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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM TO
COMMISSION FILE NUMBER: 333-77499
CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION*
(EXACT NAME OF REGISTRANT AS SPECIFIED IN THEIR CHARTERS)
DELAWARE 43-1843179
DELAWARE 43-1843177
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12444 POWERSCOURT DRIVE -- SUITE 100
ST. LOUIS, MISSOURI 63131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 965-0555
(REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the registrant of equity securities held by
non-affiliates of the registrants: There is no public trading market for the
equity securities of the Registrants.
Number of shares of common stock of Charter Communications Holding Capital
Corporation outstanding as of March 28, 2001: 100.
*Charter Communications Holdings Capital Corporation meets the conditions
set forth in General Instruction I(1)(a) and (b) to Form 10-K and is therefore
filing with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
FORM 10-K -- FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 4
Item 2. Properties.................................................. 27
Item 3. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 28
Item 6. Selected Financial Data..................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7.a Quantitative and Qualitative Disclosure about Market Risk... 50
Item 8. Financial Statements and Supplementary Data................. 51
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 51
Item 11. Executive Compensation...................................... 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 60
Item 13. Certain Relationships and Related Transactions.............. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 72
SIGNATURES............................................................ 84
This Annual Report on Form 10-K is for the year ended December 31, 2000.
This Annual Report modifies and supersedes documents filed prior to this Annual
Report. 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 Annual Report. In addition, information that we file with the SEC in the
future will automatically update and supersede information contained in this
Annual Report. In this Annual Report, "we," "us" and "our" refer to Charter
Communications Holdings, LLC and its subsidiaries.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report includes forward-looking statements regarding, among
other things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Many of the forward-looking statements contained in this Annual
Report may be identified by the use of forward-looking words such as "believe,"
"expect," "anticipate," "should," "planned," "will," "may," "intend,"
"estimate," and "potential," among others. Important factors that could cause
actual results to differ materially from the forward-looking statements we make
in this Annual Report are set forth in this Annual Report and in other reports
or documents that we file from time to time with the SEC and include, but are
not limited to:
- Our plans to offer advanced products and services;
- Our anticipated capital expenditures for our upgrades and new equipment
and facilities;
- Our beliefs regarding the effects of governmental regulation on our
business;
- Our ability to effectively compete in a highly competitive and changing
environment;
- Our ability to fund anticipated capital expenditures and any future
acquisitions; and
- Our ability to obtain equipment, inventory and programming as needed and
at a reasonable price.
All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by this cautionary statement.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Charter Communications Holdings, operating through its subsidiaries, is the
fourth largest operator of cable systems in the United States. Charter
Communications Holdings Capital Corporation is a wholly owned subsidiary of
Charter Holdings and was formed and exists solely as a co-issuer of our public
debt. Through our broadband network of coaxial and fiber optic cable, we provide
video, data, interactive and private business network services, to approximately
6.4 million customers in 40 states. All of our systems offer traditional analog
cable television. We also offer digital television, along with an array of
advanced products and services such as high-speed Internet access, interactive
video programming and video-on-demand, in an increasing number of our systems.
We continue to explore opportunities to offer telephony through our broadband
network. The introduction and roll-out of new products and services represents
an important step toward the realization of our Wired World(TM) vision, where
cable's ability to transmit voice, video and data at high speeds enables it to
serve as the primary platform for the delivery of new services to the home and
workplace.
We are wholly owned by our parent company, Charter Communications Holding
Company, LLC. Charter Communications, Inc. is a holding company whose principal
asset is an approximate 40% equity interest and a 100% voting interest in
Charter Communications Holding Company. Charter Communications, Inc.'s only
business is to act as the sole manager of Charter Communications Holding Company
and its subsidiaries, including us. As sole manager, Charter Communications,
Inc. controls the affairs of Charter Communications Holding Company and its
subsidiaries, including us. Certain of our subsidiaries commenced operations
under the "Charter Communications" name in 1994. Our principal executive offices
are located at 12444 Powerscourt Drive, Suite 100, St. Louis, Missouri 63131.
Our telephone number is (314) 965-0555. Our parent, Charter Communications,
Inc., has a web site accessible at http://www.charter.com. The information
posted on that web site is not incorporated into this Annual Report.
GENERAL BUSINESS DEVELOPMENTS IN 2000
In 2000, we focused on integrating the operations of our newly acquired
systems and improving the cable systems we acquired. In 16 acquisitions
completed in 1999 and 2000, we added approximately 3.9 million customers. These
acquisitions are identified in a chart included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
implemented core operating strategies to achieve our high standards for customer
satisfaction and financial and operating performance in each of the newly
acquired systems.
We also focused in 2000 on the upgrade of our cable systems to more quickly
provide advanced products and services and improve service reliability. Our
upgrade plan emphasizes higher bandwidth capacity and two-way communication
capability, as well as reduction of the number of headend control centers. As a
result of this rebuild effort, by year-end 2002, we expect that 93% of our
customers will be served by systems with bandwidth of 550 megahertz or more.
Complementing our system upgrade in 2000, we emphasized the roll-out of our
digital services, which we believe will serve as the platform for interactive
and other advanced services.
To finance our acquisitions and the upgrade of our systems, as well as to
pay off certain debt, we issued additional long-term debt, refinanced some of
our existing debt and received capital contributions from our parent.
We will continue to evaluate opportunities for new acquisitions and swaps
of our cable systems for systems of other cable operators. Our primary criterion
in considering these opportunities is the potential financial benefits we expect
to ultimately realize as a result of the acquisition or swap. We consider each
acquisition or swap in the context of our overall existing and planned
operations. In particular, we focus on the
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impact the acquisition or swap may have on our ability to enhance our operations
in existing markets or to develop major new markets for our operations.
ORGANIZATIONAL STRUCTURE
We are an indirect subsidiary of Charter Communications, Inc. Charter
Communications, Inc.'s principal asset is an approximate 40% equity interest and
a 100% voting interest in our direct 100% parent, Charter Communications Holding
Company, LLC. Charter Communications, Inc. provides management services to
Charter Communications Holding Company and its subsidiaries, including us. As
sole manager, Charter Communications, Inc. controls our affairs and those of our
subsidiaries.
CHARTER COMMUNICATIONS, INC. Paul G. Allen owns approximately 3.8% of the
outstanding capital stock of Charter Communications, Inc. and controls
approximately 93.5% of the voting power of Charter Communications, Inc.'s
capital stock. The remaining equity interests and voting power are held by the
public. Mr. Allen's voting control arises primarily from his ownership of
Charter Communications, Inc.'s high vote Class B common stock, which gives him
voting rights that reflect investments by his affiliates (Charter Investment,
Inc. and Vulcan Cable III Inc.) in Charter Communications, Inc.'s direct
subsidiary, Charter Communications Holding Company.
The following table sets forth information as of March 15, 2001 with
respect to the outstanding shares of common stock of Charter Communications,
Inc. and pro forma for the exchange of membership units in two of its
subsidiaries (Charter Communications Holding Company, LLC and CC VIII, LLC),
which are exchangeable for shares of Charter Communications, Inc. Class A common
stock on a one-for-one basis at any time.
PRO FORMA FOR EXCHANGE OF
AS OF MARCH 15, 2001 EQUITY IN SUBSIDIARIES
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NUMBER OF PERCENT OF NUMBER OF PERCENT OF
SHARES TOTAL SHARES SHARES SHARES
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
----------- ------------ ----------- -----------
Class A Common Stock.................... 233,745,869 99.98% 233,718,422 39.14%
Class B Common Stock.................... 50,000 .02 50,000 .01
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Total Common Stock Outstanding..... 233,795,869 100.00% 233,768,422 39.15%
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Exchangeable Equity in Subsidiaries:
Charter Investment, Inc.(a)........... 217,585,246 36.44
Vulcan Cable III Inc.(a).............. 106,715,233 17.88
Sellers of Bresnan cable systems(b)... 39,011,744 6.53
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Total Pro Forma Common Stock
Outstanding...................... 597,080,645 100.00%
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(a) Assumes exchange of units in Charter Communications Holding Company held by
such entity. Both Charter Investment, Inc. and Vulcan Cable III, Inc. are
controlled by Paul G. Allen.
(b) Assumes exchange of membership units in Charter Communications Holding
Company and CC VIII, LLC held by such persons.
VULCAN CABLE III INC. Vulcan Cable III has an 18.6% equity interest and no
voting rights in Charter Communications Holding Company. Vulcan Cable III's
membership units in Charter Communication Holding Company are exchangeable for
shares of Charter Communications, Inc. Class B common stock on a one-for-one
basis at any time. Mr. Allen owns 100% of the outstanding stock of Vulcan Cable
III.
CHARTER INVESTMENT, INC. Charter Investment, Inc. has a 38.0% equity
interest and no voting rights in Charter Communications Holding Company. Charter
Investment's membership units in Charter Communications Holding Company are
exchangeable for shares of Charter Communications, Inc. Class B common stock at
any time on a one-for-one basis. Mr. Allen owns approximately 96.8% of the
outstanding capital stock
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of Charter Investment. The remaining 3.2% equity is beneficially owned by our
founders, Jerald L. Kent, Howard L. Wood and Barry L. Babcock.
SELLERS OF BRESNAN CABLE SYSTEMS. Upon the closing of the Bresnan
acquisition, some of the sellers received a portion of their purchase price in
the form of equity interests in subsidiaries of Charter Communications, Inc.
rather than in cash. The common membership units in Charter Communications
Holding Company and the preferred membership units in CC VIII, LLC which were
issued to these sellers are exchangeable for shares of Charter Communications,
Inc. Class A common stock on a one-for-one basis at any time.
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications
Holding Company is the direct 100% parent of Charter Holdings. Charter
Communications Holding Company is owned as follows:
EQUITY VOTING
OWNERSHIP POWER
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Charter Communications, Inc. ............................. 40.8% 100%
Vulcan Cable III Inc. .................................... 18.6% --
Charter Investment, Inc. ................................. 38.0% --
Sellers of Bresnan cable systems.......................... 2.6% --
----- ---
100.0% 100%
===== ===
CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer of
publicly held Charter Holdings notes. Charter Holdings owns 100% of Charter
Communications Holdings Capital Corporation, the co-issuer of these notes, and
owns the subsidiaries that conduct all of our operations, including the Charter,
CC V, CC VI, CC VII and CC VIII Companies described below.
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Capital is a
wholly owned subsidiary of Charter Holdings and a co-issuer of the notes
described in the preceding paragraph.
OPERATING SUBSIDIARIES. These companies are subsidiaries of Charter
Holdings and own or operate all of our cable systems. There are separate credit
facilities for each of four groups of these operating subsidiaries. As indicated
below, these groups include systems acquired in the acquisitions listed in "Item
13. Management's Discussion and Analysis of Financial Condition and Results of
Operations." These groups consist of:
- the Charter Companies, including Charter Operating and its subsidiaries,
which own or operate all of the cable systems formerly operated by
Charter Investment, Inc. under the "Charter Communications" name, and the
cable systems acquired in the following 1999 and 2000 transactions:
Marcus, American Cable, Greater Media, Helicon, Vista, Rifkin, South
Miami, Farmington and Capital Cable. The Charter Companies also include
the issuers of outstanding publicly held notes of a subsidiary acquired
in the Renaissance acquisition;
- the CC V and CC VIII Companies, which own or operate all of the cable
systems acquired in the Avalon, Interlake and Bresnan acquisitions, and
include co-issuers of outstanding publicly held notes;
- the CC VI Companies, which own or operate all of the cable systems
acquired in the Fanch and Kalamazoo acquisitions; and
- the CC VII Companies, which own or operate all of the cable systems
acquired in the Falcon acquisition.
ACQUISITIONS COMPLETED IN 2000
BRESNAN. In February 2000, Charter Communications Holding Company and
Charter Holdings purchased Bresnan Communications Company Limited Partnership
for a total purchase price of approximately $3.1 billion, consisting of
approximately $1.1 billion in cash, $1.0 billion in membership units in Charter
Communications Holding Company and CC VIII, our indirect subsidiary, and $963.3
million in assumed debt. Charter Communications Holding Company transferred its
ownership interest to us. The cable
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systems acquired in the Bresnan acquisition are located in Michigan, Minnesota,
Wisconsin and Nebraska and served approximately 697,400 customers as of December
31, 2000. For the year ended December 31, 2000, these systems had revenues of
approximately $334.7 million.
KALAMAZOO. In September 2000, Charter Communications, Inc. completed a
stock-for-stock merger with Cablevision of Michigan, Inc., the owner of a cable
system in Kalamazoo, Michigan in which Charter Communications, Inc. issued
shares of its Class A common stock valued at $170.6 million. After the merger,
Charter Communications, Inc. contributed 100% of the equity interests it
acquired to Charter Communications Holding Company in exchange for membership
units. Charter Communications Holding Company in turn contributed these equity
interests to us and we in turn contributed the equity interests to a subsidiary.
The Kalamazoo system served approximately 52,100 customers as of December 31,
2000 and had revenues of approximately $21.5 million for the year ended December
31, 2000.
OTHER ACQUISITIONS. In 2000, we completed several other acquisitions for
an aggregate purchase price of $88 million in cash. These systems served
approximately 34,200 customers as of December 31, 2000 and had revenues of
approximately $14.0 million for the year ended December 31, 2000.
PENDING AT&T TRANSACTIONS
In February 2001, Charter Communications, Inc. entered into several
agreements with AT&T Broadband, LLC involving several strategic cable system
transactions that will result in a net addition of approximately 512,000
customers for the Charter cable systems. In the pending AT&T transactions,
Charter Communications, Inc. expects to acquire cable systems from AT&T
Broadband serving approximately 574,000 customers in Missouri, Alabama, Nevada
and California for a total of $1.79 billion. It is expected that the acquired
systems will be contributed by Charter Communications, Inc. to us immediately
after closing. A portion of the purchase price will consist of Charter cable
systems valued at $249 million serving approximately 62,000 customers in
Florida. Of the balance of the purchase price, up to $501.5 million will be paid
in shares of Charter Communications, Inc. Class A common stock and the remainder
will be paid in cash. Charter Holdings and Charter Capital have a commitment for
a bridge loan from Morgan Stanley Senior Funding, Inc. and Goldman Sachs Credit
Partners LP for temporary financing of the cash portion of the purchase price.
Charter Communications, Inc. expects to obtain permanent financing through one
or more debt or equity financing transactions or a combination thereof. The
acquisition transactions are expected to close in the second and/or third
quarters of 2001, subject to certain closing conditions and regulatory review.
Unless otherwise stated in this Annual Report, the operating and financial
data provided do not include the effect of the pending AT&T transactions.
BUSINESS STRATEGY
Our ultimate objective is to increase our customer base and the amount of
cash flow per customer. To achieve this objective, we are pursuing the following
strategies:
BUILD AND OPERATE A TECHNOLOGICALLY ADVANCED BROADBAND NETWORK. We are
upgrading the technical quality and capacity of our existing systems. We will
build out new systems to a minimum bandwidth of 550 megahertz or greater, which
will allow us to:
- offer advanced products and services, such as digital television,
high-speed Internet access and other interactive services;
- increase channel capacity up to 82 analog channels, and add even more
channels and services when our bandwidth is used for digital signal
transmission; and
- permit two-way communication, so that Internet access does not require a
separate telephone line and our systems can provide telephony services.
By year-end 2002, when we anticipate that the upgrade of our existing
systems will be substantially complete, we expect that approximately 93% of our
customers will be served by cable systems with at least 550
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megahertz bandwidth capacity, 88% of our customers will be served by cable
systems with at least 750 megahertz bandwidth capacity and 89% of our customers
will have two-way communication capability.
It is anticipated that upon completion of our upgrade, approximately 87% of
our customers will be served by headends serving at least 10,000 customers.
Headends are the control centers of a cable television system, where incoming
signals are amplified, converted, processed and combined for transmission to the
customer. Reducing the number of headends will reduce headend equipment and
maintenance expenditures and, together with our other upgrades, will provide
enhanced picture quality and system reliability.
In 2001, we plan to complete a national network operations center to
monitor and control all aspects of our network to enhance the reliability of our
upgraded systems and support our high-speed Internet access and other advanced
products.
As we complete our planned upgrade and build out new systems, we will be
well positioned to migrate our customers to the digital platform and deploy new
technologically advanced products and services as they are developed.
OFFER AN ARRAY OF ADVANCED PRODUCTS AND SERVICES. We offer an array of
advanced products and services to our customers, consistent with our Wired
World(TM) vision. Using digital technology, we offer additional channels on our
standard service packages, create new service packages, introduce multiple
packages of premium services, increase the number of pay-per-view channels, and
offer programming of local interest. We also offer digital music services and
interactive program guides that are comprehensive guides to television program
listings that can be accessed by channel, time, date or programming type. In
addition, we offer interactive video programming, high-speed Internet access,
including Internet access over the television, and video-on-demand. We also are
currently exploring opportunities for telephony. We have entered into the Digeo
Broadband joint venture to deliver high-speed Internet television portal
services to our customers.
FOCUS ON THE CUSTOMER. To maximize customer satisfaction and loyalty, we
operate our business to provide reliable, high-quality products and services and
superior customer care. We tailor our product and service packages to suit the
diverse communities we serve and satisfy local preferences for programming and
value. We maintain a strong management presence at the local system level to
improve our customer service and respond to local customer needs. We have
launched one state-of-the-art regional customer contact center that provides
customers with 24 x 7 access to specialized customer care representatives. Our
objective is to have a customer contact center serving each of our 12 operating
regions. We believe that our customer service efforts have contributed to our
superior customer growth and will strengthen the Charter brand name and increase
acceptance of our new advanced products and services.
EMPLOY INNOVATIVE MARKETING. We have developed and successfully
implemented a variety of innovative marketing techniques to attract new
customers, win back former customers, and increase revenue per customer. Our
marketing efforts focus on offering Charter-branded entertainment and
information services that provide value, choice, convenience and quality to our
customers. We offer our expanded product and service offerings on a stand-alone
basis and in varied packages that result in an attractive price/value
relationship. We utilize database marketing to target audiences through direct
mail and telemarketing. In addition, we promote our services in media
advertising, by door-to-door selling and through e-marketing. We are
implementing a retail sales strategy in coordination with consumer electronics
retailers and other retailers. In addition, we have a retention and loyalty
program for retaining customers that includes televised advertising to reinforce
the link between quality service and the Charter brand name.
PRODUCTS AND SERVICES
We offer our customers traditional cable television services and
programming as well as new and advanced high bandwidth services such as digital
television and high-speed Internet access. We plan to continue to enhance and
upgrade these services by adding new programming and other advanced products and
services as they are developed. In 2001, we plan to focus on our digital
television and high-speed Internet services, both of which are increasingly
desired by customers. We will also increase the number of markets where we offer
video-on-demand services.
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TRADITIONAL CABLE TELEVISION SERVICES. Customers subscribing to both
"basic" and "expanded basic" service generally receive a line-up of between 33
and 82 channels of television programming, depending on the bandwidth capacity
of the system. Customers who pay additional amounts can also subscribe to
additional channels, either individually or in packages, as add-ons to the basic
channels. We tailor both our basic channel line-up and our additional channel
offerings to each system according to demographics, programming preferences,
competition, price sensitivity and local regulation.
Our traditional cable television service offerings include the following:
- BASIC CABLE. All of our customers receive a package of basic
programming, which generally consists of local broadcast television,
local community programming, including governmental and public access,
and limited satellite-delivered or non-broadcast channels (such as
C-Span, religious and home shopping).
- EXPANDED BASIC CABLE. This expanded programming level includes a package
of satellite-delivered or non-broadcast channels (such as ESPN, CNN and
Lifetime Television) in addition to the basic channel line-up.
- PREMIUM CHANNELS. These channels provide commercial-free movies, sports
and other special event entertainment programming. Home Box Office,
Cinemax, Showtime, the Movie Channel, Starz and Encore are examples of
premium channels. Although we offer subscriptions to premium channels on
an individual basis, we are offering an increasing number of premium
channel packages and are bundling premium channels with our advanced
services.
- PAY-PER-VIEW CHANNELS. These channels allow customers to pay on a per
event basis to view a single showing of a recently released movie, a
one-time special sporting event or concert on a commercial-free basis.
ADVANCED PRODUCTS AND SERVICES. Cable's high bandwidth is a key factor in
the successful delivery of advanced products and services. A variety of emerging
technologies and increasing Internet usage by our customer base have presented
us with substantial opportunities to expand our sources of revenue. In an
increasing number of our systems, we now offer a variety of advanced products
and services, including:
- digital television and its related enhancements, such as an interactive
programming guide;
- high-speed Internet access via cable modems;
- television-based Internet access, which allows customers to access the
Internet through the use of our two-way cable plant without the need for
a personal computer;
- video-on-demand;
- interactive services, such as Wink, which adds interactivity and
electronic commerce opportunities to traditional programming and
advertising; and
- private network services such as voice and data transmission services to
a network of interconnected locations of a single customer.
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The following table summarizes our customer statistics for our analog and
digital cable and advanced products and services. The pro forma statistics as of
December 31, 1999 reflect all acquisitions closed since that date as if such
acquisitions occurred on January 1, 1999:
AS OF AND FOR THE YEAR ENDED
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ACTUAL PRO FORMA
DECEMBER 31, DECEMBER 31,
2000 1999
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VIDEO SERVICES
Basic cable (Analog signal)
Homes passed(a).................................. 10,225,000 9,970,000
Basic customers(b)............................... 6,350,900 6,193,700
Penetration(c)................................... 62.1% 62.1%
Digital cable
Homes passed(a).................................. 8,793,000 4,675,000
Digital customers................................ 1,069,500 155,400
Penetration(c)................................... 12.2% 3.3%
Number of digital terminals deployed............. 1,336,900 176,600
INTERNET AND OTHER DATA SERVICES
Cable modem high-speed Internet access
Homes passed(a).................................. 5,550,800 4,422,000
Cable modem customers............................ 252,400 84,400
Penetration...................................... 4.5% 1.9%
Television-based Internet access
Homes passed(a).................................. 472,100 429,000
TV Internet customers............................ 9,700 7,100
Penetration...................................... 2.1% 1.7%
INTERACTIVE TELEVISION (WINK)
Homes passed(a).................................. 3,271,430 983,239
Interactive TV customers......................... 304,362 39,477
PRO FORMA FOR THE YEAR ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Average monthly pro forma revenue per basic
customer(b)(d)................................... $43.31 $39.70
Average monthly pro forma operating cash flow per
basic customer(b)(e)............................. $20.52 $17.67
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(a) Homes passed are the number of living units, such as single residence homes,
apartments and condominium units, passed by the cable television
distribution network in a given cable system service area to which we offer
the named service.
(b) Basic customers are customers who receive basic cable service. All of our
customers, including those receiving digital or advanced services, receive
basic cable service.
(c) Penetration represents customers as a percentage of homes passed.
(d) Average pro forma monthly revenue per basic customer represents pro forma
revenues from all sources, adjusted to illustrate the effect of all 1999 and
2000 acquisitions as if they had closed on January 1, 1999, divided by
twelve, divided by the number of basic customers at the end of the year
(actual for December 31, 2000 and pro forma for December 31, 1999,
reflecting all acquisitions closed since this date).
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(e) Average pro forma monthly operating cash flow per basic customer represents
operating cash flow (defined as revenues less the sum of operating, general
and administrative expenses and corporate expense charges-related party),
adjusted to illustrate the effect of all 1999 and 2000 acquisitions as if
they had closed on January 1, 1999, divided by twelve, divided by the number
of basic customers at the end of the year (actual for December 31, 2000 and
pro forma for December 31, 1999, reflecting all acquisitions closed since
this date).
DIGITAL TELEVISION. As part of our systems upgrade, we are installing
headend equipment capable of delivering digitally encoded cable transmissions to
a two-way digital-capable set-top terminal in the customer's home. This digital
connection offers significant advantages. For example, we can compress the
digital signal to allow the transmission of up to twelve digital channels in the
bandwidth normally used by one analog channel. The increased channel capacity
will allow us to increase both programming and service offerings, including
offering video-on-demand to pay-per-view customers.
We offer digital service to our customers in several different service
combination packages. All digital packages include a digital set-top terminal,
an interactive electronic programming guide, 45 channels of CD quality digital
music, an expanded menu of pay-per-view channels and at least thirty additional
digital channels. Certain digital packages also offer customers one or more
premium channels of their choice with "multiplexes." Multiplexes give customers
access to several different versions of the same premium channel which are
varied as to time of broadcast (such as east and west coast time slots) or
programming content theme (such as westerns or romance). Other digital packages
bundle digital television with other advanced services, such as Internet access.
We expect to increase our digital customers to approximately two million
and our digital penetration to over 30% of digital homes passed by December 31,
2001.
CABLE MODEM-BASED HIGH-SPEED INTERNET ACCESS. We offer high-speed data and
Internet access to our residential customers primarily via cable modems attached
to personal computers, at speeds of up to approximately 50 times the speed of a
conventional telephone modem. By December 31, 2001, we expect to have
approximately 500,000 cable-modem high-speed Internet customers.
We generally offer high-speed Internet access services under the Charter
Pipeline(TM) brand. In some of our markets, however, our cable modem and
Internet access service is a co-branded service with an Internet service
provider.
TRADITIONAL DIAL-UP MODEM INTERNET ACCESS. Traditional dial-up Internet
access is available upon customer request in a limited number of our markets
where two-way cable modem Internet access is not yet available.
TV-BASED INTERNET ACCESS. We also have agreements with WorldGate, ICTV and
Digeo to offer our residential customers high-speed Internet access over the
television.
Our WorldGate television-based Internet access service offers easy,
low-cost Internet access to customers at connection speeds ranging up to 128
kilobits per second. This service, with its user-friendly interface, appeals to
first-time Internet users and does not require the use of a PC, an existing or
additional telephone line, or any additional equipment. The Internet domain name
of the customers who use this service is "Charter.net." This allows customers to
switch or expand to our other Internet services without a change of e-mail
address.
During 2001, we expect to offer Digeo Broadband's television-based Internet
access service in several markets. The Digeo product is designed to blend the
power of the Internet with the convenience of the television. Through the use of
an advanced digital set-top terminal, customers will be able to access Internet-
based streaming media on the television, including both local and national news,
sports and entertainment. The Internet domain name of customers using this
service will be "Charter TV." The Digeo product is a "portal," which is an
Internet web site that serves as a user's initial point of entry to the World
Wide Web. By offering selected content, services and links to other web sites, a
portal guides and directs users through the
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World Wide Web. In addition, the portal generates revenues from advertising on
its own web pages and by sharing revenues generated by linked or featured web
sites.
We plan to use Digeo as our television-based portal for an initial six-year
period. A Charter subsidiary and an affiliate of Mr. Allen own equity interests
in Digeo. See "Item 13. Certain Relationships and Related
Transactions -- Business Relationships."
VIDEO-ON-DEMAND. In 2000, we began the roll-out of video-on-demand (VOD)
service to digital customers in some of our markets. With VOD service, customers
can access hundreds of movies and other programming at any time, with digital
picture quality. VOD allows full VCR functionality, including the ability to
pause, rewind and fast-forward programs. Customers can also stop a program and
resume watching it several hours later during the rental period. In addition,
the VOD programming available in a particular market can be customized for
market-based or customer preferences and local interest. For example, foreign
language or other local programming could be offered in markets where such
programming is likely to appeal to customers. Generally, customers pay for VOD
(such as movies) on a per-selection basis. Some VOD programming is also
available on a category basis (such as children's programming) for a single
monthly fee.
At December 31, 2000, VOD was available to approximately 170,000 homes in
our Los Angeles and Atlanta markets with approximately 450 titles available to
customers. We expect VOD to be available to approximately 2.2 million homes
passed by the end of 2001. In systems where VOD is available, it is included as
a standard feature of our digital service packages. We utilize DIVA Systems
Corporation, a company providing interactive VOD products and services to the
cable industry, to provide us with hardware, software, programming and
operational support.
INTERACTIVE VIDEO PROGRAMMING. We provide interactive programming using
technology developed by Wink Communications, Inc. The Wink technology embeds
interactive features, such as additional information and statistics about a
television program or the option to order an advertised product, into
programming and advertisements. A customer with a Wink-enabled set-top terminal
and a Wink-enabled cable provider sees an icon flash on the screen when
additional Wink features are available to enhance a program or advertisement. By
pressing the select button on a standard remote control, a viewer of a
Wink-enhanced program is able to access additional information regarding such
program, including, for example, information on prior episodes or the program's
characters. A viewer watching an advertisement would be able to access
additional information regarding the advertised product and may also be able to
utilize the two-way transmission features to order a product. We have bundled
Wink's services with our traditional cable services in both our advanced analog
and digital platforms. Wink's services are provided free of charge to the
customer. A company controlled by Mr. Allen has a 3.2% equity interest in Wink.
Various programming networks, including CNN, NBC, ESPN, HBO, Showtime,
Lifetime, VH1, the Weather Channel and Nickelodeon, together currently produce
over 2,000 hours of Wink-enhanced programming per week. Under certain
revenue-sharing arrangements, we will modify our headend technology to allow
Wink-enabled programming to be offered on our systems. We receive fees from Wink
each time one of our customers uses Wink to request certain additional
information or order advertised products. Our customers average approximately
246,000 clicks per week on Wink icons.
PRIVATE BUSINESS NETWORKS. During 2000, we established Charter Business
Networks as a separate division to offer integrated network solutions for data,
video, Internet, and private voice communications to commercial and
institutional customers in certain of our markets. These solutions include
virtual local area and wide area networks with bandwidth and Internet access
capacity based on customer needs, supported by remote monitoring.
TELEPHONY/VOICE SERVICES. We expect to be able to offer cable telephony
services by the end of 2003 in selected markets using our systems' direct,
two-way connections to homes and other buildings. We are exploring technologies
using Internet protocol telephony to transmit digital voice signals over our
systems. We have already begun an Internet protocol (IP) telephony trial in
Wisconsin, and expect to launch a second trial in St. Louis in 2001. We have
marketed telephony services as a competitive access provider in the state of
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Wisconsin through one of our subsidiaries, and are currently looking to expand
our services as a competitive access provider into other states.
OTHER NEW BUSINESS INITIATIVES. We are seeking to provide our customers in
2001 with advanced digital set-top terminals that include digital video
recording capabilities (commonly referred to as "DVR"). Built-in DVR capability
in the set-top terminal will enable customers to store video, audio and Internet
content. We are also exploring deployment of wireless networking technology for
our cable modem customers.
SALE OF LOCAL ADVERTISING. We receive revenue from the sale of local
advertising on satellite-delivered networks such as MTV, CNN, ESPN. In any
particular system, we generally insert local advertising on a minimum of twelve
networks, and have covered up to 40 channels. Our system rebuild and additional
digital services launches have increased the number of channels, and made it
possible to insert local advertising.
HOME SHOPPING. In 2000, we also received revenues from channels devoted
exclusively to home shopping (such as HSN) and other channels that allow us to
insert infomercials during off-peak hours.
PRICING FOR OUR PRODUCTS AND SERVICES. Our revenues are derived
principally from the monthly fees our customers pay for cable services. The
rates we charge vary based on the market served and level of service selected,
and are usually adjusted on an annual basis. As of December 31, 2000, the
average monthly fee was $13.16 for basic service and $17.93 for expanded basic
service. A one-time installation fee, which may be waived in part during certain
promotional periods, is charged to new customers. We believe our rate practices
are in accordance with Federal Communications Commission Guidelines and are
consistent with those prevailing in the industry generally. See "-- Regulation
and Legislation."
In accordance with the Federal Communications Commission's rules, the rates
we charge for cable-related equipment, such as set-top terminals and remote
control devices, and installation services are based on actual costs plus a
permitted rate of return.
Although our service offerings vary according to market because of
differences in the bandwidth capacity of the cable systems in each of our
markets, competitive and regulatory factors, when offered on a stand-alone
basis, our services are typically offered at monthly price ranges as follows:
SERVICE PRICE RANGE
- ------- ---------------
Basic cable................................................. $ 9.95 - $14.00
Expanded basic cable........................................ $15.00 - $29.00
Premium channel............................................. $10.95 - $13.50
Pay-Per-View (per movie or event)........................... $ 2.95 - $50.95
Digital cable video packages................................ $45.95 - $59.95
High-speed Internet access by cable modem................... $24.95 - $34.95
Video-on-Demand (per selection)............................. $ 0.99 - $ 9.95
MANAGEMENT OF OUR SYSTEMS. Our operating philosophy emphasizes
decentralized management, with decisions being made as close to the customer as
possible. We are organized into two divisions that contain a total of twelve
operating regions. Each of the two divisions is managed by a Senior Vice
President, who is responsible for overall supervision of the operating regions
within the division. Each operating region is managed by a Senior Vice President
or a Vice President, supported by operational, marketing and engineering
personnel at the regional and local system level. Our consolidation of certain
functions at the regional level has resulted in numerous operating efficiencies
and superior customer care. At the same time, our centralized financial
management by the corporate office enables us to set financial and operating
benchmarks and monitor system performance on an ongoing basis. The corporate
office also performs certain financial control functions such as accounting,
finance and acquisitions, payroll and benefit administration, internal audit,
purchasing and programming contract administration on a centralized basis.
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The following table indicates the states covered by, and customer data for,
each of our operating regions as of December 31, 2000.
NUMBER OF
REGION STATES COVERED CUSTOMERS
- ------ -------------- ---------
WESTERN DIVISION
Central................................ Missouri, Illinois, Indiana, Arkansas 486,800
North Central.......................... Wisconsin, Minnesota 806,400
Southern California.................... Central and Southern California 642,200
Northwest.............................. Northern California, Idaho, Oregon,
Washington 486,200
Michigan............................... Michigan 621,300
National............................... Colorado, Kansas, Nebraska, New Mexico,
Oklahoma, Texas, Utah, Arizona,
Nevada 461,200
EASTERN DIVISION
Southeast.............................. North Carolina, South Carolina 568,400
South-Atlantic......................... Georgia, Florida 391,400
Mid-South.............................. Georgia, Kentucky, Tennessee 557,800
Northeast.............................. Connecticut, Massachusetts, New York,
Vermont, New Hampshire 364,100
Gulf Coast............................. Alabama, Louisiana, Mississippi 427,400
Mid-Atlantic........................... Maryland, New York, Ohio, Pennsylvania
Virginia, W. Virginia, Delaware 537,700
CUSTOMER CARE
Maximizing customer satisfaction is a key element of our business strategy.
In support of our commitment to customer satisfaction, we operate a 24-hour
customer service hotline for nearly all of our systems and offer on-time
installation and service guarantees.
To better serve our customers, we are consolidating some of our local
customer care functions at the regional level. At December 31, 2000, we
maintained 22 call centers handling approximately 56% of our customers,
including our first state-of-the-art regional customer contact center that was
established in 2000. We expect to complete six additional state-of-the-art
regional customer contact centers in 2001. By establishing regional customer
contact centers, we are able to service our customers 24 hours a day, seven days
a week, with highly trained personnel. These regional centers utilize
state-of-the-art equipment that enhances all interactions with our customers and
provides a high-performance employee environment. Our customer care specialists
receive extensive training to develop customer contact skills and product
knowledge critical to high rates of customer retention as well as to selling
additional services and higher levels of service to our customers. We expect
that our customer care functions will benefit from the additional technologies
available when our national and regional network operations centers are opened.
We utilize surveys, focus groups and other research tools as part of our efforts
to determine and respond to customer needs.
Consistent with our focus on customer satisfaction, we have implemented
stringent customer care standards that we believe meet or exceed those
established by the National Cable Television Association, the Washington,
D.C.-based trade association for the cable industry. It is our policy that if an
installer is late for a scheduled appointment the customer receives free
installation, and if a service technician is late for a service call the
customer receives a $20 credit.
OUR NETWORK TECHNOLOGY
As of December 31, 2000, our cable systems consisted of approximately
220,347 sheath miles, including approximately 29,829 sheath miles of fiber optic
cable, passing approximately 10.2 million households and serving approximately
6.4 million customers. Fiber optic cable is a communications medium that uses
glass fibers to transmit signals over long distances with minimal signal loss or
distortion.
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The following table describes the technological state of our systems as of
December 31, 2000 and the anticipated progress of planned upgrades through
year-end 2002, based on the percentage of our customers who will have access to
the bandwidths listed below and two-way capability.
550 MEGAHERTZ
LESS THAN TO 750 870 TWO-WAY
550 MEGAHERTZ 660 MEGAHERTZ MEGAHERTZ MEGAHERTZ CAPABILITY
------------- ------------- --------- --------- ----------
December 31, 2000................ 33.4% 12.6% 37.5% 16.5% 57.1%
December 31, 2001................ 19.6% 12.8% 39.3% 28.3% 70.8%
December 31, 2002................ 6.9% 5.5% 43.8% 43.8% 89.0%
We have adopted the hybrid fiber coaxial cable (HFC) architecture as the
standard for our ongoing systems upgrades. HFC architecture combines the use of
fiber optic cable with coaxial cable. Fiber optic cable has excellent broadband
frequency characteristics, noise immunity and physical durability and can carry
hundreds of video, data and voice channels over extended distances. Coaxial
cable is less expensive and requires a more extensive signal amplification in
order to obtain the desired transmission levels for delivering channels. In most
systems, we deliver our signals via fiber optic cable from the headend to a
group of nodes, and use coaxial cable to deliver the signal from individual
nodes to the homes passed served by that node. Our system design enables a
maximum of 500 homes passed to be served by a single node. Currently, our
average node serves approximately 380 homes passed. Our system design provides
for six strands of fiber to each node, with two strands activated and four
strands reserved for future services (sometimes referred to as "dark fiber"). We
believe that this hybrid network design provides high capacity and superior
signal quality, and will enable us to provide the newest forms of
telecommunications services to our customers. It also provides reserve capacity
for the addition of future services.
The primary advantages of HFC architecture over traditional coaxial-only
cable networks include:
- increased bandwidth capacity, for more channels and other services;
- dedicated bandwidth for two-way services, which avoids reverse signal
interference problems that can otherwise occur with two-way communication
capability;
- improved picture quality and service reliability; and
- operating efficiencies resulting from a reduced number of headends.
In 2001, we will have a fully operational national network operations
center to monitor our networks and ensure maximum quality of service. Monitoring
becomes increasingly important as we increase the number of customers utilizing
two-way high-speed data service. We plan to open regional operations centers in
the future to augment our national center on an as-needed basis.
SALES AND MARKETING
We have a centralized team responsible for overseeing the sales and
marketing strategies of our individual systems. For most of our systems with
over 30,000 customers, we have a dedicated marketing manager, while smaller
systems are handled regionally. We believe our success in marketing comes in
large part from new and innovative ideas and from good interaction, quick
information flow and sharing of best practices between our corporate office,
which handles programs and administration, and our regional offices, which
implement the various programs. In addition, we constantly monitor the
regulatory arena, customer perception, competition, pricing and product
preferences to increase our responsiveness to our customers.
Our long-term marketing objective is to increase our cash flow through
deeper market penetration and growth in revenue per household. We hope that
customers will come to view their cable connection as the best "pipeline" to the
home for a multitude of services. To achieve this objective, we are pursuing the
following strategies:
- increase the number of residential consumers who subscribe to digital
service, which enables them to receive a greater number of television
channels and interactive services;
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- introduce new advanced products and services;
- design product offerings to enable greater opportunity for customer
entertainment and information choices;
- package product offerings to promote the sale of premium services and
niche programming, providing an attractive price/value relationship with
our customers;
- target marketing opportunities based on geodemographic data and past
purchasing behavior;
- develop specialized programs to attract former customers, households that
have never subscribed and customers of competitive services; and
- employ Charter branding of products to promote customer awareness and
loyalty.
We invest significant amounts of time, effort and financial resources in
marketing new and existing services. To increase customer penetration and
increase the level of services used by our customers, we use coordinated
marketing techniques, including door-to-door solicitation, telemarketing, media
advertising, e-marketing and direct mail solicitation. We believe we have one of
the cable industry's highest success rates in attracting and retaining customers
who have never before subscribed to cable services.
In 2001, we have begun to sell our services through consumer electronics
retailers and other retailers that sell televisions or cable modems.
PROGRAMMING
GENERAL. We believe that offering a wide variety of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and retain our cable services. We devote considerable resources to
obtaining a wide range of programming that we believe will appeal to both
existing and potential customers. We rely on extensive market research, customer
demographics and local programming preferences to determine channel offerings in
each of our markets. We obtain basic and premium programming from a number of
suppliers, usually pursuant to a written contract. Our programming contracts
generally continue for a fixed period of time, usually from three to ten years,
and are subject to negotiated renewal. Some program suppliers offer financial
support for the launch of a new channel and ongoing marketing support. We also
try to negotiate volume discount pricing structures.
COSTS. Programming tends to be made available to us for a flat fee per
customer. However, some channels are available without cost to us. In connection
with the launch of a new channel, we may receive a distribution fee to support
the channel launch. For home shopping channels, we receive a percentage of the
amount spent in home shopping purchases by our customers on channels we carry.
Our cable programming costs have increased in recent years and are expected
to continue to increase due to factors including:
- system acquisitions that increase the number of customers;
- additional programming being provided to customers as a result of system
rebuilds that increase channel capacity;
- increased cost to produce or purchase cable programming; and
- inflationary or negotiated annual increases.
In every year we have operated, our costs to acquire programming have
substantially exceeded customary inflationary and cost-of-living type increases.
In particular, sports programming costs have increased significantly over the
past several years. In addition, contracts to purchase sports programming
sometimes contain built-in cost increases for programming added during the term
of the contract.
Under rate regulations of the Federal Communications Commission, cable
operators may increase their rates to customers to cover increased costs for
programming, subject to certain limitations. See "-- Regulation and
Legislation."
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FRANCHISES
As of December 31, 2000, our systems operated under a total of
approximately 4,520 franchises, permits and similar authorizations issued by
local and state governmental authorities. Each franchise is awarded by a
governmental authority and is usually not transferable unless the granting
governmental authority consents. Most franchises are subject to termination
proceedings in the event of a material breach. In addition, most franchises
require us to pay the granting authority a franchise fee of up to 5.0% of gross
revenues as defined by the franchise agreements, which is the maximum amount
that may be charged under the applicable law.
Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. This process usually takes three
years but can take a longer period of time and often involves substantial
expense. The Communications Act provides for an orderly franchise renewal
process in which granting authorities may not unreasonably withhold renewals. If
a renewal is withheld and the granting authority takes over operation of the
affected cable system or awards the cable franchise to another party, the
granting authority must pay the existing cable operator the "fair market value"
of the system. The Communications Act also established comprehensive renewal
procedures requiring that an incumbent franchisee's renewal application be
evaluated on its own merit and not as part of a comparative process with
competing applications. In connection with the franchise renewal process, many
governmental authorities require the cable operator to make certain commitments,
such as technological upgrades to the system, which may require substantial
capital expenditures. We cannot assure you that any particular franchise will be
renewed or that it can be renewed on commercially favorable terms. Our failure
to obtain renewals of our franchises, especially those in major metropolitan
areas where we have the most customers, would have a material adverse effect on
our business, results of operations and financial condition. Approximately 44%
of our franchises covering approximately 42% of our basic cable customers expire
within five years after December 31, 2000.
Under the 1996 Telecom Act, state and local authorities are prohibited from
limiting, restricting or conditioning the provision of telecommunications
services. They may, however, impose "competitively neutral" requirements and
manage the public rights-of-way. Granting authorities may not require a cable
operator to provide telecommunications services or facilities, other than
institutional networks, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits
franchise fees to an operator's cable-related revenues and clarifies that they
do not apply to revenues that a cable operator derives from providing new
telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems which are eligible for renewal have been
renewed or extended at or prior to their stated expiration dates.
COMPETITION
We face competition in the areas of price, service offerings and service
reliability. We compete with other providers of television signals and other
sources of home entertainment. In addition, as we expand into additional
services such as interactive services and telephony, we will face competition
from other providers of each type of service. We operate in a very competitive
business environment which can adversely affect our business and operations.
To date, we believe that we have not lost a significant number of customers
or a significant amount of revenue to our competitors. However, competition from
other providers of the technologies we expect to offer in the future may have a
negative impact on our business in the future.
Through business developments such as the mergers of Tele-Communications,
Inc. and AT&T and merger of America Online, Inc. (AOL) and Time Warner Inc.,
customers have come to expect a variety of services from a single provider.
While these mergers are not expected to have a direct or immediate impact on our
business, they encourage providers of cable and telecommunications services to
expand their service offerings. They also encourage consolidation in the cable
industry as cable operators recognize the competitive benefits of a large
customer base and expanded financial resources.
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Our key competitors include:
BROADCAST TELEVISION. Cable television has long competed with
broadcast television, which consists of television signals that the viewer
is able to receive without charge using an "off-air" antenna. The extent of
such competition is dependent upon the quality and quantity of broadcast
signals available through "off-air" reception compared to the services
provided by the local cable system. The recent licensing of digital
spectrum by the Federal Communications Commission will provide incumbent
television licenses with the ability to deliver high definition television
pictures and multiple digital-quality program streams, as well as advanced
digital services such as subscription video and data transmission.
DBS. Direct broadcast satellite, known as DBS, is a significant
competitor to cable systems. The DBS industry has grown rapidly over the
last several years, far exceeding the growth rate of the cable television
industry, and now serves more than 15 million subscribers nationwide. DBS
service allows the subscriber to receive video services directly via
satellite using a relatively small dish antenna. Moreover, video
compression technology allows DBS providers to offer more than 100 digital
channels, thereby surpassing the typical analog cable system. DBS companies
historically were prohibited from retransmitting popular local broadcast
programming. However, a change to the copyright laws in November 1999
eliminated this legal impediment. As a result, DBS companies are required
to secure retransmission consent from the popular broadcast stations they
wish to carry, and they will face mandatory carriage obligations of less
popular broadcast stations as of January 2002. In response to the
legislation, DirecTV, Inc. and EchoStar Communications Corporation have
begun carrying the major network stations in the nation's top television
markets. DBS, however, is limited in the local programming it can provide
because of the current capacity limitations of satellite technology. It is,
therefore, expected that DBS companies will offer local broadcast
programming only in the larger U.S. markets in the foreseeable future. The
DBS industry recently initiated a judicial challenge to the 2002
requirement mandating carriage of less popular broadcast stations. This
lawsuit alleges that the requirement (similar to the one applicable to
cable systems) is unconstitutional. EchoStar began providing high-speed
Internet access in late 2000, and DirecTV, who has partnered with AOL,
reports that it will begin providing its own version of high-speed Internet
access shortly.
DSL. The deployment of digital subscriber line technology, known as
DSL, allows Internet access to subscribers at data transmission speeds
greater than available over conventional telephone lines. DSL service,
therefore is competitive with high-speed Internet access over cable
systems. Several telephone companies and other companies offer DSL service.
The Federal Communications Commission has a policy of encouraging the
deployment of DSL and similar technologies, both by incumbent telephone
companies and newer, competing telephone companies. The Federal
Communication Commission's decisions and policies in this area are subject
to change. We cannot predict the likelihood of success of the Internet
access services offered by our competitors, or the impact on our business
and operations of these competitive ventures.
TRADITIONAL OVERBUILDS. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. It is possible that a
franchising authority might grant a second franchise to another cable
operator and that such a franchise might contain terms and conditions more
favorable than those afforded us. In addition, entities willing to
establish an open video system, under which they offer unaffiliated
programmers non-discriminatory access to a portion of the system's cable
system may be able to avoid local franchising requirements. Well-financed
businesses from outside the cable industry, such as public utilities that
already possess fiber optic and other transmission lines in the areas they
serve, may over time become competitors. There has been a recent increase
in the number of cities that have constructed their own cable systems, in a
manner similar to city-provided utility services. There also has been an
increased interest in traditional overbuilds by private companies.
Constructing a competing cable system is a capital intensive process which
involves a high degree of risk. We believe that in order to be successful,
a competitor's overbuild would need to be able to serve the homes and
businesses in the overbuilt area on a more cost-effective basis than us.
Any such overbuild operation would require either significant access to
capital or access to facilities already in place that are capable of
delivering cable television programming.
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As of December 31, 2000, we were aware of overbuild situations in some
of our cable systems. Approximately 139,000 basic customers, or
approximately 2% of our total basic customers, are passed by these
overbuilds. Additionally, we have been notified that franchises have been
awarded, and present potential overbuild situations, in other systems.
Approximately 253,000 or 4% of our total customers are located in areas
with potential overbuilds. In response to such overbuilds, these systems
have been designated priorities for the upgrade of cable plant and the
launch of new and enhanced services. We have upgraded many of these systems
to at least 750 megahertz two-way HFC architecture, and anticipate
upgrading the other systems to at least 750 megahertz by December 31, 2001.
TELEPHONE COMPANIES AND UTILITIES. The competitive environment has
been significantly affected by technological developments and regulatory
changes enacted under the 1996 Telecom Act, which was designed to enhance
competition in the cable television and local telephone markets. Federal
cross-ownership restrictions historically limited entry by local telephone
companies into the cable business. The 1996 Telecom Act modified this
cross-ownership restriction, making it possible for local exchange
carriers, who have considerable resources, to provide a wide variety of
video services competitive with services offered by cable systems.
Several telephone companies have obtained or are seeking cable
franchises from local governmental authorities and are constructing cable
systems. Cross-subsidization by local exchange carriers of video and
telephony services poses a strategic advantage over cable operators seeking
to compete with local exchange carriers that provide video services. Some
local exchange carriers may choose to make broadband services available
under the open video regulatory framework of the Federal Communications
Commission or through wireless technology. In addition, local exchange
carriers provide facilities for the transmission and distribution of voice
and data services, including Internet services, in competition with our
existing or potential interactive services ventures and businesses,
including Internet service, as well as data and other non-video services.
We cannot predict the likelihood of success of the broadband services
offered by our competitors or the impact on us of such competitive
ventures. Although enthusiasm on the part of local exchange carriers
appears to have waned in recent months, the entry of telephone companies as
direct competitors in the video marketplace may become more widespread and
could adversely affect the profitability of established cable systems.
As we expand our offerings to include Internet access and other
telecommunications services, we will be subject to competition from other
telecommunications providers. The telecommunications industry is highly
competitive and includes competitors with greater financial and personnel
resources, who have brand name recognition and long-standing relationships
with regulatory authorities. Moreover, mergers, joint ventures and
alliances among franchise, wireless or private cable operators, local
exchange carriers and others may result in providers capable of offering
cable television, Internet, and telecommunications services in direct
competition with us.
Additionally, we are subject to competition from utilities which
possess fiber optic transmission lines capable of transmitting signals with
minimal signal distortion.
PRIVATE CABLE. Additional competition is posed by satellite master
antenna television systems known as "SMATV systems" serving multiple
dwelling units, referred to in the cable industry as "MDU's", such as
condominiums, apartment complexes and private residential communities.
These private cable systems may enter into exclusive agreements with MDUs,
which may preclude operators of franchise systems from serving residents of
the private complexes. Private cable systems can offer both improved
reception of local television stations and many of the same
satellite-delivered program services that are offered by cable systems.
SMATV systems currently benefit from operating advantages not available to
franchised cable systems, including fewer regulatory burdens and no
requirement to service low density or economically depressed communities.
Exemption from regulation may provide a competitive advantage to certain of
our current and potential competitors. The Federal Communications
Commission ruled in 1998 that private cable operators can lease video
distribution capacity from local telephone companies and distribute cable
programming services over public rights-of-way without
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obtaining a cable franchise. In 1999, both the Fifth and Seventh Circuit
Courts of Appeals upheld this Federal Communications Commission policy.
WIRELESS DISTRIBUTION. Cable television systems also compete with
wireless program distribution services such as multi-channel multipoint
distribution systems or "wireless cable," known as MMDS. MMDS uses
low-power microwave frequencies to transmit television programming
over-the-air to paying customers. Wireless distribution services generally
provide many of the programming services provided by cable systems, and
digital compression technology is likely to increase significantly the
channel capacity of their systems. Both analog and digital MMDS services
require unobstructed "line of sight" transmission paths. Analog MMDS has
impacted our customer growth in Riverside and Sacramento, California and
Missoula, Montana. Digital MMDS is a more significant competitor,
presenting potential challenges to us in Los Angeles, California and
Atlanta, Georgia.
REGULATION AND LEGISLATION
The following summary addresses the key regulatory developments and
legislation affecting the cable industry.
The operation of a cable system is extensively regulated by the Federal
Communications Commission, some state governments and most local governments.
The Federal Communications Commission has the authority to enforce its
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of Federal Communications Commission licenses needed to
operate certain transmission facilities used in connection with cable
operations. The 1996 Telecom Act has altered the regulatory structure governing
the nation's communications providers. It removed barriers to competition in
both the cable television market and the local telephone market. Among other
things, it also reduced the scope of cable rate regulation and encouraged
additional competition in the video programming industry by allowing local
telephone companies to provide video programming in their own telephone service
areas.
The 1996 Telecom Act required the Federal Communications Commission to
undertake a host of implementing rulemakings. Moreover, Congress and the Federal
Communications Commission have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect our
operations, and there have been calls in Congress and at the Federal
Communications Commission to maintain or even tighten cable regulation in the
absence of widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which limited the ability of
cable companies to increase subscriber fees. Under that regime, all cable
systems were subjected to rate regulation, unless they faced "effective
competition" in their local franchise area. Federal law defines "effective
competition" on a community-specific basis as requiring satisfaction of
conditions not typically satisfied in the current marketplace.
Although the Federal Communications Commission established the underlying
regulatory scheme, local government units, commonly referred to as local
franchising authorities, are primarily responsible for administering the
regulation of the lowest level of cable service -- the basic service tier, which
typically contains local broadcast stations and public, educational, and
government access channels. Before a local franchising authority begins basic
service rate regulation, it must certify to the Federal Communications
Commission that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of December 31, 2000, approximately 17% of our local franchising
authorities were certified to regulate basic tier rates. The 1992 Cable Act
permits communities to certify and regulate rates at any time, so that it is
possible that additional localities served by the systems may choose to certify
and regulate basic rates in the future.
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The Federal Communications Commission historically administered rate
regulation of cable programming service tiers, which are the expanded basic
programming packages that offer services other than basic programming and which
typically contain satellite-delivered programming. As of December 31, 2000, we
had cable programming service tier rate complaints relating to approximately
414,000 customers pending at the Federal Communications Commission. Under the
1996 Telecom Act, however, the Federal Communications Commission's authority to
regulate cable programming service tier rates expired on March 31, 1999. The
Federal Communications Commission has taken the position that it will still
adjudicate pending cable programming service tier complaints but will strictly
limit its review, and possible refund orders, to the time period until March 31,
1999. We do not believe any adjudications regarding these complaints will have a
material adverse effect on our business. The elimination of cable programming
service tier regulation affords us substantially greater pricing flexibility.
Under the rate regulations of the Federal Communication Commission, most
cable systems were required to reduce their basic service tier and cable
programming service tier rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. The Federal Communications Commission
has modified its rate adjustment regulations to allow for annual rate increases
and to minimize previous problems associated with regulatory lag. Operators also
have the opportunity to bypass this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Cost of service regulation is a traditional form of rate
regulation, under which a utility is allowed to recover its costs of providing
the regulated service, plus a reasonable profit. The Federal Communications
Commission and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. Premium cable services offered on a
per-channel or per-program basis remain unregulated. However, federal law
requires that the basic service tier be offered to all cable subscribers and
limits the ability of operators to require purchase of any cable programming
service tier if a customer seeks to purchase premium services offered on a
per-channel or per-program basis, subject to a technology exception which
expires in 2002.
As noted above, Federal Communications Commission regulation of cable
programming service tier rates for all systems, regardless of size, expired
pursuant to the 1996 Telecom Act on March 31, 1999. As a result, the regulatory
requirements just discussed are now essentially applicable only to the basic
service tier and cable equipment. The 1996 Telecom Act also relaxes existing
"uniform rate" requirements by specifying that uniform rate requirements do not
apply where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the Federal Communications Commission.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more
favorable environment for us to provide telecommunications services beyond
traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. A cable
operator is authorized under the 1996 Telecom Act to provide telecommunications
services without obtaining a separate local franchise. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles, beginning in 2001, if the operator provides telecommunications
service, as well as cable service, over its plant. The Federal Communications
Commission clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access, but a recent decision by the
11th Circuit Court of Appeals disagreed and suggested that Internet traffic is
neither cable service nor telecommunications service and might leave cable
attachments that carry Internet traffic ineligible for Pole Attachment Act
protections. This decision could lead to substantial increases in pole
attachment rates, and certain utilities have already proposed vastly higher pole
attachment rates based in part on the existing court decision. The
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United States Supreme Court is now reviewing this decision, and the Eleventh
Circuit mandate has been stayed pending Supreme Court action.
Cable entry into telecommunications will be affected by the rulings and
regulations implementing the 1996 Telecom Act, including the rules governing
interconnection. A cable operator offering telecommunications generally needs
efficient interconnection with other telephone companies to provide a viable
service. A number of details designed to facilitate interconnection are subject
to ongoing regulatory and judicial review, but the basic obligation of incumbent
telephone companies to interconnect with competitors, such as cable companies
offering telephone service, is well established. Even so, the economic viability
of different interconnection arrangements can be greatly affected by regulatory
changes. Consequently, we cannot predict whether reasonable interconnection
terms will be available in any particular market we may choose to enter.
INTERNET SERVICE. Although there is at present no significant federal
regulation of cable system delivery of Internet services, and the Federal
Communications Commission has issued several reports finding no immediate need
to impose such regulation, this situation may change as cable systems expand
their broadband delivery of Internet services. In particular, proposals have
been advanced at the Federal Communications Commission and Congress that would
require cable operators to provide access to unaffiliated Internet service
providers and online service providers. The Federal Communications Commission
recently rejected a petition by certain Internet service providers attempting to
use existing access rules designed for video programming service providers to
gain access to cable system delivery. The Federal Trade Commission and the
Federal Communications Commission recently imposed certain "open-access"
requirements on Time Warner and AOL in connection with their merger, but those
requirements are not applicable to other cable operators.
Some states and local franchising authorities are considering the
imposition of mandatory Internet access requirements as part of cable franchise
renewals or transfers and a few local jurisdictions have adopted these
requirements. In June 2000, the Federal Court of Appeals for the Ninth Circuit
rejected an attempt by the City of Portland, Oregon to impose mandatory Internet
access requirements on the local cable operator. In reversing a contrary ruling
by the lower court, the Ninth Circuit court held that Internet service was not a
cable service, and therefore could not be subject to local cable franchising. At
the same time, the Court suggested that at least the transport component of
broadband Internet service could be subject to regulation as a
"telecommunications" service. Although regulation of this form of
telecommunications service would presumably be reserved for the Federal
Communications Commission (which has so far resisted requests for active
regulation), some states may argue that they are entitled to impose
"open-access" requirements pursuant to their authority over intrastate
telecommunications. In addition, some local governments may argue that a cable
operator must secure a local telecommunications franchise before providing
Internet service.
In response to the Ninth Circuit decision, the Federal Communications
Commission has initiated a new proceeding to categorize cable-delivered Internet
service and perhaps establish an appropriate regulatory scheme. The Ninth
Circuit decision is the leading case on cable-delivered Internet service at this
point, but the Federal District Court for the Eastern District of Virginia
reached a similar deregulatory result in a May 2000 ruling, albeit using a
different legal analysis. It concluded that broadband Internet service was a
cable service, but that multiple provisions of the Telecommunications Act
preempted local regulation. A Federal district court in Florida recently
addressed a similar "open-access" requirement in a local franchise and struck
down the requirement as unconstitutional. There are other instances where
"open-access" requirements have been imposed and judicial challenges are
pending. If regulators are allowed to impose Internet access requirements on
cable operators, it could burden the capacity of cable systems and complicate
our own plans for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers,
including the regional telephone companies, can now compete with cable operators
both inside and outside their telephone service areas with certain regulatory
safeguards. Because of their resources, local exchange carriers could be
formidable competitors to traditional cable operators. Various local exchange
carriers already are providing video programming services within their telephone
service areas
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through a variety of distribution methods, including both the deployment of
broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system (OVS). To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of
the Federal Communications Commission's open video system rules, including its
preemption of local franchising. The Federal Communications Commission
subsequently revised its OVS rules to eliminate this general preemption, thereby
leaving franchising discretion to state and local authorities. It is unclear
what effect this ruling will have on the entities pursuing open video system
operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Co-located cable
systems are cable systems serving an overlapping territory. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market are also
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the Federal Communications Commission with the
limited authority to grant waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the Federal Communications Commission for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several such utilities have been granted broad authority by the Federal
Communications Commission to engage in activities which could include the
provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing Federal Communications
Commission regulations prohibiting local cross-ownership between co-located
television stations and cable systems.
Pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules precluding a cable system from devoting more than 40% of its
activated channel capacity to the carriage of affiliated national video program
services. Also pursuant to the 1992 Cable Act, the Federal Communications
Commission has adopted rules that preclude any cable operator from serving more
than 30% of all U.S. domestic multichannel video subscribers, including cable
and direct broadcast satellite subscribers. The D.C. District Court of Appeals
recently struck down these vertical and horizontal ownership limits as
unconstitutional, concluding that the FCC had not adequately justified the
specific rules (i.e., the 40% and 30% figures) adopted. As a result, an existing
divestiture requirement on AT&T was suspended.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements. Broadcast signal carriage is the transmission of
broadcast television signals over a cable system to cable customers. These
requirements, among other things, allow local commercial television broadcast
stations to elect once every three years between "must carry" status or
"retransmission consent" status. Less popular stations typically elect must
carry, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to require a cable system to carry the
station. More popular stations, such as those affiliated with a national
network, typically elect retransmission consent which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to negotiate for payments for granting permission to the cable operator to carry
the stations. Must carry requests can dilute the appeal of a cable system's
programming offerings because a cable system with limited channel capacity may
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be required to forego carriage of popular channels in favor of less popular
broadcast stations electing must carry. Retransmission consent demands may
require substantial payments or other concessions. Either option has a
potentially adverse effect on our business. The burden associated with must
carry may increase substantially if broadcasters proceed with planned conversion
to digital transmission and the Federal Communications Commission determines
that cable systems must carry all analog and digital broadcasts in their
entirety. This burden would reduce capacity available for more popular video
programming and new internet and telecommunications offerings. The Federal
Communications Commission tentatively decided against imposition of dual digital
and analog must carry in a January 2001 ruling. At the same time, however, it
initiated further fact-gathering which ultimately could lead to a
reconsideration of the tentative conclusion.
ACCESS CHANNELS. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for public,
educational and governmental access programming. Federal law also requires cable
systems to designate a portion of their channel capacity, up to 15% in some
cases, for commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted rules regulating the terms, conditions and
maximum rates a cable operator may charge for commercial leased access use. We
believe that requests for commercial leased access carriages have been
relatively limited. The Federal Communications Commission rejected a request
that unaffiliated Internet service providers be found eligible for commercial
leased access.
ACCESS TO PROGRAMMING. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their cable operators over new competitors and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. This prohibition is
scheduled to expire in October 2002, unless the Federal Communications
Commission determines that an extension is necessary to protect competition and
diversity. There also has been interest expressed in further restricting the
marketing practices of cable programmers, including subjecting programmers who
are not affiliated with cable operators to all of the existing program access
requirements, and subjecting terrestrially-delivered programming to the program
access requirements. Terrestrially-delivered programming is programming
delivered other than by satellite. These changes should not have a dramatic
impact on us, but would limit potential competitive advantages we now enjoy.
Pursuant to the Satellite Home Viewer Improvement Act, the Federal
Communications Commission has adopted regulations governing retransmission
consent negotiations between broadcasters and all multichannel video programming
distributors, including cable and DBS.
INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997, the Federal
Communications Commission established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the cable operator in
a multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers who are willing to pay the building owner a
higher fee, where such a fee is permissible. The Federal Communications
Commission has also proposed terminating all exclusive multiple dwelling unit
service agreements held by incumbent operators, but allowing such contracts when
held by new entrants. In another proceeding, the Federal Communications
Commission has preempted restrictions on the deployment of private antenna on
rental property within the exclusive use of a tenant, such as balconies and
patios. This Federal Communications Commission ruling may limit the extent to
which we along with multiple dwelling unit owners may enforce certain aspects of
multiple dwelling unit agreements which otherwise prohibit, for example,
placement of digital broadcast satellite receiver antennae in multiple dwelling
unit areas under the exclusive occupancy of a renter. These developments may
make it even more difficult for us to provide service in multiple dwelling unit
complexes.
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OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION. In addition to
the Federal Communications Commission regulations noted above, there are other
regulations of the Federal Communications Commission covering such areas as:
- equal employment opportunity,
- subscriber privacy,
- programming practices, including, among other things,
(1) syndicated program exclusivity, which is a Federal Communications
Commission rule which requires a cable system to delete particular
programming offered by a distant broadcast signal carried on the
system which duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
(2) network program nonduplication,
(3) local sports blackouts,
(4) indecent programming,
(5) lottery programming,
(6) political programming,
(7) sponsorship identification,
(8) children's programming advertisements, and
(9) closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The Federal Communications Commission recently ruled that cable customers
must be allowed to purchase set-top terminals from third parties and established
a multi-year phase-in during which security functions, which would remain in the
operator's exclusive control, would be unbundled from basic converter functions,
which could then be satisfied by third party vendors. The first phase
implementation date was July 1, 2000. Compliance was technically and
operationally difficult in some locations, so we and several other cable
operators filed a request at the Federal Communications Commission that the
requirement be waived in those systems. The request resulted in a temporary
deferral of the compliance deadline for those systems.
The Federal Communications Commission recently initiated an inquiry to
determine whether the cable industry's future provision of interactive services
should be subject to regulations ensuring equal access and competition among
service vendors. The inquiry, which grew out of the Commission's review of the
AOL-Time Warner merger, is in its earliest stages, but is yet another expression
of regulatory concern regarding control over cable capacity.
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COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system, cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The U.S.
Copyright Office recently adopted an industry agreement providing for a modest
increase in the copyright royalty rates. The possible modification or
elimination of this compulsory copyright license is the subject of continuing
legislative review and could adversely affect our ability to obtain desired
broadcast programming. We cannot predict the outcome of this legislative
activity. Copyright clearances for nonbroadcast programming services are
arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. A prior voluntarily negotiated
agreement with Broadcast Music has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for American Society of Composers music based on the
previously negotiated Broadcast Music rate. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
STATE AND LOCAL REGULATION. Cable systems generally are operated pursuant
to nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee fails to
comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states,
including Connecticut, subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories of programming. Certain
states are considering the imposition of new broadly applied telecommunications
taxes.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, most franchises have been renewed for and consents have
been granted to cable operators that have provided satisfactory services and
have complied with the terms of their franchise.
Under the 1996 Telecom Act, states and local franchising authorities are
prohibited from limiting, restricting, or conditioning the provision of
competitive telecommunications services, except for certain "competitively
neutral" requirements and as necessary to manage the public rights-of-way. This
law should facilitate entry into competitive telecommunications services,
although certain jurisdictions still may attempt to impose rigorous entry
requirements. In addition, local franchising authorities may not require a cable
operator to provide any telecommunications service or facilities, other than
institutional networks under
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certain circumstances, as a condition of an initial franchise grant, a franchise
renewal, or a franchise transfer. The 1996 Telecom Act also provides that
franchising fees are limited to an operator's cable-related revenues and do not
apply to revenues that a cable operator derives from providing new
telecommunications services.
EMPLOYEES
During 2000, pursuant to a mutual services agreement between Charter
Communications Inc. and Charter Investment, Inc., Charter Investment leased the
necessary personnel and provided services to Charter Communications, Inc. to
manage Charter Communications Holding Company and its subsidiaries, including
us. Effective January 1, 2001, Charter Investment personnel became employees of
Charter Communications Holding Company and the mutual services agreement was
amended to add Charter Communications Holding Company as a party and provide
that both Charter Investment and Charter Communications Holding Company will
provide services to Charter Communications, Inc. on a cost reimbursement basis.
Charter Communications, Inc. currently has only 15 employees, all of whom
are senior management. The corporate office also includes employees of Charter
Communications Holding Company. The corporate officer is responsible for
coordinating and overseeing our operations, including certain critical
functions, such as marketing and engineering, that are conducted by personnel at
the regional and local system level. The corporate office also performs certain
financial control functions such as accounting, finance and acquisitions,
payroll and benefit administration, internal audit, purchasing and programming
contract administration on a centralized basis.
As of December 31, 2000, we had approximately 13,490 full-time equivalent
employees of which approximately 300 were represented by collective bargaining
agreements. We believe we have a good relationship with our employees and have
never experienced a work stoppage.
ITEM 2. PROPERTIES
Our principal physical assets consist of a cable television distribution
plant and equipment, including signal receiving, encoding and decoding devices,
headend reception facilities, distribution systems and customer drop equipment
for each of our cable television systems.
Our cable television plant and related equipment are generally attached to
utility poles under pole rental agreements with local public utilities and
telephone companies, and in certain locations are buried in underground ducts or
trenches. We own or lease real property for signal reception sites and business
offices in many of the communities served by our systems and for our principal
executive offices. We own most of our service vehicles.
Our subsidiaries own or lease the real property and buildings for our
regional data and call centers and our regional and divisional administrative
offices. Our subsidiaries generally have leased space for business offices
throughout our operating regions, although an increasing number of our systems
are now purchasing property for system offices. Our headend locations are
generally located on owned or leased parcels of land, and we generally own the
towers on which our equipment is located.
We believe that our properties are in good operating condition and are
suitable for our business operations.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters and other claims
incidental to our business. We believe that the resolution of such matters,
taking into account established reserves and insurance, will not have a material
adverse impact on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the vote of our sole equity holder during the
fourth quarter of the year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION
Our equity interests are not publicly traded.
(B) HOLDERS
All of the membership interests of Charter Holdings are owned by Charter
Communications Holding Company. All of the outstanding capital stock of Charter
Communications Holding Capital Corporation is owned by Charter Holdings.
(C) DIVIDENDS
None.
(D) RECENT SALES OF UNREGISTERED SECURITIES
On January 10, 2001, Charter Holdings and Charter Capital issued $900
million of 10.75% senior notes due 2009, $500 million of 11.125% senior notes
due 2011, and $350.6 million 13.50% senior discount notes due 2011 with a
principal amount at maturity of $675 million to certain qualified institutional
buyers based on the exemptions from registration contained in Rule 144A,
promulgated under the Securities Act of 1933, as amended. The principal
underwriters for this offering were Goldman, Sachs & Co. and Morgan Stanley Dean
Witter. The aggregate gross proceeds of these notes were $1.75 billion and the
aggregate underwriting commissions and discounts were approximately $27.2
million. The net proceeds totaling $1.72 billion, $272.5 million were used to
repay all remaining amounts outstanding under the Charter Holdings 2000 senior
bridge loan facility and a portion of the amounts outstanding under the Charter
Operating and Falcon revolving credit facilities and to pay expenses related to
the offering.
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ITEM 6. SELECTED FINANCIAL DATA.
CHARTER HOLDINGS
---------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1/1/98 12/24/98 DECEMBER 31,
----------------- THROUGH THROUGH -------------------------
1996 1997 12/23/98 12/31/98 1999 2000
------- ------- -------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Statement of Operations:
Revenues.............................. $14,881 $18,867 $ 49,731 $ 13,713 $ 1,428,090 $ 3,249,222
------- ------- -------- ---------- ----------- -----------
Operating Expenses:
Operating, general and
administrative...................... 8,123 11,767 25,952 7,134 737,957 1,650,918
Depreciation and amortization......... 4,593 6,103 16,864 8,318 745,315 2,462,544
Option compensation expense........... -- -- -- 845 79,979 40,978
Management fees/corporate expense
charges............................. 446 566 6,176 473 51,428 55,243
------- ------- -------- ---------- ----------- -----------
Total operating expenses.............. 13,162 18,436 48,992 16,770 1,614,679 4,209,683
------- ------- -------- ---------- ----------- -----------
Income (loss) from operations........... 1,719 431 739 (3,057) (186,589) (960,461)
Interest expense........................ (4,415) (5,120) (17,277) (2,353) (471,871) (1,065,236)
Interest income......................... 20 41 44 133 18,821 6,679
Loss on equity investments.............. -- -- -- -- -- (10,963)
Other income (expense).................. (47) 25 (728) -- (245) (6,540)
------- ------- -------- ---------- ----------- -----------
Loss before income taxes, minority
interest and extraordinary items...... (2,723) (4,623) (17,222) (5,277) (639,884) (2,036,521)
Income tax expense...................... -- -- -- -- (1,030) --
------- ------- -------- ---------- ----------- -----------
Loss before minority interest and
extraordinary items................... (2,723) (4,623) (17,222) (5,277) (640,914) (2,036,521)
Minority interest expense............... -- -- -- -- -- (11,038)
------- ------- -------- ---------- ----------- -----------
Loss before extraordinary item.......... (2,723) (4,623) (17,222) (5,277) (640,914) (2,047,559)
Extraordinary item -- Loss on early
extinguishment of debt................ -- -- -- -- (7,794) --
------- ------- -------- ---------- ----------- -----------
Net loss................................ $(2,723) $(4,623) $(17,222) $ (5,277) $ (648,708) $(2,047,559)
======= ======= ======== ========== =========== ===========
Balance sheet data (at end of period)
Total assets............................ $67,994 $55,811 $281,969 $4,335,527 $18,939,477 $22,982,177
Total debt.............................. 59,222 41,500 274,698 2,002,206 8,936,455 12,310,455
Minority interest....................... -- -- -- -- -- 640,526
Member's equity (deficit)............... 2,648 (1,975) (8,397) 830 8,047,953 8,383,863
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to the "Certain Trends and Uncertainties" section below
in this Management's Discussion and Analysis for a discussion of important
factors that could cause actual results to differ from expectations and
non-historical information contained herein. In addition, the following
discussion should be read in conjunction with the audited consolidated financial
statements of Charter Communications Holdings, LLC and its subsidiaries as of
and for the years ended December 31, 2000 and 1999 and for the period from
December 24, 1998 through December 31, 1998 and the period from January 1, 1998
to December 23, 1998.
INTRODUCTION
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of certain
significant past events. Those events include numerous mergers, acquisitions and
debt financing transactions over the last few years.
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ORGANIZATIONAL HISTORY
Our organizational structure is very complex and is described in more
detail in the forepart of this Form 10-K. Prior to the acquisition of the
Charter companies by Mr. Allen on December 23, 1998 and the merger of Marcus
Holdings with and into Charter Holdings effective April 7, 1999, the cable
systems of the Charter and Marcus companies were operated under four groups of
companies. Three of these groups were comprised of companies that were managed
by Charter Investment and in which Charter Investment had an ownership interest.
The fourth group was comprised of companies that were subsidiaries of Marcus
Holdings which Charter Investment began managing in October 1998.
THE CHARTER COMPANIES
Prior to the acquisition by Mr. Allen, the Charter companies were as
follows:
(1) CCPH
CCPH was a wholly owned subsidiary of Charter Investment. The
primary subsidiary of CCPH, which owned the cable systems, was Charter
Communications Properties, LLC. On May 20, 1998, CCPH acquired certain
cable systems from Sonic Communications, Inc. for a total purchase
price, net of cash acquired, of $228.4 million, including $60.9 million
of assumed debt. In connection with Mr. Allen's acquisition on December
23, 1998, CCPH was merged out of existence, and Charter Communications
Properties became a direct, wholly owned subsidiary of Charter
Investment.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates of
Kelso & Co., and Charter Investment had only a minority interest.
Effective December 23, 1998, prior to Mr. Allen's acquisition, Charter
Investment acquired from the Kelso affiliates the interests the Kelso
affiliates held in CCA Group. Later, the operating companies comprising
CCA Group became wholly owned subsidiaries of Charter Investment.
(3) CharterComm Holdings, LLC
The controlling interests in CharterComm Holdings were held by
affiliates of Charterhouse Group International Inc., and Charter
Investment had only a minority interest. Effective December 23, 1998,
prior to Mr. Allen's acquisition, Charter Investment acquired from the
Charterhouse Group affiliates the interests the Charterhouse Group
affiliates held in CharterComm Holdings. Consequently, CharterComm
Holdings became a wholly owned subsidiary of Charter Investment.
The cable systems were owned by the various subsidiaries of CharterComm
Holdings. In connection with Mr. Allen's acquisition of us on December 23, 1998,
some of the non-operating subsidiaries, including CharterComm Holdings, were
merged out of existence.
The acquisition by Mr. Allen became effective on December 23, 1998, through
a series of transactions in which Mr. Allen acquired approximately 94% of the
equity interests of Charter Investment for an aggregate purchase price of $2.2
billion, excluding $2.0 billion in assumed debt. CCPH and the operating
companies that formerly comprised CCA Group and CharterComm Holdings were
contributed to Charter Operating subsequent to Mr. Allen's acquisition. CCPH is
deemed to be our predecessor. Consequently, the contribution of CCPH was
accounted for as a reorganization under common control. Accordingly, our results
of operations for periods prior to and including December 23, 1998 include the
accounts of CCPH. The contributions of the operating companies that formerly
comprised CCA Group and CharterComm Holdings were accounted for in accordance
with purchase accounting. Accordingly, our results of operations for periods
after December 23, 1998 include the accounts of CCPH, CCA Group and CharterComm
Holdings.
In February 1999, Charter Holdings was formed as a wholly owned subsidiary
of Charter Investment, and Charter Operating was formed as a wholly owned
subsidiary of Charter Holdings. All of Charter Investment's
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direct interests in the entities described above were transferred to Charter
Operating. All of the prior management agreements were terminated, and a single
new management agreement was entered into between Charter Investment and Charter
Operating to cover all of the subsidiaries.
In May 1999, Charter Communications Holding Company was formed as a wholly
owned subsidiary of Charter Investment. All of Charter Investment's interests in
Charter Holdings were transferred to Charter Communications Holding Company.
In July 1999, Charter Communications, Inc. was formed as a wholly owned
subsidiary of Charter Investment.
In November 1999, Charter Communications, Inc. conducted its initial public
offering. In the initial public offering, substantially all of the equity
interests in Charter Communications, Inc. were sold to the public, and less than
1% of its equity interests were sold to Mr. Allen. Charter Communications, Inc.
contributed substantially all of the proceeds of its initial public offering to
Charter Communications Holding Company, which issued membership units to Charter
Communications, Inc. In November 1999, the management agreement between Charter
Investment and Charter Operating was amended and assigned from Charter
Investment to Charter Communications, Inc. Also in November 1999, Charter
Communications Holding Company sold membership units to Vulcan Cable III.
THE MARCUS COMPANIES
In April 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable, and agreed to acquire the remaining
interests. The owner of the remaining partnership interests retained voting
control of Marcus Cable. In October 1998, Marcus Cable entered into a management
consulting agreement with Charter Investment, pursuant to which Charter
Investment provided management and consulting services to Marcus Cable and its
subsidiaries which own cable systems. This agreement placed the Marcus cable
systems under common management with the cable systems of the Charter companies
acquired by Mr. Allen in December 1998.
In March 1999, all of Mr. Allen's interests in Marcus Cable were
transferred to Marcus Holdings, a then newly formed company. Later in March
1999, Mr. Allen acquired the remaining interests in Marcus Cable, including
voting control, which interests were transferred to Marcus Holdings. In April
1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating
subsidiaries of Marcus Holdings and all of the cable systems they owned came
under the ownership of Charter Holdings and, in turn, Charter Operating. For
financial reporting purposes, the merger of Marcus Holdings with and into
Charter Holdings was accounted for as an acquisition of Marcus Holdings
effective March 31, 1999, and accordingly, the results of operations of Marcus
Holdings have been included in our consolidated financial statements since that
date.
ACQUISITIONS
Since January 1, 1999, we completed 16 acquisitions for an aggregate
purchase price of $14.3 billion including aggregate cash payments of $9.1
billion, $3.3 billion of assumed debt and $1.9 billion of equity interests
issued. These acquisitions were funded through the issuance of long-term debt,
bank borrowings, capital contributions from our parent companies, the assumption
of outstanding debt amounts, equity issuances to certain sellers and internally
generated funds. In 2000, Charter Communications Holding Company transferred the
cable systems it acquired in three of those acquisitions (Fanch, Falcon and
Avalon) to Charter Holdings. All acquisitions were accounted for under the
purchase method of accounting and results of operations were included in our
consolidated financial statements from their respective dates of acquisition.
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The following table sets forth information on our acquisitions in 1999 and
2000.
PURCHASE PRICE (IN MILLIONS) REVENUES SINCE
---------------------------------------- ACQUISITION DATE
ACQUISITION CASH ASSUMED SECURITIES TOTAL ACQUIRED ---------------------
DATE PAID DEBT ISSUED PRICE CUSTOMERS 1999 2000
----------- ------ ------- ---------- ------- --------- -------- ----------
(IN THOUSANDS)
Renaissance..................... 4/99 $ 348 $ 111 -- $ 459 134,000 $ 42,032 $ 70,312
American Cable.................. 5/99 240 -- -- 240 69,000 24,904 42,151
Greater Media Systems........... 6/99 500 -- -- 500 176,000 32,313 95,988
Helicon......................... 7/99 410 115 25(a) 550 171,000 35,658 89,872
Vista........................... 7/99 126 -- -- 126 26,000 5,751 14,253
Cable Satellite................. 8/99 22 -- -- 22 9,000 1,917 4,750
Rifkin.......................... 9/99 1,200 128 133(b) 1,461 463,000 67,514 236,370
InterMedia...................... 10/99 873 -- -- 873(c) 278,000 54,850 229,489
------ ------ ------ ------- --------- -------- ----------
Total -- 1999
Acquisitions.............. $3,719 $ 354 $ 158 $ 4,231 1,326,000 $264,939 $ 783,185
Fanch........................... 1/00 2,400 -- -- 2,400 535,600 32,281 266,031
Falcon.......................... 1/00 1,250 1,700 550(d) 3,500 977,200 56,051 456,999
Avalon.......................... 1/00 558 274 -- 832 270,800 13,929 124,068
Interlake....................... 1/00 13 -- -- 13 6,000 -- 1,713
Bresnan......................... 2/00 1,100 963 1,015(e) 3,078 695,800 -- 297,080(g)
Capital Cable................... 4/00 60 -- -- 60 23,200 -- 7,513
Farmington...................... 4/00 15 -- -- 15 5,700 -- 1,571
Kalamazoo....................... 9/00 -- -- 171(f) 171 50,700 -- 7,360
------ ------ ------ ------- --------- -------- ----------
Total -- 2000
Acquisitions.............. 5,396 2,937 1,736 10,069 2,565,000 102,261 1,162,335
Total -- 1999 & 2000
Acquisitions.............. $9,115 $3,291 $1,894 $14,300 3,891,000 $367,200 $1,945,520
====== ====== ====== ======= ========= ======== ==========
- ---------------
(a) Purchase price component represents a preferred limited liability company
interest in Charter-Helicon, LLC, an indirect wholly owned subsidiary.
(b) Purchase price component relates to equity in Charter Communications Holding
Company.
(c) As part of this transaction, we agreed to "swap" some of our non-strategic
cable systems serving customers in Indiana, Montana, Utah & Northern
Kentucky. At the closing we retained a cable system located in Indiana for
which we were unable to timely obtain necessary regulatory approvals of the
system transfer. Such approval was subsequently obtained and the Indiana
system assets were transferred in March 2000. This transaction, including
the transfer of the retained Indiana system, resulted in a net increase of
273,300 customers.
(d) Purchase price component relates to common membership units in Charter
Communications Holding Company issued to certain of the Falcon sellers.
(e) Purchase price component is comprised of $385 million in equity in Charter
Communications Holding Company and $630 million of equity in CC VIII.
(f) In connection with this transaction, we acquired all of the outstanding
stock of Cablevision of Michigan in exchange for 11,173,376 shares of
Charter's Class A common stock.
(g) Includes revenues of approximately $.6 million related to the cable systems
acquired by Bresnan since December 31, 1999.
PENDING AT&T TRANSACTIONS
In February 2001, Charter Communications, Inc. entered into several
agreements with AT&T Broadband, LLC involving several strategic cable system
transactions that will result in a net addition of approximately 512,000
customers for the Charter cable systems. In the pending AT&T transactions,
Charter Communications, Inc. expects to acquire cable systems from AT&T
Broadband serving approximately 574,000 customers in Missouri, Alabama, Nevada
and California for a total of $1.79 billion. It is expected that the acquired
systems will be contributed to us immediately after closing. A portion of the
purchase price will
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consist of Charter cable systems valued at $249 million serving approximately
62,000 customers in Florida. Of the balance of the purchase price, up to $501.5
million will be paid in shares of Charter Communications, Inc. Class A common
stock and the remainder will be paid in cash. Charter Holdings and Charter
Capital have a commitment for a bridge loan from Morgan Stanley Senior Funding,
Inc. and Goldman Sachs Credit Partners LP for temporary financing of the cash
portion of the purchase price. Charter Communications, Inc. expects to obtain
permanent financing through one or more debt or equity financing transactions or
a combination thereof. The acquisition transactions are expected to close in the
second and/or third quarters of 2001, subject to certain closing conditions and
regulatory review.
OVERVIEW OF OPERATIONS
Approximately 87% of our revenues for the year ended December 31, 2000 are
attributable to monthly subscription fees charged to customers for our basic,
expanded basic, premium and digital cable television programming services,
Internet access through television-based service, dial-up telephone modems and
high-speed cable modem service, equipment rental and ancillary services provided
by our cable systems. The remaining 13% of revenue is derived from installation
and reconnection fees charged to customers to commence or reinstate service,
pay-per-view programming, where users are charged a fee for individual programs
requested, advertising revenues and commissions related to the sale of
merchandise by home shopping services and franchise revenues. We have generated
increased revenues in each of the past three years, primarily through customer
growth from acquisitions, internal customer growth, basic and expanded tier rate
increases and revenues from new services and products.
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and amortization expense, interest expense
and management fees/corporate expense charges. Operating costs primarily include
programming costs, cable service related expenses, marketing and advertising
costs, franchise fees and expenses related to customer billings.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include depreciation and amortization expenses associated
with our acquisitions and capital expenditures related to construction and
upgrading of our systems, and interest costs on borrowed money. We cannot
predict what impact, if any, continued losses will have on our ability to
finance our operations in the future.
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RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods (dollars in
thousands).
CHARTER HOLDINGS
------------------------------------------------------------------------------------
PERIOD PERIOD
JANUARY 1, 1998 DECEMBER 24, 1998 YEAR ENDED YEAR ENDED
TO DECEMBER 23, TO DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999 2000
---------------- ----------------- ------------------ -------------------
STATEMENTS OF OPERATIONS:
Revenues.................... $ 49,731 100.0% $13,713 100.0% $1,428,090 100.0% $ 3,249,222 100.0%
-------- ----- ------- ----- ---------- ----- ----------- -----
Operating expenses:
Operating, general and
administrative costs.... 25,952 52.2% 7,134 52.0% 737,957 51.7% 1,650,918 50.8%
Depreciation and
Amortization............ 16,864 33.9% 8,318 60.7% 745,315 52.2% 2,462,544 75.8%
Option compensation
expense................. -- -- 845 6.2% 79,979 5.6% 40,978 1.3%
Management fees/corporate
expense charges......... 6,176 12.4% 473 3.4% 51,428 3.6% 55,243 1.7%
-------- ----- ------- ----- ---------- ----- ----------- -----
Total operating expenses.... 48,992 98.5% 16,770 122.3% 1,614,679 113.1% 4,209,683 129.6%
-------- ----- ------- ----- ---------- ----- ----------- -----
Income (loss) from
operations................ 739 1.5% (3,057) (22.3)% (186,589) (13.1)% (960,461) (29.6)%
Interest expense............ (17,277) (34.7)% (2,353) (17.2)% (471,871) (33.0)% (1,065,236) (32.8)%
Interest income............. 44 .1% 133 1.0% 18,821 1.3% 6,679 .2%
Loss on equity
investments............... (10,963) (.3)%
Other expense............... (728) (1.5)% -- -- (245) -- (6,540) (.2)%
-------- ----- ------- ----- ---------- ----- ----------- -----
Loss before income taxes,
minority interest and
extraordinary item........ (17,222) (34.6)% (5,277) (38.5)% (639,884) (44.8)% (2,036,521) (62.7)%
-------- ----- ------- ----- ---------- ----- ----------- -----
Income tax expense.......... -- -- -- -- (1,030) (.1)% -- --
-------- ----- ------- ----- ---------- ----- ----------- -----
Loss before minority
interest and extraordinary
item...................... (17,222) (34.6)% (5,277) (38.5)% (640,914) (44.9)% (2,036,521) (62.7)%
-------- ----- ------- ----- ---------- ----- ----------- -----
Minority interest expense... -- -- -- -- -- -- (11,038) (.3)%
-------- ----- ------- ----- ---------- ----- ----------- -----
Loss before extraordinary
item...................... (17,222) (34.6)% (5,277) (38.5)% (640,914) (44.9)% (2,047,559) (63.0)%
-------- ----- ------- ----- ---------- ----- ----------- -----
Extraordinary item -- Loss
on early extinguishment of
debt...................... -- -- -- -- (7,794) (.5)% -- --
-------- ----- ------- ----- ---------- ----- ----------- -----
Net loss.................... $(17,222) (34.6)% $(5,277) (38.5)% $ (648,708) (45.4)% $(2,047,559) (63.0)%
======== ===== ======= ===== ========== ===== =========== =====
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FISCAL 2000 COMPARED TO FISCAL 1999
REVENUES. Revenues increased by $1,821.1 million or 128% from $1,428.1
million in 1999 to $3,249.2 million in 2000. System operations acquired after
January 1, 1999 accounted for $1,578.3 million or 87% of the increase in 2000,
while systems acquired before January 1, 1999 accounted for $242.8 million or
13%. Revenues by service offering are as follows (dollars in thousands):
2000 1999 2000 OVER 1999
--------------------- --------------------- -------------------
% OF % OF %
BALANCE REVENUES BALANCE REVENUES CHANGE CHANGE
---------- -------- ---------- -------- ---------- ------
Basic...................... $2,249,339 69% $1,002,954 70% $1,246,385 124%
Premium.................... 226,598 7% 124,788 9% 101,810 82%
Pay-per-view............... 28,590 1% 27,537 2% 1,053 4%
Digital.................... 91,115 3% 8,299 .5% 82,816 998%
Data services.............. 63,330 2% 10,107 .5% 53,223 527%
Advertising sales.......... 220,205 7% 71,997 5% 148,208 206%
Other...................... 370,045 11% 182,408 13% 187,637 103%
---------- --- ---------- --- ----------
$3,249,222 100% $1,428,090 100% $1,821,132
========== === ========== === ==========
In 2000, we added 898,300 basic customers from 5,452,600 to 6,350,900, of
which approximately 741,100 was a result of acquisitions. The remaining 157,200
relates to internal growth, which is an increase of approximately 2.5% compared
to the prior year on a pro forma basis.
Premium units increased by 2,094,700 from 2,844,400 to 4,939,100, of which
approximately 300,100 was a result of acquisitions. The remaining increase of
1,794,600 is the result of aggressive marketing and pricing of premium products
related to upgrades.
In 2000, we added 943,300 digital customers from 126,200 to 1,069,500. Of
the total increase, approximately 29,200 was the result of acquisitions and
914,100 was the result of internal growth or upgrades. The pace of growth
increased throughout the year as we upgraded our systems. We surpassed our
expectations throughout the year, with an average of 17,500 digital
installations per week during 2000 which increased to 40,000 digital
installations per week in December 2000. Growth was a result of intense
marketing efforts and strong demand for this service.
Data customers increased by 180,400 from 72,000 to 252,400 of which 12,400
was the result of acquisitions and 168,000 was the result of internal growth.
Our system upgrades facilitated interactive capability necessary to offer
high-speed interactive service. Growth in data services was also the result of
strong marketing efforts coupled with increased demand for such services.
Advertising revenues increased $148.2 million from $72.0 million in 1999 to
$220.2 million in 2000 of which approximately $101.8 million was the result of
operations acquired after January 1, 1999. In addition, as a result of our
rebuild efforts, we experienced increased capacity due to expanded channel
line-ups and thus, increased advertising. The significant level of political
campaign advertising in 2000 also contributed to increased advertising revenues.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $913.0 million from $738.0 million in 1999
to $1,650.9 million in 2000. System operations acquired after January 1, 1999
accounted for $813.8 million or 89% of the increase in 2000 while systems
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acquired before January 1, 1999 accounted for $99.6 million or 11%. Key expense
components as a percentage of revenues are as follows (dollars in thousands):
2000 1999 2000 OVER 1999
--------------------- ------------------- -----------------
% OF % OF %
BALANCE REVENUES BALANCE REVENUES CHANGE CHANGE
---------- -------- -------- -------- -------- ------
Programming................... $ 736,043 23% $330,754 23% $405,289 123%
General and Administrative.... 543,430 17% 237,480 17% 305,950 129%
Service....................... 192,603 6% 99,486 7% 93,117 94%
Marketing..................... 63,789 2% 23,447 2% 40,342 172%
Advertising sales............. 56,499 2% 31,281 2% 25,218 81%
Other......................... 58,554 2% 15,509 1% 43,045 278%
---------- -------- --------
$1,650,918 $737,957 $912,961
========== ======== ========
Of the $405.3 million increase in programming, approximately $355.7 million
or 88% relates to operations acquired after January 1, 1999. The remaining $49.6
million increase is due to continued inflationary or negotiated increases,
particularly in sports programming, coupled with increased channel capacity. The
increase in general and administrative costs of $306.0 million reflects an
increase of $275.0 million or 90% related to operations acquired after January
1, 1999. The remaining increase of $31.0 million is due to increases in
corporate and regional resources to support our growth. Service expenses
increased $93.1 million, of which $87.0 million or 93% relates to operations
acquired after January 1, 1999 and $6.1 million or 7% is a result of internal
growth. Marketing expenses increased $40.3 million to $63.8 million in 2000, of
which approximately $20.1 million or 50% relates to operations acquired after
January 1, 1999. The remaining increase of $20.2 million relates to promotions
of advanced product offerings, including Charter Digital Cable and TV-based
high-speed Internet service. Advertising expenses increased $25.2 million, of
which the majority relates to operations acquired after January 1, 1999. Other
operating expenses increased by $43.0 million from $15.5 million in 1999 to
$58.6 million in 2000, of which the majority relates to operations acquired
after January 1, 1999.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $3.8 million from $51.4 million in 1999 to $55.2 million in 2000.
The increase was primarily a result of continued growth from acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1,717.2 million from $745.3 million in 1999 to $2,462.5 million in
2000. This increase was due to a full year of expense on the fixed assets and
franchises of our 1999 acquisitions, a partial year of expense on 2000
acquisitions and capital expenditures of $2.8 billion to rebuild and upgrade our
cable systems in 2000. Related to the rebuild and upgrade of our plant, the
useful lives of certain depreciable assets were shortened. As a result, an
additional $508.5 million of depreciation expense was recorded during 2000.
These increases were partially offset by the elimination of depreciation and
amortization expense related to dispositions of cable systems.
OPTION COMPENSATION EXPENSE. Option compensation expense decreased by
$39.0 million from $80.0 million in 1999 to $41.0 million in 2000. The expense
relates to option grants at the time of the initial public offering of Charter
Communications, Inc. at prices less than the estimated fair market value of
Charter Communications Class A common stock resulting in compensation expense to
be accrued over the vesting period of the options.
INTEREST EXPENSE. Interest expense increased by $593.4 million from $471.9
million in 1999 to $1,065.2 million in 2000. The increase in interest expense
was a result of increased average debt outstanding in 2000 of $12,281.2 million
compared to $7,108.5 million in 1999, coupled with an increase in our average
borrowing rate of .66% from 8.36% in 1999 to 9.02% in 2000. The increased debt
was used for acquisitions, capital expenditures and for other corporate
purposes.
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INTEREST INCOME. Interest income decreased by $12.1 million from $18.8
million in 1999 to $6.7 million in 2000. The decrease in interest income was a
result of lower cash on hand in 2000 due to required credit facility draw downs
in 1999 which were not required in 2000.
LOSS ON EQUITY INVESTMENTS. The loss in 2000 was primarily due to losses
of $7.0 million on investments carried under the equity method of accounting and
other than temporary losses of $4.7 million on investments carried under the
cost method partially offset by realized gains of $.7 million on sales of
marketable securities.
MINORITY INTEREST EXPENSE. Minority interest expense represents the 2%
accretion of the preferred membership units in our indirect subsidiary, CC VIII,
LLC, issued to certain Bresnan sellers. These membership units are exchangeable
on a one-for-one basis for shares of Class A common stock of Charter
Communications, Inc.
NET LOSS. Net loss increased by $1,398.9 million from $648.7 million in
1999 to $2,047.6 million in 2000 as a result of the combination of factors
discussed above.
FISCAL 1999 COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998
REVENUES. Revenues increased by $1,378.4 million, from $49.7 million for
the period from January 1, 1998 through December 23, 1998 to $1,428.1 million in
1999. The increase in revenues primarily resulted from the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional revenues from these entities included for the year ended December 31,
1999 were $618.8 million, $386.7 million and $350.1 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and
administrative costs increased by $712 million, from $26.0 million for the
period from January 1, 1998 through December 23, 1998 to $738.0 million in 1999.
This increase was due primarily to the acquisition of the CCA Group and
CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional
operating, general and administrative expenses from these entities included for
the year ended December 31, 1999 were $338.5 million, $209.3 million and $158.8
million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $728.5 million, from $16.9 million, for the period from January 1,
1998 through December 23, 1998 to $745.3 million in 1999. There was a
significant increase in amortization expense resulting from the acquisitions of
the CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional depreciation and amortization expense from these entities included
for the year ended December 31, 1999 were $346.3 million, $203.5 million and
$195.1 million, respectively. The increases were offset by the elimination of
depreciation and amortization expense related to disposition of cable systems.
OPTION COMPENSATION EXPENSE. Option compensation expense in 1999 was $80.0
million due to the granting of options to employees in December 1998, February
1999 and April 1999. The exercise prices of the options on the date of grant
were less than the estimated fair values of the underlying membership units,
resulting in compensation expense accrued over the vesting period of each grant
that varies from four to five years.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $45.3 million, from $6.2 million, for the period
from January 1, 1998 through December 23, 1998 to $51.4 million in 1999. The
increase in 1998 compared to 1999 was the result of the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
INTEREST INCOME. Interest income increased by $18.8 million, from $.04
million for the period from January 1, 1998 through December 23, 1998 to $18.8
million in 1999. The increase was primarily due to investing excess cash that
resulted from required credit facilities drawdowns, the initial public offering
and the sale of the March 1999 Charter Holdings notes.
INTEREST EXPENSE. Interest expense increased by $454.6 million, from $17.3
million for the period from January 1, 1998 through December 23, 1998 to $471.9
million in 1999. This increase resulted primarily from
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interest on the notes and credit facilities used to finance the acquisitions of
CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
NET LOSS. Net loss increased by $631.5 million, from $17.2 million for the
period from January 1, 1998 through December 23, 1998 to $648.7 million in 1999.
The increase in revenues that resulted from the acquisitions of CCA Group,
CharterComm Holdings and Marcus Holdings was not sufficient to offset the
operating expenses associated with the acquired systems.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant cash to fund acquisitions, capital
expenditures, debt service costs and ongoing operations. We have historically
funded and expect to fund future liquidity and capital requirements through cash
flows from operations, borrowings under our credit facilities and debt and
equity transactions. Our cash flows from operating activities were $1.1 billion,
$460.4 million and $7.6 million in 2000, 1999 and 1998, respectively. As of
December 31, 2000, we had availability of $805.6 million under our bank credit
facilities. Since January 1, 1999, we have incurred significant debt to fund our
capital expenditures and growth through acquisition. Our significant amount of
debt may adversely affect our ability to obtain financing in the future and
react to changes in our business. We anticipate incurring substantial additional
debt in the future. Our credit facilities and other debt instruments contain
various financial and operating covenants that could adversely impact our
ability to operate our business, including restrictions on the ability of our
operating subsidiaries to distribute cash to their parents. See "-- Certain
Trends and Uncertainties -- Restrictive Covenants" for further information.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our cable systems,
as well as for system maintenance, the development of new products and services,
and set-top terminals.
Upgrading our cable systems will enable us to offer new products and
services, including digital television, additional channels and tiers, expanded
pay-per-view options, high-speed Internet access, video-on-demand, telephony and
interactive services.
We made capital expenditures, excluding acquisitions of cable systems, of
$2.78 billion and $741.5 million for the years ended December 31, 2000 and 1999,
respectively. The majority of these capital expenditures in 2000 relate to our
accelerated rebuild and upgrade program and purchases of converters and were
funded from cash flows from operations and borrowings under credit facilities.
Excluding the pending AT&T transactions, for 2001, 2002 and 2003, we expect
to spend a total of approximately $2.9 billion, $1.75 billion and $950,000,
respectively, to upgrade and rebuild our systems in order to offer advanced
services to our customers. In addition, we anticipate rebuild costs associated
with the AT&T systems we expect to acquire to total approximately $350 million.
In 2001, our capital expenditures will include extensions of systems,
development of new products and services, purchases of converters, system
improvements and the build out of six new advanced customer call centers in
2001. The amount that we spend on these types of capital expenditures will
depend on the level of our growth in digital cable customers and in the delivery
of other advanced services. Currently, a projected $500 million to $750 million
funding shortfall exists through late 2002 or early 2003 when we expect to
become cash flow positive. If we borrow the full amount available under the
Charter Holdings 2001 bridge loan commitment, our planned capital expenditures
are funded through the end of 2002 and our funding shortfall will be $300
million to $500 million through 2003. We expect to fund our projected shortfall
with additional bank debt, high yield debt, or contributions from any parent
company equity offering or any combination thereof. The amount of this projected
shortfall could increase if there is accelerated growth in digital cable
customers or in the delivery of other advanced services.
We cannot be sure that our anticipated levels of capital expenditures will
be sufficient to accomplish our planned system upgrades, expansion and
maintenance and to roll out advanced services or that we will be able
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to acquire necessary plant and equipment from vendors to complete our upgrade
and rebuild on schedule. If we are not able to obtain financing sufficient to
fund our planned upgrades and other capital expenditures, it could adversely
affect our ability to offer new products and services and compete effectively,
and could adversely affect our growth, financial condition and results of
operations. See "-- Certain Trends and Uncertainties" for further information.
RECENT INVESTING ACTIVITIES
HIGH SPEED ACCESS CORP. In December 2000, Vulcan Ventures, Inc., an entity
controlled by Mr. Allen, and Charter Communications Ventures, LLC, our
subsidiary invested $38.0 million and $37.0 million, respectively, in exchange
for 38,000 shares and 37,000 shares, respectively, of senior convertible
preferred stock of High Speed Access. The preferred stock has a liquidation
preference of $1,000 per share, in general, shares in dividends on High Speed
Access common stock on an "as converted to common stock" basis and is
convertible into common stock of High Speed Access at a conversion rate of
$5.01875 per share of High Speed Access common stock, subject to certain
adjustments. Vulcan Ventures and Charter Ventures were granted certain
preemptive, first refusal, registration and significant board representation
rights as part of the transaction.
FINANCING ACTIVITIES
As of December 31, 2000, our total debt was approximately $12.3 billion.
Actual debt outstanding at December 31, 2000 and pro forma for the issuance of
the January 2001 Charter Holdings notes and the application of the net proceeds
from these notes is summarized below (dollars in thousands):
ACTUAL PRO FORMA
BALANCE AT BALANCE AT
DECEMBER 31, DECEMBER 31,
2000 2000
------------ ------------
LONG-TERM DEBT
Charter Holdings:
8.250% Senior Notes, due 2007........................... $ 600,000 $ 600,000
8.625% Senior Discount Notes, due 2009.................. 1,500,000 1,500,000
9.920% Senior Notes, due 2011........................... 1,475,000 1,475,000
10.0% Senior Notes, due 2009............................ 675,000 675,000
10.25% Senior Notes, due 2010........................... 325,000 325,000
11.75% Senior Discount Notes, due 2010.................. 532,000 532,000
10.75% Senior Notes, due 2009........................... -- 900,000
11.125% Senior Notes, due 2011.......................... -- 500,000
13.5% Senior Discount Notes, due 2011................... -- 675,000
2000 Senior Bridge Loan Facility.......................... 272,500 --
Renaissance:
10.00% Senior Discount Notes, due 2008.................. 114,413 114,413
CC V Holdings--Avalon:
11.875% Senior Discount Notes, due 2006................. 179,750 179,750
Other long-term debt...................................... 1,971 1,971
CREDIT FACILITIES
Charter Operating......................................... 4,432,000 3,555,000
CC V -- Avalon............................................ 213,000 213,000
CC VI -- Fanch............................................ 895,000 825,000
CC VII -- Falcon.......................................... 1,050,000 565,000
CC VIII -- Bresnan........................................ 712,000 712,000
----------- -----------
12,977,634 13,348,134
Unamortized discount...................................... (667,179) (992,338)
----------- -----------
$12,310,455 $12,355,796
=========== ===========
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MARCH 1999 CHARTER HOLDINGS NOTES. In March 1999, Charter Holdings and
Charter Capital issued $3.6 billion principal amount of senior notes. The March
1999 Charter Holdings notes consisted of $600.0 million in aggregate principal
amount of 8.250% senior notes due 2007, $1.5 billion in aggregate principal
amount of 8.625% senior notes due 2009, and $1.475 billion in aggregate
principal amount at maturity of 9.920% senior discount notes due 2011. The net
proceeds of approximately $2.9 billion, combined with the borrowings under our
credit facilities, were used to consummate tender offers for publicly held debt
of several of our subsidiaries, as described below, to refinance borrowings
under our previous credit facilities, for working capital purposes and to
finance a number of acquisitions.
As of December 31, 2000, a total of $2.1 billion was outstanding under the
8.250% notes and the 8.625% notes, and the accreted value of the outstanding
9.920% notes was $1.08 billion.
JANUARY 2000 CHARTER HOLDINGS NOTES. In January 2000, Charter Holdings and
Charter Capital issued $1.5 billion principal amount of senior notes. The
January 2000 Charter Holdings notes consisted of $675.0 million in aggregate
principal amount of 10.00% senior notes due 2009, $325.0 million in aggregate
principal amount of 10.25% senior notes due 2010, and $532.0 million in
aggregate principal amount at maturity of 11.75% senior discount notes due 2010.
The net proceeds of approximately $1.25 billion were used to consummate change
of control offers for certain of the Falcon, Avalon and Bresnan notes and
debentures.
As of December 31, 2000, $1.0 billion of the January 2000 Charter Holdings
10.00% and 10.25% senior notes were outstanding, and the accreted value of the
11.75% senior discount notes was approximately $335.5 million.
CHARTER OPERATING CREDIT FACILITIES. The Charter Operating credit
facilities provide for two term facilities, one with a principal amount of $1.0
billion that matures in September 2007 (Term A), and the other with a principal
amount of $2.45 billion that matures in March 2008 (Term B). The Charter
Operating credit facilities also provide for a $1.25 billion revolving credit
facility with a maturity date in September 2007 and, at the option of the
lenders, supplemental credit facilities in the amount of $400.0 million
available until March 18, 2002. Amounts under the Charter Operating credit
facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 2.75% (8.39% to 9.27% as of December 31, 2000). A
quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of Term A and the revolving credit facility. As of December
31, 2000, outstanding borrowings were approximately $4.4 billion, and the unused
availability was $268.0 million.
RENAISSANCE NOTES. In connection with the acquisition of Renaissance in
April 1999, we assumed $163.2 million principal amount at maturity of 10% senior
discount notes due 2008. The Renaissance notes do not require the payment of
interest until April 15, 2003. From and after April 15, 2003, the Renaissance
notes bear interest, payable semi-annually in cash, on April 15 and October 15,
commencing on October 15, 2003. The Renaissance notes are due on April 15, 2008.
In May 1999, $48.8 million aggregate face amount of the Renaissance notes was
repurchased at 101% of the accreted value plus accrued and unpaid interest. As
of December 31, 2000, the accreted value of the Renaissance notes that remained
outstanding was approximately $94.6 million.
FALCON DEBENTURES. Charter Communications Holding Company acquired Falcon
in November 1999 and assumed Falcon's outstanding $375.0 million in principal
amount of 8.375% senior debentures due 2010 and 9.285% senior discount
debentures due 2010 with an accreted value of approximately $319.1 million as of
the acquisition date. Falcon was transferred to Charter Holdings in January
2000.
In February 2000, through change of control offers and purchases in the
open market, all of the Falcon 8.375% senior debentures with a principal amount
of $375.0 million were repurchased for $388.0 million, and all of the Falcon
9.285% senior discount debentures with an aggregate principal amount at maturity
of $435.3 million were repurchased for $328.1 million.
FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the
previous Falcon credit facilities were amended to provide for two term
facilities, one with a principal amount of $196.0 million that matures June 2007
(Term B), and the other with the principal amount of $294.0 million that matures
December 2007 (Term C). The Falcon credit facilities also provide for a $646.0
million revolving credit facility with a
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maturity date of December 2006 and, at the option of the lenders, supplemental
credit facilities in the amount of up to $700.0 million with a maturity date in
December 2007. Amounts under the Falcon credit facilities bear interest at the
Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.5% (8.14%
to 9.50% as of December 31, 2000). A quarterly commitment fee of between 0.25%
and 0.375% per annum is payable on the unborrowed balance. As of December 31,
2000, unused availability was $196.1 million.
AVALON CREDIT FACILITIES. In December 2000, two of our subsidiaries,
Bresnan and Avalon, were merged. Upon completion of the Bresnan/Avalon
Combination in January 2001, all amounts outstanding under the Avalon credit
facilities were repaid and the Avalon credit facilities were terminated. The
Bresnan credit facilities were amended and restated to among other things,
increase borrowing availability by $550.0 million.
AVALON NOTES. Charter Communications Holding Company acquired Avalon in
November 1999 and assumed Avalon's outstanding 11.875% senior discount notes due
2008 with an accreted value of $123.3 million and $150.0 million in principal
amount of 9.375% senior subordinated notes due 2008. Avalon was transferred to
us in January 2000. After December 1, 2003, cash interest on the Avalon 11.875%
notes will be payable semi-annually on June 1 and December 1 of each year,
commencing June 1, 2004.
In January 2000, we completed change of control offers in which we
repurchased $16.3 million aggregate principal amount at maturity of the 11.875%
notes at a purchase price of 101% of accreted value as of January 28, 2000, for
$10.5 million. As of December 31, 2000, Avalon 11.875% notes with an aggregate
principal amount of $179.8 million at maturity remained outstanding with an
accreted value of $128.4 million.
At the same time, through change of control offers and purchases in the
open market, we repurchased all of the $150.0 million aggregate principal amount
of the Avalon 9.375% notes. The aggregate repurchase price was $153.7 million
and was funded with the proceeds from the sale of the January 2000 Charter
Holdings notes.
FANCH CREDIT FACILITIES. The Fanch credit facilities provide for two term
facilities, one with a principal amount of $450.0 million that matures May 2008
(Term A), and the other with a principal amount of $400.0 million that matures
November 2008 (Term B). The Fanch credit facilities also provide for a $350.0
million revolving credit facility with a maturity date in May 2008 and, at the
option of the lenders, supplemental credit facilities in the amount of $300.0
million available until December 31, 2004. Amounts under the Fanch credit
facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 3.0% (8.15% to 9.55% as of December 31, 2000). A
quarterly commitment fee of between 0.250% and 0.375% per annum is payable on
the unborrowed balance. $850.0 million of the credit facilities were used to
fund a portion of the Fanch purchase price. As of December 31, 2000, outstanding
borrowings were $895.0 million, and unused availability was $305.0 million.
However, debt covenants limit the amount that can be borrowed to $153.5 million
at December 31, 2000.
BRESNAN NOTES. We acquired Bresnan in February 2000 and assumed Bresnan's
outstanding $170.0 million in principal amount of 8% senior notes due 2009 and
$275.0 million in principal amount at maturity of 9.25% senior discount notes
due 2009 with an accreted value of $192.2 million. In March 2000, we repurchased
all of the outstanding Bresnan notes at purchase prices of 101% of the
outstanding principal amounts plus accrued and unpaid interest or accreted
value, as applicable, for a total of $369.7 million, using proceeds from the
sale of the January 2000 Charter Holdings notes.
BRESNAN CREDIT FACILITIES. Upon the completion of the Bresnan/Avalon
combination in January 2001, the Bresnan credit facilities were amended and
restated. As amended, the Bresnan credit facilities provide for borrowings of up
to $1.45 billion. The Bresnan credit facilities provide for two term facilities,
one with a principal amount of $500.0 million (Term A), and the other with a
principal amount of $500.0 million (Term B). The Bresnan credit facilities also
provide for a $450.0 million revolving credit facility with a maturity date in
June 2007 and, at the option of lenders, supplemental facilities in the amount
of $500.0 million. Amounts under the Bresnan credit facilities bear interest at
the Base Rate or the Eurodollar Rate, as defined, plus a margin of up to 2.75%.
A quarterly commitment fee of between 0.250% and 0.375% is payable on the
unborrowed balance of Term A and the revolving credit facility. At the closing
of the Bresnan acquisition, we borrowed approximately $599.9 million to replace
the borrowings outstanding under the
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previous credit facilities and an additional $30.0 million to fund a portion of
the Bresnan purchase price. As of December 31, 2000, outstanding borrowings were
$712.0 million and unused availability was $188.0 million.
CHARTER HOLDINGS 2000 SENIOR BRIDGE LOAN FACILITY. On August 4, 2000,
Charter Holdings and Charter Capital entered into a senior bridge loan agreement
providing for senior increasing rate bridge loans in an aggregate principal
amount of up to $1.0 billion.
On August 14, 2000, Charter Holdings borrowed $1.0 billion under the senior
bridge loan facility and used substantially all of the proceeds to repay a
portion of the amounts outstanding under the Charter Operating and the Falcon
revolving credit facilities. The bridge loan initially bore interest at an
annual rate of 10.21%. For amounts not repaid by November 14, 2000, the interest
rate increased by 1.25% at such date.
The net proceeds, totaling $727.5 million, from the sales in October and
November 2000 of Charter Communications, Inc.'s convertible senior notes were
contributed as equity to Charter Holdings. We used all of the net proceeds
therefrom to repay $727.5 million of the amount outstanding under the Charter
Holdings 2000 senior bridge loan facility. As of January 5, 2001, the remaining
balance of $272.5 million on the senior bridge loan facility was paid down with
the proceeds from the sale of the Charter Holdings January 2001 notes.
JANUARY 2001 CHARTER HOLDINGS NOTES. In January 2001, Charter Holdings and
Charter Capital issued $900 million 10.75% senior notes due 2009, $500 million
11.125% senior notes due 2011 and $350.6 million 13.5% senior discount notes due
2011 with a principal amount at maturity of $675 million. The net proceeds were
approximately $1.72 billion, after giving effect to discounts, commissions and
expenses. The net proceeds from the January 2001 Charter Holdings notes were
used to repay all remaining amounts outstanding under the Charter Holdings
senior bridge loan facility and the Fanch revolving credit facility, a portion
of the amounts outstanding under the Charter Operating and Falcon revolving
credit facilities, and for general corporate purposes.
The 10.75% senior notes are not redeemable prior to maturity. Interest is
payable semi-annually on April 1 and October 1, beginning October 1, 2001 until
maturity.
The 11.125% senior notes are redeemable at the option of the issuers at
amounts decreasing from 106.750% to 100% of par value beginning on January 15,
2006, plus accrued and unpaid interest, to the date of redemption. At any time
prior to January 15, 2004, the issuers may redeem up to 35% of the aggregate
principal amount of the 11.125% senior notes at a redemption price of 111.125%
of the principal amount under certain conditions. Interest is payable
semi-annually in arrears on January 15 and July 15, beginning on July 15, 2001,
until maturity.
The 13.5% senior discount notes are redeemable at the option of the issuers
at amounts decreasing from 105.563% to 100% of the accreted value beginning
January 15, 2006. At any time prior to January 15, 2004, the issuers may redeem
up to 35% of the aggregate principal amount of the 13.5% senior notes at a
redemption price of 113.5% of the accreted value under certain conditions.
Interest is payable in arrears on January 15 and July 15, beginning on July 15,
2006, until maturity. The discount on the 13.5% senior discount notes is being
accreted using the effective interest method.
These notes rank equally with the current and future unsecured and
unsubordinated indebtedness of Charter Holdings, including the March 1999 and
January 2000 senior notes and senior discount notes, and trade payables. The
notes are structurally subordinated to all existing and future liabilities,
including trade payables of our subsidiaries.
CHARTER HOLDINGS 2001 SENIOR BRIDGE LOAN COMMITMENT. On February 26, 2001,
Charter Holdings and Charter Capital signed a commitment with Morgan Stanley
Senior Funding, Inc. and Goldman Sachs Credit Partners LP, to provide senior
increasing rate bridge loans of up to $2 billion for capital expenditures,
general corporate purposes, and to fund the cash portion of the pending AT&T
transactions. If any of the pending AT&T transactions is not completed, the
commitment would be reduced by the amount of the commitment allocated to such
portion of the transaction, up to $1 billion.
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The bridge loans would bear interest initially at a rate equal to the
bid-side yield of the 11.125% senior notes, less 25 basis points. The rate would
increase by 125 basis points at the end of the first 90 days after funding, and
50 basis points for each 90-day period after the first 90 days.
The commitment expires on December 31, 2001 unless the bridge loan
agreement has been signed. The bridge loans would mature one year from the date
of first funding, but can, at the borrowers' election, be converted into senior
term loans that would be due nine years after such conversion. Interest on the
senior term loans would initially be the rate then in effect for the bridge
loans, plus 50 basis points, and would increase by 50 basis points after every
90 days' period after such conversion.
Following any conversion of the bridge loans into senior term loans, the
lenders would have the right to request that their notes be exchanged for notes
that would be issued under an indenture with covenants and events of default
similar to those in the 11.125% senior notes, but may not be redeemed until the
fifth anniversary of the first funding of the bridge loan. After the fifth
anniversary, the notes would be redeemable at a premium of one-half of the
coupon on the note, declining ratably annually to zero on the date that is two
years prior to the maturity date. The bridge loan agreement would require that
the borrowers file a shelf registration statement with respect to the exchange
notes and to use commercially reasonable efforts to have the statement become
effective and available to allow for unrestricted resales of the exchange notes.
The exchange notes would bear interest at the higher of the rate of interest
applicable to the senior term loans and the bid-side yield of the 11.125% senior
notes.
Interest on the bridge loans, senior term loans or exchange notes would not
be lower than 9% and may not exceed 15% annually.
The prospective lenders' commitments to us are subject to a number of
conditions. We cannot assure you that such conditions will be met. If these
conditions are not met, these funds will not be available to us and we will need
to obtain alternative financing. If we are unable to obtain replacement
financing, we could be unable to consummate the pending AT&T transactions.
OUTLOOK
We believe we are uniquely positioned in the forefront of our industry
going into 2001. In 2001, we will continue to aggressively roll out our advanced
services, focusing on digital cable and high speed data. We expect to complete
the AT&T transactions in the second and/or third quarters of 2001. The effect of
these transactions is not included in this Outlook discussion.
With "same store" systems running smoothly and major 1999 and 2000
acquisitions successfully integrated, we expect 2001 revenue growth of 14-16%
and operating cash flow growth after corporate overhead expense of 12-14%. Basic
customer growth is expected to exceed 2% in 2001, consistent with 2000 growth.
Digital revenues are expected to increase dramatically from 1.07 million
customers at December 31, 2000 with 2 million customers by the end of 2001. In
addition, we expect VOD to be available to approximately 2.2 million homes
passed by the end of the year. Telephony initiatives will continue to be tested
and developed during 2001 with targeted market entry in 2002 or 2003.
Furthermore, we will continue our focus on interactive TV, with trials currently
in process and expected launches in several markets beginning in 2001. Our
advanced technology team is working on DVR capability in advanced digital
set-top terminals and wireless home networking. Set-top terminals with built-in
DVR functionality should be available to our digital customers in 2001.
Operating expenses are expected to increase 18%-19% in 2001, driven
primarily by increased digital and data sales, as well as higher programming and
general and administrative costs. Programming costs are expected to increase
approximately 25%. The year over year increase on a per channel basis is
approximately 12-13%. Sports programming is the largest portion of the expected
increase. The remainder of the increase is due to digital and basic customer
growth, new channel launches and higher premium rates. The primary drivers for
increased general and administrative costs are higher property taxes of
approximately $22 million, resulting from the network upgrades and approximately
$11 million of expenses associated with new customer call centers.
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We will continue to evaluate strategic acquisitions and "swaps" of cable
systems in order to enlarge the coverage of our current areas of operations.
This approach will allow us to generate higher growth in revenues and operating
cash flow.
Customer care will remain a priority at Charter. We plan to build six new
customer contact centers in 2001 with capital expenditures of $66 million in
2001. These new centers will serve our customer base with state-of-the-art
technology to further improve customer satisfaction. Eventually, each of our
twelve regions will have its own customer contact center.
We will continue our system rebuilds and upgrades so that our customers
have access to the latest advanced service technology. We will aggressively
evaluate funding opportunities, including bank, equity or high-yield financing,
to meet the needs of our future growth plans, including future strategic
acquisitions.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties,
in addition to those discussed elsewhere in this Form 10-K, that could
materially impact our business, results of operations and financial condition.
SUBSTANTIAL LEVERAGE. As of December 31, 2000, pro forma for the sale of
the January 2001 Charter Holdings notes and the application of the net proceeds
therefrom, our total debt was approximately $12.4 billion. We anticipate
incurring significant additional debt in the future, including the Charter
Holdings 2001 senior bridge loan commitment, to fund future acquisitions and the
expansion, maintenance and upgrade of our cable systems.
Our ability to make payments on our debt and to fund our planned capital
expenditures for upgrading our cable systems and our ongoing operations will
depend on our ability to generate cash and secure financing in the future. This,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. We cannot assure
you that our business will generate sufficient cash flow from operations, or
that future borrowings will be available to us under our existing credit
facilities, new facilities or from other sources of financing at acceptable
rates or in an amount sufficient to enable us to repay our debt, to grow our
business or to fund our other liquidity and capital needs.
VARIABLE INTEREST RATES. At December 31, 2000, approximately 53% of our
debt bears interest at variable rates that are linked to short-term interest
rates. In addition, a significant portion of our existing debt, assumed debt or
debt we might arrange in the future will bear interest at variable rates. If
interest rates rise, our costs relative to those obligations will also rise. At
December 31, 2000, our weighted-average rate on outstanding bank commitments is
approximately 8.33% and approximately 9.50% on high-yield debt, resulting in a
blended weighted-average rate of 8.94%. See "-- Interest Rate Risk."
RESTRICTIVE COVENANTS. Our credit facilities and the indentures governing
our outstanding debt contain a number of significant covenants that, among other
things, restrict our ability and the ability of our subsidiaries to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- pledge assets.
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Furthermore, in accordance with our credit facilities we are required to
maintain specified financial ratios and meet financial tests. The ability to
comply with these provisions may be affected by events beyond our control. The
breach of any of these covenants will result in a default under the applicable
debt agreement or instrument, which could trigger acceleration of the debt. Any
default under our credit facilities or the indentures governing our outstanding
debt may adversely affect our growth, our financial condition, and our results
of operations and the ability to repay amounts due under our publicly held debt.
NEW SERVICES AND PRODUCTS GROWTH STRATEGY. We expect that a substantial
portion of any of our future growth will be achieved through revenues from
additional services. We cannot be assured that we will be able to offer new
advanced services successfully to our customers or that those new advanced
services will generate revenues. The amount of our capital expenditures and
related roll-out of advanced services may be limited by the availability of
certain equipment (in particular, digital set-top terminals and cable modems)
due to production capacity constraints of certain vendors and/or materials
shortages. We continue to work with our primary vendors to address such problems
and have been assured that we will have an adequate supply to meet our demand.
If we are unable to grow our cash flow sufficiently, we may be unable to fulfill
our obligations or obtain alternative financing.
MANAGEMENT OF GROWTH. We have experienced rapid growth that has placed and
is expected to continue to place a significant strain on our management,
operations and other resources. Our future success will depend in part on our
ability to successfully integrate the operations acquired and to be acquired and
to attract and retain qualified personnel. No significant severance cost was
incurred in conjunction with acquisitions in 1999 and 2000. The failure to
retain or obtain needed personnel or to implement management, operating or
financial systems necessary to successfully integrate acquired operations or
otherwise manage growth when and as needed could have a material adverse effect
on our business, results of operations and financial condition.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. Effective March 31, 1999, the scope of rate
regulation was reduced so that it continues to impact only the lowest level of
basic cable service and associated equipment. This change affords cable
operators much greater pricing flexibility, although Congress could revisit this
issue if confronted with substantial rate increases.
Cable operators also face significant regulation of their channel capacity.
They currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access users, and
unaffiliated commercial leased access programmers. This carriage burden could
increase in the future, particularly if the Federal Communications Commission
(FCC) were to require cable systems to carry both the analog and digital
versions of local broadcast signals. The FCC is currently conducting a
proceeding in which it is considering this channel usage possibility, although
it recently issued a tentative decision against such dual carriage.
There is also uncertainty whether local franchising authorities, state
regulators, the FCC, or the U.S. Congress will impose obligations on cable
operators to provide unaffiliated Internet service providers with access to
cable plant on non-discriminatory terms. If they were to do so, and the
obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. Recently, two federal district courts in Virginia and a
federal circuit court in California struck down as unlawful open-access
requirements imposed by three different franchising authorities. The federal
circuit court ruling reversed an earlier district court decision that had upheld
an open-access requirement. In response, the FCC has initiated a new proceeding
to categorize cable-delivered Internet service and perhaps establish an
appropriate regulatory scheme. Company-specific open access requirements were
imposed on Time Warner cable systems in connection with the AOL merger.
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Although cable system attachments to public utility poles historically have
been regulated at the federal or state level, the provision of non-traditional
cable services, like the provision of Internet access, may endanger that
regulatory protection. The 11th Circuit Court of Appeals recently ruled such
services left cable attachments ineligible for regulatory protection, and
certain utilities already have proposed vastly higher put attachment rates. The
11th Circuit decision is now scheduled to be reviewed by the United States
Supreme Court.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements, is required under the terms of the credit facilities of our
subsidiaries. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to otherwise pay lower market rates. Collars
limit our exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
Our participation in interest rate hedging transactions involves
instruments that have a close correlation with our debt, thereby managing our
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
At December 31, 2000, we had outstanding $1.9 billion, $15.0 million and
$520 million in notional amounts of interest rate swaps, caps and collars,
respectively.
The notional amounts of interest rate instruments are used to measure
interest to be paid or received and do not represent the amount of exposure to
credit loss. While swaps, caps and collars represent an integral part of our
interest rate risk management program, their incremental effect on interest
expense for the years ended December 31, 2000 and 1999, was not significant.
The fair value of fixed-rate debt at December 31, 2000, was $5.5 billion.
The fair value of fixed-rate debt is based on quoted market prices. The fair
value of variable-rate debt approximates the carrying value of $7.3 billion at
December 31, 2000, since this debt bears interest at current market rates.
ACCOUNTING STANDARDS NOT YET IMPLEMENTED
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by SFAS 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, and SFAS
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, is effective for the Registrants as of January 1, 2001. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. Adoption of these
new accounting standards is expected to result in a cumulative effect of a
change in accounting principle that increases net loss by approximately $23.9
million.
SUPPLEMENTAL UNAUDITED PRO FORMA DATA
The following Supplemental Unaudited Pro Forma Data is based on the
historical financial data of Charter Holdings and does not include the effect of
the pending AT&T transactions or any borrowings under the Charter Holdings 2001
senior bridge loan commitment. Our financial data, on a consolidated basis, is
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adjusted on a pro forma basis to illustrate the estimated effects of the
following transactions as if they had occurred on January 1, 2000:
- the acquisitions by Charter Holdings and its subsidiaries completed since
January 1, 2000, including the Bresnan and Kalamazoo acquisitions;
- borrowings under the Charter Holdings 2000 senior bridge loan facility
and the application of a portion of such borrowings to repay a portion of
the amounts outstanding under the Charter Operating and Falcon revolving
credit facilities;
- the repayment of a portion of the Charter Holdings 2000 senior bridge
loan facility with net proceeds from the issuance and sale of Charter
Communications, Inc.'s convertible senior notes, which proceeds were
contributed to us; and
- the issuance and sale of the January 2001 Charter Holdings notes and the
application of the net proceeds to repay all remaining amounts
outstanding under the Charter Holdings 2000 senior bridge loan facility
and the Fanch revolving credit facility, and a portion of the amounts
outstanding under the Charter Operating and Falcon revolving credit
facilities.
The pro forma impact of the issuance and sale of the January 2000 Charter
Holdings notes, issued on January 10, 2000, is not significant and is therefore
not taken into account in the pro forma adjustments below.
The Supplemental Unaudited Pro Forma Data reflects the application of the
principles of purchase accounting to the acquisitions completed since January 1,
2000. The purchase price allocations are based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information of intangible assets and is subject to post-closing purchase price
adjustments. We believe that finalization of the purchase price allocation will
not have a material impact on our results of operations or financial position.
The Supplemental Unaudited Pro Forma Data does not purport to be indicative
of what our results of operations would actually have been had the transactions
described above been completed on the dates indicated or to project our results
of operations for any future date.
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SUPPLEMENTAL UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------
CHARTER PRO FORMA
HOLDINGS ADJUSTMENTS(A) TOTAL
------------ --------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
REVENUES:
Basic.............................................. $ 2,249,339 $ 36,382 $ 2,285,721
Premium............................................ 226,598 5,152 231,750
Pay-per-view....................................... 28,590 474 29,064
Digital............................................ 91,115 736 91,851
Advertising sales.................................. 220,205 2,519 222,724
Data services...................................... 63,330 1,643 64,973
Other.............................................. 370,045 2,846 372,891
----------- -------- -----------
Total revenues................................ 3,249,222 49,752 3,298,974
OPERATING EXPENSES:
Programming........................................ 736,043 13,144 749,187
General and administrative......................... 543,430 2,300 545,730
Service............................................ 192,603 6,766 199,369
Marketing.......................................... 63,789 541 64,330
Advertising Sales.................................. 56,499 5,222 61,721
Other.............................................. 58,554 1,339 59,893
Depreciation....................................... 1,205,049 15,592 1,220,641
Amortization....................................... 1,257,495 31,253 1,288,748
Option compensation expense........................ 40,978 -- 40,978
Corporate expense charges.......................... 55,243 707 55,950
----------- -------- -----------
Total operating expenses...................... 4,209,683 76,864 4,286,547
----------- -------- -----------
Loss from operations............................... (960,461) (27,112) (987,573)
Interest expense................................... (1,065,236) (24,165) (1,089,401)
Interest income.................................... 6,679 (49) 6,630
Other expense...................................... (17,503) (77) (17,580)
----------- -------- -----------
Loss before minority interest expense.............. (2,036,521) (51,403) (2,087,924)
Minority interest expense(b)....................... (11,038) (1,551) (12,589)
----------- -------- -----------
Net loss........................................... $(2,047,559) $(52,954) $(2,100,513)
=========== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(c).......................................... 1,484,580 19,656 1,504,236
EBITDA margin(d)................................... 45.7% 39.5% 45.6%
Adjusted EBITDA(e)................................. 1,598,304 20,440 1,618,744
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SUPPLEMENTAL UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------
CHARTER PRO FORMA
HOLDINGS ADJUSTMENTS(A) TOTAL
---------- ---------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA
(at end of period, except for average)
Homes passed(f)...................................... 10,225,000
Basic customers(g)................................... 6,350,900
Basic penetration(h)................................. 62.1%
Premium units(i)..................................... 4,939,100
Premium penetration(j)............................... 77.8%
Average monthly revenue per basic customer(k)........ $ 43.29
- ---------------
(a) Comprised of: (1) Our acquisitions' results of operations from January 1,
2000 to their respective acquisition dates (Interlake -- January 31, 2000;
Bresnan -- February 14, 2000; Capital Cable and Farmington -- April 1,
2000; Kalamazoo -- September 7, 2000), as well as the sale of 4,715
customers in Dickinson, North Dakota, completed on December 31, 2000; (2)
borrowings under the Charter Holdings 2000 senior bridge loan facility and
the application of a portion of such borrowings to repay a portion of the
amounts outstanding under the Charter Operating and Falcon revolving credit
facilities; (3) repayment of a portion of the Charter Holdings 2000 senior
bridge loan facility with net proceeds from the issuance and sale of the
Charter Communications, Inc. convertible senior notes; and (4) the issuance
and sale of the January 2001 Charter Holdings notes and the application of
the net proceeds to repay all remaining amounts outstanding under the
Charter Holdings 2000 senior bridge loan facility and the Fanch revolving
credit facility, and a portion of the amounts outstanding under the Charter
Operating and Falcon revolving credit facilities.
(b) Represents the accretion of the preferred membership units in our indirect
subsidiary, CC VIII, LLC, issued to certain Bresnan sellers. These
membership units are exchangeable on a one-for-one basis for shares of
Class A common stock of Charter Communications, Inc.
(c) EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization, and minority interest. EBITDA is presented
because it is a widely accepted financial indicator of a cable company's
ability to service indebtedness. However, EBITDA should not be considered
as an alternative to income from operations or to cash flows from
operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because EBITDA is not calculated
identically by all companies, the presentation here may not be comparable
to other similarly titled measures of other companies. Management's
discretionary use of funds depicted by EBITDA may be limited by working
capital, debt service and capital expenditure requirements and by
restrictions related to legal requirements, commitments and uncertainties.
(d) EBITDA margin represents EBITDA as a percentage of revenues.
(e) Adjusted EBITDA means EBITDA before option compensation expense, corporate
expense charges and other expense. Adjusted EBITDA is presented because it
is a widely accepted financial indicator of a cable company's ability to
service indebtedness. However, adjusted EBITDA should not be considered as
an alternative to income from operations or to cash flows from operating,
investing or financing activities, as determined in accordance with
generally accepted accounting principles. Adjusted EBITDA should also not
be construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because adjusted EBITDA is not
calculated identically by all companies, the presentation here may not be
comparable to other similarly titled measures of other companies.
Management's discretionary use of funds depicted by adjusted EBITDA may be
limited by working capital, debt service and capital expenditure
requirements and by restrictions related to legal requirements, commitments
and uncertainties.
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(f) Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable distribution
network in a given cable system service area.
(g) Basic customers are customers who receive basic cable service.
(h) Basic penetration represents basic customers as a percentage of homes
passed.
(i) Premium units represent the total number of subscriptions to premium
channels.
(j) Premium penetration represents premium units as a percentage of basic
customers.
(k) Average monthly revenue per basic customer represents revenues divided by
the number of months in the period divided by the number of basic customers
at period end.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements is required under the terms of the credit facilities of our
subsidiaries. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to otherwise pay lower market rates. Collars
limit our exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
Our participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
The table set forth below summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 2000 (dollars in thousands):
FAIR VALUE AT
DECEMBER 31,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000
-------- -------- -------- -------- -------- ---------- ---------- -------------
DEBT
Fixed Rate............... $ -- $ 495 $ 67,247 $ 279 $750,000 $5,607,613 $6,425,634 $5,496,923
Average Interest
Rate................. -- 7.5% 11.8% 7.5% 5.8% 9.7% 9.3% --
Variable Rate............ $ -- $129,645 $286,170 $418,593 $590,332 $5,877,260 $7,302,000 $7,302,000
Average Interest
Rate................. -- 7.6% 7.7% 7.7% 7.7% 8.3% 8.2% --
INTEREST RATE INSTRUMENTS
Variable to Fixed
Swaps.................. $720,000 $330,000 $ 80,000 $140,000 $300,000 $ 372,713 $1,942,713 $ 5,236
Average Pay Rate....... 7.8% 7.5% 6.8% 6.8% 7.8% 7.7% 7.6% --
Average Receive Rate... 7.8% 7.7% 7.7% 7.8% 7.8% 7.9% 7.8% --
Cap...................... -- $ 15,000 -- -- -- -- $ 15,000 --
Average Cap Rate....... -- 9.0% -- -- -- -- 9.0% --
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the costs (proceeds) to settle the outstanding contracts. Interest
rates on variable debt are estimated using the average implied forward London
Interbank Offering Rate (LIBOR) rates for the year of maturity based on the
yield curve in effect at December 31, 2000. While swaps, caps and collars
represent an integral part of our interest rate risk management program, their
incremental effect on interest expense for the years ended December 31, 2000,
1999 and 1998 was not significant.
In addition to the interest rate instruments listed in the table above, we
maintain collars with an aggregate $520 million notional amount maturing in
2004. The collar agreements are structured so that if LIBOR falls below 5.3%, we
pay 6.7%. If the LIBOR rate is between 5.3% and 8.0%, we pay LIBOR. The LIBOR
rate is
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capped at 8.0% if LIBOR falls between 8.0% and 9.9%. If rates go above 9.9%, the
cap is removed. As of December 31, 2000, the fair value of the collars was a
liability of $10.8 million.
In January 2001, Charter Holdings and Charter Capital issued $900 million
10.75% senior notes due 2009, $500 million 11.125% senior notes due 2011 and
$675 million 13.5% senior discount notes due 2011. The net proceeds from the
selling of these notes, approximately $1.72 billion, were used, in part, to
repay all remaining amounts outstanding under the Charter Holdings 2000 senior
bridge loan facility and the Fanch revolving credit facility, and a portion of
the amounts outstanding under the Charter Operating and Falcon revolving credit
facilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated financial statements, predecessor financial statements and
certain financial statements of entities or cable systems we acquired (as
required to comply with the application of Rule 3-05 of Regulation S-X and Staff
Accounting Bulletin 80), the related notes thereto, and the reports of
independent auditors are included in this Annual Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS
Charter Holdings is a holding company with no operations. Charter Capital
is a direct wholly owned finance subsidiary of Charter Holdings that exists
solely for the purpose of serving as co-obligor of the March 1999, January 2000
and January 2001 Charter Holdings notes and has no operations. Neither Charter
Holdings nor Charter Capital has any employees. We and our direct and indirect
subsidiaries are managed by Charter Communications, Inc. See "Item 13. Certain
Relationships and Related Transactions."
Charter Holdings has two directors, Jerald L. Kent and William D. Savoy.
The persons listed below are directors of Charter Communications, Inc., Charter
Communications Holding Company, Charter Holdings or Charter Capital, as
indicated. All of Charter Communications, Inc.'s directors are elected annually.
DIRECTORS POSITION
- --------- --------
Paul G. Allen........................ Chairman of the Board of Directors of Charter
Communications, Inc. and Director of Charter Communications
Holding Company
William D. Savoy..................... Director of Charter Communications, Inc., Charter
Communications Holding Company and Charter Holdings
Jerald L. Kent....................... Director of Charter Communications, Inc., Charter
Communications Holding Company, Charter Holdings and Charter
Capital
Marc B. Nathanson.................... Director of Charter Communications, Inc.
Ronald L. Nelson..................... Director of Charter Communications, Inc.
Nancy B. Peretsman................... Director of Charter Communications, Inc.
Howard L. Wood....................... Director of Charter Communications, Inc.
The following sets forth certain biographical information with respect to
the directors listed above.
PAUL G. ALLEN, 48, has been Chairman of the Board of Directors of Charter
Communications, Inc. since July 1999, and Chairman of the board of directors of
Charter Investment, Inc. since December 1998. Mr. Allen, a co-founder of
Microsoft Corporation, has been a private investor for more than five years,
with interests in over 140 companies, each contributing to the Wired World
vision that we share. Mr. Allen's
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investments include Vulcan Ventures Incorporated, Portland Trail Blazers NBA
team, Seattle Seahawks NFL franchise, Vulcan Programming, Inc. and Vulcan Cable
III Inc., and he has investments in USA Networks, Inc., TechTV, L.L.C.,
Dreamworks SKG, High Speed Access Corp., Wink Communications, Inc. and Oxygen
Media, LLC. He is a director of USA Networks, Inc., TechTV, L.L.C. and numerous
privately held companies.
JERALD L. KENT, 44, has been the President, Chief Executive Officer and a
director of Charter Communications, Inc. since July 1999 and of Charter
Investment (a predecessor to, and currently an affiliate of, Charter
Communications, Inc.) since April 1995. He previously held the position of chief
financial officer of Charter Investment. Prior to co-founding Charter Investment
in 1993, Mr. Kent was executive vice president and chief financial officer of
Cencom Cable Associates, Inc. Before that, he held other executive positions at
Cencom. Earlier, he was with Arthur Andersen LLP, where he attained the position
of tax manager. Mr. Kent is a member of the board of directors of High Speed
Access Corp., Cable Television Laboratories, Inc., Com21 Inc. and C-Span. He is
also a member of the executive committee and the board of directors of the
National Cable Television Association. Mr. Kent, a certified public accountant,
received his undergraduate and M.B.A. degrees from Washington University (St.
Louis). Mr. Kent's employment agreement provides that he serve on the Board of
Directors of Charter Communications, Inc. See "Item 13. Certain Relationships
and Related Transactions -- Employment and Consulting Agreements."
MARC B. NATHANSON, 55, has been a director of Charter Communications, Inc.
since January 2000. Mr. Nathanson is the chairman of Mapleton Investments LLC,
an investment vehicle formed in 1999. He also founded and served as chairman and
chief executive officer of Falcon Holding Group, Inc., a cable operator, and its
predecessors, from 1975 until 1999. He served as chairman and chief executive
officer of Enstar Communications Corporation, a cable operator, from 1988 until
November 1999. Prior to 1975, Mr. Nathanson held executive positions with
Teleprompter Corporation, Warner Cable and Cypress Communications Corporation.
In 1995, he was appointed by the President of the United States, and since 1998
has served as chairman of The Broadcasting Board of Governors. Pursuant to a May
1999 letter agreement, Mr. Nathanson serves as Vice-Chairman and as a director
of Charter Communications, Inc. See "Item 13. Certain Relationships and Related
Transactions -- Employment and Consulting Arrangements."
RONALD L. NELSON, 48, has been a director of Charter Communications, Inc.
since November 1999. Mr. Nelson is a founding member of DreamWorks LLC, a
multi-media entertainment company, where he has served in executive management
since 1994. Prior to that time, during his 15 years at Paramount Communications
Inc., he served in a variety of operating and executive positions. He currently
serves as a member of the board of directors of Advanced Tissue Sciences, Inc.
and Centre Pacific, L.L.C., a registered investment advisor. Mr. Nelson has a
B.S. degree from the University of California at Berkeley and an M.B.A. degree
from the University of California at Los Angeles.
NANCY B. PERETSMAN, 47, has been a director of Charter Communications, Inc.
since November 1999. Ms. Peretsman has been a managing director and executive
vice president of Allen & Company Incorporated, an investment bank unrelated to
Paul G. Allen, since 1995. From 1983 to 1995, she was an investment banker at
Salomon Brothers Inc., where she was a managing director since 1990. She is a
director of Priceline.com Incorporated and several privately held companies. She
has a B.A. degree from Princeton University and an M.P.P.M. degree from Yale
University.
WILLIAM D. SAVOY, 36, has been a director of Charter Communications, Inc.
since July 1999 and a director of Charter Investment since December 1998. Since
1990, Mr. Savoy has been an officer and a director of many affiliates of Mr.
Allen, including vice president and a director of Vulcan Ventures Incorporated,
president of Vulcan Northwest, Inc., and president and a director of Vulcan
Programming, Inc. and Vulcan Cable III Inc. Mr. Savoy also serves on the
advisory board of Dreamworks SKG and as a director of drugstore.com, High Speed
Access Corp., Metricom, Inc., Peregrine Systems, Inc., RCN Corporation,
Telescan, Inc., USA Networks, Inc., TechTV, L.L.C., Digeo Broadband, Inc. and
Value America, Inc. Mr. Savoy holds a B.S. degree in computer science,
accounting and finance from Atlantic Union College.
HOWARD L. WOOD, 61, has been a director of Charter Communications, Inc.
since January 2000. Mr. Wood co-founded Charter Investment in 1993 and served in
various executive capacities there until
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November 1999, when he became a consultant to Charter Communications, Inc. Prior
to 1993, Mr. Wood was chief executive officer of Cencom Cable Associates, Inc.,
where he also served in various other executive positions. Earlier he was
partner-in-charge of the St. Louis Tax Division of Arthur Andersen LLP. He is a
director of First State Community Bank, Gaylord Entertainment Company and Data
Research, Inc. Mr. Wood, a certified public accountant, graduated from
Washington University (St. Louis) School of Business.
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EXECUTIVE OFFICERS
The following persons are executive officers of each of Charter
Communications, Inc., Charter Communications Holding Company and Charter
Holdings:
EXECUTIVE OFFICERS POSITION
- ------------------ --------
Jerald L. Kent.................... President and Chief Executive Officer
David G. Barford.................. Executive Vice President and Chief Operating Officer
Mary Pat Blake.................... Senior Vice President -- Marketing and Charter Media
Eric A. Freesmeier................ Senior Vice President -- Administration
Thomas R. Jokerst................. Senior Vice President -- Advanced Technology Development
Kent D. Kalkwarf.................. Executive Vice President and Chief Financial Officer
Ralph G. Kelly.................... Senior Vice President -- Treasurer
David L. McCall................... Senior Vice President of Operations -- Eastern Division
John C. Pietri.................... Senior Vice President -- Engineering
Michael E. Riddle................. Senior Vice President and Chief Information Officer
Steven A. Schumm.................. Executive Vice President, Assistant to the President
Curtis S. Shaw.................... Senior Vice President, General Counsel and Secretary
Stephen E. Silva.................. Senior Vice President -- Corporate Development and
Technology
James (Trey) H. Smith, III........ Senior Vice President of Operations -- Western Division
Information regarding our executive officers is set forth below.
DAVID C. ANDERSEN, 52, Senior Vice President -- Communications. Prior to
joining Charter Communications, Inc. in May 2000, Mr. Andersen served as vice
president of Communications for CNBC, the worldwide cable and satellite business
news network subsidiary of NBC. Before that, starting in 1982 when he
established their public relations department, Mr. Andersen served in various
management positions at Cox Communications, Inc., most recently as vice
president of Public Affairs. Mr. Andersen serves on the board of KIDSNET, and is
a former chairman of the National Captioning Institute's Cable Advisory Board.
He received a B.S. degree in Journalism from the University of Kansas.
DAVID G. BARFORD, 42, Executive Vice President and Chief Operating Officer.
Mr. Barford was promoted to his current position in July 2000, having previously
served as Senior Vice President of Operations -- Western Division. Prior to
joining Charter Investment in 1995, Mr. Barford held various senior marketing
and operating roles during nine years at Comcast Cable Communications, Inc. He
received a B.A. degree from California State University, Fullerton, and an
M.B.A. degree from National University.
MARY PAT BLAKE, 45, Senior Vice President -- Marketing and Charter Media.
Prior to joining Charter Investment in 1995, Ms. Blake was active in the
emerging business sector and formed Blake Investments, Inc. in 1993. She has 18
years of experience with senior management responsibilities in marketing, sales,
finance, systems, and general management. Ms. Blake received a B.S. degree from
the University of Minnesota and an M.B.A. degree from the Harvard Business
School.
ERIC A. FREESMEIER, 48, Senior Vice President -- Administration. From 1986
until joining Charter Investment in 1998, Mr. Freesmeier served in various
executive management positions at Edison Brothers Stores, Inc. Earlier he held
management and executive positions at Montgomery Ward. Mr. Freesmeier holds
bachelor's degrees from the University of Iowa and a master's degree from
Northwestern University's Kellogg Graduate School of Management.
THOMAS R. JOKERST, 51, Senior Vice President -- Advanced Technology
Development. Mr. Jokerst joined Charter Investment in 1994. Previously he served
as a vice president of Cable Television Laboratories
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and as a regional director of engineering for Continental Cablevision. Mr.
Jokerst is a graduate of Ranken Technical Institute and of Southern Illinois
University.
KENT D. KALKWARF, 41, Executive Vice President and Chief Financial Officer.
Mr. Kalkwarf was promoted to the position of Executive Vice President in July
2000, having previously served as Senior Vice President. Prior to joining
Charter Investment in 1995, Mr. Kalkwarf was employed for 13 years by Arthur
Andersen LLP, where he attained the position of senior tax manager. He has
extensive experience in cable, real estate and international tax issues. Mr.
Kalkwarf has a B.S. degree from Illinois Wesleyan University and is a certified
public accountant.
RALPH G. KELLY, 44, Senior Vice President -- Treasurer. Prior to joining
Charter Investment in 1993, Mr. Kelly was controller and then treasurer of
Cencom Cable Associates. He left Charter Investment in 1994, to become chief
financial officer of CableMaxx, Inc., and returned in 1996. Mr. Kelly received
his bachelor's degree in accounting from the University of Missouri -- Columbia
and his M.B.A. degree from Saint Louis University.
JERALD L. KENT, 44, President, Chief Executive Officer and Director. Mr.
Kent has held these positions with Charter Communications, Inc. since July 1999
and with Charter Investment since April 1995. He previously held the position of
chief financial officer of Charter Investment. Prior to co-founding Charter
Investment in 1993, Mr. Kent was executive vice president and chief financial
officer of Cencom Cable Associates, Inc. Before that, he held other executive
positions at Cencom. Earlier, he was with Arthur Andersen LLP, where he attained
the position of tax manager. Mr. Kent is a member of the board of directors of
High Speed Access Corp., Digeo Broadband Inc., Cable Television Laboratories,
Inc., Com21 Inc. and C-Span. He is also a member of the executive committee and
the board of directors of the National Cable Television Association. Mr. Kent, a
certified public accountant, received his undergraduate and M.B.A. degrees from
Washington University (St. Louis).
DAVID L. MCCALL, 45, Senior Vice President of Operations -- Eastern
Division. Prior to joining Charter Investment in 1995, Mr. McCall was associated
with Crown Cable and its predecessor company, Cencom Cable Associates, Inc.,
from 1983 to 1994. Mr. McCall is a member of the Southern Cable Association's
Tower Club.
JOHN C. PIETRI, 51, Senior Vice President -- Engineering. Prior to joining
Charter Investment in 1998, Mr. Pietri was with Marcus Cable for nine years,
most recently serving as senior vice president and chief technical officer.
Earlier he was in operations with West Marc Communications and Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
MICHAEL E. RIDDLE, 42, Senior Vice President and Chief Information Officer.
Prior to joining Charter Communications, Inc. in December 1999, Mr. Riddle was
director, applied technologies of Cox Communications for four years. Prior to
that, he held technical and management positions during 17 years at Southwestern
Bell and its subsidiaries. Mr. Riddle attended Fort Hays State University.
STEVEN A. SCHUMM, 48, Executive Vice President, Assistant to the President.
Prior to joining Charter Investment in 1998, Mr. Schumm was managing partner of
the St. Louis office of Ernst & Young LLP for 14 years. He had joined Ernst &
Young in 1974. He served as one of 10 members of the firm's National Tax
Committee. Mr. Schumm earned a B.S. degree from Saint Louis University.
CURTIS S. SHAW, 52, Senior Vice President, General Counsel and Secretary.
From 1988 until he joined Charter Investment in 1997, Mr. Shaw served as
corporate counsel to NYNEX. Since 1973, Mr. Shaw has practiced as a corporate
lawyer, specializing in mergers and acquisitions, joint ventures, public
offerings, financings, and federal securities and antitrust law. Mr. Shaw
received a B.A. degree from Trinity College and a J.D. degree from Columbia
University School of Law.
STEPHEN E. SILVA, 41, Senior Vice President -- Corporate Development and
Technology. Mr. Silva joined Charter Investment in 1995 and has also served as
vice president responsible for billing services and new product development. Mr.
Silva previously served in various management positions at U.S. Computer
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Services, Inc., a billing service provider specializing in the cable industry.
He is a member of the board of directors of High Speed Access Corp. and Diva
Systems Corporation.
JAMES (TREY) H. SMITH, III, 53, Senior Vice President of
Operations -- Western Division. Mr. Smith was appointed to his current position
in September 2000, previously serving as a division president of AT&T Broadband.
Before that, he was president and chief executive officer of Rogers Cablesystems
Ltd., senior vice president of the Western Region for MediaOne/Continental Cable
and executive vice president of operations for Times Mirror Cable TV, Inc. He
received B.B.A. and M.B.A. degrees from Georgia State University and is a
certified public accountant.
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
The employee directors of Charter Holdings, Charter Capital, Charter
Communications Holding Company and Charter Communications, Inc. are not entitled
to any additional compensation for serving as director nor are they paid any
fees for attendance at any Board meetings. Each non-employee director of Charter
Communications, Inc., other than Mr. Allen, was issued 40,000 fully vested
options for agreeing to join the Board of Directors of Charter Communications,
Inc. All non-employee directors of Charter Communications, Inc. received an
annual grant of 10,000 vested options in February 2001. All directors of Charter
Communications, Inc. are entitled to reimbursement for costs incurred in
connection with attendance at Board and committee meetings and may receive
additional compensation to be determined.
Mr. Kent is a party to an employment agreement with Charter Communications,
Inc. Mr. Wood is a party to a consulting agreement with Charter Communications,
Inc. and Mr. Nathanson is a party to a letter agreement with Charter
Communications, Inc. These agreements are summarized in "Item 13. Certain
Relationships and Related Transactions -- Employment and Consulting
Arrangements."
EXECUTIVE COMPENSATION
Summary Compensation Table
None of the executive officers listed in Item 10 above has ever received
any compensation from Charter Holdings or Charter Capital, nor do such
individuals expect to receive compensation from Charter Holdings or Charter
Capital at any time in the future.
The following table sets forth information regarding the compensation paid
for services rendered in 2000 to executive officers of Charter Holdings for the
fiscal years ended December 31, 1998, 1999 and 2000, including the Chief
Executive Officer and each of the other four most highly compensated executive
officers as of December 31, 2000. Through the beginning of November 1999, such
executive officers had received their compensation from Charter Investment.
Since November 1999, such officers receive their compensation from Charter
Communications, Inc.
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LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARD
YEAR ----------------------------------------- SECURITIES
ENDED OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($)(1) COMPENSATION(2) OPTIONS(#) COMPENSATION($)(3)
- --------------------------- ------- --------- ----------- --------------- ------------ ------------------
Jerald L. Kent............ 2000 1,250,000 1,000,000 127,005(4) -- 5,250
President and Chief 1999 1,250,000 625,000 76,799(5) -- 4,000
Executive Officer 1998 790,481 641,353 -- 7,044,127 18,821
Steven A. Schumm(6)....... 2000 410,000 444,000 -- -- 2,040
Executive Vice President 1999 400,000 60,000 -- 782,681 1,920
1998 12,307 12,300 -- -- --
David G. Barford.......... 2000 255,000 250,500 -- 40,000 5,250
Executive Vice President 1999 235,000 80,000 -- 200,000 7,000
and Chief Operating 1998 220,000 225,000(7) -- -- 8,395,235(8)
Officer
Kent D. Kalkwarf.......... 2000 225,000 250,500 -- 40,000 5,250
Executive Vice President 1999 180,000 80,000 -- 200,000 2,586
and Chief Financial 1998 135,000 55,000 -- -- 7,768,091(8)
Officer
David L. McCall........... 2000 225,000 283,625 -- 25,000 4,237
Senior Vice President of 1999 149,656 108,800 -- 200,000 505
Operations -- Eastern 1998 133,414 107,180 -- -- 4,193,495(8)
Division
- ---------------
(1) Includes "stay" bonus of $321,000 for Mr. Schumm and $160,500 for each of
Messrs. Barford, Kalkwarf and McCall in the form of principal and interest
forgiven during 2000 under employee's promissory note, as more fully
described in "Item 13. Certain Relationships and Related
Transactions -- Employment and Consulting Arrangements."
(2) Includes other annual non-cash compensation, such as company-paid health,
disability and life insurance premiums pursuant to plans covering all
employees, unless the aggregate amount does not exceed the lesser of $50,000
or 10% of such officer's total annual salary and bonus shown in the table.
(3) Includes matching contributions under Charter Communications, Inc.'s 401(k)
plan.
(4) Includes $35,499 attributed to personal use of corporate airplane and
$85,214 as reimbursement for purchase of a car.
(5) Includes $55,719 paid for club membership and dues and $20,351 attributed to
personal use of corporate airplane.
(6) Mr. Schumm became affiliated with Charter Investment on December 16, 1998.
(7) Includes $150,000 received as a one-time bonus.
(8) Received in March 1999 in connection with a one-time change of control
payment under the terms of a previous equity appreciation rights plan. This
payment was triggered by Mr. Allen's acquisition of control on December 23,
1998, but was income for 1999.
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2000 OPTION GRANTS
The following table shows individual grants of options made to executive
officers named in the Summary Compensation Table during 2000. All such grants
were made under the 1999 Option Plan and the exercise price was based upon the
fair market value of the underlying securities on the date of grant.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------------
NAME GRANTED(1) IN 2000 PRICE DATE 5% 10%
- ---- ---------- ---------- -------- ---------- ---------- ------------
Jerald L. Kent............. -- -- -- -- -- --
Steven A. Schumm........... -- -- -- -- -- --
David G. Barford........... 40,000 0.4 $19.47 2/15/10 489,783 2,020,007
Kent D. Kalkwarf........... 40,000 0.4 $19.47 2/15/10 489,783 2,020,007
David L. McCall............ 25,000 0.2 $19.47 2/15/10 306,114 1,262,504
- ---------------
(1) These options are exercisable as to 25% of the underlying securities at the
fifteenth month after grant, and thereafter, as to 1/45 of the remaining
securities in each of the next 45 months. These options were granted under
the 1999 Option Plan and, when vested, are exercisable for membership units
of Charter Communications Holding Company, which are immediately exchanged
on a one-for-one basis for shares of Charter Communications Inc.'s Class A
common stock.
(2) This column shows the hypothetical gains on the options granted based on
assumed annual compound price appreciation of 5% and 10% over the full
ten-year term of the options. The assumed rates of appreciation are mandated
by the SEC and do not represent our estimate or projection of future prices.
1999 OPTION PLAN
Charter Holdings adopted an option plan on February 9, 1999, which was
assumed by Charter Communications Holding Company in May 1999. This plan
provides for the grant of options to purchase up to 25,009,798 membership units
in Charter Communications Holding Company to current and prospective employees
and consultants of Charter Communications Holding Company and its affiliates and
current and prospective non-employee directors of Charter Communications, Inc.
Membership units received upon exercise of any options are immediately exchanged
for shares of Charter Communications, Inc. Class A common stock on a one-for-one
basis.
As of March 15, 2001, a total of 20,913,384 options to purchase membership
units in Charter Communications Holding Company were outstanding under the plan.
One-fourth of the options vest on the 15-month anniversary of the date of grant
and the remaining vest 1/45 on each month anniversary following the 15-month
anniversary of the date of grant. The options expire after ten years from the
date of grant. The plan administrator has the discretion to accelerate the
vesting of any options.
2001 STOCK INCENTIVE PLAN
In February 2001, the Board of Directors of Charter Communications, Inc.
unanimously adopted the Charter Communications, Inc. 2001 Stock Incentive Plan
(the "2001 Incentive Plan"). This plan provides for the grant of Nonqualified
Stock Options, Stock Appreciation Rights, Dividend Equivalent Rights,
Performance Units and Performance Shares, Share Awards, Phantom Stock and
Restricted Stock (as each term is defined in the 2001 Incentive Plan. The number
of shares of Class A Common Stock of Charter Communications, Inc. available for
stock-based options and awards under this plan is such that the combined number
of shares available under the 1999 Option Plan and the 2001 Incentive Plan will
be 60,000,000. The 2001 Incentive Plan extends to employees (including future
employees who have received a formal offer of employment), officers, consultants
and directors of Charter Communications, Inc., as well as subsidiaries and
affiliates of Charter Communications, Inc.
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As of March 15, 2001, options to purchase 6,823,450 shares of Class A
common stock have been granted, subject to approval of the plan by Charter
Communications, Inc.'s shareholders, which is expected to occur in June 2001.
Each option and award under the 2001 Incentive Plan will be evidenced by an
agreement that sets forth the terms of the grant. Under the 2001 Incentive Plan,
the Committee administering the plan has the authority to, among other things:
(i) select the individuals to whom options and awards will be granted, (ii)
determine the type, size and terms and conditions of options and awards and
(iii) establish the terms for treatment of options and awards upon a termination
of employment.
2000 AGGREGATED OPTION EXERCISES AND DECEMBER 31, 2000 OPTION VALUE TABLE
There were no option exercises by executive officers named in the Summary
Compensation Table in 2000. The following table sets forth, for such officers,
information concerning options, including the number of securities for which
options were held at December 31, 2000, the value of unexercised "in-the-money"
options (i.e., the positive spread between the exercise price of outstanding
options and the market value of Charter Communications Inc.'s Class A common
stock on December 31, 2000) and the value of unexercised options as of December
31, 2000.
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SECURITIES DECEMBER 31, 2000(1) DECEMBER 31, 2000(2)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
Jerald L. Kent.............. -- -- 3,522,063 3,522,064 $80,901,787 $80,901,810
Steven A. Schumm............ -- -- 300,027 482,654 6,981,620 11,086,103
David G. Barford............ -- -- 76,666 163,334 1,761,018 3,751,782
Kent D. Kalkwarf............ -- -- 76,666 163,334 1,761,018 3,751,782
David L. McCall............. -- -- 76,666 148,334 1,761,018 3,407,232
- ---------------
(1) These options are exercisable as to 25% of the underlying securities at the
fifteenth month after grant, and thereafter, as to 1/45 of the remaining
securities in each of the next 45 months. These options were granted under
the 1999 Option Plan and, when vested, are exercisable for membership units
of Charter Communications Holding Company, which are immediately exchanged
on a one-for-one basis for shares of Charter Communications Inc.'s Class A
common stock.
(2) Based on a per share market value of $22.97 for Charter Communications
Inc.'s Class A common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In February 2000, the Board of Directors of Charter Communications, Inc.
appointed a Compensation Committee comprised of Messrs. Allen, Savoy, Nathanson
and Wood, and executive officer compensation matters, including option grants,
were delegated to the Compensation Committee. In June 2000, the Board of
Directors of Charter Communications, Inc. appointed Nancy B. Peretsman and
Ronald L. Nelson to serve as a separate committee to administer the 1999 Option
Plan.
During 2000 and through the date hereof, no member of the Compensation
Committee or the Option Plan Committee was an officer or employee of Charter
Communications, Inc. or any of its subsidiaries. Mr. Wood served as an officer
of Charter Communications, Inc. for several months in 1999, and served as a
consultant to Charter Communications, Inc. in 2000. Mr. Nathanson served as an
officer of certain of Charter Communications, Inc.'s subsidiaries prior to their
acquisition by Charter Communications, Inc. Transactions between Charter
Communications, Inc. and certain members of the Compensation Committee are more
fully described in "Item 13. Certain Relationships and Related Transactions."
None of the executive officers of Charter Communications, Inc., Charter
Communications Holding Company, Charter Holdings or Charter Capital serve on the
compensation committee of any other company
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that has an executive officer currently serving on the Board of Directors of
Charter Communications Inc. or any of its affiliates, the Compensation Committee
or the Option Plan Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of Charter Communications, Inc.'s Class A common stock as of March 15,
2001 by:
- each of our directors and the directors of Charter Communications, Inc.;
- each of our executive officers and the executive officers of Charter
Communications, Inc. named in the Summary Compensation Table;
- all directors and executive officers of Charter Holdings and Charter
Communications, Inc. as a group; and
- each person known by us to own beneficially 5% or more of the outstanding
Charter Communications, Inc. Class A common stock.
With respect to the percentage of voting power set forth in the following
table:
- each holder of Charter Communications, Inc. Class A common stock is
entitled to one vote per share; and
- each holder of Charter Communications, Inc. Class B common stock is
entitled to a number of votes based on the number of such holder's and
his affiliates' shares of Class B common stock and membership units of
Charter Communications Holding Company exchangeable for Class B common
stock. For example, Mr. Allen is entitled to ten votes for each share of
Class B common stock held by him or his affiliates and ten votes for each
membership unit of Charter Communications Holding Company held by him or
his affiliates.
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SHARES CLASS A COMMON STOCK
RECEIVABLE ON ----------------------------------------
NUMBER OF EXERCISE OF SHARES ISSUABLE % OF
CLASS A SHARES VESTED UPON EXCHANGE % OF VOTING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OPTIONS(2) OR CONVERSION(3) EQUITY(4) POWER(5)
- ------------------------------------ -------------- ------------- ---------------- --------- --------
Paul G. Allen(6)................. 8,900,883 10,000 324,300,479(7) 48.21% 93.5%
Charter Investment, Inc.(8)...... -- -- 217,585,246(9) 48.20% *
Vulcan Cable III Inc.(6)......... -- -- 106,715,233(11) 31.34% *
Jerald L. Kent................... 22,000 4,109,074 1.74% *
Howard L. Wood................... -- 155,000 * *
Marc B. Nathanson(10)............ 9,967,435 50,000 4.28% *
Ronald L. Nelson................. 17,500 50,000 * *
Nancy B. Peretsman............... 10,000 50,000 * *
William D. Savoy................. -- 50,000 735,126(11) * *
Steven A. Schumm(12)............. 3,700 339,161 * *
David G. Barford................. 2,500 86,666 * *
Kent D. Kalkwarf................. 9,000 86,666 * *
David L. McCall.................. 4,700 86,666 * *
All current directors and executive
officers as a group (21
persons)....................... 19,040,893 5,645,315 324,300,479 61.91% 93.9%
TCID of Michigan, Inc............ -- -- 15,117,743 6.1% *
- ---------------
* Less than 1%.
(1) Includes shares for which the named person has:
- Sole voting and investment power; or
- Shared voting and investment power with a spouse.
Does not include shares that may be acquired through exercise of options.
(2) Includes shares of Charter Communications, Inc. Class A common stock
issuable upon exercise of options vested on or before May 14, 2001 under
the 1999 Option Plan. Furthermore, because the controlling shareholder of
Charter Communications, Inc. has advised Charter Communications, Inc. of
his intent to vote to approve the 2001 Incentive Plan, this number also
includes options granted to directors under the 2001 Incentive Plan, which
were fully vested upon grant but the exercise of which is conditioned on
the Charter Communications, Inc. shareholders' approval of the plan at the
upcoming annual meeting.
(3) Beneficial ownership is determined in accordance with Rule 13d-3. The
beneficial owners of Charter Communications, Inc.'s Class B common stock,
Charter Communications Holding Company membership units and CC VIII, LLC
membership units are deemed to be beneficial owners of an equal number of
shares of the Charter Communications, Inc.'s Class A common stock because
such holdings are either convertible into Class A shares (in the case of
Class B shares) or exchangeable (directly or indirectly) into Class A
shares (in the case of the membership units) on a one-for-one basis. Unless
otherwise noted, the named holders have sole investment and voting power
with respect to the shares listed as beneficially owned.
(4) The calculation of this percentage assumes for each person that:
- 233,745,869 shares of Class A common stock are currently issued and
outstanding;
- 50,000 shares of Class B common stock held by Mr. Allen have been
converted into shares of Class A common stock;
- the acquisition by such person of all shares of Class A common stock
that such person or affiliates of such person has the right to acquire
upon exchange of membership units in subsidiaries;
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- the acquisition by such person of all shares that may be acquired upon
exercise of options to purchase shares or exchangeable membership
units that have vested or will vest by May 14, 2001; and
- that none of the other listed persons or entities has received any
shares of Class A common stock that are issuable to any of such
persons pursuant to the exercise of options or otherwise.
A person is deemed to have the right to acquire shares of Class A common
stock with respect to vested options under the 1999 Option Plan. When
vested, these options are exercisable for membership units of Charter
Communications Holding Company, which are immediately exchanged on a
one-for-one basis for shares of Charter Communications, Inc.'s Class A
common stock. A person is also deemed to have the right to acquire shares
of Class A common stock issuable upon the exercise of vested options under
the 2001 Incentive Plan.
(5) The calculation of this percentage assumes that Mr. Allen's equity
interests are retained in the form that maximizes voting power (i.e., the
50,000 shares of Class B common stock held by Mr. Allen have not been
converted into shares of Class A common stock; that the membership units of
Charter Communications Holding Company owned by both Vulcan Cable III Inc.
and Charter Investment have not been exchanged for shares of Class A common
stock); and that outstanding membership units of CC VIII, LLC owned by TCID
of Michigan, Inc. have not been exchanged for shares of Class A common
stock.
(6) The address of these persons is 505 Fifth Avenue, Suite 900, Seattle, WA
98104.
(7) The total listed is comprised of:
- 217,585,246 membership units in Charter Communications Holding Company
held by Charter Investment;
- 106,715,233 membership units in Charter Communications Holding Company
held by Vulcan Cable III Inc.; and
- 50,000 shares of Class B common stock held directly by Mr. Allen (100%
of the Class B common stock issued and outstanding).
(8) Includes 217,585,246 membership units in Charter Communications Holding
Company which are exchangeable for shares of Class B common stock on a
one-for-one basis, which are convertible to shares of Class A common stock
on a one-for-one basis. The address of this person is 12444 Powerscourt
Drive, Suite 100, St. Louis, MO 63131.
(9) These membership units in Charter Communications Holding Company are
exchangeable for shares of Class A common stock at any time on a
one-for-one basis.
(10) Consists of the following shares:
- 4,023,336 shares for which he has sole investment and voting power;
- 5,543,654 shares for which he has shared investment and voting power;
and
- 400,445 shares for which he has sole investment power and shared
voting power.
(11) Includes 735,126 shares of Class A common stock that may be acquired by Mr.
Savoy upon exercise of options from Vulcan Cable III Inc. to purchase
membership units in Charter Communications Holding Company that have vested
or will vest by May 14, 2001.
(12) Includes 3,700 shares for which Mr. Schumm has shared investment and voting
power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following sets forth certain transactions in which we and our
directors, executive officers and affiliates are involved. We believe that each
of the transactions described below was on terms no less favorable to us than
could have been obtained from independent third parties.
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MANAGEMENT AND CONSULTING ARRANGEMENTS
MANAGEMENT ARRANGEMENTS. Charter Communications, Inc. has entered into
management arrangements with Charter Communications Holding Company and certain
of its subsidiaries. Under these agreements, Charter Communications, Inc.
provides management services for and operates the cable television systems owned
or to be acquired. The management agreements covering the CC VI and CC VII
Companies limit management fees payable to Charter Communications, Inc. to 5% of
gross revenues. Under the arrangement covering all of our other operating
subsidiaries, there is no limit on the dollar amount or percentage of revenues
payable as management fees. However, the aggregate amount paid by Charter
Communications Holding Company and all of its subsidiaries is limited to the
amount necessary to reimburse Charter Communications, Inc. for all of its
expenses, costs, losses, liabilities and damages paid or incurred by it in
connection with the performance of its services under the various management
agreements. The expenses subject to reimbursement include any fees that Charter
Communications, Inc. is obligated to pay under the mutual services agreement
described below. Payment of management fees by Charter Communications, Inc.'s
operating subsidiaries is subject to certain restrictions under the credit
facilities of such subsidiaries. In the event any portion of the management fee
due and payable is not paid, it is deferred and accrued as a liability. Any
deferred amount of the management fee will bear interest at the rate of 10% per
annum, compounded annually, from the date it was due and payable until the date
it is paid.
In 2000, we paid an aggregate of $4,957,000 as management fees, exclusive
of amounts paid to Charter Investment pursuant to the mutual services agreement
described below.
MUTUAL SERVICES AGREEMENT WITH CHARTER INVESTMENT AND CHARTER
COMMUNICATIONS HOLDING COMPANY. Charter Communications, Inc. has only 15
employees, all of whom are also executive officers of Charter Communications
Holding Company. Charter Communications, Inc., Charter Investment and Charter
Communications Holding Company are parties to a mutual services agreement. The
mutual services agreement provides that each party shall provide rights and
services to the others as may be reasonably requested for the management of
Charter Communications Holding Company and Charter Holdings and the cable
systems owned by their subsidiaries. The officers and employees of each party
are available to the other parties to provide these rights and services, and all
expenses and costs incurred in providing these rights and services are paid by
Charter Communications, Inc. Each of the parties will indemnify and hold
harmless the other parties and their directors, officers and employees from and
against any and all claims that may be made against any of them in connection
with the mutual services agreement except due to its or their gross negligence
or willful misconduct. The mutual services agreement expires on November 12,
2009, and may be terminated at any time by any party upon thirty days' written
notice to the other. During 2000, Charter Communications, Inc. paid $50,285,700
to Charter Investment for services rendered pursuant to the mutual services
agreement. All such amounts are reimbursable to Charter Communications, Inc.
pursuant to a management arrangement with its subsidiaries. See "-- Management
Arrangements."
CONSULTING AGREEMENT. Charter Communications Holding Company is a party to
a consulting agreement with Vulcan Northwest and Charter Investment. Pursuant to
this consulting agreement, Vulcan Northwest and Charter Investment provide
advisory, financial and other consulting services with respect to the
acquisitions by Charter Communications Holding Company of the business, assets
or stock of other companies. Such services include participation in the
evaluation, negotiation and implementation of these acquisitions. The original
agreement had an expiration date of December 31, 2000, but automatically renewed
by its terms and automatically renews for successive one-year terms unless
otherwise terminated. For services rendered, the consulting agreement provides
for payment of a fee equal to 1% of the aggregate value of the acquisition for
services rendered for each acquisition made by Charter Communications Holding
Company or any of its affiliates, reimbursement of reasonable out-of-pocket
expenses incurred and indemnification. In 2000, no fees were paid with respect
to consulting services by an affiliate of Mr. Allen.
PREVIOUS MANAGEMENT AGREEMENT WITH CHARTER INVESTMENT. Prior to November
12, 1999, Charter Investment provided management and consulting services to our
operating subsidiaries for a fee equal to 3% of the gross revenues of the
systems then owned plus reimbursement of expenses. The balance of management
fees payable under the previous management agreement was accrued with payment at
the discretion of
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Charter Investment, with interest payable on unpaid amounts. During 2000,
Charter Communications, Inc.'s subsidiaries paid $5,369,000 to Charter
Investment to reduce management fees payable. At December 31, 2000 total
management fees payable to Charter Investment were $13,751,000, exclusive of any
interest that may be charged.
ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN
As described under "Business Relationships" in this section, Mr. Allen and
a number of his affiliates have interests in various entities that provide
services or programming to our subsidiaries. Given the diverse nature of Mr.
Allen's investment activities and interests, and to avoid the possibility of
future disputes as to potential business, Charter Communications Holding Company
and Charter Communications, Inc., under the terms of their respective
organizational documents, may not, and may not allow their subsidiaries to,
engage in any business transaction outside the cable transmission business
except for the Digeo Broadband, Inc. joint venture; the joint venture to develop
a digital video recorder set-top terminal; the purchase of investment in High
Speed Access Corp.; the investment in Cable Sports Southeast, LLC, a provider of
regional sports programming; as an owner and operator of the business of
Interactive Broadcaster Services Corporation (Chat TV); and incidental
businesses engaged in as of the closing of Charter Communications, Inc.'s
initial public offering. This restriction will remain in effect until all of the
shares of high-vote Class B common stock in Charter Communications, Inc. have
been converted into shares of Class A common stock due to Mr. Allen's equity
ownership in Charter Communications, Inc. falling below specified thresholds.
Should Charter Communications, Inc. or Charter Communications Holding
Company or any of their subsidiaries wish to pursue, or allow their subsidiaries
to pursue, a business transaction outside of this scope, it must first offer Mr.
Allen the opportunity to pursue the particular business transaction. If he
decides not to pursue the business transaction and consents to Charter
Communications, Inc. or its subsidiaries engaging in the business transaction,
they will be able to do so. In any such case, the respective restated
certificate of incorporation and the amended and restated limited liability
company agreement of Charter Communications, Inc. and Charter Communications
Holding Company would be amended accordingly to appropriately modify the current
restrictions on their ability to engage in any business other than the cable
transmission business. The cable transmission business means the business of
transmitting video, audio, including telephony, and data over cable television
systems owned, operated or managed by Charter Communications, Inc., Charter
Communications Holding Company or any of their subsidiaries from time to time.
The businesses of RCN Corporation, a company in which Mr. Allen has made a
significant investment, are not considered cable transmission businesses under
these provisions. See "-- Business Relationships -- RCN Corporation."
Under Delaware corporate law, each director of Charter Communications,
Inc., including Mr. Allen, is generally required to present to Charter
Communications, Inc., any opportunity he or she may have to acquire any cable
transmission business or any company whose principal business is the ownership,
operation or management of cable transmission businesses, so that we may
determine whether we wish to pursue such opportunities. However, Mr. Allen and
the other directors generally will not have an obligation to present other types
of business opportunities to Charter Communications, Inc. and they may exploit
such opportunities for their own account.
INTERCOMPANY LOANS
From time to time, there are intercompany borrowings and repayments between
or among Charter Communications, Inc. and its subsidiaries and between or among
its subsidiaries. For amounts borrowed, our practice is for the borrowing party
to pay interest to the lending party based on the borrower's cost of funds on
its revolving credit facility, which is based on a spread over LIBOR. On
occasion, indebtedness between companies has been forgiven in lieu of a
contribution to capital. The average month-end principal balance of indebtedness
from our subsidiaries to our parent companies during 2000 was $250 million. The
aggregate interest paid by our operating subsidiaries for parent company
indebtedness was $22.8 million, and accrued interest on such debt at December
31, 2000 was $2.3 million.
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EMPLOYMENT AND CONSULTING ARRANGEMENTS
Jerald L. Kent is employed by Charter Communications, Inc. pursuant to an
employment agreement that terminates on December 23, 2001 with automatic
one-year renewals. Under this agreement, Mr. Kent has agreed to serve as
President and Chief Executive Officer of Charter Communications, Inc., with
responsibility for the nationwide general management, administration and
operation of all present and future business of Charter Communications, Inc. and
its subsidiaries. The agreement provides that during the initial term, Mr. Kent
would receive an annual base salary of $1,250,000, or such higher rate as may
from time to time be determined by Charter Communications, Inc.'s Board of
Directors in its discretion and an annual bonus in an aggregate amount not to
exceed $625,000, to be determined by the Board based on an assessment of the
performance of Mr. Kent as well as the achievement of certain financial targets.
Charter Communications, Inc. also agreed to cause Mr. Kent to be elected to
Charter Communications, Inc.'s Board of Directors as additional compensation.
Effective for 2001, Mr. Kent's base salary was increased to $1,500,000. Also in
2001, he received a $1,000,000 bonus for services rendered in 2000.
Under the agreement, Mr. Kent is entitled to participate in any disability
insurance, pension or other benefit plan afforded to employees generally or to
executives of Charter Communications, Inc. Mr. Kent will be reimbursed by
Charter Communications, Inc. for life insurance premiums of up to $30,000 per
year and is granted personal use of the corporate airplane. Mr. Kent also is
entitled to the use of a car valued at up to $100,000 and the fees and dues for
his membership in a country club of his choice. In 2000, Mr. Kent did not avail
himself of reimbursement for life insurance premiums or country club dues.
In connection with this agreement, Mr. Kent received options to purchase
7,044,127 Charter Communications Holding Company membership units with an
exercise price of $20.00. The options have a term of ten years and vested 25% on
December 23, 1998. The remaining 75% vest 1/36 on the first day of each of the
36 months commencing January 1, 2000. The terms of these options provide that
immediately following the issuance of membership units received upon exercise of
such options, these units will be automatically exchanged for shares of Charter
Communications, Inc. Class A common stock on a one-for-one basis.
The agreement further provides that Charter Communications, Inc. will
indemnify and hold harmless Mr. Kent to the maximum extent permitted by law from
and against any claims, damages, liabilities, losses, costs or expenses in
connection with or arising out of the performance by Mr. Kent of his duties.
If the agreement expires because Charter Communications, Inc. gives Mr.
Kent notice of its intention not to extend the initial term, or if the agreement
is terminated by Mr. Kent for good reason or by Charter Communications, Inc.
without cause:
- Charter Communications, Inc. will pay to Mr. Kent an amount equal to the
aggregate base salary due to Mr. Kent for the remaining term and the
Charter Communications, Inc. Board of Directors will consider additional
amounts, if any, to be paid to Mr. Kent; and
- any unvested options held by Mr. Kent shall immediately vest.
Pursuant to an automatically renewing consulting agreement between Charter
Communications, Inc. and Howard L. Wood, Mr. Wood provides consulting services
to Charter Communications, Inc. and also is responsible for such other duties as
the Chief Executive Officer determines. Mr. Wood receives annual cash
compensation at a rate of $60,000, and is entitled to receive health benefits as
well as use of an office and a full-time secretary. The cost of the office and
secretary in 2000 was $40,000. Charter Communications, Inc. will indemnify and
hold harmless Mr. Wood to the maximum extent permitted by law from and against
any claims, damages, liabilities, losses, costs or expenses incurred in
connection with or arising out of the performance by him of his duties.
Charter Investment issued 1999 "stay bonuses" and Charter Communications,
Inc. issued 2000 "stay bonuses" to executive officers in the form of three-year
promissory notes. One-third of the original outstanding principal amount of each
of these notes and interest is forgiven at the end of each of the first three
anniversaries of the issue date, as long as the employee is still employed by
the issuer of the bonus or any of its
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affiliates. Generally, the promissory notes bear interest at 7% per year. The
following table provides certain information about such notes as of December 31,
2000.
OUTSTANDING BALANCE
INDIVIDUAL ISSUE DATE AS OF 12/31/00
- ---------- --------------- -------------------
David C. Andersen........................................ April, 2000 $150,000
David G. Barford......................................... January, 1999 300,000
Mary Pat Blake........................................... January, 1999 300,000
Eric A. Freesmeier....................................... January, 1999 300,000
Thomas R. Jokerst........................................ January, 1999 300,000
Kent D. Kalkwarf......................................... January, 1999 300,000
Ralph G. Kelly........................................... January, 1999 300,000
David L. McCall.......................................... January, 1999 300,000
John C. Pietri........................................... January, 1999 150,000
Steven A. Schumm......................................... January, 1999 600,000
Curtis S. Shaw........................................... January, 1999 300,000
Stephen E. Silva......................................... January, 1999 200,000
James (Trey) H. Smith.................................... September, 2000 200,000
Effective as of May 25, 1999, Marc B. Nathanson entered into a letter
agreement with Charter Communications, Inc. for a three-year term. Under this
agreement, Mr. Nathanson serves as Vice-Chairman and as a director of Charter
Communications, Inc. During the term of this agreement, Mr. Nathanson receives a
benefit equal to $193,197 per year, which amount is being paid by Charter
Communications, Inc. to a company controlled by Mr. Nathanson. In addition, Mr.
Nathanson is entitled to the rights and benefits provided to other directors of
Charter Communications, Inc. Charter Communications, Inc. will indemnify and
hold harmless Mr. Nathanson to the maximum extent permitted by law from and
against any claims, damages, liabilities, losses, costs or expenses incurred in
connection with or arising out of the performance by Mr. Nathanson of his
duties.
OTHER RELATIONSHIPS
David L. McCall, Senior Vice President of Operation -- Eastern Division, is
a partner in a partnership that leases office space to us. In 2000, the
partnership received approximately $126,470 pursuant to such lease and related
agreements. In addition, approximately $457,000 was paid to a construction
company controlled by Mr. McCall's brother and $270,695 to a construction
company controlled by Mr. McCall's son.
A company controlled by Mr. Wood occasionally leases an airplane to Charter
Communications, Inc. and its subsidiaries and affiliates for business travel. An
hourly time share rate is paid for such usage. Mr. Wood's affiliated company
reimburses Charter Communications, Inc. for the full annual cost of two
individuals qualified to operate the plane and who are otherwise available to
Charter Communications, Inc. in connection with its own flight operations, which
amount was $123,843 in 2000. Charter Communications, Inc. paid Mr. Wood's
affiliate $2,200 in 2000 for time share usage of the airplane. In addition, Mr.
Wood has also used Charter Communications, Inc.'s airplane for occasional
personal use in 2000, a benefit valued at $19,900.
In addition, Mr. Wood's daughter, a Vice President of Charter
Communications Holding Company, received a bonus in the form of a three-year
promissory note bearing interest at 7% per year. One-third of the original
outstanding principal amount of the note and interest are forgiven as long as
she remains employed by our subsidiary at the end of each of the first three
anniversaries of the issue date in February 1999. The amount of principal and
interest forgiven on this note in 2000 was $80,250 and the outstanding balance
on the note as of December 31, 2000 was $150,000.
In addition, companies controlled by Mr. Nathanson lease certain office
space in Pasadena, California, and warehouse space in Riverside, California, to
our subsidiaries. Mr. Nathanson's affiliates received total annual rent in 2000
of $430,918 and $122,581, respectively, for these premises.
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BUSINESS RELATIONSHIPS
Mr. Allen or his affiliates own equity interests or warrants to purchase
equity interests in various entities with which we do business or which provide
us with services or programming. Among these entities are High Speed Access
Corp., WorldGate Communications, Inc., Wink Communications, Inc., TechTV,
L.L.C., USA Networks, Inc., Oxygen Media, Inc., Digeo Broadband, Inc., RCN
Corporation and Interval Research Corporation. Mr. Allen owns 100% of the equity
of Vulcan Ventures and is its chief executive officer. Mr. Savoy is also a vice
president and a director of Vulcan Ventures. The various cable, Internet and
telephony companies that Mr. Allen has invested in may mutually benefit one
another. The agreements governing our relationship with Digeo Broadband, Inc.
are an example of a cooperative business relationship among his affiliated
companies. We can give no assurance, nor should you expect, that any of these
business relationships will be successful, that we will realize any benefits
from these relationships or that we will enter into any business relationships
in the future with Mr. Allen's affiliated companies.
Mr. Allen and his affiliates have made, and in the future likely will make,
numerous investments outside of us and our business. We cannot assure you that,
in the event that we or any of our subsidiaries enter into transactions in the
future with any affiliate of Mr. Allen, such transactions will be on terms as
favorable to us as terms we might have obtained from an unrelated third party.
Also, conflicts could arise with respect to the allocation of corporate
opportunities between us and Mr. Allen and his affiliates. We have not
instituted any formal plan or arrangement to address potential conflicts of
interest.
In June 1999, Charter Communications Holding Company entered into the
Bresnan purchase agreement. In February 2000, Charter Communications Holding
Company assigned its rights under the Bresnan purchase agreement to purchase
certain assets to Charter Holdings and Charter Holdings accepted such assignment
and assumed all obligations of Charter Communications Holding Company under the
Bresnan purchase agreement with respect to those assets.
VULCAN VENTURES. Vulcan Ventures Incorporated, Charter Communications,
Inc., Charter Investment and Charter Communications Holding Company are parties
to an agreement dated September 21, 1999 regarding the right of Vulcan Ventures
to use up to eight of our digital cable channels. Specifically, we will provide
Vulcan with exclusive rights for carriage of up to eight digital cable
television programming services or channels on each of the digital cable
television systems with local control of the digital product owned, operated,
controlled or managed by Charter Communications, Inc. now or in the future of
550 megahertz or more. If the system offers digital services but has less than
550 megahertz of capacity, then the programming services will be equitably
reduced. Upon request of Vulcan Ventures, we will attempt to reach a
comprehensive programming agreement pursuant to which we will pay the
programmer, if possible, a fee per digital subscriber. If such fee arrangement
is not achieved, then we and the programmer shall enter into a standard
programming agreement. We believe that this transaction is on terms at least as
favorable to us as Mr. Allen would negotiate with other cable operators.
HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet
access over cable modems. Charter Communications Holding Company is a party to a
systems access and investment agreement with Vulcan Ventures and High Speed
Access and a related network services agreement with High Speed Access. These
agreements provide High Speed Access with exclusive access to at least 750,000
of our homes that have either an installed cable drop from our cable system or
that are eligible for a cable drop by virtue of our cable system passing the
home. The term of the network services agreement is, as to a particular cable
system, five years from the date revenue billing commences for that cable
system. The programming content agreement provides each of Vulcan Ventures and
High Speed Access with a license to use certain content and materials of the
other on a non-exclusive, royalty-free basis. Net receipts received from High
Speed Access in 2000 were approximately $461,000.
In connection with the above-described agreements, Vulcan Ventures invested
an aggregate of $45 million in High Speed Access and now holds 22,224,688 shares
of High Speed Access common stock.
Additionally, Charter Communications Holding Company, as the assignee of
Vulcan Ventures, now holds warrants that were amended and restated on May 12,
2000, giving Charter Communications, Inc. the
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right to purchase up to 12,000,000 shares of High Speed Access common stock at
an exercise price of $3.23 per share. A portion of the warrants may be earned
under the agreements described above, and the other portion relates to warrants
that may be earned under an agreement entered into with High Speed Access on May
12, 2000, described below. Warrants earned under the agreements described above
become vested at the time systems are committed by us and are based upon the
number of homes passed. Warrants under these agreements can only be earned until
July 31, 2003, and are earned at the rate of 1.55 shares of common stock for
each home passed in excess of 750,000. Warrants earned under the agreements
described above are exercisable until May 25, 2006. Such warrants may be
forfeited in certain circumstances, generally if we withdraw a committed system.
As of December 31, 2000, Charter Communications, Inc. has earned 1,932,931
warrants under the agreements described above.
On May 12, 2000, Charter Communications, Inc. entered into a separate
agreement with High Speed Access, which was assigned by Charter Communications,
Inc. to Charter Communications Holding Company on August 1, 2000. Under the
agreement, it was agreed that homes passed by our cable television systems would
be committed to High Speed Access for which High Speed Access will provide
residential Tier 2 and above technical support and network operations center
support. Such systems will be in locations where we have launched or intend to
launch cable modem-based Internet access to residential customers. Tier 2
support is customer service support beyond the initial screening of a problem.
An agreement has been made to commit an aggregate of 5,000,000 homes
passed, including all homes passed in systems previously committed, to High
Speed Access (other than full turnkey systems), on or prior to May 12, 2003.
Additional homes passed may also be committed in excess of the initial
5,000,000. With respect to each system launched or intended to be launched, a
per customer fee will be paid to High Speed Access according to agreed pricing
terms. In addition, High Speed Access will also be compensated for services that
exceed certain minimum thresholds.
Warrants that may be earned under the new agreement become vested at the
time High Speed Access is authorized to proceed with respect to a system, and
will be based upon the number of homes passed in such system. With respect to
the initial aggregate 5,000,000 homes passed, the warrant provides that Charter
Communications Holding Company will have the right to purchase 0.775 shares of
common stock for every home passed. With respect to any additional homes passed
in excess of 5,000,000, the warrant provides that Charter Communications Holding
Company will have the right to purchase 1.55 shares of common stock for every
home passed. Warrants earned under the new agreement are exercisable until 7 1/2
years from the date they are earned. Such warrants are generally not subject to
forfeiture, even if the new agreement is terminated. High Speed Access has
agreed to increase the number of shares of common stock subject to the amended
and restated warrant, upon Charter Communications Holding Company's request, if
the number of warrants earned exceeds 11,500,000. High Speed Access also granted
Charter Communications Holding Company certain registration rights with respect
to shares of common stock held by Charter Communications Holding Company and its
direct and indirect subsidiaries, including shares of common stock issuable upon
exercise of the amended and restated warrant.
The new agreement governing the services to be provided by High Speed
Access has a term of five years. Charter Communications Holding Company has the
option to renew the agreement for additional successive five year terms on
similar terms. On each renewal date, High Speed Access will issue Charter
Communications Holding Company an additional warrant for each renewal term.
These renewal warrants will grant Charter Communications Holding Company the
right to purchase additional shares of common stock at a price of $10.00 per
share. The number of shares of common stock subject to a renewal warrant will be
determined based upon 0.50 shares of common stock for every home passed in each
system committed to High Speed Access during the initial five-year term and each
five-year renewal term.
Either party may terminate the new agreement, in whole or in part, if the
other party defaults, becomes insolvent or files for bankruptcy. Charter
Communications Holding Company may terminate the new agreement if High Speed
Access merges with another party or experiences a change of control. If Charter
Communications Holding Company terminates the new agreement, it may, in certain
circumstances, be required to pay a termination fee.
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Vulcan Ventures owns 47.4% of the outstanding stock of High Speed Access.
Jerald L. Kent, the President and Chief Executive Officer and a director of
Charter Communications Holding Company and Charter Communications, Inc.; Stephen
E. Silva, Senior Vice President -- Corporate Development and Technology of
Charter Communications Holding Company and Charter Communications, Inc.; and Mr.
Savoy, a member of the boards of directors of Charter Communications Holding
Company and Charter Communications, Inc., are all members of the board of
directors of High Speed Access.
Additionally, on December 5, 2000, one of our subsidiaries, Charter
Communications Ventures, LLC, and Vulcan Ventures purchased 38,000 shares and
37,000 shares, respectively, of senior convertible preferred stock of High Speed
Access for $38.0 million and $37.0 million, respectively. The preferred stock
has a liquidation preference of $1,000 per share. The preferred stock generally
shares in dividends on High Speed Access common stock on an "as converted to
common stock" basis and will be convertible into common stock of High Speed
Access at a conversion rate of $5.01875 per share of High Speed Access common
stock, subject to certain adjustments. Charter Communications Ventures and
Vulcan Ventures were granted certain preemptive, first refusal, registration and
board representation rights as part of the transaction.
WORLDGATE. WorldGate is a provider of Internet access through cable
systems. Charter Communications, Inc. has an affiliation agreement with
WorldGate for an initial term which expired in November 2000. The agreement
automatically renews for additional successive two-year periods upon expiration
of the initial five-year term, unless terminated by either party for failure of
the other party to perform any of its obligations or undertakings required under
the agreement. We started offering WorldGate service in 1998. Pursuant to the
agreement, we have agreed to use our reasonable best efforts to deploy the
WorldGate Internet access service within a portion of our cable systems and to
install the appropriate headend equipment in all of our major markets in those
systems. Major markets for purposes of this agreement include those in which we
have more than 25,000 customers. We incur the cost for the installation of
headend equipment. In addition, to the extent we determine that it is
economically practical, we have agreed to use our reasonable best efforts to
deploy such service in all non-major markets that are technically capable of
providing interactive pay-per-view service. When WorldGate has a telephone
return path service available, we will, if economically practical, use all
reasonable efforts to install the appropriate headend equipment and deploy the
WorldGate service in our remaining markets. Telephone return path service is the
usage of telephone lines to connect to the Internet to transmit data or receive
data. We have also agreed to market the WorldGate service within our market
areas. We pay a monthly subscriber access fee to WorldGate based on the number
of subscribers to the WorldGate service. We have the discretion to determine
what fees, if any, we will charge our subscribers for access to the WorldGate
service. For the year ended December 31, 2000, we paid WorldGate approximately
$5,089,200 consisting of $4,985,200 for equipment purchases and $104,000 for
subscriber access fees. We charged our subscribers approximately $393,830 for
the year ended December 31, 2000. Charter Communications, Inc. also owns 138,765
shares of WorldGate's common stock for which it paid an aggregate of $2,000,000.
On July 25, 2000, Charter Communications Holding Company entered into a
joint venture, named TV Gateway LLC, with WorldGate and several other cable
operators to develop and deploy a server-based interactive program guide.
Charter Communications Holding Company invested $850,000, providing it a 16.25%
ownership interest in the joint venture. For the first four years after the
formation of TV Gateway, Charter Communications Holding Company will earn
additional ownership units, up to a maximum of 750,000 ownership units, as the
interactive program guide is deployed to our customers. In connection with the
formation of the joint venture, on August 15, 2000, Charter Communications
Holding Company purchased 31,211 shares of common stock of WorldGate at $16.02
per share for an aggregate purchase price of $500,000. As a result of this
purchase, Charter Communications Holding Company received a $125,000 credit from
WorldGate against future equipment purchases relating to the deployment of its
service. Additionally, WorldGate granted Charter Communications Holding Company
warrants to purchase up to 500,000 shares of WorldGate common stock for a period
of seven years at a purchase price of $24.78. For a period of three years from
the date of closing, Charter Communications Holding Company will also be issued
warrants to purchase common stock of WorldGate based on the number of two-way
digital homes passed in the systems in which Charter Communications Holding
Company has deployed WorldGate service.
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WINK. Wink Communications, Inc. offers an enhanced broadcasting system
that adds interactivity and electronic commerce opportunities to traditional
programming and advertising. Viewers can, among other things, find news, weather
and sports information on-demand and order products through use of a remote
control. The existing agreement between Wink and Charter Communications Holding
Company expired in October 2000 and a new agreement is being negotiated. Either
party has the right to terminate the agreement for the other party's failure to
comply with any of its respective material obligations under the agreement.
Pursuant to the agreement, Wink granted us the non-exclusive license to use
their software to deliver the enhanced broadcasting to all of our cable systems.
We pay a fixed monthly license fee to Wink. We also supply all server hardware
required for deployment of Wink services. In addition, we agreed to promote and
market the Wink service to our customers within the area of each system in which
such service is being provided. We share in the revenue generated by Wink from
all fees collected for transactions generated by our customers. The amount of
revenue shared is based on the number of transactions per month. For the year
ended December 31, 2000, minimal revenue and expenses have been recognized as a
result of this agreement. Vulcan Ventures owns 985,200 shares of Wink's stock
and warrants to purchase shares of common stock and has a 3.2% equity interest
in Wink.
TECHTV. TechTV, L.L.C. operates a cable television channel which
broadcasts shows about technology and the Internet. Pursuant to a carriage
agreement terminating in 2008, TechTV has provided us with programming for
broadcast via our cable television systems at no cost. Carriage fee amounts per
subscriber are determined based on the percentage of subscribers in a particular
system receiving the services. These fees will be waived for systems with higher
penetration levels until December 31, 2003, and for systems with lower
penetration levels through April 30, 2001. In certain circumstances, we are
entitled to a percentage of TechTV's net product revenues from infomercials and
home shopping and attributed to our carriage of the service. Additionally, we
receive incentive payments for channel launches through December 31, 2003.
TechTV may not offer its services to any other cable operator which serves the
same or fewer number of customers at a more favorable rate or on more favorable
carriage terms.
On February 5, 1999, Vulcan Programming, which is 100% owned by Mr. Allen,
acquired an approximate one-third interest in TechTV. Mr. Savoy is the president
and director of Vulcan Programming. In January 2000, Vulcan Ventures acquired an
additional 64% in TechTV for $204.8 million bringing its interest in TechTV to
approximately 98.7%. The remaining 1.3% of TechTV is owned by its management and
employees. Mr. Allen is a director of TechTV and Mr. Savoy is vice president of
TechTV.
USA NETWORKS. USA Networks, Inc. operates USA Network and The Sci-Fi
Channel, which are cable television networks. USA Networks also operates Home
Shopping Network, which is a retail sales program available via cable television
systems. Pursuant to an agreement terminating in 2005, Charter Communications
Holding Company is a party to a non-exclusive affiliation agreement with USA
Networks for the cablecast of USA Network programming. Mr. Allen and Mr. Savoy
are also directors of USA Networks. As of March 15, 2001, Mr. Allen owned
approximately 8.2% and Mr. Savoy owned less than 1% of the capital stock of USA
Networks.
OXYGEN MEDIA, LLC. Oxygen Media provides programming content aimed at the
female audience for distribution over the Internet and cable television systems.
Vulcan Ventures invested $50 million in 1999 in Oxygen Media. Vulcan Ventures
has made equity investments in Oxygen Media of $50 million in 2000, with an
additional investment of $100 million contemplated in 2001. In addition, by
mid-year 2001, Charter Communications Holding Company expects to enter into a
carriage agreement with Oxygen Media pursuant to which we will carry Oxygen
Media programming content on certain of our cable systems. Mr. Savoy, a director
of Charter Communications, Inc. and Charter Communications Holding Company,
serves on the board of directors of Oxygen Media. Mr. Allen owns an approximate
19% interest in Oxygen Media.
PORTLAND TRAIL BLAZERS. On October 7, 1996, the former owner of our Falcon
cable systems entered into a letter agreement and a cable television agreement
with Trail Blazers Inc. for the cable broadcast in the metropolitan area
surrounding Portland, Oregon of pre-season, regular season and playoff
basketball games of the Portland Trail Blazers, a National Basketball
Association basketball team. Mr. Allen is the 100% owner of the Portland Trail
Blazers and Trail Blazers Inc. We continue to operate under the terms of these
agreements
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since our acquisition of the Falcon cable systems in November 1999. Under the
letter agreement, Trail Blazers Inc. is paid a fixed fee for each subscriber in
areas directly served by the Falcon cable systems. Under the cable television
agreement, we share subscription revenues with Trail Blazers Inc. Trail Blazers
Inc. provides technical facilities and services in connection with the cable
broadcast of the Portland Trail Blazers basketball games. The letter agreement
and the cable television agreement will terminate on September 30, 2001. We paid
approximately $1.1 million for the year ended December 31, 2000 in connection
with the cable broadcast of Portland Trail Blazers basketball games under the
cable television agreement.
DIGEO BROADBAND, INC. During 2001, we expect to offer Digeo Broadband's
television-based Internet access service in several markets. The Digeo product
is designed to blend the power of the Internet with the convenience of the
television. Through the use of an advanced digital set-top terminal, customers
will be able to access Internet-based streaming media on the television,
including both local and national news, sports and entertainment. The Internet
domain name of customers using this service will be "Charter TV." The Digeo
product is a "portal," which is an Internet web site that serves as a user's
initial point of entry to the World Wide Web. By offering selected content,
services and links to other web sites and a portal guide, it directs users
through the World Wide Web. In addition, the portal generates revenues from
advertising on it own web pages and by sharing revenues generated by linked or
featured web sites.
On March 5, 2001, Charter Communications, Inc. finalized a carriage
agreement with Digeo Broadband, which will function as its television-based
Internet portal for an initial six-year period. In connection with the execution
of the carriage agreement on March 5, 2001, Charter Communications, Inc.
(through Digeo Broadband Holdings, LLC ("Digeo Holdings")) also received an
equity interest in Digeo Broadband funded by Vulcan's contribution to Digeo
Holdings of approximately $21.2 million, which is subject to a priority return
of capital to Vulcan up to the amount so funded. Vulcan also agreed to make,
through January 24, 2004, certain additional contributions through Digeo
Holdings to acquire Digeo Broadband equity in order to maintain Charter
Communications, Inc.'s pro rata interest in Digeo in the event of certain future
Digeo equity financings by Digeo's founders. These additional equity interests
will also be subject to a priority return of capital to Vulcan up to the amount
so contributed. Mr. Allen and Mr. Savoy are directors of Digeo Broadband.
RCN CORPORATION. Vulcan Ventures, an entity controlled by Mr. Allen, owns
an approximate 26% equity interest in RCN Corporation, including its investment
of $1.65 billion in 2000. In October 1999, Charter Communications Holding
Company entered into a term sheet with RCN containing the principal terms of a
non-exclusive joint venture to provide telephony services to customers in our
Los Angeles cable systems. Charter Communications, Inc.'s certificate of
incorporation and Charter Communications Holding Company's limited liability
company agreement provide that the businesses of RCN are not deemed to be "cable
transmission businesses." Mr. Savoy, a director of Charter Communications, Inc.
is also a director of RCN. To date, we have had only preliminary discussions
with RCN and have not entered into definitive agreements.
JOINT VENTURE FOR DEVELOPMENT OF DIGITAL VIDEO RECORDER SET-TOP
TERMINAL. In September 2000, our subsidiary, Charter Communications Ventures,
entered into a joint venture with General Instrument Corporation (doing business
as the Broadband Communications Sector of Motorola, Inc.), ReplayTV, Inc. and
Interval Research Corporation, an entity controlled by Mr. Allen, to develop and
integrate digital video recording capabilities in digital set-top terminals. The
joint venture will focus on creating a set-top based digital video recording
platform that will be designed for storing video, audio and Internet content.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report:
(1) Financial Statements.
A listing of the financial statements, notes and reports of
independent public accountants required by Item 8 begins on page F-1
of this Annual Report.
(2) Financial Statement Schedules.
No financial statement schedules are required to be filed by Items 8
and 14(d) because they are not required or are not applicable, or
the required information is set forth in the applicable financial
statements or notes thereto.
(3) Exhibits (listed by numbers corresponding to the Exhibit Table of
Item 601 in Regulation S-K).
EXHIBIT DESCRIPTION
------- -----------
2.1 Merger Agreement, dated March 31, 1999, by and between
Charter Communications Holdings, LLC and Marcus Cable
Holdings, LLC (Incorporated by reference to Amendment No. 2
to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation filed on June 22, 1999 (File
No. 333-77499))
2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999,
between InterMedia Partners of West Tennessee, L.P. and
Charter Communications, LLC (Incorporated by reference to
Amendment No. 2 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on June
22, 1999 (File No. 333-77499))
2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID
1P-V, Inc. and Charter Communications, LLC (Incorporated by
reference to Amendment No. 2 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
June 22, 1999 (File No. 333-77499))
2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between
Robin Media Group, Inc., InterMedia Partners of West
Tennessee, L.P. and Charter RMG, LLC (Incorporated by
reference to Amendment No. 2 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
June 22, 1999 (File No. 333-77499))
2.6(d) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners Southeast, Charter Communications, LLC,
Charter Communications Properties, LLC, and Marcus Cable
Associates, L.L.C. (Incorporated by reference to Amendment
No. 2 to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation filed on June 22, 1999 (File
No. 333-77499))
2.6(d)(i) Amendment to Asset Exchange Agreement, made as of October 1,
1999, by and among InterMedia Partners Southeast and Charter
Communications, LLC, Charter Communications Properties, LLC
and Marcus Cable Associates, L.L.C. (Incorporated by
reference to Amendment No. 3 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on October
18, 1999 (File No. 333-83887))
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EXHIBIT DESCRIPTION
------- -----------
2.6(e) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners, a California Limited Partnership,
Brenmor Cable Partners, L.P. and Robin Media Group, Inc.
(Incorporated by reference to Amendment No. 2 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on June 22, 1999 (File No. 333-77499))
2.6(f) Common Agreement, dated April 20, 1999, between InterMedia
Partners, InterMedia Partners Southeast, InterMedia Partners
of West Tennessee, L.P., InterMedia Capital Partners IV,
L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners,
L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter
Communications Properties, LLC, Marcus Cable Associates,
L.L.C. and Charter RMG, LLC (Incorporated by reference to
Amendment No. 3 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July 2,
1999 (File No. 333-77499)) (Portions of this exhibit have
been omitted pursuant to a request for confidential
treatment.)
2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among InterLink Communications Partners, LLLP, the
sellers listed therein and Charter Communications, Inc. (now
called Charter Investment, Inc.) (Incorporated by reference
to Amendment No. 2 to the registration statement on Form S-4
of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on June
22, 1999 (File No. 333-77499))
2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among Rifkin Acquisition Partners, L.L.L.P., the sellers
listed therein and Charter Communications, Inc. (now called
Charter Investment, Inc.) (Incorporated by reference to
Amendment No. 4 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July
22, 1999 (File No. 333-77499))
2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among
the sellers listed therein and Charter Communications, Inc.
(now called Charter Investment, Inc.) (Incorporated by
reference to Amendment No. 4 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
July 22, 1999 (File No. 333-77499))
2.7(d) Assignment of Purchase Agreement with InterLink
Communications Partners, LLLP, dated as of June 30, 1999, by
and between Charter Communications, Inc. (now called Charter
Investment, Inc.) and Charter Communications Operating, LLC
(Incorporated by reference to Amendment No. 4 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on July 22, 1999 (File No. 333-77499))
2.7(e) Assignment of Purchase Agreement with Rifkin Acquisition
Partners L.L.L.P., dated as of June 30, 1999, by and between
Charter Communications, Inc. (now called Charter Investment,
Inc.) and Charter Communications Operating, LLC
(Incorporated by reference to Amendment No. 4 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on July 22, 1999 (File No. 333-77499))
2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30,
1999, by and between Charter Communications, Inc. (now
called Charter Investment, Inc.) and Charter Communications
Operating, LLC (Incorporated by reference to Amendment No. 4
to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation filed on July 22, 1999 (File
No. 333-77499))
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EXHIBIT DESCRIPTION
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2.7(g) Amendment to the Purchase Agreement with InterLink
Communications Partners, LLLP, dated June 29, 1999
(Incorporated by reference to Amendment No. 6 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on August 27, 1999 (File No. 333-77499))
2.7(h) Contribution Agreement, dated as of September 14, 1999, by
and among Charter Communications Operating, LLC, Charter
Communications Holding Company, LLC, Charter Communications,
Inc., Paul G. Allen and the certain other individuals and
entities listed on the signature pages thereto (Incorporated
by reference to Amendment No. 3 to the registration
statement on Form S-1 of Charter Communications, Inc. filed
on October 18, 1999 (File No. 333-83887))
2.7(i) Form of First Amendment to the Contribution Agreement dated
as of September 14, 1999, by and among Charter
Communications Operating, LLC, Charter Communications
Holding Company, LLC, Charter Communications, Inc. and Paul
G. Allen (Incorporated by reference to Amendment No. 5 to
the registration statement on Form S-1 of Charter
Communications, Inc. filed on November 4, 1999 (File No.
333-83887))
2.8 Contribution and Sale Agreement dated as of December 30,
1999, by and among Charter Communications Holding Company,
LLC, CC VII Holdings, LLC and Charter Communications VII,
LLC (Incorporated by reference to the report on Form 8-K of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on January
18, 2000 (File No. 333-77499))
2.9 Contribution and Sale Agreement dated as of December 30,
1999, by and among Charter Communications Holding Company,
LLC and Charter Communications Holdings, LLC (Incorporated
by reference to the report on Form 8-K of Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation filed on January 18, 2000 (File
No. 333-77499))
2.10(a) Securities Purchase Agreement, dated May 13, 1999, by and
between Avalon Cable Holdings LLC, Avalon Investors, L.L.C.,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC
and Charter Communications Holdings LLC and Charter
Communications, Inc. (now called Charter Investment, Inc.)
(Incorporated by reference to Amendment No. 1 to the
registration statement on Form S-4 of Avalon Cable of
Michigan LLC, Avalon Cable of Michigan Inc., Avalon Cable of
New England LLC and Avalon Cable Finance Inc. filed on May
28, 1999 (File No. 333-75453))
2.10(b) Assignment and Contribution Agreement, entered into as of
October 11, 1999 by and between Charter Communications
Holding Company, LLC and Charter Communications, Inc.
(Incorporated by reference to Amendment No. 3 to the
registration statement on Form S-1 of Charter
Communications, Inc. filed on October 18, 1999 (File No.
333-83887))
2.10(c) Assignment Agreement effective as of June 16, 1999, by and
among Charter Communications, Inc., Charter Communications
Holdings LLC, Charter Communications Holding Company, LLC,
Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon
Cable of Michigan Holdings, Inc. and Avalon Cable LLC
(Incorporated by reference to Amendment No. 3 to the
registration statement on Form S-1 of Charter
Communications, Inc. filed on October 18, 1999 (File No.
333-83887))
2.11(a) Purchase and Contribution Agreement, dated as of May 26,
1999, by and among Falcon Communications, L.P., Falcon
Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable
Trust, Falcon Holding Group, Inc. and DHN Inc. and Charter
Communications, Inc. (now called Charter Investment,
Inc.)(Incorporated by reference to Amendment No. 2 to the
registration statement on Form S-1 of Charter
Communications, Inc. filed on September 28, 1999 (File No.
333-83887))
74
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EXHIBIT DESCRIPTION
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2.11(b) First Amendment to Purchase and Contribution Agreement,
dated as of June 22, 1999, by and among Charter
Communications, Inc., Charter Communications Holding
Company, LLC, Falcon Communications, L.P., Falcon Holding
Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust,
Falcon Holding Group, Inc. and DHN Inc. (Incorporated by
reference to the quarterly report on Form 10-Q filed by
Falcon Communications, L.P. and Falcon Funding Corporation
on August 13, 1999 (File Nos. 333-60776 and 333-55755))
2.11(c) Form of Second Amendment to Purchase And Contribution
Agreement, dated as of October 27, 1999, by and among
Charter Investment, Inc., Charter Communications Holding
Company, LLC, Falcon Communications, L.P., Falcon Holding
Group, L.P., TCI Falcon Holdings, LLC, Falcon Holding Group,
Inc. and DHN Inc. (Incorporated by reference to Amendment
No. 5 to the registration statement on Form S-1 of Charter
Communications, Inc. filed on November 4, 1999 (File No.
333-83887))
2.11(d) Third Amendment to Purchase and Contribution Agreement dated
as of November 12, 1999, by and among Charter
Communications, Inc., Falcon Communications L.P., Falcon
Holdings Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable
Trust, Falcon Holding Group, Inc. and DHN Inc. (Incorporated
by reference to the report on Form 8-K of CC VII Holdings,
LLC and Falcon Funding Corporation filed on November 26,
1999 (File No. 033-60776))
2.12(a) Purchase Agreement, dated as of May 21, 1999, among
Blackstone TWF Capital Partners, L.P., Blackstone TWF
Capital Partners A L.P., Blackstone TWF Capital Partners B
L.P., Blackstone TWF Family Investment Partnership, L.P.,
RCF Carry, LLC, Fanch Management Partners, Inc., PBW Carried
Interest, Inc., RCF Indiana Management Corp, The Robert C.
Fanch Revocable Trust, A. Dean Windry, Thomas Binning, Jack
Pottle, SDG/Michigan Communications Joint Venture, Fanch-JV2
Master Limited Partnership, Cooney Cable Associates of Ohio,
Limited Partnership, North Texas Cablevision, LTD., Post
Cablevision of Texas, Limited Partnership, Spring Green
Communications, L.P., Fanch-Narragansett CSI Limited
Partnership, and Fanch Cablevision of Kansas General
Partnership and Charter Communications, Inc. (now called
Charter Investment, Inc.) (Incorporated by reference to
Amendment No. 2 to the registration statement on Form S-1 of
Charter Communications, Inc. filed on September 28, 1999
(File No. 333-83887))
2.12(b) Assignment of Purchase Agreement by and between Charter
Investment, Inc. and Charter Communications Holding Company,
LLC, effective as of September 21, 1999 (Incorporated by
reference to Amendment No. 3 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on October
18, 1999 (File No. 333-83887))
2.13 Purchase and Contribution Agreement, entered into as of June
1999, by and among BCI (USA), LLC, William Bresnan,
Blackstone BC Capital Partners L.P., Blackstone BC Offshore
Capital Partners L.P., Blackstone Family Investment
Partnership III L.P., TCID of Michigan, Inc. and TCI Bresnan
LLC and Charter Communications Holding Company, LLC (now
called Charter Investment, Inc.)(Incorporated by reference
to Amendment No. 2 to the registration statement on Form S-1
of Charter Communications, Inc. filed on September 28, 1999
(File No. 333-83887))
2.14(a) Asset Purchase Agreement, dated as of February 26, 2001,
among Marcus Cable of Alabama, L.L.C., on the one hand, and
TCI of Selma, Inc., TCI of Lee County, Inc., TCI Cablevision
of Alabama, Inc., Alabama T.V. Cable, Inc. and TCI
Southeast, Inc., on the other hand. (Incorporated by
reference to the Annual Report on Form 10-K of Charter
Communications, Inc. filed on March 6, 2001 (File No.
27927))
2.14(b) Reorganization Agreement, dated as of February 26, 2001,
among Charter Communications, Inc., on the one hand, and TCI
TKR of Alabama, Inc. and TCI Southeast, Inc., on the other
hand. (Incorporated by reference to the Annual Report on
Form 10-K of Charter Communications, Inc. filed on March 6,
2001 (File No. 27927))
75
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EXHIBIT DESCRIPTION
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2.14(c) Asset Purchase Agreement, dated as of February 26, 2001,
among Falcon Cable Systems Company II, L.P., on the one
hand, and AT&T Broadband, LLC, Communication Services, Inc.,
Ohio Cablevision Network, Inc., TCI Cablevision of
California, Inc. and TCI Washington Associates, L.P., on the
other hand. (Incorporated by reference to the Annual Report
on Form 10-K of Charter Communications, Inc. filed on March
6, 2001 (File No. 27927))
2.14(d) Reorganization Agreement, dated as of February 26, 2001,
among Charter Communications, Inc., on the one hand, and TCI
Cablevision of Nevada, Inc. and TCI West, Inc., on the other
hand. (Incorporated by reference to the Annual Report on
Form 10-K of Charter Communications, Inc. filed on March 6,
2001 (File No. 27927))
2.14(e) Asset Purchase Agreement, dated as of February 26, 2001,
among Charter Communications, Inc., Interlink Communications
Partners, LLC, Charter Communications, LLC and Falcon Cable
Media, on the one hand, and TCI Cable Partners of St. Louis,
L.P. and TCI Cablevision of Missouri, Inc., on the other
hand. (Incorporated by reference to the Annual Report on
Form 10-K of Charter Communications, Inc. filed on March 6,
2001 (File No. 27927))
2.14(f) Asset Purchase Agreement, dated as of February 26, 2001,
among Charter Communications Entertainment I, LLC, on the
one hand, and St. Louis Tele-Communications, Inc., TCI Cable
Partners of St. Louis, L.P., TCI Cablevision of Missouri,
Inc., TCI of Illinois, Inc., TCI TKR of Central Florida,
Inc. and TCI Holdings, Inc., on the other hand.
(Incorporated by reference to the Annual Report on Form 10-K
of Charter Communications, Inc. filed on March 6, 2001 (File
No. 27927))
2.14(g) Agreement Regarding Closing Matters, dated as of February
26, 2001, among Charter Communications, Inc., on behalf of
itself, Marcus Cable of Alabama, L.L.C., Falcon Cable
Systems Company II, L.P., Interlink Communications Partners,
LLC, Charter Communications, LLC, Falcon Cable Media, and
Charter Communications Entertainment I, LLC, on the one
hand, and AT&T Broadband, LLC, on behalf of itself, TCI TKR
of Alabama, Inc., TCI of Selma, Inc., TCI of Lee County, TCI
Cablevision of Alabama, Inc. and Alabama T.V. Cable, Inc.,
TCI Southeast, Inc., TCI Cablevision of Nevada, Inc., TCI
West, Inc., Communications Services, Inc., Ohio Cablevision
Network, Inc., TCI Cablevision of California, Inc., TCI
Washington Associates, LP., TCI of Illinois, Inc., TCI
Cablevision of Missouri, Inc., St. Louis
Tele-Communications, Inc., TCI Cable Partners of St. Louis,
L.P., TCI TKR of Central Florida, Inc. and TCI Holdings,
Inc., on the other hand. (Incorporated by reference to the
Annual Report on Form 10-K of Charter Communications, Inc.
filed on March 6, 2001 (File No. 27927))
3.1 Certificate of Formation of Charter Communications Holdings,
LLC (Incorporated by reference to Amendment No. 2 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on June 22, 1999 (File No. 333-77499))
3.2 Limited Liability Company Agreement of Charter
Communications Holdings, LLC (Incorporated by reference to
Amendment No. 2 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on June
22, 1999 (File No. 333-77499))
3.3 Form of Restated Certificate of Incorporation of Charter
Communications Capital Corporation (Incorporated by
reference to Amendment No. 2 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
June 22, 1999 (File No. 333-77499))
76
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EXHIBIT DESCRIPTION
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3.4 Form of Bylaws of Charter Communications Capital Corporation
(Incorporated by reference to Amendment No. 2 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on June 22, 1999 (File No. 333-77499))
4.1(a) Indenture relating to the 10.00% Senior Notes due 2009,
dated as of January 12, 2000, between Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank (Incorporated
by reference to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on January
25, 2000 (File No. 333-95351))
4.1(b) Form of 10.00% Senior Note due 2010 (included in Exhibit No.
4.1(a)) (Incorporated by reference to the registration
statement on Form S-4 of Charter Communications Holdings,
LLC and Charter Communications Holdings Capital Corporation
filed on January 25, 2000 (File No. 333-95351))
4.1(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated, TD
Securities (USA) Inc., First Union Securities, Inc., PNC
Capital Markets, Inc. and SunTrust Equitable Securities
Corporation, relating to the 10.00% Senior Notes due 2009
(Incorporated by reference to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on January
25, 2000 (File No. 333-95351))
4.2(a) Indenture relating to the 10.25% Senior Notes due 2010,
dated as of January 12, 2000, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank (Incorporated
by reference to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on January
25, 2000 (File No. 333-95351))
4.2(b) Form of 10.25% Senior Note due 2010 (included in Exhibit No.
4.2(a)) (Incorporated by reference to the registration
statement on Form S-4 of Charter Communications Holdings,
LLC and Charter Communications Holdings Capital Corporation
filed on January 25, 2000 (File No. 333-95351))
4.2(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated, TD
Securities (USA) Inc., First Union Securities, Inc., PNC
Capital Markets, Inc. and SunTrust Equitable Securities
Corporation, relating to the 10.25% Senior Notes due 2010
(Incorporated by reference to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on January
25, 2000 (File No. 333-95351))
4.3(a) Indenture relating to the 11.75% Senior Discount Notes due
2010, dated as of January 12, 2000, among Charter
Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and Harris Trust and Savings
Bank (Incorporated by reference to the registration
statement on Form S-4 of Charter Communications Holdings,
LLC and Charter Communications Holdings Capital Corporation
filed on January 25, 2000 (File No. 333-95351))
77
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EXHIBIT DESCRIPTION
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4.3(b) Form of 11.75% Senior Discount Note due 2010 (included in
Exhibit No. 4.3(a)) (Incorporated by reference to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on January 25, 2000 (File No. 333-95351))
4.3(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated, TD
Securities (USA) Inc., First Union Securities, Inc., PNC
Capital Markets, Inc. and SunTrust Equitable Securities
Corporation, relating to the 11.75% Senior Discount Notes
due 2010 (Incorporated by reference to the registration
statement on Form S-4 of Charter Communications Holdings,
LLC and Charter Communications Holdings Capital Corporation
filed on January 25, 2000 (File No. 333-95351))
4.4(a) Indenture relating to the 8.250% Senior Notes due 2007,
dated as of March 17, 1999, between Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank (Incorporated
by reference to Amendment No. 2 to the registration
statement on Form S-4 of Charter Communications Holdings,
LLC and Charter Communications Holdings Capital Corporation
filed on June 22, 1999 (File No. 333-77499))
4.4(b) Indenture relating to the 8.625% Senior Notes due 2009,
dated as of March 17, 1999, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank (Incorporated
by reference to Amendment No. 2 to the registration
statement on Form S-4 of Charter Communications Holdings,
LLC and Charter Communications Holdings Capital Corporation
filed on June 22, 1999 (File No. 333-77499))
4.4(c) Indenture relating to the 9.920% Senior Discount Notes due
2011, dated as of March 17, 1999, among Charter
Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and Harris Trust and Savings
Bank (Incorporated by reference to Amendment No. 2 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on June 22, 1999 (File No. 333-77499))
4.5 Indenture, dated as of April 9, 1998, by and among
Renaissance Media (Louisiana) LLC, Renaissance Media
(Tennessee) LLC, Renaissance Media Capital Corporation,
Renaissance Media Group LLC and United States Trust Company
of New York, as trustee (Incorporated by reference to the
registration statement on Forms S-4 of Renaissance Media
Group LLC, Renaissance Media (Tennessee) LLC, Renaissance
Media (Louisiana) LLC and Renaissance Media Capital
Corporation filed on June 12, 1998 (File No. 333-56679))
4.6 Indenture, dated January 15, 1996, by and among Rifkin
Acquisition Partners, L.L.L.P., Rifkin Acquisition Capital
Corp., as issuers, Cable Equities of Colorado Management
Corp., FNI Management Corp., Cable Equities of Colorado,
Ltd., Cable Equities, Inc. and Rifkin/ Tennessee, Ltd., as
Subsidiary Guarantors, and Marine Midland Bank, as trustee
(Incorporated by reference to the registration statement on
Form S-1 of Rifkin Acquisition Capital Corp. and Rifkin
Acquisition Partners, L.L.P. filed on April 2, 1996 (File
No. 333-3084))
4.7(a) Indenture, dated as of December 10, 1998, by and among
Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC
and Avalon Cable Holdings Finance, Inc., as issuers and The
Bank of New York, as trustee for the Notes (Incorporated by
reference to Amendment No. 1 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
April 18, 2000 (File No. 333-77499))
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EXHIBIT DESCRIPTION
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4.7(b) Supplemental Indenture, dated as of March 26, 1999, by and
among Avalon Cable of Michigan Holdings, Inc., Avalon Cable
LLC and Avalon Cable Holdings Finance, Inc., as issuers,
Avalon Cable of Michigan, Inc., as guarantor, and The Bank
of New York, as trustee for the Notes (Incorporated by
reference to Amendment No. 1 to the registration statement
on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings
Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and
Avalon Cable of Michigan, Inc. filed on May 28, 1999 (File
No. 333-75415))
10.1 Credit Agreement, dated as of March 18, 1999, between
Charter Communications Operating, LLC, and certain lenders
and agents named therein (Incorporated by reference to
Amendment No. 2 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on June
22, 1999 (File No. 333-77499))
10.1(a) First Amendment to Credit Agreement dated as of June 28,
1999 between Charter Communications Operating, LLC, Charter
Communications Holdings LLC and certain lenders and agents
named therein (Incorporated by reference to the registration
statement on Form S-4 of Charter Communications Holdings,
LLC and Charter Communications Holdings Capital Corporation
filed on January 25, 2000 (File No. 333-95351))
10.1(b) Second Amendment to Credit Agreement dated as of December
14, 1999 between Charter Communications Operating, LLC,
Charter Communications Holdings LLC and certain lenders and
agents named therein (Incorporated by reference to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on January 25, 2000 (File No. 333-95351))
10.1(c) Third Amendment to Credit Agreement dated as of February 24,
2000, between Charter Communications Operating, LLC, Charter
Communications, LLC and certain lenders and agents named
therein (Incorporated by reference to the annual report on
Form 10-K filed by Charter Communications, Inc. on March 30,
2000 (File No. 333-83887))
10.2(a)(1) Form of Second Amended Management Agreement, dated as of
November 9, 1999, by and among Charter Investment, Inc.,
Charter Communications, Inc. and Charter Communications
Operating, LLC (Incorporated by reference to Amendment No. 3
to the registration statement on Form S-1 of Charter
Communications, Inc. filed on October 18, 1999 (File No.
333-83887))
10.2(b) First Amended and Restated Mutual Services Agreement, dated
as of December 21, 2000, by and between Charter
Communications, Inc., Charter Investment, Inc. and Charter
Communications Holding Company, LLC (Incorporated by
reference to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on
February 2, 2001 (File No. 333-54902))
10.2(c) Form of Management Agreement, dated as of November 9, 1999,
by and between Charter Communications Holding Company, LLC
and Charter Communications, Inc. (Incorporated by reference
to Amendment No. 3 to the registration statement on Form S-1
of Charter Communications, Inc. filed on October 18, 1999
(File No. 333-83887))
10.2(d) Management Agreement, dated as of November 12, 1999, by and
between CC VI Operating Company, LLC and Charter
Communications, Inc. (Incorporated by reference to Amendment
No. 1 to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation filed on April 18, 2000 (File
No. 333-77499))
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EXHIBIT DESCRIPTION
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10.2(e) Management Agreement, dated as of November 12, 1999 by and
between Falcon Cable Communications, LLC and Charter
Communications, Inc. (Incorporated by reference to Amendment
No. 1 to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation filed on April 18, 2000 (File
No. 333-77499))
10.2(f) Management Agreement dated as of February 14, 2000, by and
between CC VIII Operating, LLC, certain subsidiaries of CC
VIII Operating, LLC and Charter Communications, Inc.
(Incorporated by reference to the annual report on Form 10-K
filed by Charter Communications, Inc. on March 30, 2000
(File No. 333-83887))
10.3 Consulting Agreement, dated as of March 10, 1999, by and
between Vulcan Northwest Inc., Charter Communications, Inc.
(now called Charter Investment Inc.) and Charter
Communications Holdings, LLC (Incorporated by reference to
Amendment No. 4 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July
22, 1999 (File No. 333-77499))
10.4 Charter Communications Holdings, LLC 1999 Option Plan
(Incorporated by reference to Amendment No. 4 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on July 22, 1999 (File No. 333-77499))
10.4(a) Assumption Agreement regarding option plan, dated as of May
25, 1999, by and between Charter Communications Holdings,
LLC and Charter Communications Holding Company, LLC
(Incorporated by reference to Amendment No. 6 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on August 27, 1999 (File No. 333-77499))
10.4(b) Form of Amendment No. 1 to the Charter Communications
Holdings, LLC 1999 Option Plan (Incorporated by reference to
Amendment No. 4 to the registration statement on Form S-1 of
Charter Communications, Inc. filed on November 1, 1999 (File
No. 333-83887))
10.4(c) Amendment No. 2 to the Charter Communications Holdings, LLC
1999 Option Plan (Incorporated by reference to the annual
report on Form 10-K filed by Charter Communications, Inc. on
March 30, 2000 (File No. 333-83887))
10.6 Membership Interests Purchase Agreement, dated July 22,
1999, by and between Charter Communications Holding Company,
LLC and Paul G. Allen (Incorporated by reference to
Amendment No. 6 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on August
27, 1999 (File No. 333-77499))
10.7 Employment Agreement, dated as of August 28, 1998, between
Jerald L. Kent and Paul G. Allen (Incorporated by reference
to Amendment No. 5 to the registration statement on Form S-4
of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on August
10, 1999 (File No. 333-77499))
10.8 Assignment of Employment Agreements, dated as of December
23, 1998, between Paul G. Allen and Charter Communications,
Inc. (now called Charter Investment, Inc.) (Incorporated by
reference to Amendment No. 6 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
August 27, 1999 (File No. 333-77499))
10.9(a) Option Agreement, dated as of February 9, 1999, between
Jerald L. Kent and Charter Communications Holdings, LLC
(Incorporated by reference to Amendment No. 6 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on August 27, 1999 (File No. 333-77499))
80
81
EXHIBIT DESCRIPTION
------- -----------
10.9(b) Amendment to the Option Agreement, dated as of August 23,
1999, between Jerald L. Kent and Charter Communications
Holding Company, LLC (Incorporated by reference to Amendment
No. 6 to the registration statement on Form S-4 of Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation filed on August 27, 1999 (File
No. 333-77499))
10.9(c) Form of Amendment to the Option Agreement, dated as of
November 8, 1999, by and among Jerald L. Kent, Charter
Communications Holding Company, LLC and Charter
Communications, Inc. (Incorporated by reference to Amendment
No. 4 to the registration statement on Form S-1 of Charter
Communications, Inc. filed on November 1, 1999 (File No.
333-83887))
10.10 Letter Agreement, dated as of July 22, 1999 between Charter
Communications Holding Company, LLC and Charter
Communications Holdings, LLC (Incorporated by reference to
Amendment No. 5 to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on August
10, 1999 (File No. 333-77499))
10.11 Amendment to Membership Interests Purchase Agreement, dated
as of August 10, 1999, by and among Charter Communications
Holding Company, LLC, Vulcan Cable III Inc. and Paul G.
Allen (Incorporated by reference to Amendment No. 6 to the
registration statement on Form S-4 of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on August 27, 1999 (File No. 333-77499))
10.12 Form of Assignment and Assumption Agreement, dated as of
November 4, 1999, by and between Charter Investment, Inc.
and Charter Communications, Inc. (Incorporated by reference
to Amendment No. 2 to the registration statement on Form S-1
of Charter Communications, Inc. filed on September 28, 1999
(File No. 333-83887))
10.13 Form of Registration Rights Agreement, dated as of November
12, 1999, by and among Charter Communications, Inc., Charter
Investment, Inc., Vulcan Cable III Inc., Mr. Paul G. Allen,
Mr. Jerald L. Kent, Mr. Howard L. Wood and Mr. Barry L.
Babcock (Incorporated by reference to Amendment No. 3 to the
registration statement on Form S-1 of Charter
Communications, Inc. filed on October 18, 1999 (File No.
333-83887))
10.14 Form of Consulting Agreement, dated as of November 1, 1999,
by and between Howard L. Wood and Charter Communications,
Inc. (Incorporated by reference to Amendment No. 4 to the
registration statement on Form S-1 of Charter
Communications, Inc. filed on November 1, 1999 (File No.
333-83887))
10.15 Form of Termination of Employment Agreement, dated as of
November 1, 1999, by and between Howard L. Wood and Charter
Investment, Inc., Communications, Inc. and Charter
Communications Holding Company, LLC (Incorporated by
reference to Amendment No. 4 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on
November 1, 1999 (File No. 333-83887))
10.16 Letter Agreement, dated September 21, 1999, by and among
Charter Communications, Inc., Charter Investment, Inc.,
Charter Communications Holding Company, Inc. and Vulcan
Ventures Inc. (Incorporated by reference to Amendment No. 3
to the registration statement on Form S-1 of Charter
Communications, Inc. filed on October 18, 1999 (File No.
333-83887))
10.17 Second Amended and Restated Credit Agreement dated as of
February 2, 1999, as Amended and Restated as of January 2,
2001 by and among CC VIII Operating, LLC, as borrower, CC
VIII Holdings, LLC, as guarantor, and several financial
institutions or entities named therein
81
82
EXHIBIT DESCRIPTION
------- -----------
10.18 Form of Credit Agreement, dated as of June 30, 1998, as
Amended and Restated as of November 12, 1999, among Falcon
Cable Communications, LLC, certain guarantors and several
financial institutions or entities named therein
(Incorporated by reference to Amendment No. 3 to the
registration statement on Form S-1 of Charter
Communications, Inc. filed on October 18, 1999 (File No.
333-83887))
10.19 Credit Agreement, dated as of November 12, 1999, among CC VI
Holdings, LLC, CC VI Operating Company, LLC and several
financial institutions or entities named therein
(Incorporated by reference to the report on Form 8-K of
Charter Communications, Inc. filed on November 29, 1999
(File No. 333-83887))
10.20(a) Amended and Restated Limited Liability Company Agreement for
Charter Communications Holding Company, LLC, dated February
14, 2000 (Incorporated by reference to the current report on
Form 8-K of Charter Communications, Inc. filed on February
29, 2000 (File No. 333-83887))
10.20(b) Second Amendment to the Amended and Restated Limited
Liability Company Agreement for Charter Communications
Holding Company, LLC, dated October 24, 2000. (Incorporated
by reference to the Annual Report on Form 10-K of Charter
Communications, Inc. filed on March 6, 2001 (File No.
27927))
10.21 Letter Agreement, dated May 25, 1999, between Charter
Communications, Inc. and Marc Nathanson (Incorporated by
reference to the registration statement on Form S-4 of
Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on January
25, 2000 (File No. 333-95351))
10.22 Exchange Agreement, dated as of February 14, 2000, by and
among Charter Communications, Inc., BCI (USA), LLC, William
J. Bresnan, Blackstone BC Capital Partners L.P., Blackstone
BC Offshore Capital Partners L.P., Blackstone Family Media,
III L.P. (as assignee of Blackstone Family Investment III
L.P.), TCID of Michigan, Inc., and TCI Bresnan LLC
(Incorporated by reference to the current report on Form 8-K
of Charter Communications, Inc. filed on February 29, 2000
(File No. 333-83887))
10.23 Form of Exchange Agreement, dated as of November 12, 1999 by
and among Charter Investment, Inc., Charter Communications,
Inc., Vulcan Cable III Inc. and Paul G. Allen (Incorporated
by reference to Amendment No. 3 to the registration
statement on Form S-1 of Charter Communications, Inc. filed
on October 18, 1999 (File No. 333-83887))
10.24 Commitment Letter, dated February 26, 2001, by and among
Goldman Sachs Credit Partners, L.P. and Morgan Stanley
Senior Funding, Inc., on the one hand, and Charter
Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation, on the other hand
(Incorporated by reference to the current report on Form 8-K
of Charter Communications, Inc. filed on February 29, 2000
(File No. 333-83887))
10.25 Indenture relating to 5.75% Convertible Senior Notes due
2005, dated as of October 25, 2000, among Charter
Communications, Inc. and BNY Midwest Trust Company as
trustee (Incorporated by reference to the quarterly report
on Form 10-Q filed by Charter Communications, Inc. on
November 14, 2000 (File No. 000-27927))
10.26 Registration Rights Agreement relating to 5.75% Convertible
Senior Notes due 2005, dated as of October 30, 2000, among
Charter Communications, Inc., Goldman, Sachs & Co., Morgan
Stanley & Co. Incorporated, Bear, Stearns & Co., and Merrill
Lynch Pierce, Fenner & Smith Incorporated (Incorporated by
reference to the quarterly report on Form 10-Q filed by
Charter Communications, Inc. on November 14, 2000 (File No.
000-27927))
12.1 Computation of Ratio of Earnings to Fixed Charges
82
83
EXHIBIT DESCRIPTION
------- -----------
21.1 Subsidiaries of Charter Communications Holdings, LLC
99 Risk Factors
(b) Reports on Form 8-K
On December 28, 2000, the Registrants filed a current report on Form
8-K to announce their plans to raise $850.0 million of senior and senior
discount notes in a private placement. The transaction size was
subsequently increased and the Registrants received gross proceeds of
approximately $1.75 billion when the notes were sold in January 2001.
On January 8, 2000, the Registrants filed a report on Form 8-K to
announce that they had entered into an agreement to sell $900.0 million of
10.75% Senior Notes due 2009, $500.0 million of 11.125% Senior Notes due
2011 and $350.6 million of 13.5% Senior Discount Notes due 2011 with a
principal amount at maturity of $675.0 million.
On March 5, 2001, the Registrants filed a report on Form 8-K to
announce the entering into of several agreements with AT&T Broadband, LLC
involving several strategic cable system transactions that will result in a
net addition of approximately 512,000 customers for the Charter cable
systems. The Registrants also reported a commitment for a bridge loan from
Morgan Stanley Senior Funding, Inc. and Goldman Sachs Credit Partners, L.P.
for temporary financing of the cash portion of the purchase price.
On March 12, 2001, the Registrants filed a report on Form 8-K to
extend until March 15, 2001, their offer to exchange their outstanding
10.75%, 11.125% and 13.5% notes sold in January, as described above, for
registered notes with the same terms.
On March 15, 2001, the Registrants filed a report on Form 8-K to
extend this exchange offer until March 19, 2001.
83
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Charter Communications Holdings, LLC has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHARTER COMMUNICATIONS HOLDINGS, LLC,
a registrant
By: CHARTER COMMUNICATIONS, INC.,
Sole Manager
By: /s/ JERALD L. KENT
-------------------------------------
Jerald L. Kent
President and Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Charter
Communications, Inc. and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PAUL G. ALLEN Chairman of the Board of March 30, 2001
- --------------------------------------------------- Directors, Charter
Paul G. Allen Communications, Inc.
/s/ JERALD L. KENT President, Chief Executive March 30, 2001
- --------------------------------------------------- Officer, Director (Principal
Jerald L. Kent Executive Officer), Charter
Communications, Inc. and
Charter Communications Holdings
Capital Corporation
/s/ KENT D. KALKWARF Executive Vice President and March 30, 2001
- --------------------------------------------------- Chief Financial Officer
Kent D. Kalkwarf (Principal Financial Officer
and Principal Accounting
Officer), Charter
Communications, Inc. and
Charter Communications Holdings
Capital Corporation
/s/ MARC B. NATHANSON Director, Charter Communications, March 30, 2001
- --------------------------------------------------- Inc.
Marc B. Nathanson
/s/ RONALD L. NELSON Director, Charter Communications, March 30, 2001
- --------------------------------------------------- Inc.
Ronald L. Nelson
84
85
SIGNATURE TITLE DATE
--------- ----- ----
/s/ NANCY B. PERETSMAN Director, Charter Communications, March 30, 2001
- --------------------------------------------------- Inc.
Nancy B. Peretsman
/s/ WILLIAM D. SAVOY Director, Charter Communications, March 30, 2001
- --------------------------------------------------- Inc.
William D. Savoy
/s/ HOWARD L. WOOD Director, Charter Communications, March 30, 2001
- --------------------------------------------------- Inc.
Howard L. Wood
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Charter Communications Holdings Capital Corporation has
duly caused this Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CHARTER COMMUNICATIONS HOLDINGS, LLC,
a registrant
By: /s/ JERALD L. KENT
-------------------------------------
Jerald L. Kent
President and Chief Executive Officer
85
86
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................... F-2
Report of Independent Auditors.............................. F-3
Report of Independent Auditors.............................. F-4
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-5
Consolidated Statements of Operations for the Years Ended
December 31, 2000 and 1999, and for the Period from
December 24, 1998, through December 31, 1998.............. F-6
Consolidated Statements of Changes in Members' Equity for
the Years Ended December 31, 2000 and 1999 and for the
Period from December 24, 1998, through December 31,
1998...................................................... F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000 and 1999, and for the Period from
December 24, 1998, through December 31, 1998.............. F-8
Notes to Consolidated Financial Statements.................. F-9
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................... F-34
Consolidated Statement of Operations for the Period from
January 1, 1998, through December 23, 1998................ F-35
Consolidated Statement of Changes in Shareholder's
Investment for the Period from January 1, 1998 through
December 23, 1998......................................... F-36
Consolidated Statement of Cash Flows for the Period from
January 1, 1998, through December 23, 1998................ F-37
Notes to Consolidated Financial Statements.................. F-38
BRESNAN COMMUNICATIONS GROUP LLC:
Independent Auditors' Report................................ F-44
Consolidated Balance Sheets as of December 31, 1999 and
February 14, 2000......................................... F-45
Consolidated Statements of Operations and Members' Equity
(Deficit) for the Year Ended December 31, 1999 and for the
Period from January 1, 2000 to February 14, 2000.......... F-46
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1999 and for the Period from January 1, 2000
to February 14, 2000...................................... F-47
Notes to Consolidated Financial Statements.................. F-48
F-1
87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO CHARTER COMMUNICATIONS HOLDINGS, LLC:
We have audited the accompanying consolidated balance sheets of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, changes in member's
equity and cash flows for the years then ended and for the period from December
24, 1998, through December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of Charter Communications VI Operating
Company, LLC and subsidiaries, and CC VII Holdings, LLC -- Falcon Systems, as of
December 31, 1999, and for the periods from the dates of acquisition through
December 31, 1999, which statements on a combined basis reflect total assets and
total revenues of 31 percent and 6 percent, respectively, of the related
consolidated totals of the Company. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for those entities, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Charter Communications Holdings,
LLC and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended, and for the period
from December 24, 1998, through December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 8, 2001
F-2
88
REPORT OF INDEPENDENT AUDITORS
CHARTER COMMUNICATIONS VI
OPERATING COMPANY, LLC
We have audited the consolidated balance sheet of Charter Communications VI
Operating Company, LLC and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, member's equity and cash flows for the
period from inception (November 9, 1999) to December 31, 1999 (not presented
separately herein). These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charter
Communications VI Operating Company, LLC and subsidiaries at December 31, 1999,
and the consolidated results of its operations and its cash flows for the period
from November 9, 1999 to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 11, 2000
F-3
89
REPORT OF INDEPENDENT AUDITORS
SOLE MEMBER
CC VII HOLDINGS, LLC
We have audited the combined balance sheet of the CC VII Holdings,
LLC -- Falcon Systems as of December 31, 1999, and the related combined
statements of operations and parent's investment and cash flows for the period
from November 13, 1999 (commencement date) to December 31, 1999 (not presented
separately herein). These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the CC VII
Holdings, LLC -- Falcon Systems at December 31, 1999 and the results of its
operations and its cash flows for the period from November 13, 1999
(commencement date) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 2, 2000
F-4
90
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 130,619 $ 114,096
Accounts receivable, less allowance for doubtful accounts
of $12,421 and $11,471, respectively................... 217,605 93,743
Receivables from related party............................ 13,044 --
Prepaid expenses and other................................ 72,252 34,513
----------- -----------
Total current assets.............................. 433,520 242,352
----------- -----------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net........................ 5,230,483 3,490,573
Franchises, net........................................... 17,068,702 14,985,793
----------- -----------
22,299,185 18,476,366
----------- -----------
OTHER ASSETS................................................ 249,472 220,759
----------- -----------
$22,982,177 $18,939,477
=========== ===========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 1,358,479 $ 704,734
Payables to related party................................. -- 6,713
----------- -----------
Total current liabilities......................... 1,358,479 711,447
----------- -----------
LONG-TERM DEBT.............................................. 12,310,455 8,936,455
----------- -----------
LOANS PAYABLE -- RELATED PARTY.............................. -- 1,079,163
----------- -----------
DEFERRED MANAGEMENT FEES -- RELATED PARTY................... 13,751 21,623
----------- -----------
OTHER LONG-TERM LIABILITIES................................. 275,103 142,836
----------- -----------
MINORITY INTEREST........................................... 640,526 --
----------- -----------
MEMBER'S EQUITY:
Member's equity........................................... 8,384,161 8,045,737
Accumulated other comprehensive income (loss)............. (298) 2,216
----------- -----------
Total member's equity............................. 8,383,863 8,047,953
----------- -----------
$22,982,177 $18,939,477
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-5
91
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
2000 1999 1998
----------- ---------- ------------
(DOLLARS IN THOUSANDS)
REVENUES............................................. $ 3,249,222 $1,428,090 $13,713
----------- ---------- -------
OPERATING EXPENSES:
Operating, general and administrative.............. 1,650,918 737,957 7,134
Depreciation and amortization...................... 2,462,544 745,315 8,318
Option compensation expense........................ 40,978 79,979 845
Corporate expense charges -- related parties....... 55,243 51,428 473
----------- ---------- -------
4,209,683 1,614,679 16,770
----------- ---------- -------
Loss from operations............................ (960,461) (186,589) (3,057)
OTHER INCOME (EXPENSE):
Interest expense................................... (1,065,236) (471,871) (2,353)
Interest income.................................... 6,679 18,821 133
Loss on equity investments......................... (10,963) -- --
Other, net......................................... (6,540) (245) --
----------- ---------- -------
Loss before income tax expense, minority
interest expense and extraordinary item....... (2,036,521) (639,884) (5,277)
INCOME TAX EXPENSE................................... -- (1,030) --
----------- ---------- -------
Loss before minority interest expense and
extraordinary item.............................. (2,036,521) (640,914) (5,277)
MINORITY INTEREST EXPENSE............................ (11,038) -- --
----------- ---------- -------
Loss before extraordinary item....................... (2,047,559) (640,914) (5,277)
EXTRAORDINARY ITEM -- Loss on debt extinguishment.... -- (7,794) --
----------- ---------- -------
Net loss........................................... $(2,047,559) $ (648,708) $(5,277)
=========== ========== =======
The accompanying notes are an integral part of these consolidated statements.
F-6
92
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
ACCUMULATED
OTHER TOTAL
MEMBER'S COMPREHENSIVE MEMBER'S
EQUITY INCOME (LOSS) EQUITY
----------- ------------- -----------
(DOLLARS IN THOUSANDS)
BALANCE, December 24, 1998 ........................ $ 2,151,811 $ -- $ 2,151,811
Option compensation expense...................... 845 -- 845
Net loss......................................... (5,277) -- (5,277)
----------- ------- -----------
BALANCE, December 31, 1998 ........................ 2,147,379 -- 2,147,379
Capital contribution............................. 6,477,363 -- 6,477,363
Distributions to Charter
Investment and Charter........................ (10,276) -- (10,276)
Option compensation expense...................... 79,979 -- 79,979
Net loss......................................... (648,708) -- (648,708)
Unrealized gain on marketable securities
available for sale............................ -- 2,216 2,216
----------- ------- -----------
BALANCE, December 31, 1999 ........................ $ 8,045,737 $ 2,216 $ 8,047,953
Capital contributions............................ 2,371,595 -- 2,371,595
Distributions to Parent.......................... (26,590) -- (26,590)
Option compensation expense...................... 40,978 -- 40,978
Net loss......................................... (2,047,559) -- (2,047,559)
Unrealized loss on marketable securities
available for sale............................ -- (2,514) (2,514)
----------- ------- -----------
BALANCE, December 31, 2000 ........................ $ 8,384,161 $ (298) $ 8,383,863
=========== ======= ===========
The accompanying notes are an integral part of these consolidated statements.
F-7
93
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
2000 1999 1998
----------- ----------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................. $(2,047,559) $ (648,708) $ (5,277)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Minority interest expense............................... 11,038 -- --
Depreciation and amortization........................... 2,462,544 745,315 8,318
Option compensation expense............................. 40,978 79,979 845
Noncash interest expense................................ 180,685 98,920 --
Loss on equity investments.............................. 10,963 -- --
Loss from early extinguishment of debt.................. -- 7,794 --
Changes in assets and liabilities, net of effects from
acquisitions --
Accounts receivable..................................... (138,391) (32,366) (8,753)
Prepaid expenses and other.............................. (44,515) 14,256 (211)
Accounts payable and accrued expenses................... 695,188 175,280 10,227
Receivables from and payables to related party,
including deferred management fees................... (49,232) 21,183 473
Other operating activities................................ 4,587 (1,245) 2,022
----------- ----------- --------
Net cash provided by operating activities............... 1,126,286 460,408 7,644
----------- ----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (2,783,440) (741,508) (13,672)
Payments for acquisitions, net of cash acquired........... (101,210) (3,560,241) --
Loan to Marcus Cable Holdings............................. -- (1,680,142) --
Purchases of investments.................................. (47,573) -- --
Other investing activities................................ 24,268 (22,198) --
----------- ----------- --------
Net cash used in investing activities................... (2,907,955) (6,004,089) (13,672)
----------- ----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 6,715,303 9,261,546 14,200
Repayments of long-term debt.............................. (4,499,793) (5,694,375) --
Borrowings from (repayments to) related party............. (1,079,163) 1,079,163 --
Payments for debt issuance costs.......................... (62,848) (113,481) --
Capital contributions..................................... 751,095 1,144,290 --
Distributions............................................. (26,590) (10,276) --
Other financing activities................................ 188 (18,663) --
----------- ----------- --------
Net cash provided by financing activities............... 1,798,192 5,648,204 14,200
----------- ----------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 16,523 104,523 8,172
CASH AND CASH EQUIVALENTS, beginning of period.............. 114,096 9,573 1,401
----------- ----------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 130,619 $ 114,096 $ 9,573
=========== =========== ========
CASH PAID FOR INTEREST...................................... $ 775,647 $ 314,606 $ 5,538
=========== =========== ========
NONCASH TRANSACTIONS:
Transfer of equity interests to the Company............... $ 1,620,500 $ 5,333,073 $ --
Issuance of preferred equity in a subsidiary as payment
for acquisition......................................... $ 629,488 $ -- $ --
The accompanying notes are an integral part of these consolidated statements.
F-8
94
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
General
As of December 31, 2000, Charter Communications Holdings, LLC (Charter
Holdings or the Company), a Delaware limited liability company, owns and
operates cable systems through its operating subsidiaries serving approximately
6.4 million (unaudited) customers. The Company currently offers a full array of
traditional analog cable services and advanced bandwidth services such as
digital television, interactive video programming, Internet access through
television-based service, dial-up telephone modems and high speed cable modems,
and video-on-demand. Charter Holdings is a subsidiary of Charter Communications
Holding Company, LLC (Charter Holdco), which is a subsidiary of Charter
Communications, Inc. (Charter). In November 1999, Charter completed an initial
public offering of the sale of 195.5 million shares of Class A common stock.
Proceeds from the offering were used by Charter to purchase membership units in
Charter Holdco, which used the funds received from Charter for the acquisition
of additional cable systems.
Organization and Basis of Presentation
Charter Holdings is a holding company whose principal assets are equity
interests in cable operating subsidiaries. The consolidated financial statements
of Charter Holdings include accounts of Charter Holdings and all of its direct
and indirect subsidiaries. All material intercompany transactions and balances
have been eliminated.
Charter Holdings was formed in February 1999 as a wholly owned subsidiary
of Charter Investment, Inc. (Charter Investment). Charter Investment, through
its wholly owned subsidiary, Charter Communications Properties Holdings LLC
(CCPH), commenced operations with the acquisition of a cable system on September
30, 1995.
Effective December 23, 1998, through a series of transactions, Mr. Allen
acquired approximately 94% of Charter Investment for an aggregate purchase price
of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter
Investment acquired, for fair value from unrelated third parties, all of the
interests it did not already own in CharterComm Holdings, LLC (CharterComm
Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and
Charter Communications Long Beach, Inc.), all cable operating companies, for
$2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment
previously managed and owned minority interests in these companies. These
acquisitions were accounted for using the purchase method of accounting and
accordingly, results of operations of CharterComm Holdings and CCA Group are
included in the consolidated financial statements from the date of acquisition.
In February 1999, Charter Investment transferred all of its cable operating
subsidiaries to a wholly owned subsidiary of Charter Holdings. This transfer was
accounted for as a reorganization of entities under common control similar to a
pooling of interests.
As a result of the change in ownership of CCPH, CharterComm Holdings and
CCA Group, Charter Holdings applied push-down accounting in the preparation of
its consolidated financial statements. Accordingly, on December 23, 1998,
Charter Holdings increased its member's equity by $2.2 billion to reflect the
amounts paid by Mr. Allen and Charter Investment. The purchase price was
allocated to assets acquired and liabilities assumed based on their relative
fair values, including amounts assigned to franchises of $3.6 billion.
On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen,
(collectively, the "Mr. Allen Companies") purchased substantially all of the
outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable)
for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of
the remaining partnership interest retained voting control of Marcus Cable. In
February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed, and Mr.
Allen's interests in Marcus Cable were transferred to Marcus Holdings on March
15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership
F-9
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interests in Marcus Cable, including voting control. On April 7, 1999, Marcus
Holdings was merged into Charter Holdings and Marcus Cable was transferred to
Charter Holdings. For financial reporting purposes, the merger was accounted for
as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen
obtained voting control of Marcus Cable. Accordingly, the results of operations
of Marcus Cable have been included in the consolidated financial statements from
April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in
the consolidated financial statements using historical carrying values reflected
in the accounts of the Mr. Allen Companies. Total member's equity of Charter
Holdings increased by $1.3 billion as a result of the Marcus Cable acquisition.
Previously, on April 23, 1998, the Mr. Allen Companies recorded the assets
acquired and liabilities assumed of Marcus Cable based on their relative fair
values.
On January 1, 2000, Charter Holdco and Charter Holdings effected a number
of transactions in which cable systems acquired by Charter Holdco in November
1999 were contributed to Charter Holdings (the "Transferred Systems"). As a
result of these transactions, Charter Holdings became the indirect parent of the
CCVI Holdings, LLC ("Fanch"), CCVII Holdings, LLC ("Falcon") and CCV Holdings
LLC ("Avalon") cable systems. Effective January 1, 2000, the Company accounted
for the contribution of the Transferred Systems to Charter Holdings as a
reorganization of entities under common control in a manner similar to a pooling
of interests. The accounts of the Transferred Systems are included in these
consolidated financial statements from the date the Transferred Systems were
acquired by Charter Holdco, November 1999.
Pursuant to a membership interests purchase agreement, as amended, Vulcan
Cable III Inc. (Vulcan), a company controlled by Mr. Allen, contributed $500
million in cash in August 1999 to Charter Holdco, contributed an additional
$180.7 million in certain equity interests acquired in connection with Charter
Holdings' acquisition of Rifkin Acquisition Partners, L.L.L.P. and InterLink
Communications Partners, LLLP (collectively, "Rifkin") in September 1999, and
contributed $644.3 million in cash in September 1999 to Charter Holdco. All
funds and equity interests were contributed by Charter Holdco to Charter
Holdings to finance certain acquisitions. In addition, certain Rifkin sellers
received $133.3 million of the purchase price in the form of preferred equity in
Charter Holdco.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost, which approximates market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installations. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred,
while equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems.................................. 3 - 15 years
Buildings and leasehold improvements........................ 5 - 15 years
Vehicles and equipment...................................... 3 - 5 years
F-10
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Franchises
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company. Accumulated
amortization related to franchises was $1.9 billion and $650.5 million, as of
December 31, 2000 and 1999, respectively. Amortization expense related to
franchises for the years ended December 31, 2000 and 1999, and for the period
from December 24, 1998, through December 31, 1998, was $1.2 billion, $520.0
million and $5.3 million, respectively.
Other Assets
Other assets include deferred financing costs, costs capitalized related to
customer acquisitions and investments in equity securities. The accounting
policies for each are discussed below.
Costs related to borrowings are deferred and amortized to interest expense
using the effective interest method over the terms of the related borrowings. As
of December 31, 2000 and 1999, other assets include $158.8 million and $120.7
million respectively, of deferred financing costs, net of accumulated
amortization of $35.2 million and $10.3 million, respectively.
The Company capitalizes incremental and direct contract acquisition and
origination costs associated with obtaining new customers by analogy to
Statement of Financial Accounting Standards (SFAS) No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Costs of Leases as permitted by Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. Costs capitalized are only those
that are realizable from future revenues. The Company capitalizes third party
incremental costs associated with obtaining new customers as well as internal
salaries and benefits for personnel directly involved in customer origination
and set up. Costs related to unsuccessful efforts and indirect costs are
expensed as incurred. Capitalized costs are charged to expense generally over
periods from one to twelve months. As of December 31, 2000 and 1999, the
unamortized portion of the deferred costs was $3.0 million and $2.4 million,
respectively.
Investments in equity securities are accounted for at cost, under the
equity method of accounting or in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Charter recognizes losses for
any decline in value considered to be other than temporary. 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 income (loss). Comprehensive loss for the years ended December 31,
2000 and 1999, and for the period from December 24, 1998, through December 31,
1998, was $2.1 billion, $646.5 million and $5.3, respectively. The following
summarizes information as of December 31, 2000, and for the year ended December
31, 2000:
GAIN (LOSS)
FOR THE
CARRYING VALUE YEAR ENDED
AT DECEMBER 31, DECEMBER 31,
2000 2000
--------------- ------------
Equity investments, under the cost method................ $ 5,041 $ (4,690)
Equity investments, under the equity method.............. 36,005 (6,989)
Marketable securities, at market value................... -- 716
------- --------
$41,046 $(10,963)
======= ========
F-11
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Assets
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted net cash flows
related to the asset over its remaining life, the carrying value of such asset
is reduced to its estimated fair value.
Revenues
Revenues from basic, premium, pay-per-view, digital and data services are
recognized when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 31, 2000 and 1999, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Advertising sales are recognized in the period that the advertisements are
exhibited.
Local governmental authorities impose franchise fees on the Company ranging
up to a federally mandated maximum of 5.0% of gross revenues. Such fees are
collected on a monthly basis, from the Company's customers and are periodically
remitted to local franchise authorities. Franchise fees collected and paid are
reported as revenues and expenses.
Other Long-term Liabilities
The Company receives upfront payments from certain programmers to launch
and promote new cable channels. Revenue is recognized to the extent of the fair
value of the advertising services provided to promote the new channel. Such
revenue is classified as advertising revenue and totaled $51.5 million for the
year ended December 31, 2000. The remaining portion is deferred and amortized as
an offset to programming expense over the respective terms of the program
agreements, which range from one to 20 years. For the years ended December 31,
2000 and 1999, and for the period from December 24, 1998, through December 31,
1998, the Company amortized and recorded as a reduction of programming costs
$6.9 million, $3.4 million, and $12, respectively. As of December 31, 2000 and
1999, the unamortized portion of the deferred launch payments totaled $104.2
million and $13.4 million, respectively, and is included in other long-term
liabilities.
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
F-12
98
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Certain indirect subsidiaries of Charter Holdings are corporations and file
separate federal and state income tax returns. Results of operations from these
subsidiaries are not material to the consolidated results of operations of the
Company. Income tax expense for the year ended December 31, 1999, represents
taxes assessed by certain state jurisdictions. Deferred income tax assets and
liabilities are not material.
Segments
In accordance with SFAS No. 131, Disclosure about Segments of an Enterprise
and Related Information, segments have been identified based upon management
responsibility. The individual segments have been aggregated into one reportable
segment, cable services.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United Sates requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS:
During 2000, the Company acquired cable systems for an aggregate purchase
price of $101.2 million, net of cash acquired. Also during 2000, Charter Holdco
acquired cable systems for an aggregate purchase price of $1.1 billion, net of
cash acquired, excluding debt assumed of $963.3 million. In connection with the
acquisitions, Charter issued shares of Class A common stock valued at
approximately $178.0 million, and Charter Holdco and an indirect subsidiary of
Charter Holdings issued equity interests totaling $384.6 million and $629.5
million, respectively. Immediately after the acquisitions, Charter Holdco
contributed all of its equity interests in these acquisitions to Charter
Holdings. The purchase prices were allocated to assets and liabilities assumed
based on relative fair values, including amounts assigned to franchises of $3.0
billion.
During 1999, the Company acquired cable systems in eight separate
transactions for an aggregate purchase price of $3.6 billion, net of cash
acquired, excluding debt assumed of $354.0 million. In connection with the
Rifkin acquisition, Charter Holdco issued equity interests totaling $133.3
million to certain sellers. In addition, Vulcan purchased $180.7 million of
equity interests in Rifkin. Vulcan and Charter Holdco contributed interests in
Rifkin to Charter Holdings, increasing equity by $314.0 million. The purchase
price was allocated to assets acquired and liabilities assumed based on their
relative fair values, including amounts assigned to franchises of $3.9 billion.
During 1999, Charter Holdco acquired the cable systems of Fanch, Falcon and
Avalon and on January 1, 2000, Charter Holdco transferred its equity interests
in these cable systems to Charter Holdings (see Note 1), increasing member's
equity by $4.6 billion. Charter Holdco acquired these cable systems for an
aggregate purchase price of $4.0 billion, net of cash acquired, excluding debt
assumed of $2.2 billion and equity issued by Charter Holdco of $550 million.
Charter Holdco allocates the purchase price to assets acquired and liabilities
assumed based on their relative fair values, including amounts assigned to
franchises of $5.8 billion.
All of the above acquisitions were accounted for using the purchase method
of accounting, and accordingly, results of operations of the acquired assets
have been included in the consolidated financial statements from their
respective dates of acquisition. The allocation of the purchase price for the
acquisitions acquired during 2000 are based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information. Management believes that finalization of the purchase prices and
F-13
99
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
allocation will not have a material impact on the consolidated results of
operations or financial position of the Company.
Summarized pro forma operating results of the Company as though all
acquisitions and dispositions closed since January 1, 1999, the issuance and
sale of the January 2000 Charter Holdings Notes, and the drawdown of the Charter
Holdings Senior Bridge Loan Facility and subsequent repayment of a portion of
such facility (see Note 7) had occurred on January 1, 1999, with adjustments to
give effect to amortization of franchises, interest expense, minority interest,
and certain other adjustments, follows.
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(UNAUDITED)
Revenues.................................................. $ 3,298,974 $ 2,948,993
Loss from operations...................................... (987,573) (464,781)
Net loss.................................................. (2,051,667) (1,449,847)
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the consolidated
results of operations had these transactions been completed as of the assumed
date or which may be obtained in the future.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows
for the years ended December 31:
2000 1999
-------- --------
Balance, beginning of year.................................. $ 11,471 $ 1,728
Acquisitions of cable systems............................... 780 5,860
Charged to expense.......................................... 46,151 20,872
Uncollected balances written off, net of recoveries......... (45,981) (16,989)
-------- --------
Balance, end of year........................................ $ 12,421 $ 11,471
======== ========
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31:
2000 1999
----------- ----------
Cable distribution systems................................. $ 5,618,889 $3,523,217
Land, buildings and leasehold improvements................. 282,960 108,214
Vehicles and equipment..................................... 385,199 176,221
----------- ----------
6,287,049 3,807,652
Less -- Accumulated depreciation........................... (1,056,565) (317,079)
----------- ----------
$ 5,230,483 $3,490,573
=========== ==========
For the years ended December 31, 2000 and 1999, and for the period from
December 24, 1998, through December 31, 1998, depreciation expense was $1.2
billion, $225.0 million, and $2.8 million, respectively.
During the year ended December 31, 2000, the Company reduced the estimated
useful lives of certain depreciable assets expected to have reduced lives as a
result of the rebuild and upgrade of the Company's cable distribution systems.
As a result, the above depreciation expense balance for 2000 includes an
additional $508.5 million of depreciation.
F-14
100
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31:
2000 1999
---------- --------
Accounts payable............................................ $ 365,007 $112,233
Capital expenditures........................................ 281,142 66,713
Accrued interest............................................ 208,850 99,946
Programming costs........................................... 120,035 72,245
Accrued general and administrative.......................... 75,315 39,648
Franchise fees.............................................. 53,494 46,524
Liability for pending transfer of cable system.............. -- 88,200
Other accrued expenses...................................... 254,636 179,225
---------- --------
$1,358,479 $704,734
========== ========
The liability for pending transfer of cable system represents the fair
value of a cable system to be transferred upon obtaining necessary regulatory
approvals in connection with the transaction with InterMedia Capital Partners IV
L. P., InterMedia Partners and their affiliates. Such approvals were obtained
and the system's assets were transferred in March 2000.
F-15
101
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
2000 1999
----------- ----------
Charter Holdings:
8.250% Senior Notes...................................... $ 600,000 $ 600,000
8.625% Senior Notes...................................... 1,500,000 1,500,000
9.920% Senior Discount Notes............................. 1,475,000 1,475,000
10.00% Senior Notes...................................... 675,000 --
10.25% Senior Notes...................................... 325,000 --
11.75% Senior Discount Notes............................. 532,000 --
Senior Bridge Loan Facility.............................. 272,500 --
Renaissance:
10.00% Senior Discount Notes............................. 114,413 114,413
CC V Holdings, LLC (Avalon):
9.375% Senior Subordinated Notes......................... -- 150,000
11.875% Senior Discount Notes............................ 179,750 196,000
CC VII Holdings, LLC (Falcon):
8.375% Senior Debentures................................. -- 375,000
9.285% Senior Discount Debentures........................ -- 435,250
Credit Facilities:
Charter Operating........................................ 4,432,000 2,906,000
CC Michigan, LLC and CC New England, LLC (Avalon)........ 213,000 170,000
CC VI Operating Company, LLC (Fanch)..................... 895,000 850,000
Falcon Cable Communications, LLC......................... 1,050,000 865,500
CC VIII Operating, LLC (Bresnan)......................... 712,000 --
Other debt................................................. 1,971 1,400
----------- ----------
12,977,634 9,638,563
Unamortized net discount................................... (667,179) (702,108)
----------- ----------
$12,310,455 $8,936,455
=========== ==========
In March 1999, the Company extinguished substantially all existing
long-term debt, excluding borrowings of the Company under its credit agreements,
and refinanced substantially all existing credit agreements at various
subsidiaries with a new credit agreement entered into by Charter Communications
Operating, LLC (Charter Operating) (the "Charter Operating Credit Facilities").
The excess of the amount paid over the carrying value, net of deferred financing
costs, of the Company's long-term debt of $7.8 million was recorded as an
extraordinary item-loss on debt extinguishment in the accompanying consolidated
statement of operations.
Charter Holdings Notes
In January 2000, Charter Holdings and Charter Communications Holdings
Capital Corporation (Charter Holdings Capital), a wholly owned subsidiary of
Charter Holdings (collectively, the "Issuers"), issued $675.0 million 10.000%
Senior Notes due 2009 (the "10.000% Senior Notes"), $325.0 million 10.250%
Senior Notes due 2010 (the "10.25% Senior Notes"), and $532.0 million 11.75%
Senior Discount Notes due 2010 (the "11.75% Senior Discount Notes"),
collectively referred to as the "January 2000 Charter Holdings Notes". The net
proceeds were $1.25 billion, after giving effect to discounts, commissions and
expenses.
F-16
102
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 10.00% Senior Notes are not redeemable prior to maturity. Interest is
payable semiannually on April 1 and October 1, beginning April 1, 2000 until
maturity.
The 10.25% Senior Notes are redeemable at the option of the Issuers at
amounts decreasing from 105.125% to 100% of par value plus accrued and unpaid
interest, beginning on January 15, 2005, to the date of redemption. At any time
prior to January 15, 2003, the Company may redeem up to 35% of the aggregate
principal amount of the 10.25% Senior Notes at a redemption price of 110.25% of
the principal amount under certain conditions. Interest is payable semiannually
in arrears on January 15 and July 15, beginning on July 15, 2000, until
maturity.
The 11.75% Senior Discount Notes are redeemable at the option of the
Issuers at amounts decreasing from 105.875% to 100% of accreted value beginning
January 15, 2005. At any time prior to January 15, 2003, the Company may redeem
up to 35% of the aggregate principal amount of the 11.75% Senior Notes at a
redemption price of 111.75% of the accreted value under certain conditions.
Interest is payable semiannually in arrears on January 15 and July 15, beginning
on July 15, 2005, until maturity. The discount on the 11.75% Senior Discount
Notes is being accreted using the effective interest method. The unamortized
discount was $196.5 million at December 31, 2000.
In March 1999, Issuers issued $600.0 million 8.250% Senior Notes due 2007
(the "8.250% Senior Notes"), $1.5 billion 8.625% Senior Notes due 2009 (the
"8.625% Senior Notes"), and $1,475.0 million 9.920% Senior Discount Notes due
2011 (the "9.920% Senior Discount Notes"), collectively referred to as the
"Charter Holdings Notes". The net proceeds were $2.9 billion, after giving
effect to discounts, commissions and expenses.
The 8.250% Senior Notes are not redeemable prior to maturity. Interest is
payable semiannually in arrears on April 1 and October 1, beginning October 1,
1999, until maturity.
The 8.625% Senior Notes are redeemable at the option of the Issuers at
amounts decreasing from 104.313% to 100% of par value plus accrued and unpaid
interest beginning on April 1, 2004, to the date of redemption. At any time
prior to April 1, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of
the principal amount under certain conditions. Interest is payable semiannually
in arrears on April 1 and October 1, beginning October 1, 1999, until maturity.
The 9.920% Senior Discount Notes are redeemable at the option of the
Issuers at amounts decreasing from 104.960% to 100% of accreted value beginning
April 1, 2004. At any time prior to April 1, 2002, the Issuers may redeem up to
35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a
redemption price of 109.920% of the accreted value under certain conditions.
Thereafter, cash interest is payable semiannually in arrears on April 1 and
October 1 beginning April 1, 2004, until maturity. The discount on the 9.920%
Senior Discount Notes is being accreted using the effective interest method. The
unamortized discount was $397.8 million at December 31, 2000, and $497.2 million
at December 31, 1999.
The Charter Holdings Notes and the January 2000 Charter Holdings Notes rank
equally with current and future unsecured and unsubordinated indebtedness
(including accounts payables of the Company). The Issuers are required to make
an offer to repurchase all of the Charter Holdings Notes, at a price equal to
101% of the aggregate principal or 101% of the accreted value, together with
accrued and unpaid interest, upon a change of control of the Company.
Charter Holdings Senior Bridge Loan Facility
On August 4, 2000, Charter Holdings and Charter Holdings Capital entered
into a senior bridge loan agreement providing for senior increasing rate bridge
loans in an aggregate principal amount of up to $1.0 billion.
F-17
103
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 14, 2000, Charter Holdings borrowed $1.0 billion under the senior
bridge loan facility and used substantially all of the proceeds to repay a
portion of the amounts outstanding under the Charter Operating and the Falcon
revolving credit facilities. The bridge loan initially bore interest at an
annual rate of 10.21%.
In October and November 2000, Charter issued $750.0 million of 5.75%
Convertible Senior Notes maturing on October 15, 2005 (the Charter Convertible
Notes) for net proceeds of $727.5 million. The net proceeds from the sale of the
Charter Convertible Notes were contributed as equity to Charter Holdings.
Charter Holdings used substantially all of the net proceeds to repay a portion
of the amounts outstanding under the Charter Holdings senior bridge loan
facility. In January 2001, the bridge loan was repaid with a portion of the
proceeds from the January 2001 Charter Holdings Notes. (see Note 18).
Renaissance Notes
In connection with the acquisition of Renaissance Media Group LLC
(Renaissance) in 1999, the Company assumed $163.2 million principal amount at
maturity of senior discount notes due April 2008 (the "Renaissance Notes"). As a
result of the change in control of Renaissance, the Company was required to make
an offer to repurchase the Renaissance Notes at 101% of their accreted value. In
May 1999, the Company made an offer to repurchase the Renaissance Notes pursuant
to this requirement, and the holders of the Renaissance Notes tendered an amount
representing 30% of the total outstanding principal amount at maturity for
repurchase. These notes were repurchased using a portion of the proceeds from
the Charter Holdings Notes.
As of December 31, 2000 and 1999, $114.4 million aggregate principal amount
at maturity of Renaissance Notes with an accreted value of $94.6 million and
$86.5 million, respectively, was outstanding. Interest on the Renaissance Notes
shall be paid semiannually at a rate of 10% per annum beginning on October 15,
2003.
The Renaissance Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after April 15, 2003, initially at 105% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100% of the principal amount at maturity, plus accrued and unpaid interest, on
or after April 15, 2006. In addition, at any time prior to April 15, 2001, the
Company may redeem up to 35% of the original principal amount at maturity with
the proceeds of one or more sales of membership units at 110% of their accreted
value, plus accrued and unpaid interest on the redemption date, provided that
after any such redemption, at least $106 million aggregate principal amount at
maturity remains outstanding.
Avalon Notes
The Company acquired CC V Holdings, LLC (Avalon) (formerly known as Avalon
Cable LLC) in November 1999 and assumed Avalon's 11.875% Senior Discount Notes
due 2008 (the "Avalon 11.875% Notes") and 9.375% Subordinated Notes due 2008
(the "Avalon 9.375% Notes"). After December 1, 2003, cash interest on the Avalon
11.875% Notes will be payable semiannually on June 1 and December 1 of each
year, commencing June 1, 2004.
In January 2000, the Company, through change of control offers and
purchases in the open market, completed the repurchase of the Avalon 9.375%
Notes with a total outstanding principal amount of $150.0 million for a total of
$153.7 million. Also in January 2000, the Company repurchased a portion of the
Avalon 11.875% Notes with a total outstanding principal amount of $16.3 million
for a total of $10.5 million. The repurchase of the Avalon 9.375% Notes and the
Avalon 11.875% Notes was funded by a portion of the cash proceeds from the
issuance of the January 2000 Charter Holdings Notes. The unamortized net
discount related to the Avalon 11.875% Notes was $48.1 million as of December
31, 2000, and $66.8 million as of December 31, 1999.
F-18
104
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Falcon Debentures
The Company acquired CC VII Holdings, LLC (Falcon) (formerly known as
Falcon Communications, L.P.) in November 1999 and assumed Falcon's 8.375% Senior
Debentures Due 2010 (the "Falcon 8.375% Debentures") and 9.285% Senior Discount
Debentures Due 2010 (the "Falcon 9.285% Debentures"), collectively referred to
as the "Falcon Debentures".
In February 2000, the Company, through change of control offers and
purchases in the open market, completed the repurchase of the Falcon 8.375%
Debentures with a total outstanding principal amount of $375.0 million for a
total of $388.0 million. Also, in February 2000, the Company, through change of
control offers and purchases in the open market, repurchased the Falcon 9.285%
Debentures with an aggregate principal amount of $435.3 million for a total of
$328.1 million. The repurchase of all the Falcon Debentures was funded by a
portion of the proceeds from the January 2000 Charter Holdings Notes.
Charter Operating Credit Facilities
As of December 31, 2000, the Charter Operating Credit Facilities provide
for two term facilities, one with a principal amount of $1.0 billion that
matures in 2007 (Term A), and the other with the principal amount of $2.45
billion that matures in 2008 (Term B). The Charter Operating Credit Facilities
also provide for a $1.25 billion revolving credit facility with a maturity date
of September 2007 and at the options of the lenders, supplemental credit
facilities, in the amount of $400.0 million available until March 18, 2002.
Amounts under the Charter Operating Credit Facilities bear interest at the Base
Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.39% to
9.27% as of December 31, 2000 and 8.22% to 8.97% as of December 31, 1999). A
quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of Term A and the revolving credit facility. As of December
31, 2000, the unused availability on the Charter Operating Credit Facilities was
$268.0 million.
Avalon Credit Facilities
In connection with the Avalon acquisition, the Company entered into a new
credit agreement (the "Avalon Credit Facilities"). The Avalon Credit Facilities
have maximum borrowings of $300.0 million, consisting of a revolving facility in
the amount of $175.0 million that matures May 15, 2008, and a Term B loan in the
amount of $125.0 million that matures on November 15, 2008. The Avalon Credit
Facilities also provide for, at the options of the lenders, supplemental credit
facilities in the amounts of $75.0 million available until December 31, 2003.
Amounts under the Avalon Credit Facilities bear interest at the Base Rate or the
Eurodollar rate, as defined, plus a margin up to 2.75% (8.19% to 9.5% as of
December 31, 2000 and 7.995% to 8.870% as of December 31, 1999). A quarterly
commitment fee of between 0.250% and 0.375% per annum is payable on the
unborrowed balance.
In December 2000, Bresnan was merged into Avalon (Bresnan/Avalon
Combination). Upon completion of the Bresnan/Avalon Combination in January 2001,
all amounts due under the Avalon credit facilities were repaid using borrowings
from the Bresnan credit facilities and the Avalon credit facilities were
terminated. In addition, the Bresnan credit facilities were amended and restated
to, among other things, increase borrowing availability by $550.0 million.
Fanch Credit Facilities
In connection with the acquisition of cable systems of Fanch Cablevision
L.P. and affiliates (Fanch), the Company entered into a new credit agreement
(the "Fanch Credit Facilities"). The Fanch Credit Facilities provide for two
term facilities, one with a principal amount of $450.0 million that matures May
2008 (Term A), and the other with the principal amount of $400.0 million that
matures November 2008 (Term B). The Fanch Credit Facilities also provide for a
$350.0 million revolving credit facility with a maturity date of
F-19
105
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
May 2008 and at the options of the lenders, supplemental credit facilities, in
the amount of $300.0 million available until December 31, 2004. Amounts under
the Fanch Credit Facilities bear interest at the Base Rate or the Eurodollar
rate, as defined, plus a margin of up to 3.00% (8.15% to 9.55% as of December
31, 2000 and 8.12% to 8.87% as of December 31, 1999). A quarterly commitment fee
of between 0.250% and 0.375% per annum is payable on the unborrowed balance. As
of December 31, 2000, unused availability was $305.0 million. However, debt
covenants limit the additional amounts that can be borrowed to $153.5 million at
December 31, 2000.
Falcon Credit Facilities
In connection with the Falcon acquisition, the existing Falcon credit
agreement (the "Falcon Credit Facilities") was amended to provide for two term
facilities, one with a principal amount of $196.0 million that matures June 2007
(Term B), and the other with a principal amount of $294.0 million that matures
December 2007 (Term C). The Falcon Credit Facilities also provide for a $756.0
million revolving credit facility with a maturity date of December 2006 and at
the option of the lenders, supplemental credit facilities in the amounts of
$700.0 million with a maturity date of December 2007. Amounts under the Falcon
Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as
defined, plus a margin of up to 2.5% (8.14% to 9.50% as of December 31, 2000 and
7.57% to 8.73% as of December 31, 1999). A quarterly commitment fee of between
0.25% and 0.375% per annum is payable on the unborrowed balance. As of December
31, 2000, unused availability was $196.1 million.
Bresnan Credit Facilities
In connection with the Bresnan acquisition, the existing Bresnan credit
agreement (the "Bresnan Credit Facilities") was amended and restated to provide
for borrowings of up to $900.0 million, consisting of three term facilities, one
with a principal amount of $403.0 million that matures June 30, 2007 (Term A),
and one with a principal amount of $297.0 million that matures February 2, 2008
(Term B). The Bresnan Credit Facilities also provide for a $200.0 million
revolving credit facility that may not have a maturity date earlier than six
calendar months after the maturity date of the Term B loan facility. Amounts
under the Bresnan Credit Facilities bear interest at the Base Rate or Eurodollar
rate, as defined, plus a margin of up to 2.5% (8.44% to 9.30% as of December 31,
2000). A quarterly commitment fee of between 0.25% and 0.375% per annum is
payable on the unborrowed balance. As of December 31, 2000, unused availability
was $188.0 million.
Upon completion of the Bresnan/Avalon Combination in January 2001, all
amounts due under the Avalon credit facilities were repaid using borrowings from
the Bresnan credit facilities and the Avalon credit facilities were terminated.
In addition, the Bresnan credit facilities were amended and restated to, among
other things, increase borrowing availability by $550.0 million.
The indentures governing the debt agreements require issuers of the debt
and/or its subsidiaries to comply with various financial and other covenants,
including the maintenance of certain operating and financial ratios. These debt
instruments also contain substantial limitations on, or prohibitions of
distributions, additional indebtedness, liens, asset sales and certain other
items. As a result of limitations and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, Charter Holdco and Charter.
Based upon outstanding indebtedness at December 31, 2000, the amortization
of term loans, scheduled reductions in available borrowings of the revolving
credit facilities, and the maturity dates for all senior and
F-20
106
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subordinated notes and debentures, aggregate future principal payments on the
total borrowings under all debt agreements at December 31, 2000, are as follows:
YEAR AMOUNT
- ---- -----------
2001........................................................ $ --
2002........................................................ 130,140
2003........................................................ 353,417
2004........................................................ 418,872
2005........................................................ 590,332
Thereafter.................................................. 11,484,873
-----------
$12,977,634
===========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements as of
December 31 follows:
2000 1999
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
DEBT
Charter Holdings Debt............. $4,780,212 $4,425,631 $3,072,151 $2,834,313
Credit Facilities................. 7,302,000 7,302,000 4,791,500 4,791,500
Loans Payable -- Related Party.... -- -- 1,079,163 1,079163
Other............................. 228,243 194,729 1,072,804 1,065,850
2000 1999
--------------------------------- ---------------------------------
CARRYING NOTIONAL FAIR CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE VALUE AMOUNT VALUE
-------- ---------- ------- -------- --------- --------
INTEREST RATE HEDGE
AGREEMENTS
Swaps................ $(1,306) $1,942,713 $ 5,236 $(6,827) $4,542,71 $(47,220)
Caps................. -- 15,000 -- -- 15,000 16
Collars.............. -- 520,000 10,807 1,361 240,000 (199)
As the long-term debt under the credit agreements bears interest at current
market rates, their carrying amount approximates market value at December 31,
2000 and 1999. The fair values of the notes and the debentures are based on
quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.61% and 8.06% at December 31, 2000 and 1999, respectively. The
weighted average interest rate for the Company's interest rate cap agreements
was 9.0% at December 31, 2000 and 1999. The Company's interest rate collar
agreements are structured so that if LIBOR falls below 5.3%, the Company pays
6.7%. If the LIBOR rate is between 5.3% and 8.0%, the Company pays LIBOR. The
LIBOR rate is capped at 8.0% if LIBOR falls between 8.0% and 9.9%. If rates rise
above 9.9%, the cap is removed.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
F-21
107
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would (receive) or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's credit facilities, thereby reducing the exposure to
credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
9. MINORITY INTEREST:
Minority interest represents preferred membership units issued by a
subsidiary in connection with the acquisition of Bresnan by Charter Holdco. The
preferred membership units are exchangeable on a one-for-one basis for shares of
Class A common stock of Charter and accrete at a rate of 2% per year.
10. REVENUES:
Revenues consist of the following for the years and period ended:
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
2000 1999 1998
---------- ---------- ------------
Basic......................................... $2,249,339 $1,002,954 $ 9,347
Premium....................................... 226,598 124,788 1,415
Pay-per-view.................................. 28,590 27,537 260
Digital....................................... 91,115 8,299 10
Advertising sales............................. 220,205 71,997 493
Data services................................. 63,330 10,107 55
Other......................................... 370,045 182,408 2,133
---------- ---------- -------
$3,249,222 $1,428,090 $13,713
========== ========== =======
F-22
108
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating, general and administrative expenses consist of the following for
the years and period ended:
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
2000 1999 1998
----------- --------- ------------
Programming..................................... $ 736,043 $330,754 $3,137
General and administrative...................... 543,430 237,480 2,377
Service......................................... 192,603 99,486 847
Marketing....................................... 63,789 23,447 225
Advertising sales............................... 56,499 31,281 344
Other........................................... 58,554 15,509 204
---------- -------- ------
$1,650,918 $737,957 $7,134
========== ======== ======
12. RELATED PARTY TRANSACTIONS:
Charter Investment and Charter provide management services to the Company
including centralized customer billing services, data processing and related
support, benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These costs are
allocated based on the number of basic customers. Such costs totaled $50.8
million, $18.8 million and $128 for the years ended December 31, 2000 and 1999,
and for the period from December 24, 1998, through December 31, 1998,
respectively. All other costs incurred by Charter Investment and Charter on
behalf of the Company are recorded as expenses in the accompanying consolidated
financial statements and are included in corporate expense charges -- related
parties. Management believes that costs incurred by Charter Investment and
Charter on the Company's behalf and included in the accompanying consolidated
financial statements are not materially different than costs the Company would
have incurred as a stand-alone entity.
The Company pays certain costs on behalf of Charter Investment and Charter.
These costs are reimbursed by Charter Investment and Charter and are recorded as
receivables from related party in the accompanying consolidated financial
statements.
The Company is charged a management fee as stipulated in the management
agreements between Charter Investment, Charter and the Company. To the extent
management fees charged to the Company are greater (less) than the corporate
expenses incurred by Charter Investment, the Company records distributions to
(capital contributions from) Charter Investment. For the year ended December 31,
1999, the Company recorded distributions of $10.3 million. For the year ended
December 31, 2000, and for the period from December 24, 1998, through December
31, 1998, the management fee charged to the Company approximated the corporate
expenses incurred by Charter Investment and Charter on behalf of the Company.
The credit facilities and indebtedness prohibit payments of management fees in
excess of 3.5% of revenues until repayment of such indebtedness. Any amount in
excess of 3.5% of revenues owed to Charter Investment or Charter based on the
Management Agreement is recorded as deferred management fees -- related party.
In December 2000, Charter Communications Ventures, LLC (Charter Ventures),
a subsidiary of Charter Holdings, and Vulcan Ventures, Inc. (Vulcan), an
affiliate of Mr. Allen, invested $37.0 million and $38.0 million, respectively,
in High Speed Access Corp. (HSA) which provides high speed Internet access to
certain of the Company's cable customers. The investments took the form of
convertible preferred stock that
F-23
109
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may be converted into HSA common stock. In addition, the Company and Vulcan own
equity interests or warrants to purchase equity interests in HSA. As of December
31, 2000, the Company earned 1,932,931 warrants under certain agreements.
Additional warrants may be earned by the Company based upon the number of homes
passed. Under the terms of a network services agreement, the Company splits
revenue with HSA based on set percentages of gross revenues in each category of
service. Certain officers and directors of the Company serve as directors of
HSA. For the years ended December 31, 2000 and 1999, revenues earned from HSA
were $7.8 million and $461, respectively. The Company paid HSA $3.6 million, and
$0.7 million, for the years ended December 31, 2000 and 1999, respectively,
relating to monthly subscriber fees and equipment purchases. Charter Venture's
investment is accounted for under the equity method, with a carrying value of
$36.0 million as of December 31, 2000.
Charter Ventures is a party to a joint venture with General Instrument
Corporation (doing business as Broadband Communications Sector of Motorola,
Inc), Replay TV Inc. and Interval Research Corporation, an entity controlled by
Mr. Allen, to develop and integrate digital video recording capabilities in
advanced digital set-top boxes. The joint venture will focus on creating a
set-top based digital recording platform that will be designed for storing
video, audio and Internet content. In connection with the formation of the joint
venture, Charter Ventures contributed $3.2 million in October 2000. The Company
received management fees of $9.0 million for the year ended December 31, 2000.
ZDTV, L.L.C. (operating as techtv) operates a cable television channel,
which broadcasts shows about technology and the Internet. Vulcan and its
affiliates own a 97% interest in techtv, and certain directors and officers of
the Company serve as directors or officers of techtv. Through December 31, 2000,
techtv has agreed to provide the Company no cost programming for broadcast over
its cable systems. Effective January 1, 2001, the Company will pay a monthly per
customer fee to techtv for cable systems that distribute techtv on a level of
service received by fewer than 80% of the total system's customers. In addition,
Mr. Allen is the 100% owner of the Portland Trailblazers, a National Basketball
Association Team, and Trail Blazers, Inc. Expenses in connection with the cable
broadcast of Portland Trail Blazers Basketball games were $993 and $727 for the
years ended December 31, 2000 and 1999, respectively.
The Company, Mr. Allen and certain affiliates of Mr. Allen own equity in
and are directors of USA Networks, Inc. (USA Networks). USA Networks operates
USA Network and the Sci-Fi Channel, which are cable television networks. USA
Networks also operates Home Shopping Network, which is a retail sales program
available via cable television systems. The Company pays USA Networks a monthly
fee for programming services based on the number of subscribers. For the years
ended December 31, 2000 and 1999, the Company paid USA Networks approximately
$25.0 million and $16.7 million, respectively. In addition, the Company receives
commissions from USA Networks for home shopping sales generated by its customers
and for promotion of the Home Shopping Network. Such revenues for the years
ended December 31, 2000 and 1999, were $26.5 million, and $1.8 million,
respectively.
The Company, Mr. Allen and certain affiliates of Mr. Allen also own equity
interests or warrants to purchase equity interests in various entities that
provide services, programming or equipment to the Company, including WorldGate
Communications, Inc. (WorldGate), Wink Communications, Inc. (Wink), Oxygen Media
Inc. (Oxygen Media), Digeo Broadband, Inc., RCN Corporation, TV Gateway LLC,
Vulcan and Interval Research Company. In addition, certain officers or directors
of the Company also serve as directors of Oxygen Media, RCN Corporation and
InfoSpace, Inc. The Company and its affiliates do not hold controlling interests
in any of these companies. The Company has paid less than 1% of operating costs
for the year ended December 31, 2000 and 1999, and for the period from December
24, 1998, through December 31, 1998, for these services and equipment purchases.
In addition, the Company receives revenues from Worldgate related to TV-based
Internet access. Such revenues for the years ended December 31, 2000 and 1999,
and for the period from December 24, 1998, through December 31, 1998, were less
than 1% of total revenues.
F-24
110
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the issuance of the Charter Holdings Notes in March
1999, the Company extinguished substantially all existing long-term debt
including debt at Marcus Cable. Prior to the merger with Marcus Cable in March
1999, the Company loaned Marcus Cable $1.7 billion. In April 1999, the loan was
repaid.
During November 1999, the Company received $1.1 billion from Charter and
Charter Holdco that was used to pay down credit facilities. The Company recorded
the funds as loans payable-related party. The loans were repaid with additional
long-term borrowings made in connection with the Bresnan acquisition in February
2000. The loans carried interest rates from 7.82% to 7.91%. Interest expense on
the loans was $14.7 million and $10.4 million for the years ended December 31,
2000 and 1999, respectively.
13. OPTION PLAN:
In accordance with an employment agreement between Charter Investment and
the President and Chief Executive Officer of Charter and a related option
agreement with the President and Chief Executive Officer, an option to purchase
7,044,127 Charter Holdco membership interests, was issued to the President and
Chief Executive Officer. The option vests over a four-year period from the date
of grant and expires ten years from the date of grant.
In February 1999, Charter Holdings adopted an option plan providing for the
grant of options. The plan was assumed by Charter Holdco. The option plan
provides for grants of options to employees, officers and directors of Charter
Holdco and its affiliates, including the Company, and consultants who provide
services to Charter Holdco. Options granted vest over five years from the grant
date, commencing 15 months after the date of grant. Options not exercised
accumulate and are exercisable, in whole or in part, in any subsequent period,
but not later than ten years from the date of grant.
Membership units received upon exercise of the options are automatically
exchanged into Class A common stock of Charter on a one-for-one basis.
F-25
111
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity for the option plan for the years ended December
31, 2000 and 1999, and for the period from December 24, 1998, through December
31, 1998, is as follows:
2000 1999 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
Options outstanding,
beginning of period..... 20,757,608 $19.79 7,044,127 $20.00 -- $ --
Granted
Pre IPO Grants.......... -- -- 9,584,681 20.04 7,044,127 $20.00
Post IPO Grants......... 10,247,200 18.06 4,741,400 19.00 -- --
Exercised................. (16,514) 20.00 -- -- -- --
Cancelled................. (2,505,937) 18.98 (612,600) 19.95 -- --
----------- ------ ----------- ------ -----------
Options outstanding, end
of period............... 28,482,357 $19.24 20,757,608 $19.79 7,044,127 $20.00
=========== ====== =========== ====== =========== ======
Weighted Average Remaining
Contractual Life........ 8.6 years 9.2 years 10.0 years
=========== =========== ===========
Options Exercisable, end
of period............... 7,026,346 $19.98 2,091,032 $19.90 1,761,032 $20.00
=========== ====== =========== ====== =========== ======
Weighted average fair
value of options
granted................. $ 12.34 $ 12.59 $ 12.50
=========== =========== ===========
The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to
account for the option plans. Option compensation expense of $41.0 million,
$80.0 million, and $845 for the years ended December 31, 2000 and 1999, and for
the period from December 24, 1998, through December 31, 1998, respectively, was
recorded in the consolidated financial statements since the exercise prices were
less than the estimated fair values of the underlying membership interests on
the date of grant. Estimated fair values were determined by the Company using
the valuation inherent in the Paul Allen Transaction and valuations of public
companies in the cable industry adjusted for factors specific to the Company.
Compensation expense is being recorded over the vesting period of each grant
that varies from four to five years. As of December 31, 2000, deferred
compensation remaining to be recognized in future periods totaled $31.6 million.
No stock option compensation expense was recorded for the options granted after
November 8, 1999 (Post IPO), since the exercise price was equal to the estimated
fair value of the underlying membership interests on the date of grant. Since
the membership units are exchangeable into Class A common stock of Charter on a
one-for-one basis, the estimated fair value was equal to the quoted market
values of Class A common stock.
SFAS 123, Accounting for Stock-Based Compensation, requires pro forma
disclosure of the impact on earnings as if the compensation costs for these
plans had been determined consistent with the fair value
F-26
112
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
methodology of this statement. The Company's net loss would have been increased
to the following pro forma amounts under SFAS 123 for the years and period
ended:
PERIOD FROM
DECEMBER 24,
YEAR ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
2000 1999 1998
----------- --------- ------------
Net loss:
As reported................................. $(2,047,559) $(648,708) $(5,277)
Pro forma................................... (2,224,239) (673,042) (5,495)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants during the years ended December 31, 2000 and
1999, and the period from December 24, 1998, through December 31, 1998,
respectively: risk-free interest rates of 6.5%, 5.5%, and 4.8%; expected
volatility of 46.9%, 43.8% and 43.7%; and expected lives of 10 years. The
valuations assume no dividends are paid.
14. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases certain facilities and equipment under noncancellable
operating leases. Leases and rental costs charged to expense for the years ended
December 31, 2000 and 1999, and for the period from December 24, 1998, through
December 31, 1998, were $14.2 million, $11.2 million and $70, respectively. As
of December 31, 2000, future minimum lease payments are as follows:
YEAR AMOUNT
- ---- -------
2001........................................................ $11,077
2002........................................................ 7,557
2003........................................................ 5,242
2004........................................................ 4,101
2005........................................................ 3,173
Thereafter.................................................. 10,364
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
years ended December 31, 2000 and 1999, and for the period from December 24,
1998, through December 31, 1998, was $31.6 million, $14.3 million and $137,
respectively.
Litigation
The Company is a party to lawsuits and claims that arose in the ordinary
course of conducting its business. In the opinion of management, after
consulting with legal counsel, and taking into account recorded liabilities, the
outcome of these lawsuits and claims will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
Regulation in the Cable Industry
The cable industry is subject to extensive regulation at the federal, local
and, in some instances, state levels. The Cable Communications Policy Act of
1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable
Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996
Telecom Act"), establish a national policy to guide the development and
regulation of cable systems. The Federal Communications
F-27
113
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable systems and have
resulted in additional regulatory oversight by the FCC and local or state
franchise authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. During 2000 and 1999,
the amounts refunded by the Company have been insignificant. The Company may be
required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. As of
December 31, 2000, approximately 17% of the Company's local franchising
authorities are certified to regulate basic tier rates. The Company is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding its pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. State governmental agencies are required to
follow FCC rules when prescribing rate regulation, and thus, state regulation of
cable rates is not allowed to be more restrictive than the federal or local
regulation.
15. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in 401(k) plans (the "401(k)
Plans"). Employees that qualify for participation can contribute up to 15% of
their salary, on a pre-tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches 50% of the first
5% of participant contributions. The Company made contributions to the 401(k)
Plans totaling $6.1 million, $2.9 million and $20 for the years ended December
31, 2000 and 1999, and for the period from December 24, 1998, through December
31, 1998, respectively.
16. RECENTLY ISSUED ACCOUNTING STANDARDS:
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, and SFAS
No. 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, is effective for the Company as of January 1, 2001. SFAS No. 133
establishes accounting
F-28
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. Adoption of these new accounting standards is
expected to result in a cumulative effect of a change in accounting principle
that increases net loss by approximately $23.9 million.
17. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
As the result of limitations on and prohibition of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company. The
following parent-only financial statements of Charter Holdings account for the
investments in Charter Operating, Fanch, Falcon, Avalon and Bresnan under the
equity method of accounting. The financial statements should be read in
conjunction with the consolidated financial statements of the Company and notes
thereto.
F-29
115
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 8,462 $ 9,762
Investments in subsidiaries................................. 13,170,266 11,090,874
Other assets................................................ 121,176 69,793
----------- -----------
$13,299,904 $11,170,429
=========== ===========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities......................................... $ 96,041 $ 47,365
Payables to related party................................... 39,789 2,960
Long-term debt.............................................. 4,780,211 3,072,151
Member's equity............................................. 8,383,863 8,047,953
----------- -----------
Total liabilities and member's equity.................. $13,299,904 $11,170,429
=========== ===========
F-30
116
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
PERIOD FROM
DECEMBER 24,
1998,
{YEAR ENDED DECEMBER 31,} THROUGH
-------------------------- DECEMBER 31,
2000 1999 1998
------------ ---------- ------------
{(DOLLARS IN THOUSANDS)}
Interest expense...................................... $ (424,601) $(221,925) $ --
Interest income....................................... 4,938 11,833 --
Equity in losses of subsidiaries...................... (1,627,896) (438,616) (5,277)
----------- --------- -------
Net loss.............................................. $(2,047,559) $(648,708) $(5,277)
=========== ========= =======
F-31
117
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31,} THROUGH
-------------------------- DECEMBER 31,
2000 1999 1998
----------- ----------- ------------
(DOLLARS IN THOUSANDS)}
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(2,047,559) $ (648,708) $(5,277)
Noncash interest expense.......................... 153,274 78,473 --
Equity in losses of subsidiaries.................. 1,627,896 438,616 5,277
Change in assets and liabilities.................. 76,333 48,825 --
----------- ----------- -------
Net cash used in operating activities.......... (190,056) (82,794) --
----------- ----------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries........................ (2,048,323) (1,730,466) --
Loans to subsidiaries............................. -- (1,680,142) --
Repayment of debt on behalf of subsidiaries....... -- (663,259) --
Distributions..................................... -- 96,748 --
----------- ----------- -------
Net cash used in investing activities.......... (2,048,323) (3,977,119) --
----------- ----------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds form debt offering................... -- 2,999,385 --
Payments for debt issuance costs.................. (60,228) (74,000) --
Borrowings of long-term debt...................... 2,300,303 -- --
Repayments of long-term debt...................... (727,500) -- --
Distributions..................................... (26,591) -- --
Capital contributions............................. 751,095 1,144,290 --
----------- ----------- -------
Net cash used in financing activities.......... 2,237,079 4,069,675 --
----------- ----------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (1,300) 9,762 --
CASH AND CASH EQUIVALENTS, beginning of period...... 9,762 -- --
----------- ----------- -------
CASH AND CASH EQUIVALENTS, end of period............ $ 8,462 $ 9,762 $ --
=========== =========== =======
18. SUBSEQUENT EVENTS:
In January 2001, the Company issued the January 2001 Charter Holdings Notes
with an aggregate principal amount at maturity of $2.075 billion. The January
2001 Charter Holdings Notes are comprised of $900.0 million 10.75% Senior Notes
due 2009, $500.0 million 11.125% Senior Notes due 2011, and $350.6 million of
13.5% Senior Discount Notes due 2011 with a principal amount at maturity of
$675.0 million. The net proceeds were approximately $1.72 billion, after giving
effect to discounts, commissions and expenses. The Company used all the net
proceeds to repay all remaining amounts outstanding under the Charter Holdings
senior bridge loan facility and the Fanch revolving credit facility, a portion
of the amounts outstanding under the Charter Operating and Falcon revolving
credit facilities, and for general corporate purposes.
In February 2001, Charter entered into several agreements with AT&T
Broadband, LLC involving several strategic cable system transactions that will
result in a net addition of approximately 512,000
F-32
118
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customers (unaudited) for the Charter cable systems. In the pending AT&T
transactions, Charter expects to acquire cable systems from AT&T Broadband
serving approximately 574,000 customers (unaudited) in Missouri, Alabama, Nevada
and California for a total of $1.79 billion. It is expected that the acquired
systems will be contributed to the Company immediately after closing. A portion
of the purchase price will consist of Charter cable systems valued at $249.0
million serving approximately 62,000 customers (unaudited) in Florida. Of the
balance of the purchase price, up to $501.5 million will be paid in Class A
common stock and the remainder will be paid in cash. Charter Holdings and
Charter Communications Holdings Capital Corporation have a commitment for a
bridge loan from Morgan Stanley Senior Funding, Inc. and Goldman Sachs Credit
Partners LP for temporary financing of the cash portion of the purchase price.
Charter expects to obtain permanent financing through one or more debt or equity
financing transactions or a combination thereof. The acquisition transactions
are expected to close in the second and/or third quarters of 2001, subject to
certain closing conditions and regulatory review.
F-33
119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated statements of operations,
changes in shareholder's investment and cash flows of Charter Communications
Holdings, LLC and subsidiaries for the period from January 1, 1998, through
December 23, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the operations and the cash flows of
Charter Communications Holdings, LLC and subsidiaries for the period from
January 1, 1998, through December 23, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM
JANUARY 1, 1998
THROUGH
DECEMBER 23, 1998
----------------------
(DOLLARS IN THOUSANDS)
REVENUES.................................................... $ 49,731
OPERATING EXPENSES:
Operating, general and administrative..................... 25,952
Depreciation and amortization............................. 16,864
Corporate expense allocation -- related party............. 6,176
--------
48,992
--------
Income from operations.................................... 739
--------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (17,277)
Interest income........................................... 44
Other, net................................................ (728)
--------
(17,961)
--------
Net loss............................................... $(17,222)
========
The accompanying notes are an integral part of this consolidated statement.
F-35
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S INVESTMENT
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ----------- --------
(DOLLARS IN THOUSANDS)}
BALANCE, January 1, 1998......................... $-- $ 5,900 $ (7,875) $ (1,975)
Capital contributions.......................... -- 10,800 -- 10,800
Net loss....................................... -- -- (17,222) (17,222)
-- ------- -------- --------
BALANCE, December 23, 1998....................... $-- $16,700 $(25,097) $ (8,397)
== ======= ======== ========
The accompanying notes are an integral part of this consolidated statement.
F-36
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM
JANUARY 1, 1998,
THROUGH
DECEMBER 23, 1998
----------------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (17,222)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 16,864
Noncash interest expense............................... 267
Gain on disposal of property, plant and equipment...... (14)
Changes in assets and liabilities, net of effects from
acquisition --
Receivables............................................ 10
Prepaid expenses and other............................. (125)
Accounts payable and accrued expenses.................. 16,927
Payables to manager of cable systems --related party... 5,288
Other operating activities............................. 569
---------
Net cash provided by operating activities............ 22,564
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (15,364)
Payment for acquisition, net of cash acquired............. (167,484)
Other investing activities................................ (486)
---------
Net cash used in investing activities................ (183,334)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 217,500
Repayments of long-term debt.............................. (60,200)
Capital contributions..................................... 7,000
Payments for debt issuance costs.......................... (3,487)
---------
Net cash provided by financing activities............ 160,813
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 43
CASH AND CASH EQUIVALENTS, beginning of period.............. 626
---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 669
=========
CASH PAID FOR INTEREST...................................... $ 7,679
=========
The accompanying notes are an integral part of this consolidated statement.
F-37
123
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, was formed in February 1999 as a wholly owned subsidiary of
Charter Investment, Inc. (Charter Investment). Charter Investment, through its
wholly owned cable television operating subsidiary, Charter Communications
Properties Holdings, LLC (CCPH), commenced operations with the acquisition of a
cable television system on September 30, 1995.
Effective December 23, 1998, as part of a series of transactions, through
which Paul G. Allen acquired Charter Investment, Mr. Allen acquired CCPH for an
aggregate purchase price of $211 million, excluding $214 million in debt assumed
(the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction,
CCPH was converted from a corporation to a limited liability company. Also, in
conjunction with the Paul Allen Transaction, Charter Investment for fair value
acquired from unrelated third parties all of the interest it did not already own
in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of
CCA Holdings, Corp., CCT Holdings Corp. and Charter Communications Long Beach,
Inc.), all cable television operating companies, for $2.0 billion, excluding
$1.8 billion in debt assumed. Charter Investment previously managed and owned
minority interests in these companies. In February 1999, Charter Investment
transferred all of its cable television operating subsidiaries to a wholly owned
subsidiary of Charter Communications Holdings, LLC (Charter Holdings), Charter
Communications Operating, LLC (Charter Operating). Charter Holdings was a wholly
owned subsidiary of Charter Investment. The transfer was accounted for as a
reorganization of entities under common control similar to a pooling of
interests.
The accompanying consolidated financial statements include the accounts of
CCPH and CCP, its wholly owned cable operating subsidiary, representing the
consolidated financial statements of Charter Holdings and subsidiaries
(collectively, the "Company") for all periods presented. The accounts of
CharterComm Holdings and CCA Group are not included since these companies were
not owned and controlled by Charter Investment prior to December 23, 1998.
As a result of the change in ownership of CCPH, CharterComm Holdings and
CCA Group, Charter Holdings has applied push-down accounting in the preparation
of the consolidated financial statements effective December 23, 1998.
Accordingly, the consolidated financial statements of Charter Holdings for
periods ended on or before December 23, 1998, are presented on a different cost
basis than the consolidated financial statements for the periods after December
23, 1998 (not presented herein), and are not comparable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installations. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred,
while equipment replacement and betterments are capitalized.
F-38
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
For the period from January 1, 1998, through December 23, 1998,
depreciation expense was $6.2 million.
Franchises
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company.
Other Assets
Debt issuance costs are being amortized to interest expense using the
effective interest method over the term of the related debt. The interest rate
cap costs are being amortized over the terms of the agreement, which
approximates three years.
Impairment of Assets
If facts and circumstances indicate that a long-lived asset may be
impaired, the carrying value is reviewed. If a review indicates that the
carrying value of such asset is not recoverable based on projected undiscounted
net cash flows related to the asset over its remaining life, the carrying value
of such asset is reduced to its estimated fair value.
Revenues
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 23, 1998, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly
basis from the Company's customers and are periodically remitted to local
franchise authorities. Franchise fees collected and paid are reported as
revenues and expenses.
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the
F-39
125
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period incurred. Premiums paid for interest rate caps are deferred, included in
other assets, and are amortized over the original term of the interest rate
agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
Income Taxes
The Company filed a consolidated income tax return with Charter Investment.
Income taxes were allocated to the Company in accordance with the tax-sharing
agreement between the Company and Charter Investment.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITION:
In 1998, the Company acquired a cable system for an aggregate purchase
price, net of cash acquired, of $228.4 million, comprised of $167.5 million in
cash and $60.9 million in a note payable to the seller. The excess of the cost
of properties acquired over the amounts assigned to net tangible assets at the
date of acquisition was $207.6 million and is included in franchises.
The above acquisition was accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition. The
purchase price was allocated to tangible and intangible assets based on
estimated fair values at the acquisition date.
Unaudited pro forma operating results as though the acquisition discussed
above, excluding the Paul Allen Transaction, had occurred on January 1, 1998,
with adjustments to give effect to amortization of franchises, interest expense
and certain other adjustments are as follows:
PERIOD FROM
JANUARY 1, 1998,
THROUGH
DECEMBER 23, 1998
-----------------
(UNAUDITED)
Revenues.................................................... $ 67,007
Loss from operations........................................ (7,097)
Net loss.................................................... (24,058)
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the results of operations had
the transaction been completed as of the assumed date or which may be obtained
in the future.
F-40
126
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows:
PERIOD FROM
JANUARY 1, 1998,
THROUGH
DECEMBER 23, 1998
-----------------
Balance, beginning of period................................ $ 52
Acquisition of system..................................... 96
Charged to expense........................................ 1,122
Uncollected balances written off, net of recoveries....... (778)
------
Balance, end of period...................................... $ 492
======
5. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future
tax consequence attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred income tax assets and liabilities are measured using the enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Deferred income tax expense or benefit is
the result of changes in the liability or asset recorded for deferred taxes. A
valuation allowance must be established for any portion of a deferred tax asset
for which it is more likely than not that a tax benefit will not be realized.
No current provision (benefit) for income taxes was recorded. The effective
income tax rate is less than the federal rate of 35% primarily due to providing
a valuation allowance on deferred income tax assets.
6. RELATED-PARTY TRANSACTIONS:
Charter Investment provides management services to the Company including
centralized customer billing services, data processing and related support,
benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These billings are
determined based on the number of basic customers. Such costs totaled $437 for
the period from January 1, 1998, through December 23, 1998. All other costs
incurred by Charter Investment on behalf of the Company are expensed in the
accompanying consolidated financial statements and are included in corporate
expense allocations related party. The cost of these services is allocated based
on the number of basic customers. Management considers these allocations to be
reasonable for the operations of the Company.
Charter Investment utilized a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to the Company as determined by independent actuaries,
at the present value of the actuarially computed present and future liabilities
for such benefits. Medical coverage provides for $2.4 million aggregate stop
loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $800 aggregate stop loss protection and a
loss limitation of $150 per person per year.
The Company is charged a management fee based on percentages of revenues as
stipulated in the management agreement between Charter Investment and the
Company. For the period from January 1, 1998, through December 23, 1998, the
management fee charged to the Company approximated the corporate expenses
incurred by Charter Investment on behalf of the Company.
F-41
127
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases certain facilities and equipment under noncancellable
operating leases. Leases and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, was $278.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
period from January 1, 1998, through December 23, 1998, was $421.
Litigation
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable systems. The Federal Communications Commission (FCC) has
principal responsibility for implementing the policies of the Cable Acts. Many
aspects of such regulation are currently the subject of judicial proceedings and
administrative or legislative proposals. Legislation and regulations continue to
change, and the Company cannot predict the impact of future developments on the
cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable systems and have
resulted in additional regulatory oversight by the FCC and local or state
franchise authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications
F-42
128
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
regarding their pre-sunset complaints will have a material adverse effect on the
Company's consolidated financial position or results of operations.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. State governmental agencies are required to
follow FCC rules when prescribing rate regulation, and thus, state regulation of
cable television rates is not allowed to be more restrictive than the federal or
local regulation. The Company is subject to state regulation in Connecticut.
8. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on or before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. The Company contributed $74.0 for the period from January 1,
1998, through December 23, 1998.
Appreciation Rights Plan
Certain employees of Charter participated in the 1995 Charter
Communications, Inc. Appreciation Rights Plan (the "Plan"). The Plan permitted
Charter Investment to grant 1,500,000 units to certain key employees, of which
1,251,500 were outstanding at December 31, 1997. Units received by an employee
vest at a rate of 20% per year, unless otherwise provided in the participant's
Appreciation Rights Unit Agreement. The appreciation rights entitled the
participants to receive payment, upon termination or change in control of
Charter Investment, of the excess of the unit value over the base value (defined
as the appreciation value) for each vested unit. The unit value was based on
adjusted equity, as defined in the Plan. Deferred compensation expense was based
on the appreciation value since the grant date and was being amortized over the
vesting period.
As a result of the acquisition of Charter Investment by Mr. Allen, the Plan
was terminated, all outstanding units became 100% vested and all amounts were
paid by Charter Investment in 1999. The cost of this plan was allocated to the
Company based on the number of basic customers. The Company considers this
allocation to be reasonable for the operations of the Company. For the period
January 1, 1998, through December 23, 1998, the Company expensed $3,800,
included in corporate expense allocation-related party and increased
shareholder's investment for the cost of this plan.
9. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No.
133, has delayed the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company has not yet quantified the impact of adopting
SFAS No. 133 on the consolidated financial statements nor has determined the
timing of its adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings (loss).
F-43
129
INDEPENDENT AUDITORS' REPORT
The Common Member and Manager
Bresnan Communications Group LLC:
We have audited the accompanying consolidated balance sheets of Bresnan
Communications Group LLC and its subsidiaries as of December 31, 1999 and
February 14, 2000, and the related consolidated statements of operations and
members' equity (deficit) and cash flows for the year ended December 31, 1999
and for the period ended February 14, 2000. These consolidated financial
statements are the responsibility of the Bresnan Communications Group LLC's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bresnan
Communications Group LLC, as of December 31, 1999 and February 14, 2000, and the
results of their operations and their cash flows for the year ended December 31,
1999 and the period ended February 14, 2000, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
April 20, 2000
F-44
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BRESNAN COMMUNICATIONS GROUP LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, FEBRUARY 14,
1999 2000
------------ ------------
(AMOUNTS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 5,995 $ --
Restricted cash (note 3).................................... 290 301
Trade and other receivables, net............................ 9,006 9,062
Property and equipment, at cost:
Land and buildings........................................ 6,879 7,271
Distribution systems...................................... 534,812 546,939
Support equipment......................................... 62,283 60,747
--------- ----------
603,974 614,957
Less accumulated depreciation............................. 228,868 233,810
--------- ----------
375,106 381,147
Franchise costs, net........................................ 328,068 354,887
Other assets, net of amortization........................... 19,038 18,746
--------- ----------
Total assets...................................... $ 737,503 $ 764,143
========= ==========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Bank overdraft.............................................. $ -- $ 1,542
Accounts payable............................................ 18,900 20,776
Accrued expenses............................................ 35,613 8,240
Accrued interest............................................ 11,748 1,459
Debt (note 4)............................................... 895,607 963,292
Other liabilities........................................... 10,020 10,604
--------- ----------
Total Liabilities................................. 971,888 1,005,913
Members' deficit............................................ (234,385) (241,770)
--------- ----------
Commitments and contingencies
Total liabilities and members' deficit............ $ 737,503 $ 764,143
========= ==========
See accompanying notes to consolidated financial statements.
F-45
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BRESNAN COMMUNICATIONS GROUP LLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY (DEFICIT)
PERIOD FROM
JANUARY 1,
YEAR ENDED 2000 TO
DECEMBER 31, FEBRUARY 14,
1999 2000
------------ ------------
(AMOUNTS IN THOUSANDS)
REVENUE..................................................... $ 283,574 $ 37,102
Operating costs and expenses:
Programming (note 6)...................................... 72,355 10,178
Operating................................................. 31,624 4,857
Selling, general and administrative (note 6).............. 67,351 10,414
Organizational and divestiture costs...................... 5,281 865
Depreciation and amortization............................. 59,752 8,095
--------- ---------
236,363 34,409
--------- ---------
Operating income....................................... 47,211 2,693
OTHER INCOME (EXPENSE):
Interest expense:
Related party (note 4)................................. (152) --
Other.................................................. (67,139) (9,522)
Gain (loss) on sale of cable television systems........... 556 --
Other, net................................................ (900) (106)
--------- ---------
(67,635) (9,628)
--------- ---------
Net earnings (loss)......................................... (20,424) (6,935)
MEMBERS' EQUITY (DEFICIT):
Beginning of period....................................... 381,748 (234,385)
Capital contributions by members.......................... 136,500 --
Capital distributions to members.......................... (732,209) (450)
--------- ---------
End of period............................................. $(234,385) $(241,770)
========= =========
See accompanying notes to consolidated financial statements.
F-46
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BRESNAN COMMUNICATIONS GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
JANUARY 1,
YEAR ENDED 2000 TO
DECEMBER 31, FEBRUARY 14,
1999 2000
------------ ------------
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (20,424) $ (6,935)
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 59,752 8,095
Amortization of debt discount and deferred financing
costs................................................. 18,683 2,345
Gain on sale of cable television systems............... (556) --
Other, net............................................. -- 689
Changes in operating assets and liabilities, net of
effects of acquisitions:
Change in receivables................................ 621 (56)
Change in other assets............................... 429 37
Change in accounts payable, accrued expenses, accrued
interest and other liabilities...................... 25,457 (34,227)
--------- --------
Net cash provided by (used in) operating
activities...................................... 83,962 (30,052)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expended for property and equipment and for
franchise costs........................................ (90,879) (6,642)
Cash paid in acquisitions................................. (78,680) (36,177)
Cash received in disposals................................ 4,956 200
Change in restricted cash................................. 46,999 (11)
--------- --------
Net cash used in investing activities............. (117,604) (42,630)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank overdraft.................................. -- (1,542)
Borrowings under note agreement........................... 597,530 67,000
Proceeds from Senior Notes................................ 170,000 --
Proceeds from Senior Discount Notes....................... 175,021 --
Repayments under note agreement........................... (294,672) (1,405)
Deferred finance costs paid............................... (19,169) --
Contributions by members.................................. 136,500 --
Distributions to members.................................. (732,209) (450)
--------- --------
Net cash provided by financing activities......... 33,001 66,687
--------- --------
Net decrease in cash.............................. (641) (5,995)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 6,636 5,995
--------- --------
End of period............................................. $ 5,995 $ --
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
Cash paid during the period for interest.................. $ 58,695 $ 17,603
========= ========
See accompanying notes to consolidated financial statements.
F-47
133
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND FEBRUARY 14, 2000
(AMOUNTS IN THOUSANDS)
(1) BASIS OF PRESENTATION
Bresnan Communications Group LLC and its subsidiaries ("BCG" or the
"Company") are wholly owned by Bresnan Communications Company Limited
Partnership, a Michigan limited partnership ("BCCLP"). BCG is a Delaware limited
liability company formed on August 5, 1998 for the purpose of acting as
co-issuer with its wholly-owned subsidiary, Bresnan Capital Corporation ("BCC"),
of $170,000 aggregate principal amount at maturity of 8% Senior Notes and
$275,000 aggregate principal amount at maturity of 9.25% Senior Discount Notes,
both due in 2009 (collectively the "Notes"). Also, at this time, BTC borrowed
approximately $508,000 of $650,000 available under a new credit facility (the
"Senior Credit Facility"). (See Note 4, Debt.) Prior to the issuance of the
Notes on February 2, 1999, BCCLP completed the terms of a contribution agreement
dated June 3, 1998, as amended, whereby certain affiliates of AT&T Broadband and
Internet Services, formerly Tele-Communications, Inc. ("TCI"), contributed
certain cable television systems along with assumed TCI debt of approximately
$708,854 to BCCLP which was repaid with the proceeds of the Notes and the Senior
Credit Facility. In addition, Blackstone BC Capital Partners L.P. ("Blackstone")
and affiliates contributed $136,500 to BCCLP. Upon completion of the Notes
offering on February 2, 1999 BCCLP contributed all of its assets and liabilities
to BCG, which formed a wholly owned subsidiary, Bresnan Telecommunications
Company LLC ("BTC"), into which it contributed all of its assets and certain
liabilities. The above noted contributed assets and liabilities were accounted
for at predecessor cost because of the common ownership and control of TCI and
have been reflected in the accompanying financial statements in a manner similar
to a pooling of interests.
The consolidated financial statements include the accounts of BCG and those
of its wholly owned subsidiary, BTC, subsequent to the aforementioned formation
transaction.
The Company owns and operates cable television systems in small- and
medium-sized communities in the midwestern United States.
Prior to the transactions noted above, TCI and William J. Bresnan and
certain entities which he controls (collectively, the "Bresnan Entities"), held
78.4% and 21.6% interests, respectively, in BCCLP. As of February 2, 1999, TCI,
Blackstone and the Bresnan Entities held 50.00%, 39.79% and 10.21% interests,
respectively. On February 14, 2000, these interests were sold to Charter
Communications Holding Company, LLC. (See Note 8, Sale of the Company.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash Equivalents
Cash equivalents consist of investments which are readily convertible into
cash and have maturities of three months or less at the time of acquisition.
(b) Trade and Other Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1999 and February 14, 2000 was not significant.
(c) Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including interest
during construction and applicable overhead, are capitalized. During the year
ended December 31, 1999 and the period ended February 14, 2000, interest
capitalized was $1,027 and $137, respectively.
F-48
134
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
(d) Franchise Costs
Franchise costs represent the difference between the cost of acquiring
cable television systems and amounts allocated to their tangible assets. Such
amounts are generally amortized on a straight-line basis over 40 years. Costs
incurred in negotiating and renewing franchise agreements are amortized on a
straight-line basis over the life of the franchise, generally 10 to 20 years.
(e) Impairment of Long-Lived Assets
Management periodically reviews the carrying amounts of property and
equipment and identifiable intangible assets to determine whether current events
or circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets. Accordingly, actual
results could vary significantly from such estimates. Assets to be disposed of
are carried at the lower of their financial statement carrying amount or fair
value less costs to sell.
(f) Financial Instruments
The Company has entered into fixed interest rate exchange agreements
("Interest Rate Swaps") which are used to manage interest rate risk arising from
its financial liabilities. Such Interest Rate Swaps are accounted for as a
hedge; accordingly, amounts receivable or payable under the Interest Rate Swaps
are recognized as adjustments to interest expense. These instruments are not
used for trading purposes.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for all fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities by requiring that
all derivative instruments be reported as assets or liabilities and measured at
their fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those instruments
qualify as hedges of the (1) fair values of existing assets, liabilities, or
firm commitments, (2) variability of cash flows of forecasted transactions, or
(3) foreign currency exposures of net investments in foreign operations.
Although management has not completed its assessment of the impact of SFAS 133
on its combined results of operations and financial position, management
estimates that the impact of SFAS 133 will not be material.
(g) Income Taxes
The majority of BCG's net assets were historically held in partnerships. In
addition, BCG has been formed as a limited liability company, to be treated for
tax purposes as a flow-through entity. Accordingly, no provision has been made
for income tax expense or benefit in the accompanying combined financial
statements as the earnings or losses of Bresnan Communications Group LLC will be
reported in the respective tax returns of BCG's members. (See Note 5, Income
Taxes).
F-49
135
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) Revenue Recognition
Cable revenue for customer fees, equipment rental, advertising,
pay-per-view programming and revenue sharing agreements is recognized in the
period that services are delivered. Installation revenue is recognized in the
period the installation services are provided to the extent of direct selling
and installation costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable distribution system.
(i) Statement of Cash Flows
Except for acquisition transactions described in Note 3, transactions
effected through Members' equity (deficit) have been considered constructive
cash receipts and payments for purposes of the statement of cash flows.
(j) Advertising Costs
All advertising costs are expensed as incurred.
(k) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(l) Recent Accounting Pronouncements
In December 1999 the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with fiscal years beginning
between December 16, 1999 and March 15, 2000. The Company has not yet assessed
the impact, if any, that SAB 101 might have on its financial position or results
of operations.
(3) ACQUISITIONS AND SYSTEM DISPOSITIONS
In 1999, BCG acquired three cable systems that were accounted for under the
purchase method. The purchase prices were allocated to the assets acquired in
relation to their fair values as increases to property and equipment of $24,098
and franchise costs of $54,582. In connection with two of the acquisitions, the
aforementioned third party intermediary disbursed $46,999 of cash to complete
the reinvestment in certain identified assets for income tax purposes.
Also, in 1999, BCG disposed of cable systems for gross proceeds of $4,956,
which resulted in a gain of $556.
In 2000, BCG purchased two cable systems for a total of $36,177. The
purchase prices were allocated to the assets acquired in relation to their fair
values as increase to property and equipment of $8,581 and franchise costs of
$27,596.
The results of operations of these cable television systems have been
included in the accompanying combined statements of operations from their dates
of acquisition or their disposition, as applicable. Pro forma information on the
acquisitions and dispositions has not been presented because the effects were
not significant.
F-50
136
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) DEBT
Debt is summarized for December 31, 1999 and February 14, 2000 as follows:
1999 2000
--------- ---------
(AMOUNTS IN THOUSANDS)
Senior Credit Facility(a)................................... $534,200 $599,900
Senior Notes Payable(b)..................................... 170,000 170,000
Senior Discount Notes Payable(b)............................ 190,132 192,222
Other debt.................................................. 1,275 1,170
-------- --------
$895,607 $963,292
======== ========
- ---------------
(a) The Senior Credit Facility represents borrowings under a $650,000 senior
reducing revolving credit and term loan facility as documented in the loan
agreement as of February 2, 1999. The Senior Credit Facility has a current
available commitment of $650,000 of which $599,900 is outstanding at
February 14, 2000. The Senior Credit Facility provides for three tranches, a
revolving loan tranche for $150,000 (the "Revolving Loan"), a term loan
tranche of $328,000 (the "A Term Loan" and together with the Revolving Loan,
"Facility A") and a term loan tranche of $172,000 (the "Facility B").
The commitments under the Senior Credit Facility will reduce commencing with
the quarter ending March 31, 2002. Facility A permanently reduces in
quarterly amounts ranging from 2.5% to 7.5% of the Facility A amount
starting March 31, 2002 and matures approximately eight and one half years
after February 2, 1999. Facility B is also to be repaid in quarterly
installments of .25% of the Facility B amount beginning in March 2002 and
matures approximately nine years after February 2, 1999, on which date all
remaining amounts of Facility B will be due and payable. Additional
reductions of the Senior Credit Facility will also be required upon certain
asset sales, subject to the right of the Company and its subsidiaries to
reinvest asset sale proceeds under certain circumstances. The interest rate
options include a LIBOR option and a Prime Rate option plus applicable
margin rates based on the Company's total leverage ratio, as defined. The
rate applicable to balances outstanding at February 14, 2000 ranged from
7.28% to 8.50%. Covenants of the Senior Credit Facility require, among other
conditions, the maintenance of specific levels of the ratio of cash flows to
future debt and interest expense and certain limitations on additional
investments, indebtedness, capital expenditures, asset sales and affiliate
transactions. In addition, the Company is required to pay a commitment fee
on the unused revolver portion of Facility A which will accrue at a rate
ranging from .25% to .375% per annum, depending on the Company's total
leverage ratio, as defined.
(b) On February 2, 1999, the Company issued $170,000 aggregate principal amount
senior notes payable (the "Senior Notes"). In addition, on the same date,
the Company issued $275,000 aggregate principal amount at maturity of senior
discount notes, (the "Senior Discount Notes") for approximately $175,021
gross proceeds (collectively the "Notes").
The Senior Notes are unsecured and will mature on February 1, 2009. The
Senior Notes bear interest at 8% per annum payable semi-annually on February
1 and August 1 of each year, commencing August 1, 1999.
The Senior Discount Notes are unsecured and will mature on February 1, 2009.
The Senior Discount Notes were issued at a discount to their aggregate
principal amount at maturity and will accrete at a rate of approximately
9.25% per annum, compounded semi-annually, to an aggregate principal amount
of $275,000 on February 1, 2004. Subsequent to February 1, 2004, the Senior
Discount Notes will bear interest at a rate of 9.25% per annum payable
semi-annually in arrears on February 1 and August 1 of each year, commencing
August 1, 2004.
F-51
137
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company may elect, upon not less than 60 days prior notice, to commence
the accrual of interest on all outstanding Senior Discount Notes on or after
February 1, 2002, in which case the outstanding principal amount at maturity
of each Senior Discount Note will on such commencement date be reduced to
the accreted value of such Senior Discount Note as of such date and interest
shall be payable with respect to the Senior Discount Notes on each February
and August 1 thereafter.
The Company may not redeem the Notes prior to February 1, 2004 except that
prior to February 1, 2002, the Company may redeem up to 35% of the Senior
Notes and Senior Discount Notes at redemption prices equal to 108% and
109.25% of the applicable principal amount and accreted value, respectively,
with proceeds of an equity offering. Subsequent to February 1, 2004, the
Company may redeem the Notes at redemption prices declining annually from
approximately 104% of the principal amount or accreted value.
Bresnan Communications Group LLC and its wholly owned subsidiary Bresnan
Capital Corporation are the sole obligors of the Senior Notes and Senior
Discount Notes. Bresnan Communications Group LLC has no other assets or
liabilities other than its investment in its wholly owned subsidiary Bresnan
Telecommunications Company LLC. Bresnan Capital Corporation has no other
assets or liabilities.
Upon change of control of the Company, the holders of the notes have the
right to require the Company to purchase the outstanding notes at a price
equal to 101% of the principal amount or accreted value plus accrued and
unpaid interest. (See Note 8 "Sale of the Company"). Subsequent to the
period end, the Senior Notes and Senior Discount Notes were repaid by the
Company at a price equal to 101% of the principal amount or accreted value
plus accrued and unpaid interest.
The Company entered into interest rate swap agreements to effectively fix or
set maximum interest rates on a portion of its floating rate long-term debt.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate swap agreements.
At February 14, 2000, such interest rate swap agreements effectively fixed
or set a maximum LIBOR base interest rates between 8.0% and 8.02% on an
aggregate notional principal amount of $50,000, which rates would become
effective upon the occurrence of certain events. The effect of the interest
rate swap on interest expense for the period ended February 14, 2000 was not
significant. The expiration dates of the interest rate swaps ranges from
April 1, 2000 to April 3, 2000. The difference between the fair market value
and book value of long-term debt and the interest rate swaps at December 31,
1999 and February 14, 2000 is not significant.
(5) INCOME TAXES
Taxable earnings differ from those reported in the accompanying
consolidated statements of operations due primarily to differences in
depreciation and amortization methods and estimated useful lives under
regulations prescribed by the Internal Revenue Service. At February 14, 2000,
the financial statement carrying amount of the Company's assets exceeded its tax
basis by approximately $396 million.
(6) TRANSACTIONS WITH RELATED PARTIES
BCG and its predecessor purchased, at TCI's cost, substantially all of its
pay television and other programming from affiliates of TCI. Charges for such
programming were $62,502 and $8,535 for the year ended December 31, 1999 and the
period ended February 14, 2000, respectively, and are included in programming
expenses in the accompanying consolidated financial statements.
Prior to February 2, 1999, certain affiliates of the partners of BCCLP
provided administrative services to BCG and assumed managerial responsibility of
BCG's cable television system operations and construction. As compensation for
these services, BCG paid a monthly fee calculated pursuant to certain agreed
upon formulas. Subsequent to the TCI Transaction on February 2, 1999, certain
affiliates of a partner of BCCLP provide
F-52
138
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administrative services and have assumed managerial responsibilities of BCG. As
compensation for these services BCG pays a quarterly fee equal to approximately
3% of gross revenues. Such aggregate charges totaled $10,498 and $1,389 and have
been included in selling, general and administrative expenses for year ended
December 31, 1999 and the period ended February 14, 2000, respectively.
(7) COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Although the Federal Communications Commission (the "FCC") has established
regulations required by the 1992 Cable Act, local government units (commonly
referred to as local franchising authorities) are primarily responsible for
administering the regulation of a cable system's basic service tier ("BST"). The
FCC itself directly administered rate regulation of any cable programming
service tier ("CPST"). The FCC's authority to regulate CPST rates expired on
March 31, 1999. The FCC has taken the position that it will still adjudicate
CPST complaints filed after this sunset date (but no later than 180 days after
the last CPST rate increase imposed prior to March 31, 1999), and will strictly
limit its review (and possible refund orders) to the time period predating the
sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price structure that allows for the recovery
of inflation and certain associated costs, as well as providing some incentive
for expanding channel carriage. Operators also have the opportunity to bypass
this "benchmark" regulatory structure in favor of the traditional
"cost-of-service" regulation in cases where the latter methodology appears
favorable. Premium cable service offered on a per-channel or per-program basis
remain unregulated, as do affirmatively marketed packages consisting entirely of
new programming product.
The management of BCG believes that it has complied in all material
respects with the provisions of the 1992 Cable Act and the 1996 Act, including
its rate setting provisions. If, as a result of the review process, a system
cannot substantiate its rates, it could be required to retroactively reduce its
rates to the appropriate benchmark and refund the excess portion of rates
received. Any refunds of the excess portion of CPST rates would be retroactive
to the date of complaint. Any refunds of the excess portion of BST or equipment
rates would be retroactive to one year prior to the implementation of the rate
reductions.
Certain plaintiffs have filed or threatened separate class action
complaints against certain of the systems of BCG, alleging that the systems'
practice of assessing an administrative fee to the subscribers whose payments
are delinquent constitutes an invalid liquidated damage provision and a breach
of contract, and violates local consumer protection statutes. Plaintiffs seek
recovery of all late fees paid to the subject systems as a class purporting to
consist of all subscribers who were assessed such fees during the applicable
limitation period, plus attorney fees and costs.
BCG has additional contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
possible that BCG may incur losses upon conclusion of these matters and the
matters referred to above, an estimate of any loss or range of loss cannot
presently be made. Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of these actions, the
ultimate disposition should not have material adverse effect upon the combined
financial condition of BCG.
The Company entered into a letter of intent with a cable operator pursuant
to which the Company acquires a small cable television system in Minnesota. The
transaction would result in a net cost of approximately $13,000 and will be
funded by cash flow from operations and additional borrowings.
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BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BCG leases business offices, has entered into pole attachment agreements
and uses certain equipment under lease arrangements. Rental expense under such
arrangements amounted to $3,547 and $405 during the year ended December 31, 1999
and the period ended February 14, 2000, respectively.
Future minimum lease payments under noncancelable operating leases are
estimated to approximate $2,240 per year for each of the next five years.
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on the same or similar properties.
(8) SALE OF THE COMPANY
In June 1999, the Partners of BCCLP entered into an agreement to sell all
of their partnership interests in BCCLP to Charter Communications Holding
Company, LLC for a purchase price of approximately $3.1 billion in cash and
equity instruments of Charter and its subsidiaries (including the Company) which
will be reduced by the assumption of BCCLP's debt at closing. In conjunction
with the sale of the partnership interests, Charter assumed the Company's
outstanding indebtedness under the Senior Credit Facility (See Note 4, Debt.)
The accompanying financial statements do not reflect the effect of the
adjustments, if any, resulting from the sale of the partnership's interests on
February 14, 2000.
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