-speed Internet
services, and is offset partially by a decrease of 70,900 analog video
customers. Our
goal
is to increase revenues by improving customer service, which we believe will
stabilize our analog video customer base, implementing price increases on
certain services and packages and increasing the number of customers who
purchase high-speed Internet services, digital video and advanced products
and
services such as telephone, video on demand ("VOD"), high definition television
and digital video recorder service.
Average
monthly revenue per analog video customer increased to $77.64 for the three
months ended March
31,
2006
from
$70.75 for the three months ended March
31,
2005
primarily as a result of incremental revenues from advanced services and price
increases. Average monthly revenue per analog video customer represents total
quarterly revenue, divided by three, divided by the average number of analog
video customers during the respective period.
20
Revenues
by service offering were as follows (dollars in millions):
|
Three
Months Ended March 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2006
over 2005
|
|||||||||||||||||
|
Revenues
|
%
of
Revenues
|
Revenues
|
%
of
Revenues
|
Change
|
%
Change
|
||||||||||||||
|
Video
|
$
|
869
|
63
|
%
|
$
|
842
|
66
|
%
|
$
|
27
|
3
|
%
|
|||||||
|
High-speed
Internet
|
254
|
18
|
%
|
215
|
17
|
%
|
39
|
18
|
%
|
||||||||||
|
Telephone
|
20
|
2
|
%
|
6
|
1
|
%
|
14
|
233
|
%
|
||||||||||
|
Advertising
sales
|
70
|
5
|
%
|
64
|
5
|
%
|
6
|
9
|
%
|
||||||||||
|
Commercial
|
76
|
6
|
%
|
65
|
5
|
%
|
11
|
17
|
%
|
||||||||||
|
Other
|
85
|
6
|
%
|
79
|
6
|
%
|
6
|
8
|
%
|
||||||||||
|
$
|
1,374
|
100
|
%
|
$
|
1,271
|
100
|
%
|
$
|
103
|
8
|
%
|
||||||||
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Approximately
$27 million of the increase was the result of price increases and incremental
video revenues from existing customers and approximately $11 million was the
result of an increase in digital video customers. The increases were offset
by
decreases of approximately $11 million related to a decrease in analog video
customers.
Approximately
$38 million of the increase in revenues from high-speed Internet services
provided to our non-commercial customers related to the increase in the average
number of customers receiving high-speed Internet services, whereas
approximately $1 million related to the
increase in average price of the service.
Revenues
from telephone services increased primarily as a result of an increase of
135,800 telephone customers in 2006.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. Advertising sales revenues increased
primarily as a result of an increase in local advertising sales and a one-time
ad buy by a programmer offset by a decline in national advertising sales. For
the three months ended March 31, 2006 and 2005, we received $6 million and
$3
million, respectively, in advertising sales revenues from
programmers.
Commercial
revenues consist primarily of revenues from cable video and high-speed Internet
services to our commercial customers. Commercial revenues increased primarily
as
a result of an increase in commercial high-speed Internet revenues.
Other
revenues consist of revenues from franchise fees, telephone revenue, equipment
rental, customer installations, home shopping, dial-up Internet service, late
payment fees, wire maintenance fees and other miscellaneous revenues. For each
of the three months ended March 31, 2006 and 2005, franchise fees represented
approximately 53% of total other revenues. The increase in other revenues was
primarily the result of an increase in franchise fees of $4 million,
installation revenue of $1 million and wire maintenance fees of $1
million.
21
Operating
Expenses.
Programming costs included in the accompanying condensed consolidated statements
of operations were $391 million and $358 million, representing 62% and 64%
of total operating expenses for the three months ended March 31, 2006 and 2005,
respectively. Key expense components as a percentage of revenues were as follows
(dollars in millions):
|
Three
Months Ended March 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2006
over 2005
|
|||||||||||||||||
|
Expenses
|
%
of
Revenues
|
Expenses
|
%
of
Revenues
|
Change
|
%
Change
|
||||||||||||||
|
Programming
|
$
|
391
|
29
|
%
|
$
|
358
|
28
|
%
|
$
|
33
|
9
|
%
|
|||||||
|
Service
|
209
|
15
|
%
|
176
|
14
|
%
|
33
|
19
|
%
|
||||||||||
|
Advertising
sales
|
26
|
2
|
%
|
25
|
2
|
%
|
1
|
4
|
%
|
||||||||||
|
$
|
626
|
46
|
%
|
$
|
559
|
44
|
%
|
$
|
67
|
12
|
%
|
||||||||
Programming
costs consist primarily of costs paid to programmers for analog, premium,
digital channels, VOD and pay-per-view programming. The increase in programming
costs was primarily a result of rate increases. Programming
costs
were offset by the amortization of payments received from programmers in support
of launches of new channels of $4 million and $9 million for the three months
ended March 31, 2006 and 2005, respectively.
Our
cable
programming costs have increased in every year we have operated in excess of
customary inflationary and cost-of-living increases. We expect them to continue
to increase due to a variety of factors, including annual increases imposed
by
programmers and additional programming being provided to customers as a result
of system rebuilds and bandwidth reallocation, both of which increase channel
capacity. In 2006, we expect programming costs to increase at a higher rate
than
in 2005. These costs will be determined in part on the outcome of programming
negotiations in 2006 and will likely be subject to offsetting events or
otherwise affected by factors similar to the ones mentioned in the preceding
paragraph. Our increasing programming costs have resulted in declining operating
margins for our video services because we have been unable to pass on all cost
increases to our customers. We expect to partially offset any resulting margin
compression from our traditional video services with revenue from advanced
video
services, increased telephone revenues, high-speed Internet revenues,
advertising revenues and commercial service revenues.
Service
costs consist primarily of service personnel salaries and benefits, franchise
fees, system utilities, costs of providing high-speed Internet service,
maintenance and pole rent expense. The increase in service costs resulted
primarily from increased labor and maintenance costs to support improved service
levels and our advanced products of $12 million, increased costs of providing
high-speed Internet and telephone service of $9 million, higher fuel and utility
prices of $4 million and franchise fees of $3 million. Advertising sales
expenses consist of costs related to traditional advertising services provided
to advertising customers, including salaries, benefits and commissions.
Advertising sales expenses increased primarily as a result of increased salary,
benefit and commission costs.
Selling,
General and Administrative Expenses.
Key
components of expense as a percentage of revenues were as follows (dollars
in
millions):
|
Three
Months Ended March 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2006
over 2005
|
|||||||||||||||||
|
Expenses
|
%
of
Revenues
|
Expenses
|
%
of
Revenues
|
Change
|
%
Change
|
||||||||||||||
|
General
and administrative
|
$
|
243
|
17
|
%
|
$
|
206
|
16
|
%
|
$
|
37
|
18
|
%
|
|||||||
|
Marketing
|
38
|
3
|
%
|
35
|
3
|
%
|
3
|
9
|
%
|
||||||||||
|
$
|
281
|
20
|
%
|
$
|
241
|
19
|
%
|
$
|
40
|
17
|
%
|
||||||||
General
and administrative expenses consist primarily of salaries and benefits, rent
expense, billing costs, customer care center costs, internal network costs,
bad
debt expense and property taxes. The increase in general and administrative
expenses resulted primarily from a rise in salaries and benefits of $26 million
and increases in
22
customer
care center costs of $4 million related to investments to improve customer
service levels, consulting services of $2 million, billing costs of $2 million,
property and casualty insurance of $2 million and property taxes of $1 million.
Marketing
expenses increased as a result of an increased investment in targeted marketing
campaigns.
Depreciation
and Amortization. Depreciation
and amortization expense decreased by $23 million for
the
three months ended March
31,
2006 compared to the three months ended March 31, 2005. The decrease in
depreciation was the result of assets becoming fully depreciated offset by
an
increase in capital expenditures.
Asset
Impairment Charges.
Asset
impairment charges for the three months ended March 31, 2006 and 2005 represent
the write-down of assets related to cable asset sales to fair value less costs
to sell.
See
Note 3 to the condensed consolidated financial statements.
Other
Operating Expenses, Net.
Other
operating expenses decreased $5 million as a result of a $4 million decrease
in
losses on sales of assets and a $1 million decrease in special
charges.
Interest
Expense, Net. Net
interest expense increased by $41 million, or 21%, for
the
three months ended March
31,
2006 compared to the
three
months ended March
31,
2005. The increase in net interest expense was a result of an increase in our
average borrowing rate from 7.82% in the first quarter of 2005 to 8.57% in
the
first quarter of 2006 and an increase of $912 million in average debt
outstanding from $9.8 billion for the first quarter of 2005 compared to
$10.7 billion for the first quarter of 2006.
Other
Income, Net.
Other
income decreased $14 million primarily as a result of a $19 million decrease
in
net gains on derivative instruments and hedging activities as a result of
decreases in gains on interest rate agreements that do not qualify for hedge
accounting under Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting
for Derivative Instruments and Hedging Activities. Other
income in 2005 also included net losses on extinguishment of debt of $5 million
which did not recur in 2006. See Note 6 to the condensed consolidated financial
statements. Other income also includes the 2% accretion of the preferred
membership interests in our indirect subsidiary, CC VIII, and the pro rata
share
of the profits and losses of CC VIII.
Income
Tax Expense. Income
tax expense was recognized through increases in deferred tax liabilities and
current federal and state income tax expenses of certain of our indirect
corporate subsidiaries.
Net
Loss.
Net
loss increased by $95 million, or 71%, for the three months ended March
31,
2006
compared
to the three months ended March
31,
2005
as a
result of the factors described above.
Liquidity
and Capital Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities, cash
needs, capital expenditures and outstanding debt.
Recent
Financing Transactions
On
January 30, 2006, CCH II and CCH II Capital Corp. issued $450 million in debt
securities, the proceeds of which were provided, directly or indirectly, to
Charter Communications Operating, LLC ("Charter Operating"), which used such
funds to reduce borrowings, but not commitments, under the revolving portion
of
its credit facilities.
In
April
2006, Charter Operating completed a $6.85 billion refinancing of its credit
facilities including a new $350 million revolving/term facility (which converts
to a term loan in one year), a $5.0 billion term loan due in 2013 and certain
amendments to the existing $1.5 billion revolving credit facility. In addition,
the refinancing reduced margins on Eurodollar rate Term A & B loans to
2.625% from a weighted average of 3.15% previously and margins on base rate
term
loans to 1.625% from a weighted average of 2.15% previously. Concurrent with
this refinancing, the CCO Holdings, LLC ("CCO Holdings") bridge loan was
terminated.
23
Our
long-term financing as of March 31, 2006 consists of $5.4 billion of credit
facility debt and $5.3 billion accreted value of high-yield notes. Pro forma
for
the completion of the credit facility refinancing discussed above, none of
our
debt matures in the remainder of 2006, and in 2007 and 2008, $25 million and
$128 million mature, respectively. In 2009 and beyond, significant additional
amounts will become due under our remaining long-term debt
obligations.
Our
business requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. We have historically funded these
requirements through cash flows from operating activities, borrowings under
our
credit facilities, equity contributions from our parent companies, sales of
assets, issuances of debt securities and cash on hand. However, the mix of
funding sources changes from period to period. For the three months ended March
31, 2006, we generated $239 million of net cash flows from operating activities
after paying cash interest of $214 million. In addition, we used approximately
$241 million for purchases of property, plant and equipment. Finally, we had
net
cash flows from financing activities of $60 million. We expect that our mix
of
sources of funds will continue to change in the future based on overall needs
relative to our cash flow and on the availability of funds under our credit
facilities, our and our parent companies’ access to the debt markets, the timing
of possible asset sales and our ability to generate cash flows from operating
activities. We continue to explore asset dispositions as one of several possible
actions that we could take in the future to improve our liquidity, but we do
not
presently consider unannounced future asset sales as a significant source of
liquidity.
We
expect
that cash on hand, cash flows from operating activities, proceeds from sale
of
assets and the amounts available under our credit facilities will be adequate
to
meet our and our parent companies’ cash needs through 2007. We believe that cash
flows from operating activities and amounts available under our credit
facilities may not be sufficient to fund our operations and satisfy our and
our
parent companies’ interest and principal repayment obligations in 2008 and will
not be sufficient to fund such needs in 2009 and beyond. We have been advised
that Charter continues to work with its financial advisors in its approach
to
addressing liquidity, debt maturities and our overall balance sheet
leverage.
Debt
Covenants
Our
ability to operate depends upon, among other things, our continued access to
capital, including credit under the Charter Operating credit facilities. The
Charter Operating credit facilities, along with our indentures, contain certain
restrictive covenants, some of which require us to maintain specified financial
ratios and meet financial tests and to provide annual audited financial
statements with an unqualified opinion from our independent auditors. As of
March 31, 2006, we are in compliance with the covenants under our indentures
and
credit facilities, and we expect to remain in compliance with those covenants
for the next twelve months. As of March 31, 2006, our potential availability
under our credit facilities totaled approximately $904 million, although the
actual availability at that time was only $516 million because of limits imposed
by covenant restrictions. However,
pro forma for the completion of the credit facility refinancing discussed above,
our potential availability under our credit facilities as of March 31, 2006
would have been approximately $1.3 billion, although actual covenanted
availability
of $516 million would remain unchanged.
Continued access to our credit facilities is subject to our remaining in
compliance with these covenants, including covenants tied to our operating
performance. If any events of non-compliance occur, funding under the credit
facilities may not be available and defaults on some or potentially all of
our
debt obligations could occur. An event of default under any of our debt
instruments could result in the acceleration of our payment obligations under
that debt and, under certain circumstances, in cross-defaults under our other
debt obligations, which could have a material adverse effect on our consolidated
financial condition and results of operations.
Parent
Company Debt Obligations
Any
financial or liquidity problems of our parent companies could cause serious
disruption to our business and have a material adverse effect on our business
and results of operations. A failure by Charter Holdings, CCH I Holdings, LLC
("CIH") or CCH I to satisfy their debt payment obligations or a bankruptcy
filing with respect to Charter Holdings, CIH or CCH I would give the lenders
under our credit facilities the right to accelerate the payment obligations
under these facilities. Any such acceleration would be a default under the
indenture governing our notes.
On a
consolidated basis, our parent companies have a significant level of debt,
which, including our debt, totaled approximately $19.5 billion as of March
31,
2006, as discussed below.
24
Charter’s
ability to make interest payments on its convertible senior notes, and, in
2006
and 2009, to repay the outstanding principal of its convertible senior notes
of
$20 million and $863 million, respectively, will depend on its ability to raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco and its subsidiaries. As of March 31, 2006, Charter Holdco was owed
$24
million in intercompany loans from its subsidiaries, which were available to
pay
interest and principal on Charter’s convertible senior notes. In addition,
Charter has $99 million of governmental securities pledged as security for
the
next four scheduled semi-annual interest payments on Charter’s 5.875%
convertible senior notes.
As
of
March 31, 2006, Charter Holdings, CIH and CCH I had approximately $7.8 billion
principal amount of high-yield notes outstanding with approximately $105
million, $0, $684 million and $7.0 billion maturing in 2007, 2008, 2009 and
thereafter, respectively. Charter, Charter Holdings, CIH and CCH I will need
to
raise additional capital or receive distributions or payments from us in order
to satisfy their debt obligations. However, because of their significant
indebtedness, our ability and the ability of the parent companies to raise
additional capital at reasonable rates or at all is uncertain.
During
the three months ended March 31, 2006, we distributed $26 million of cash to
our
parent company.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, CCHC, LLC,
Charter Holdco, Charter Holdings, CIH and CCH I) for
payment of principal on parent company notes are
restricted under the indentures governing the CIH notes, CCH I notes, CCH II
notes, CCO Holdings notes and Charter Operating notes unless
there is no default, each applicable subsidiary’s leverage ratio test is met at
the time of such distribution and, in the case of our convertible senior notes,
other specified tests are met. For
the
quarter ended March 31, 2006, there was no default under any of these indentures
and the other specified tests were met. However, certain of our subsidiaries
did
not meet their respective leverage ratio tests based on March 31, 2006 financial
results. As
a
result, distributions from certain of our subsidiaries to their parent companies
have been restricted and will continue to be restricted until those tests are
met. Distributions
by Charter Operating for payment of principal on parent company notes are
further restricted by the covenants in the credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures. However, distributions for payment of
interest on Charter’s
convertible
senior notes are further limited to when each applicable subsidiary’s leverage
ratio test is met and other specified tests are met. There can be no assurance
that they will satisfy these tests at the time of such distribution.
Specific
Limitations at Charter Holdings
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures and
other specified tests are met. For the quarter ended March
31,
2006, there was no default under Charter Holdings’ indentures and the other
specified tests were met. However, Charter Holdings did not meet the leverage
ratio test of 8.75 to 1.0 based on March 31, 2006 financial results. As
a
result, distributions from Charter Holdings to Charter or Charter Holdco have
been restricted and will continue to be restricted until that test is met.
During
this restriction period,
in which distributions are restricted,
the
indentures governing the Charter Holdings notes permit Charter Holdings and
its
subsidiaries to make specified investments (that are not restricted payments)
in
Charter Holdco or Charter up to an amount determined by a formula, as long
as
there is no default under the indentures.
Our
ability to incur additional debt may be limited by the restrictive covenants
in
our indentures and credit facilities. No assurances can be given that we will
not experience liquidity problems if we do not obtain sufficient additional
financing on a timely basis as our debt becomes due or because of adverse market
conditions, increased competition or other unfavorable events. If, at any time,
additional capital or borrowing capacity is required beyond amounts internally
generated or available under our credit facilities or through additional debt
or
equity financings, we would consider:
|
•
|
issuing
equity
at
a parent company level,
the proceeds of which could be loaned or contributed to
us;
|
|
|
•
|
issuing
debt securities that may have structural or other priority over our
existing notes;
|
|
25
|
•
|
further
reducing our expenses and capital expenditures, which may impair
our
ability to increase revenue;
|
|
|
•
|
selling
assets; or
|
|
|
•
|
requesting
waivers or amendments with respect to our credit facilities, the
availability and terms of which would be subject to market conditions.
|
If
the
above strategies are not successful, we could be forced to restructure our
obligations or seek protection under the bankruptcy laws. In addition, if we
find it necessary to engage in a recapitalization or other similar transaction,
our noteholders might not receive principal and interest payments to which
they
are contractually entitled.
Sale
of Assets
In
February 2006, we signed three separate definitive agreements to sell certain
cable television systems serving a total of approximately 360,000 analog video
customers in West Virginia, Virginia, Illinois, Kentucky,
Nevada,
Colorado, New Mexico and Utah
for a
total of approximately $971 million. As of March 31, 2006, those cable systems
met the criteria for assets held for sale under SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
As
such, the assets were written down to fair value less estimated costs to sell
resulting in asset impairment charges during the three months ended March 31,
2006 of approximately $99 million.
In
July
2005, we closed the sale of certain cable systems in Texas and West Virginia
and
closed the sale of an additional cable system in Nebraska in October 2005 for
a
total sales price of approximately $37 million, representing a total of
approximately 33,000 customers.
Acquisition
In
January 2006, we closed the purchase of certain cable systems in Minnesota
from
Seren Innovations, Inc. We acquired approximately 17,500 analog video customers,
8,000 digital video customers, 13,200 high-speed Internet customers and 14,500
telephone customers for a total purchase price of approximately $42
million.
Historical
Operating, Financing and Investing Activities
We
held
$26 million in cash and cash equivalents as of March 31, 2006 compared to
$3 million as of December 31, 2005. For the three months ended March 31,
2006, we generated $239 million of net cash flows from operating activities
after paying cash interest of $214 million. In addition, we used approximately
$241 million for purchases of property, plant and equipment. Finally, we had
net
cash flows from financing activities of $60 million.
Operating
Activities. Net
cash
provided by operating activities increased $52 million, or 28%, from $187
million for the three months ended March 31, 2005 to $239 million for the three
months ended March 31, 2006. For the three months ended March 31, 2006, net
cash
provided by operating activities increased primarily as a result of changes
in
operating assets and liabilities that provided $90 million more cash during
the
three months ended March 31, 2006 than the corresponding period in 2005 offset
with an increase in cash interest expense of $39 million over the corresponding
prior period.
Investing
Activities. Net
cash
used by investing activities for the three months ended March 31, 2006 and
2005
was $276 million and $190 million, respectively. Investing activities used
$86
million more cash during the three months ended March 31, 2006 than the
corresponding period in 2005 primarily as a result of increased cash used for
capital expenditures in 2006 coupled with cash used for the purchase of cable
systems discussed above.
Financing
Activities. Net
cash
provided by financing activities was $60 million for the three months ended
March 31, 2006 and net cash used in financing activities was $517 million for
the three months ended March 31, 2005. The increase in cash provided during
the
three months ended March 31, 2006 as compared to the corresponding period in
2005, was primarily the result of proceeds from the issuance of
debt.
Capital
Expenditures
We
have
significant ongoing capital expenditure requirements. Capital expenditures
were
$241 million and $211 million for the three months ended March
31,
2006 and
2005,
respectively. Capital expenditures increased as a
26
result
of
increased spending on customer premise equipment as a result of increases in
digital video, high-speed Internet and telephone customers. See the table below
for more details.
Our
capital expenditures are funded primarily from cash flows from operating
activities, the issuance of debt and borrowings under credit facilities. In
addition, during the three months ended March
31,
2006
and
2005, our liabilities related to capital expenditures decreased $7 million
and
increased $16 million, respectively.
During
2006, we expect capital expenditures to be approximately $1.0 billion to $1.1
billion. We expect that 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 for scalable
infrastructure costs. We expect to fund capital expenditures for 2006 primarily
from cash flows from operating activities, proceeds from asset sales and
borrowings under our credit facilities.
We
have
adopted capital expenditure disclosure guidance, which was developed by eleven
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 operating statistics
in capital expenditures and customers among peer companies in the cable
industry. These disclosure guidelines are not required disclosure under
Generally Accepted Accounting Principles ("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, 2006 and
2005 (dollars in millions):
|
Three
Months Ended March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Customer
premise equipment (a)
|
$
|
130
|
$
|
86
|
|||
|
Scalable
infrastructure (b)
|
34
|
42
|
|||||
|
Line
extensions (c)
|
26
|
29
|
|||||
|
Upgrade/Rebuild
(d)
|
9
|
10
|
|||||
|
Support
capital (e)
|
42
|
44
|
|||||
|
Total
capital expenditures
|
$
|
241
|
$
|
211
|
|||
|
(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 terminals 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).
|
As
of the
end of the period covered by this report, management, including our Chief
Executive Officer and Chief Financial Officer, 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 affidavits 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
27
under
the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission’s rules and forms.
There
was
no change in our internal control over financial reporting during the quarter
ended March 31, 2006 that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
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, our management believes that our
controls provide such reasonable assurances.
28
PART
II. OTHER INFORMATION.
CCH
II is
a party to lawsuits and claims that have arisen in the ordinary course of
conducting its business. In the opinion of management, after taking into account
recorded liabilities, the outcome of these other lawsuits and claims are not
expected to have a material adverse effect on our consolidated financial
condition, results of operations or our liquidity.
Item
1A. Risk
Factors
Risks
Related to Significant Indebtedness of Us and Our Parent
Companies
We
may not generate (or, in general, we and our parent companies may not have
available to the applicable obligor) sufficient cash flow or have access to
additional external liquidity sources to fund our capital expenditures, ongoing
operations and our and our parent companies’ debt
obligations.
Our
ability to service our and our parent companies’ debt and to fund our planned
capital expenditures and ongoing operations will depend on both our ability
to
generate cash flow and our and our parent companies’ access to additional
external liquidity sources, and in general our and our parent companies’ ability
to provide (by dividend or otherwise), such funds to the applicable issuer
of
the debt obligation. Our ability to generate cash flow is dependent on many
factors, including:
|
·
|
our
future operating performance;
|
|
·
|
the
demand for our products and
services;
|
|
·
|
general
economic conditions and conditions affecting customer and advertiser
spending;
|
|
·
|
competition
and our ability to stabilize customer losses;
and
|
|
·
|
legal
and regulatory factors affecting our
business.
|
Some
of
these factors are beyond our control. If we and our parent companies are unable
to generate sufficient cash flow and/or access additional external liquidity
sources, we and our parent companies may not be able to service and repay our
and our parent companies’ debt, operate our business, respond to competitive
challenges or fund our and our parent companies’ other liquidity and capital
needs. Although CCH II and CCH II Capital Corp. sold $450 million principal
amount of 10.250% senior notes due 2010 in January 2006, we or our parent
companies may not be able to access additional sources of external liquidity
on
similar terms, if at all. We
believe that cash flows from operating activities and amounts available under
our credit facilities will not be sufficient to fund our operations and satisfy
our and our parent companies’ interest and principal repayment obligations in
2009 and beyond. See “Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Liquidity and Capital
Resources.”
We
may not be able to access funds under our credit facilities if we fail to
satisfy the covenant restrictions in the credit facilities, which could
adversely affect our financial condition and our ability to conduct our
business.
We
have
historically relied on access to credit facilities in order to fund operations
and to service our and our parent company debt, and we expect such reliance
to
continue in the future. Our total potential borrowing availability under the
Charter Operating credit facilities was approximately $904 million as of March
31, 2006, although the actual availability at that time was only $516 million
because of limits imposed by covenant restrictions. However,
pro forma for the completion of the credit facility refinancing discussed above,
our potential availability under our credit facilities as of March 31, 2006
would have been approximately $1.3 billion, although actual covenanted
availability
of $516 million would remain unchanged.
An
event
of default under the credit facilities or indentures, if not waived, could
result in the acceleration of those debt obligations and, consequently, our
and
our parent companies’ other debt obligations. Such acceleration could result in
exercise of remedies by our creditors and could force us to seek the protection
of the bankruptcy laws,
29
which
could materially adversely impact our ability to operate our business and to
make payments under our debt instruments. In addition, an event of default
under
the credit facilities, such as the failure to maintain the applicable required
financial ratios, would prevent additional borrowing under our credit
facilities, which could materially adversely affect our ability to operate
our
business and to make payments under our and our parent companies’ debt
instruments.
Because
of our holding company structure, our outstanding notes are structurally
subordinated in right of payment to all liabilities of our subsidiaries.
Restrictions in our subsidiaries’ debt instruments limit their ability to
provide funds to us.
Our
sole
assets are our equity interests in our subsidiaries. Our operating subsidiaries
are separate and distinct legal entities and are not obligated to make funds
available to us for payments on our notes or other obligations in the form
of
loans, distributions or otherwise. Our subsidiaries’ ability to make
distributions to us is subject to their compliance with the terms of their
credit facilities and indentures. Our direct or indirect subsidiaries include
the borrowers and guarantors under the Charter Operating credit facilities.
Three of our subsidiaries are also obligors under other senior high yield notes.
See “Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources — Debt Covenants.” Our
notes are structurally subordinated in right of payment to all of the debt
and
other liabilities of our subsidiaries. As of March 31, 2006, our total debt
was
approximately $10.7 billion, of which $8.7 billion was structurally senior
to
the CCH II notes.
In
the
event of bankruptcy, liquidation or dissolution of one or more of our
subsidiaries, that subsidiary’s assets would first be applied to satisfy its own
obligations, and following such payments, such subsidiary may not have
sufficient assets remaining to make payments to us as an equity holder or
otherwise. In that event:
|
·
|
the
lenders under Charter Operating’s credit facilities and the holders of our
subsidiaries’ other debt instruments will have the right to be paid in
full before us from any of our subsidiaries’ assets;
and
|
|
·
|
the
holders of preferred membership interests in our subsidiary, CC VIII,
would have a claim on a portion of its assets that may reduce the
amounts
available for repayment to holders of our outstanding notes.
|
In
addition, our outstanding notes are unsecured and therefore will be effectively
subordinated in right of payment to all existing and future secured debt we
may
incur to the extent of the value of the assets securing such debt.
Any
failure by our parent companies to satisfy their substantial debt obligations
could have a material adverse effect on us.
Because
Charter is our sole manager and because we are indirectly or directly wholly
owned by Charter Holdings, CIH and CCH I, their financial or liquidity problems
could cause serious disruption to our business and could have a material adverse
effect on our operations and results. A failure by certain of our parent
companies to satisfy their debt payment obligations or a bankruptcy filing
by
certain of our parent companies would give the lenders under the Charter
Operating credit facilities the right to accelerate the payment obligations
under these facilities. Any such acceleration would be a default under the
indentures governing our outstanding notes. In addition, if any of our parent
companies were to default on their debt obligations and that default were to
result in a change of control of any of them (whether through a bankruptcy,
receivership or other reorganization, or otherwise), such a change of control
could result in an event of default under the Charter Operating credit
facilities and our outstanding notes and require a change of control repurchase
offer under our and our parent companies’ outstanding notes.
Furthermore,
the Charter Operating credit facilities provide that an event of default would
occur if certain of Charter Operating’s parent companies have indebtedness in
excess of $500 million aggregate principal amount which remains undefeased
three
months prior to its final maturity. Our and our parent company indebtedness
that
may be subject to this provision includes indebtedness that matures in 2010
and
2011. Our and our parent companies’ inability to refinance or repay our and our
parent companies’ indebtedness would result in a default under the Charter
Operating credit facilities.
30
We
and our parent companies have a significant amount of existing debt and may
incur significant additional debt, including secured debt, in the future, which
could adversely affect our and our parent companies’ financial health and our
and their ability to react to changes in our
business.
We
and
our parent companies have a significant amount of debt and may (subject to
applicable restrictions in their debt instruments) incur additional debt in
the
future.
As
of
March 31, 2006, our parent companies had outstanding approximately $883 million
aggregate principal amount of convertible notes, $20 million and $863 million
of
which matures in 2006 and 2009, respectively, and approximately $7.8 billion
principal amount of high-yield notes outstanding with approximately $105
million, $0, $684 million and $7.0 billion maturing in 2007, 2008, 2009 and
thereafter, respectively. Our parent companies will need to raise additional
capital and/or receive distributions or payments from us in order to satisfy
their debt obligations in 2007 and beyond. However, because of their significant
indebtedness, our and our parent companies’ ability to raise additional capital
at reasonable rates or at all is uncertain, and our and our parent companies’
ability to make distributions or payments to our and their respective parent
companies is subject to availability of funds and restrictions under our
applicable debt instruments. If we or our parent companies were to engage in
a
recapitalization or other similar transaction, our noteholders might not receive
principal and interest to which they are contractually entitled.
Our
and
our parent companies’ significant amount of debt could have other important
consequences. For example, the debt will or could:
|
·
|
require
us to dedicate a significant portion of our cash flow from operating
activities to make payments on our and our parent companies’ debt, which
will reduce our funds available for working capital, capital expenditures
and other general corporate
expenses;
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business,
the cable and telecommunications industries and the economy at
large;
|
|
·
|
place
us at a disadvantage as compared to our competitors that have
proportionately less debt;
|
|
·
|
make
us vulnerable to interest rate increases, because a significant portion
of
our borrowings are, and will continue to be, at variable rates of
interest;
|
|
·
|
expose
us to increased interest expense as we refinance existing lower interest
rate instruments;
|
|
·
|
adversely
affect our relationship with customers and
suppliers;
|
|
·
|
limit
our and our parent companies’ ability to borrow additional funds in the
future, if we need them, due to applicable financial and restrictive
covenants in our and our parent companies’ debt;
and
|
|
·
|
make
it more difficult for us to satisfy our obligations to the holders
of our
notes and to the lenders under our credit facilities as well as our
parent
companies’ ability to satisfy their obligations to their
noteholders.
|
A
default
by us or one of our parent companies under our or its debt obligations could
result in the acceleration of those obligations and the obligations under our
and our parent companies’ other notes. We and our parent companies may incur
substantial additional debt in the future. If current debt levels increase,
the
related risks that we now face will intensify.
The
agreements and instruments governing our and our parent companies’ debt contain
restrictions and limitations that could significantly affect our ability to
operate our business, as well as significantly affect our and our parent
companies’ liquidity.
The
Charter Operating credit facilities and the indentures governing our and our
parent companies’ debt contain a number of significant covenants that could
adversely affect our ability to operate our business, as well as significantly
affect our and our parent companies’ liquidity, and therefore could adversely
affect our results of operations. These covenants will restrict, among other
things, our and our parent companies’ ability to:
31
|
·
|
incur
additional debt;
|
|
·
|
repurchase
or redeem equity interests and
debt;
|
|
·
|
make
certain investments or
acquisitions;
|
|
·
|
pay
dividends or make other
distributions;
|
|
·
|
dispose
of assets or merge;
|
|
·
|
enter
into related party transactions;
|
|
·
|
grant
liens and pledge assets.
|
Furthermore,
Charter Operating’s credit facilities require our subsidiaries to, among other
things, maintain specified financial ratios, meet specified financial tests
and
provide annual audited financial statements, with an unqualified opinion from
our independent auditors. Charter Operating’s ability to comply with these
provisions may be affected by events beyond our control.
The
breach of any covenants or obligations in our or our parent companies’ foregoing
indentures or credit facilities, not otherwise waived or amended, could result
in a default under the applicable debt agreement or instrument and could trigger
acceleration of the related debt, which in turn could trigger defaults under
other agreements governing our and our parent companies’ long-term indebtedness.
In addition, the secured lenders under the Charter Operating credit facilities
and the holders of the Charter Operating senior second-lien notes could
foreclose on their collateral, which includes equity interests in our
subsidiaries, and exercise other rights of secured creditors. Any default under
those credit facilities, the indentures governing our or our parent companies’
notes could adversely affect our growth, our financial condition and our results
of operations and our ability to make payments on our notes and Charter
Operating’s credit facilities and other debt of our subsidiaries.
All
of our and our parent companies’ outstanding debt is subject to change of
control provisions. We and our parent companies may not have the ability to
raise the funds necessary to fulfill our and our parent companies’ obligations
under our and our parent companies’ indebtedness following a change of control,
which would place us and our parent companies in default under the applicable
debt instruments.
We
and
our parent companies may not have the ability to raise the funds necessary
to
fulfill our obligations under our and our parent companies’ notes and our credit
facilities following a change of control. Under the indentures governing our
and
our parent companies’ notes, upon the occurrence of specified change of control
events, each such issuer is required to offer to repurchase all of its
outstanding notes. However, we and our parent companies may not have sufficient
funds at the time of the change of control event to make the required repurchase
of the applicable notes and all of the notes issuers are limited in their
ability to make distributions or other payments to their respective parent
company to fund any required repurchase. In addition, a change of control under
our credit facilities would result in a default under those credit facilities.
Because such credit facilities and our subsidiaries’ notes are obligations of
our subsidiaries, the credit facilities and our subsidiaries’ notes would have
to be repaid by our subsidiaries before their assets could be available to
us or
our parent companies to repurchase our and our parent companies’ notes. Any
failure to make or complete a change of control offer would place the applicable
issuer or borrower in default under its notes. The failure of our subsidiaries
to make a change of control offer or repay the amounts accelerated under their
credit facilities would place them in default.
Paul
G. Allen and his affiliates are not obligated to purchase equity from,
contribute to or loan funds to us or any of our parent
companies.
Paul
G.
Allen and his affiliates are not obligated to purchase equity from, contribute
to or loan funds to us or any of our parent companies.
32
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. We have lost a significant number of video customers to direct
broadcast satellite competition and further loss of video customers could have
a
material negative impact on our business.
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 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 may provide additional
benefits to certain of our competitors, either through access to financing,
resources or efficiencies of scale.
Our
principal competitor for video services throughout our territory is DBS.
Competition from DBS, including intensive marketing efforts and aggressive
pricing has had an adverse impact on our ability to retain customers. DBS has
grown rapidly over the last several years and continues to do so. The cable
industry, including us, has lost a significant number of subscribers to DBS
competition, and we face serious challenges in this area in the future. We
believe that competition from DBS service providers may present greater
challenges in areas of lower population density, and that our systems service
a
higher concentration of such areas than those of other major cable service
providers.
Local
telephone companies and electric utilities can offer video and other services
in
competition with us and they increasingly may do so in the future. Certain
telephone companies have begun more extensive deployment of fiber in their
networks that enable them to begin providing video services, as well as
telephone and high bandwidth Internet access services, to residential and
business customers and they are now offering such service in limited areas.
Some
of these telephone companies have obtained, and are now seeking, franchises
or
operating authorizations that are less burdensome than existing Charter
franchises.
The
subscription television industry also faces competition from free broadcast
television and from other communications and entertainment media. Further loss
of customers to DBS or other alternative video and Internet services could
have
a material negative impact on the value of our business and its performance.
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 and “dial-up”. DSL service is competitive with high-speed
Internet service over cable systems. In addition, DBS providers have entered
into joint marketing arrangements with Internet access providers to offer
bundled video and Internet service, which competes with our ability to provide
bundled services to our customers. Moreover, as we expand our telephone
offerings, we will face considerable competition from established telephone
companies and other carriers, including VoIP providers.
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 operating expenses,
and also require us to make capital expenditures to acquire additional digital
set-top terminals. Customers who subscribe to our services as a result of these
offerings may not remain customers for any significant period of time following
the end of the promotional period. A failure to retain existing customers and
customers added through promotional offerings or to collect the amounts they
owe
us could have a material adverse effect on our business and financial results.
Mergers,
joint ventures and alliances among franchised, wireless or private cable
operators, satellite television 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.
We
cannot
assure you that our cable systems 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. We cannot predict
the
extent to which competition may affect our business and operations in the
future.
33
We
have a history of net losses and expect to continue to experience net losses.
Consequently, we may not have the ability to finance future
operations.
We
have
had a history of net losses and expect to continue to report net losses for
the
foreseeable future. Our net losses are principally attributable to insufficient
revenue to cover the combination of operating costs and interest costs we incur
because of our debt and the depreciation expenses that we incur resulting from
the capital investments we have made in our cable properties. We expect that
these expenses will remain significant, and we expect to continue to report
net
losses for the foreseeable future. We reported net losses of $228 million and
$133 million for the three months ended March 31, 2006 and 2005, respectively.
Continued losses would reduce our cash available from operations to service
our
indebtedness, as well as limit our ability to finance our operations.
We
may not have the ability to pass our increasing programming costs on to our
customers, which would adversely affect our cash flow and operating
margins.
Programming
has been, and is expected to continue to be, our largest operating expense
item.
In recent years, the cable industry has experienced a rapid escalation in the
cost of programming, particularly sports programming. We expect programming
costs to continue to increase because of a variety of factors, including
inflationary or negotiated annual increases, additional programming being
provided to customers and increased costs to purchase programming. The inability
to fully pass these programming cost increases on to our customers has had
an
adverse impact on our cash flow and operating margins. As measured by
programming costs, and excluding premium services (substantially all of which
were renegotiated and renewed in 2003), as of March 31, 2006, approximately
12%
of our current programming contracts were expired, and approximately another
6%
were scheduled to expire at or before the end of 2006. There can be no assurance
that these agreements will be renewed on favorable or comparable terms. Our
programming costs increased by approximately 9% in the three months ended March
31, 2006 compared to the corresponding period in 2005. We expect our programming
costs in 2006 to continue to increase at a higher rate than in 2005. To the
extent that we are unable to reach agreement with certain programmers on terms
that we believe are reasonable we may be forced to remove such programming
channels from our line-up, which could result in a further loss of customers.
If
our required capital expenditures exceed our projections, we may not have
sufficient funding, which could adversely affect our growth, financial condition
and results of operations.
During
the three months ended March 31, 2006, we spent approximately $241 million
on
capital expenditures. During 2006, we expect capital expenditures to be
approximately $1.0 billion to $1.1 billion. The actual amount of our capital
expenditures depends on the level of growth in high-speed Internet and telephone
customers and in the delivery of other advanced services, as well as the cost
of
introducing any new services. We may need additional capital if there is
accelerated growth in high-speed Internet customers, telephone customers or
in
the delivery of other advanced services. If we cannot obtain such capital from
increases in our cash flow from operating activities, additional borrowings,
proceeds from asset sales or other sources, our growth, financial condition
and
results of operations could suffer materially.
Our
inability to respond to technological developments and meet customer demand
for
new products and services could limit our ability to compete
effectively.
Our
business is characterized by rapid technological change and the introduction
of
new products and services. We cannot assure you that we will be able to fund
the
capital expenditures necessary to keep pace with unanticipated technological
developments, or that we will successfully anticipate the demand of our
customers for products and services requiring new technology. Our inability
to
maintain and expand our upgraded systems and provide advanced services in a
timely manner, or to anticipate the demands of the marketplace, could materially
adversely affect our ability to attract and retain customers. Consequently,
our
growth, financial condition and results of operations could suffer materially.
Malicious
and abusive Internet practices could impair our high-speed Internet
services
Our
high-speed Internet customers utilize our network to access the Internet and,
as
a consequence, we or they may become victim to common malicious and abusive
Internet activities, such as unsolicited mass advertising (i.e., “spam”) and
dissemination of viruses, worms and other destructive or disruptive software.
These activities could
34
have
adverse consequences on our network and our customers, including degradation
of
service, excessive call volume to call centers and damage to our or our
customers’ equipment and data. Significant incidents could lead to customer
dissatisfaction and, ultimately, loss of customers or revenue, in addition
to
increased costs to us to service our customers and protect our network. Any
significant loss of high-speed Internet customers or revenue or significant
increase in costs of serving those customers could adversely affect our growth,
financial condition and results of operations.
Risks
Related to Mr. Allen’s Controlling Position
The
failure by Mr. Allen to maintain a minimum voting and economic interest in
us
could trigger a change of control default under our subsidiary’s credit
facilities.
The
Charter Operating credit facilities provide that the failure by (a) Mr. Allen,
(b) his estate, spouse, immediate family members and heirs and (c) any trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners or other owners of which consist exclusively of Mr. Allen or such
other
persons referred to in (b) above or a combination thereof, to maintain a 35%
direct or indirect voting interest in the applicable borrower would result
in a
change of control default. Such a default could result in the acceleration
of
repayment of our and our subsidiaries’ indebtedness, including borrowings under
the Charter Operating credit facilities.
Mr.
Allen controls us and may have interests that conflict with your
interests.
Mr.
Allen
has the ability to control us. Through his control as of March 31, 2006 of
approximately 90% of the voting power of the capital stock of our manager,
Charter, Mr. Allen is entitled to elect all but one of Charter’s board members
and effectively has the voting power to elect the remaining board member as
well. Mr. Allen thus has the ability to control fundamental corporate
transactions requiring equity holder approval, including, but not limited to,
the election of all of Charter’s directors, approval of merger transactions
involving us and the sale of all or substantially all of our assets.
Mr.
Allen
is not restricted from investing in, and has invested in, and engaged in, other
businesses involving or related to the operation of cable television systems,
video programming, high-speed Internet service, telephone or business and
financial transactions conducted through broadband interactivity and Internet
services. Mr. Allen may also engage in other businesses that compete or may
in
the future compete with us.
Mr.
Allen’s control over our management and affairs could create conflicts of
interest if he is faced with decisions that could have different implications
for him, us and the holders of our notes. Further, Mr. Allen could effectively
cause us to enter into contracts with another entity in which he owns an
interest or to decline a transaction into which he (or another entity in which
he owns an interest) ultimately enters.
Current
and future agreements between us and either Mr. Allen or his affiliates may
not
be the result of arm’s-length negotiations. Consequently, such agreements may be
less favorable to us than agreements that we could otherwise have entered into
with unaffiliated third parties.
We
are not permitted to engage in any business activity other than the cable
transmission of video, audio and data unless Mr. Allen authorizes us to pursue
that particular business activity, which could adversely affect our ability
to
offer new products and services outside of the cable transmission business
and
to enter into new businesses, and could adversely affect our growth, financial
condition and results of operations.
Charter’s
certificate of incorporation and Charter Holdco’s limited liability company
agreement provide that Charter and Charter Holdco and their subsidiaries,
including us, cannot engage in any business activity outside the cable
transmission business except for specified businesses. This will be the case
unless Mr. Allen consents to our engaging in the business activity. The cable
transmission business means the business of transmitting video, audio (including
telephone services), and data over cable television systems owned, operated
or
managed by us from time to time. These provisions may limit our ability to
take
advantage of attractive business opportunities.
35
The
loss of Mr. Allen’s services could adversely affect our ability to manage our
business.
Mr.
Allen
is Chairman of Charter’s board of directors and provides strategic guidance and
other services to Charter. If Charter were to lose his services, our growth,
financial condition and results of operations could be adversely impacted.
Risks
Related to Regulatory and Legislative Matters
Our
business is subject to extensive governmental legislation and regulation, which
could adversely affect our business.
Regulation
of the cable industry has increased cable operators’ administrative and
operational expenses and limited their revenues. Cable operators are subject
to,
among other things:
|
·
|
rules
governing the provision of cable equipment and compatibility with
new
digital technologies;
|
|
·
|
rules
and regulations relating to subscriber
privacy;
|
|
·
|
limited
rate regulation;
|
|
·
|
requirements
governing when a cable system must carry a particular broadcast station
and when it must first obtain consent to carry a broadcast
station;
|
|
·
|
rules
for franchise renewals and transfers;
and
|
|
·
|
other
requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
|
Additionally,
many aspects of these regulations are currently the subject of judicial
proceedings and administrative or legislative proposals. There are also ongoing
efforts to amend or expand the federal, state and local regulation of some
of
our cable systems, which may compound the regulatory risks we already face.
Certain states and localities are considering new telecommunications taxes
that
could increase operating expenses.
Our
cable systems are operated under franchises that are subject to non-renewal
or
termination. The failure to renew a franchise in one or more key markets could
adversely affect our business.
Our
cable
systems generally operate pursuant to franchises, permits and similar
authorizations issued by a state or local governmental authority controlling
the
public rights-of-way. Many franchises establish comprehensive facilities and
service requirements, as well as specific customer service standards and
monetary penalties for non-compliance. In many cases, franchises are terminable
if the franchisee fails to comply with significant provisions set forth in
the
franchise agreement governing system operations. Franchises are generally
granted for fixed terms and must be periodically renewed. Local franchising
authorities may resist granting a renewal if either past performance or the
prospective operating proposal is considered inadequate. Franchise authorities
often demand concessions or other commitments as a condition to renewal. In
some
instances, franchises have not been renewed at expiration, and we have operated
and are operating under either temporary operating agreements or without a
license while negotiating renewal terms with the local franchising authorities.
Approximately 11% of our franchises, covering approximately 12% of our analog
video customers, were expired as of March 31, 2006. Approximately 6% of
additional franchises, covering approximately an additional 7% of our analog
video customers, will expire on or before December 31, 2006, if not renewed
prior to expiration.
We
cannot
assure you that we will be able to comply with all significant provisions of
our
franchise agreements and certain of our franchisors have from time to time
alleged that we have not complied with these agreements. Additionally, although
historically we have renewed our franchises without incurring significant costs,
we cannot assure you that we will be able to renew, or to renew as favorably,
our franchises in the future. A termination of or a sustained failure to renew
a
franchise in one or more key markets could adversely affect our business in
the
affected geographic area.
36
Our
cable systems are operated under franchises that are non-exclusive. Accordingly,
local franchising authorities can grant additional franchises and create
competition in market areas where none existed previously, resulting in
overbuilds, which could adversely affect results of
operations.
Our
cable
systems are operated under non-exclusive franchises granted by local franchising
authorities. Consequently, local franchising authorities can grant additional
franchises to competitors in the same geographic area or operate their own
cable
systems. In addition, certain telephone companies are seeking authority to
operate in local communities without first obtaining a local franchise. As
a
result, competing operators may build systems in areas in which we hold
franchises. In some cases municipal utilities may legally compete with us
without obtaining a franchise from the local franchising authority.
Different
legislative proposals have been introduced in the United States Congress and
in
some state legislatures that would greatly streamline cable franchising. This
legislation is intended to facilitate entry by new competitors, particularly
local telephone companies. Such legislation has passed in at least four states
in which we have operations and one of these newly enacted statutes is subject
to court challenge. Although various legislative proposals provide some
regulatory relief for incumbent cable operators, these proposals are generally
viewed as being more favorable to new entrants due to a number of varying
factors including efforts to withhold streamlined cable franchising from
incumbents until after the expiration of their existing franchises. To the
extent incumbent cable operators are not able to avail themselves of this
streamlined franchising process, such operators may continue to be subject
to
more onerous franchise requirements at the local level than new entrants. The
Federal Communications Commission ("FCC'') recently initiated a proceeding
to
determine whether local franchising authorities are impeding the deployment
of
competitive cable services through unreasonable franchising requirements and
whether such impediments should be preempted. At this time, we are not able
to
determine what impact such proceeding may have on us.
The
existence of more than one cable system operating in the same territory is
referred to as an overbuild. These overbuilds could adversely affect our growth,
financial condition and results of operations by creating or increasing
competition. As of March 31, 2006, we are aware of overbuild situations
impacting approximately 6% of our estimated homes passed, and potential
overbuild situations in areas servicing approximately an additional 4% of our
estimated homes passed. Additional overbuild situations may occur in other
systems.
Local
franchise authorities have the ability to impose additional regulatory
constraints on our business, which could further increase our
expenses.
In
addition to the franchise agreement, cable authorities in some jurisdictions
have adopted cable regulatory ordinances that further regulate the operation
of
cable systems. This additional regulation increases the cost of operating our
business. We cannot assure you that the local franchising authorities will
not
impose new and more restrictive requirements. Local franchising authorities
also
have the power to reduce rates and order refunds on the rates charged for basic
services.
Further
regulation of the cable industry could cause us to delay or cancel service
or
programming enhancements or impair our ability to raise rates to cover our
increasing costs, resulting in increased losses.
Currently,
rate regulation is strictly limited to the basic service tier and associated
equipment and installation activities. However, the FCC and the U.S. Congress
continue to be concerned that cable rate increases are exceeding inflation.
It
is possible that either the FCC or the U.S. Congress will again restrict the
ability of cable system operators to implement rate increases. Should this
occur, it would impede our ability to raise our rates. If we are unable to
raise
our rates in response to increasing costs, our losses would increase.
There
has
been considerable legislative and regulatory interest in requiring cable
operators to offer historically bundled programming services on an á la carte
basis or to at least offer a separately available child-friendly “Family Tier.”
It is possible that new marketing restrictions could be adopted in the future.
Such restrictions could adversely affect our operations.
Actions
by pole owners might subject us to significantly increased pole attachment
costs.
Pole
attachments are cable wires that are attached to poles. Cable system attachments
to public utility poles historically have been regulated at the federal or
state
level, generally resulting in favorable pole attachment rates for
37
attachments
used to provide cable service. The FCC clarified that a cable operator’s
favorable pole rates are not endangered by the provision of Internet access,
and
that approach ultimately was upheld by the Supreme Court of the United States.
Despite the existing regulatory regime, utility pole owners in many areas are
attempting to raise pole attachment fees and impose additional costs on cable
operators and others. In addition, the favorable pole attachment rates afforded
cable operators under federal law can be increased by utility companies if
the
operator provides telecommunications services, as well as cable service, over
cable wires attached to utility poles. Any significant increased costs could
have a material adverse impact on our profitability and discourage system
upgrades and the introduction of new products and services.
We
may be required to provide access to our networks to other Internet service
providers, which could significantly increase our competition and adversely
affect our ability to provide new products and
services.
A
number
of companies, including independent Internet service providers, or ISPs, have
requested local authorities and the FCC to require cable operators to provide
non-discriminatory access to cable’s broadband infrastructure, so that these
companies may deliver Internet services directly to customers over cable
facilities. In a June 2005 ruling, commonly referred to as Brand
X,
the
Supreme Court upheld an FCC decision (and overruled a conflicting Ninth Circuit
opinion) making it much less likely that any nondiscriminatory “open access”
requirements (which are generally associated with common carrier regulation
of
“telecommunications services”) will be imposed on the cable industry by local,
state or federal authorities. The Supreme Court held that the FCC was correct
in
classifying cable provided Internet service as an “information service,” rather
than a “telecommunications service.” This favorable regulatory classification
limits the ability of various governmental authorities to impose open access
requirements on cable-provided Internet service. Given how recently Brand
X
was
decided, however, the nature of any legislative or regulatory response remains
uncertain. The imposition of open access requirements could materially affect
our business.
If
we
were required to allocate a portion of our bandwidth capacity to other Internet
service providers, we believe that it would impair our ability to use our
bandwidth in ways that would generate maximum revenues.
Changes
in channel carriage regulations could impose significant additional costs on
us.
Cable
operators also face significant regulation of their channel carriage. They
currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access programming,
and unaffiliated commercial leased access programming. This carriage burden
could increase in the future, particularly if cable systems were required to
carry both the analog and digital versions of local broadcast signals (dual
carriage) or to carry multiple program streams included with a single digital
broadcast transmission (multicast carriage). Additional government-mandated
broadcast carriage obligations could disrupt existing programming commitments,
interfere with our preferred use of limited channel capacity and limit our
ability to offer services that would maximize customer appeal and revenue
potential. Although the FCC issued a decision in February 2005, confirming
an
earlier ruling against mandating either dual carriage or multicast carriage,
that decision has been appealed. In addition, the FCC could reverse its own
ruling or Congress could legislate additional carriage obligations.
Offering
voice communications service may subject us to additional regulatory burdens,
causing us to incur additional costs.
In
2002,
we began to offer voice communications services on a limited basis over our
broadband network. We continue to explore development and deployment of Voice
over Internet Protocol or VoIP services. The regulatory requirements applicable
to VoIP service are unclear although the FCC has declared that certain VoIP
services are not subject to traditional state public utility regulation. The
full extent of the FCC preemption of VoIP services is not yet clear. Expanding
our offering of these services may require us to obtain certain authorizations,
including federal, state and local licenses. We may not be able to obtain such
authorizations in a timely manner, or conditions could be imposed upon such
licenses or authorizations that may not be favorable to us. Furthermore,
telecommunications companies generally are subject to significant regulation,
including payments to the Federal Universal Service Fund and the intercarrier
compensation regime. In addition, pole attachment rates are higher for providers
of telecommunications services than for providers of cable service. If there
were to be a final legal determination by the FCC, a state Public Utility
Commission, or appropriate court that VoIP services are subject to these higher
rates, our pole attachment costs could increase significantly, which could
adversely affect our financial condition and results of operations.
38
Item
5. Other
Information.
At
its
meeting held on February 7, 2006, the Board of Directors of Charter approved
the
metrics for the 2006 Executive Bonus Plan participants. A description of the
specific performance metrics and bonus target is attached hereto as Exhibit
10.2.
The
index
to the exhibits begins on page 41 of this quarterly report.
39
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, CCH
II,
LLC and CCH II Capital Corp. have duly caused this quarterly report to be signed
on their behalf by the undersigned, thereunto duly authorized.
CCH
II,
LLC
Registrant
By:
CHARTER COMMUNICATIONS, INC., Sole Manager
Dated:
May 12, 2006
By:
/s/
Kevin D. Howard
Name:
Kevin D. Howard
Title:
Vice
President and
Chief
Accounting Officer
CCH
II
CAPITAL CORP.
Registrant
Dated:
May 12, 2006
By:
/s/
Kevin D. Howard
Name:
Kevin D. Howard
Title:
Vice
President and
Chief
Accounting Officer
40
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Exhibit
Number
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Description
of Document
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2.1
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Purchase
Agreement dated as of January 26, 2006, by and between CCH II, LLC,
CCH II
Capital Corp and J.P. Morgan Securities, Inc as Representative of
several
Purchasers for $450,000,000 10.25% Senior Notes Due 2010 (incorporated
by
reference to Exhibit 10.3 to the current report on Form 8-K of Charter
Communications, Inc. filed on January 27, 2006 (File No.
000-27927)).
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2.2
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Asset
Purchase Agreement, dated February 27, 2006, by and between Charter
Communications Operating, LLC and Cebridge Acquisition Co., LLC
(incorporated
by reference to Exhibit 2.2 to the quarterly report on Form 10-Q
of
Charter Communications, Inc. filed on May 2, 2006 (File No.
000-27927)).
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3.1
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Certificate
of Formation of CCH II, LLC (incorporated by reference to Exhibit 3.1
to Amendment No. 1 to the registration statement on Form S-4 of CCH
II, LLC and CCH II Capital Corporation filed on March 24, 2004 (File
No.
333-111423)).
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3.2
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Amended
and Restated Limited Liability Company Agreement of CCH II, LLC,
dated as
of July 10, 2003 (incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the registration statement on Form S-4 of CCH II,
LLC and CCH II Capital Corporation filed on March 24, 2004 (File
No.
333-111423)).
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3.3
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Certificate
of Incorporation of CCH II Capital Corporation (incorporated by reference
to Exhibit 3.3 to Amendment No. 1 to the registration statement on
Form S-4 of CCH II, LLC and CCH II Capital Corporation filed on March
24, 2004 (File No. 333-111423)).
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3.4
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Amended
and Reinstated By-laws of CCH II Capital Corporation (incorporated
by
reference to Exhibit 3.4 to Amendment No. 1 to the registration
statement on Form S-4 of CCH II, LLC and CCH II Capital Corporation
filed on March 24, 2004 (File No. 333-111423)).
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10.1(a)
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Senior
Bridge Loan Agreement dated as of October 17, 2005 by and among CCO
Holdings, LLC, CCO Holdings Capital Corp., certain lenders, JPMorgan
Chase
Bank, N.A., as Administrative Agent, J.P. Morgan Securities Inc.
and
Credit Suisse, Cayman Islands Branch, as joint lead arrangers and
joint
bookrunners, and Deutsche Bank Securities Inc., as documentation
agent.
(incorporated by reference to Exhibit 99.1 to the current report
on
Form 8-K of Charter Communications, Inc. filed on October 19,
2005 (File No. 000-27927)).
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10.1(b)
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Waiver
and Amendment Agreement to the Senior Bridge Loan Agreement dated
as of
January 26, 2006 by and among CCO Holdings, LLC, CCO Holdings Capital
Corp., certain lenders, JPMorgan Chase Bank, N.A., as Administrative
Agent, J.P. Morgan Securities Inc. and Credit Suisse, Cayman Islands
Branch, as joint lead arrangers and joint bookrunners, and Deutsche
Bank
Securities Inc., as documentation agent (incorporated by reference
to
Exhibit 10.2 to the current report on Form 8-K of Charter
Communications, Inc. filed on January 27, 2006
(File No. 000-27927)).
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10.2+
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Description
of Charter Communications, Inc. 2006 Executive Bonus Plan (incorporated
by
reference to Exhibit 10.2 on the quarterly report on Form 10-Q of
Charter
Communications, Inc. filed May 2, 2006 (File No.
000-27927)).
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10.3+
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Retention
Agreement dated as of January 9, 2006, by and between Paul E. Martin
and Charter Communications, Inc. (incorporated by reference to
Exhibit 99.1 to the current report on Form 8-K of Charter
Communications, Inc. filed on January 10, 2006 (File
No. 000-27927)).
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10.4+
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Employment
Agreement dated as of January 20, 2006 by and between Jeffrey T.
Fisher
and Charter Communications, Inc. (incorporated by reference to Exhibit
10.1 to the current report on Form 8-K of Charter Communications,
Inc.
filed on January 27, 2006 (File No. 000-27927)).
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10.5+
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Employment
Agreement dated as of February 28, 2006 by and between Michael J.
Lovett
and Charter Communications, Inc. (incorporated by reference to Exhibit
99.2 to the current report on Form 8-K of Charter Communications,
Inc.
filed on March 3, 2006 (File No. 000-27927)).
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10.6+
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Separation
Agreement of Wayne H. Davis, dated as of March 23, 2006 (incorporated
by
reference to Exhibit 99.1 to the current report on Form 8-K of
Charter Communications, Inc. filed on April 6, 2006 (File No.
000-27927)).
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10.7+
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Consulting
Agreement of Wayne H. Davis, dated as of March 23, 2006 (incorporated
by
reference to Exhibit 99.2 to the current report on Form 8-K of Charter
Communications, Inc. filed on April 6, 2006 (File No.
000-27927)).
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41
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31.1*
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Certificate
of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
under
the Securities Exchange Act of 1934.
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31.2*
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Certificate
of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
under
the Securities Exchange Act of 1934.
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32.1*
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
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32.2*
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
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*
Document attached
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Management compensatory plan or arrangement
42
Exhibit
31.1
I,
Neil
Smit, certify that:
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1.
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I
have reviewed this Quarterly Report on Form 10-Q of CCH II, LLC and
CCH II Capital Corp.;
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2.
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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;
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3.
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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;
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4.
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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:
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(a)
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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;
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(b)
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[Reserved];
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(c)
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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
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(d)
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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; and
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5.
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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):
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(a)
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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
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(b)
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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.
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Date:
May
12, 2006
/s/
Neil Smit
Neil
Smit
President
and Chief Executive Officer
Exhibit
31.2
I,
Jeffrey T. Fisher, certify that:
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1.
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I
have reviewed this Quarterly Report on Form 10-Q of CCH II, LLC and
CCH II Capital Corp.;
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2.
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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;
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3.
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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;
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4.
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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:
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(a)
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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;
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(b)
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[Reserved];
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(c)
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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
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(d)
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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; and
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5.
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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):
|
|
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(a)
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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
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(b)
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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.
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Date:
May
12, 2006
/s/
Jeffrey T. Fisher
Jeffrey
T. Fisher
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 CCH II, LLC and CCH II
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, 2006 (the "Report") filed with the Securities and Exchange
Commission:
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fully
complies with the requirements of Section 13(a) of the Securities
Exchange
Act of 1934; and
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the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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/s/
Neil Smit
Neil
Smit
President
and Chief Executive Officer
May
12,
2006
Exhibit
32.2
CERTIFICATION
OF CHIEF FINANCIAL
OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL
STATEMENTS
I,
Jeffrey T. Fisher, the Chief Financial Officer of CCH II, LLC and CCH II 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,
2006 (the "Report") filed with the Securities and Exchange Commission:
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fully
complies with the requirements of Section 13(a) of the Securities
Exchange
Act of 1934; and
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the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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/s/
Jeffrey T. Fisher
Jeffrey
T. Fisher
Chief
Financial Officer
(Principal
Financial Officer)
May
12,
2006