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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO _________
COMMISSION FILE NUMBER: 333-77499
333-77499-01
CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
(Exact name of registrants as specified in its charter)
DELAWARE 43-1843179
DELAWARE 43-1843177
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12405 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
(Address of principal executive offices including zip code)
(314) 965-0555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file reports), and (2) have been subject to such
filing requirements for the past 90 days. YES |X| NO | |
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). YES | | NO |X|
Number of shares of common stock of Charter Communications Holdings Capital
Corporation outstanding as of May 14, 2003: 100
*Charter Communications Holdings Capital Corporation meets the conditions set
forth in General Instruction H(1)(a) and (b) to Form 10-Q and is therefore
filing with the reduced disclosure format.
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CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Independent Accountants' Review Report................................................. 4
Financial Statements - Charter Communications Holdings, LLC and Subsidiaries
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002................. 5
Consolidated Statements of Operations for the three months ended March 31, 2003........ 6
Consolidated Statements of Cash Flows for the three months ended March 31, 2003........ 7
Notes to Consolidated Financial Statements............................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 38
Item 4. Controls and Procedures................................................................ 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 39
Item 6. Exhibits and Reports on Form 8-K....................................................... 42
SIGNATURES ....................................................................................... 43
CERTIFICATIONS ....................................................................................... 44
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This Quarterly Report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended, regarding, among other things, our plans,
strategies and prospects, both business and financial, including, without
limitation, the forward-looking statements set forth in the "Liquidity and
Capital Resources" section under Part I, Item 2 ("Management's Discussion and
Analysis of Financial Condition and Results of Operations") in this Quarterly
Report. Although we believe that our plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, we
cannot assure you that we will achieve or realize these plans, intentions or
expectations. Forward-looking statements are inherently subject to risks,
uncertainties and assumptions, including, without limitation, the factors
described under "Certain Trends and Uncertainties" under Part I, Item 2
("Management's Discussion and Analysis of Financial Condition and Results of
Operations") in this Quarterly Report. Many of the forward-looking statements
contained in this Quarterly Report may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "will," "may," "intend," "estimated," and "potential," among others.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this Quarterly Report are set forth in
this Quarterly Report and in other reports or documents that we file from time
to time with the United States Securities and Exchange Commission, or the SEC,
and include, but are not limited to:
- our ability to sustain and grow revenues and cash flows from
operating activities by offering video and data services and to
maintain a stable customer base, particularly in the face of
increasingly aggressive competition from other service providers;
- our ability to comply with all covenants in our credit facilities
and indentures, any violation of which would result in a violation
of the applicable facility or indenture and could trigger a default
of other obligations under cross default provisions;
- availability of funds to meet interest payment obligations under our
debt and to fund our operations and necessary capital expenditures,
either through cash from operations, further borrowings or other
sources;
- any adverse consequences arising out of the recent restatement of
our financial statements;
- the results of the pending grand jury investigation by the United
States Attorney's Office for the Eastern District of Missouri, the
pending SEC investigation and the putative class action and
derivative shareholders litigation against us;
- the cost and availability of funding to refinance the existing debt
as it becomes due;
- our ability to achieve free cash flow;
- our ability to obtain programming at reasonable prices;
- general business conditions, economic uncertainty or slowdown and
potential international conflict;
- the impact of any armed conflict, including loss of customers in
areas with large numbers of military personnel; and
- the effects of governmental regulation on our business.
All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by this cautionary statement.
We are under no obligation to update any of the forward-looking statements after
the date of this Quarterly Report to conform these statements to actual results
or to changes in our expectations.
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Member
Charter Communications Holdings, LLC:
We have reviewed the accompanying interim consolidated balance sheet of Charter
Communications Holdings, LLC, and subsidiaries as of March 31, 2003, and the
related consolidated statements of operations and cash flows for the three-month
period ended March 31, 2003 and 2002. These interim consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 5 to the interim consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets."
As discussed in Note 15 to the interim consolidated financial statements,
effective January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure."
/s/ KPMG LLP
St. Louis, Missouri
May 15, 2003
4
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
UNAUDITED
MARCH 31, DECEMBER 31,
2003 2002 *
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 414 $ 310
Accounts receivable, less allowance for doubtful accounts of
$18 and $19, respectively 226 253
Receivables from related party 40 50
Prepaid expenses and other current assets 37 40
-------- --------
Total current assets 717 653
-------- --------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated
depreciation of $2,901 and $2,550, respectively 7,198 7,460
Franchises, net of accumulated amortization
of $3,454 and $3,452, respectively 13,725 13,727
Total investment in cable properties, net 20,923 21,187
-------- --------
OTHER ASSETS 312 316
-------- --------
Total assets $ 21,952 $ 22,156
======== ========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,146 $ 1,310
Payables to related parties 52 73
-------- --------
Total current liabilities 1,198 1,383
-------- --------
LONG-TERM DEBT 17,578 17,288
-------- --------
DEFERRED MANAGEMENT FEES - RELATED PARTY 14 14
-------- --------
OTHER LONG-TERM LIABILITIES 861 897
-------- --------
MINORITY INTEREST 671 668
-------- --------
MEMBER'S EQUITY:
Member's equity 1,728 2,011
Accumulated other comprehensive loss (98) (105)
-------- --------
Total member's equity 1,630 1,906
-------- --------
Total liabilities and member's equity $ 21,952 $ 22,156
======== ========
* Agrees with the audited consolidated balance sheet included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
See accompanying notes to consolidated financial statements.
5
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS)
UNAUDITED
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------- -------
(RESTATED)
REVENUES $ 1,178 $ 1,074
COSTS AND EXPENSES:
Operating (excluding depreciation and amortization and
other items listed below) 485 426
Selling, general and administrative 235 222
Depreciation and amortization 370 326
Option compensation expense, net -- 2
Special charges, net 2 1
------- -------
1,092 977
------- -------
Income from operations 86 97
OTHER INCOME (EXPENSE):
Interest expense, net (370) (343)
Other, net 5 32
------- -------
(365) (311)
------- -------
Loss before minority interest, income taxes and cumulative effect of
accounting change (279) (214)
MINORITY INTEREST (3) (3)
------- -------
Loss before income taxes and cumulative effect of accounting change (282) (217)
INCOME TAX EXPENSE (1) --
------- -------
Loss before cumulative effect of accounting change (283) (217)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX -- (540)
------- -------
Net loss $ (283) $ (757)
======= =======
See accompanying notes to consolidated financial statements.
6
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
------------- -------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (283) $ (757)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Minority interest 3 3
Depreciation and amortization 370 326
Noncash interest expense 104 92
Gain on derivative instruments and hedging activities, net (14) (33)
Deferred income taxes 1 --
Cumulative effect of accounting change -- 540
Other, net 9 2
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable 26 56
Prepaid expenses and other assets 1 10
Accounts payable and accrued expenses (63) (124)
Receivables from and payables to related party, including deferred
management fees (3) (31)
------------- -------------
Net cash flows from operating activities 151 84
------------- -------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Purchases of property, plant and equipment (101) (435)
Change in accounts payable and accrued expenses related to capital
expenditures (117) (72)
Payments for acquisitions, net of cash acquired -- (78)
Purchases of investments (2) (4)
------------- -------------
Net cash flows from investing activities (220) (589)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 346 1,867
Repayments of long-term debt (152) (1,310)
Repayments to related parties (21) (87)
Payments for debt issuance costs -- (40)
Capital contributions -- 87
------------- -------------
Net cash flows from financing activities 173 517
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 104 12
CASH AND CASH EQUIVALENTS, beginning of period 310 2
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 414 $ 14
============= =============
CASH PAID FOR INTEREST $ 160 $ 144
============= =============
See accompanying notes to consolidated financial statements.
7
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Charter Communications Holdings, LLC (Charter Holdings) is a holding company
whose primary assets at March 31, 2003 are equity interests in its cable
operating subsidiaries. Charter Holdings is a subsidiary of Charter
Communications Holding Company, LLC (Charter Holdco), which is a subsidiary of
Charter Communications, Inc. (Charter). The consolidated financial statements
include the accounts of Charter Holdings and all of its direct and indirect
subsidiaries. Charter Holdings and its subsidiaries are collectively referred to
herein as the "Company." All material intercompany transactions and balances
have been eliminated in consolidation. The Company owns and operates cable
systems that provide a full range of video, data, telephony and other advanced
broadband services. The Company also provides commercial high-speed data, video,
telephony and Internet services as well as advertising sales and production
services.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures typically included in the Company's Annual Report on Form
10-K have been condensed or omitted for this Quarterly Report. The accompanying
consolidated financial statements are unaudited and are subject to review by
regulatory authorities. However, in the opinion of management, such statements
include all adjustments, which consist of only normal recurring adjustments,
necessary for a fair presentation of the results for the periods presented.
Interim results are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant judgments and estimates include capitalization of
labor and overhead costs, depreciation and amortization costs, impairments of
property, plant and equipment, franchises and goodwill, income taxes and other
contingencies. Actual results could differ from those estimates.
Reclassifications
Certain 2002 amounts have been reclassified to conform with the 2003
presentation.
3. LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred net losses of $283 million and $757 million for the
three months ended March 31, 2003 and 2002, respectively. The Company's net cash
flows from operating activities were $151 million and $84 million for the three
months ended March 31, 2003 and 2002, respectively. In addition, the Company has
historically required significant cash to fund capital expenditures.
Historically, the Company has funded capital requirements through cash flows
from operating activities, borrowings under the credit facilities of the
Company's subsidiaries, equity contributions from Charter Holdco and by
issuances of debt securities. The mix of funding sources changes from period to
period, but for the three months ended March 31, 2003, approximately 69% of the
Company's capital funding requirements were from cash flows from operating
activities and approximately 31% was from borrowings under the credit facilities
of the Company's subsidiaries. For the three months ended March 31, 2003, the
Company increased its borrowings under its subsidiaries' credit facilities by
$194 million and increased cash on hand by $104 million.
The Company expects that cash on hand, cash flows from operating activities and
the funds available under the bank facilities and borrowings under the Vulcan
Inc. commitment described below will be adequate to meet its 2003 cash needs.
However, the bank facilities are subject to certain restrictive covenants,
portions of which are subject to the operating results of the Company's
subsidiaries. The Company's 2003 operating plan anticipates maintaining
compliance with these covenants. If the Company's actual operating results do
not maintain compliance with these
8
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
covenants, or if other events of noncompliance occur, funding under the bank
facilities may not be available and defaults on some or potentially all debt
obligations could occur. In addition, no assurances can be given that the
Company may not experience liquidity problems because of adverse market
conditions or other unfavorable events or if the Company does not obtain
sufficient additional financing on a timely basis. In that regard, effective
April 14, 2003, the Company's subsidiary entered into a commitment letter with
Vulcan Inc., which is an affiliate of Paul Allen. Pursuant to the letter, Vulcan
Inc. agreed to lend, or cause an affiliate to lend, initially to Charter
Communications VII, LLC an aggregate amount of up to $300 million, which amount
includes a subfacility of up to $100 million for the issuance of letters of
credit, subject to negotiation and execution of definitive documentation. The
facility does not commit any party to provide funding to the Company. Under
certain circumstances, the Company could utilize (or cause a subsidiary to
utilize) the facility to provide funding to the Company to the extent necessary
to comply with leverage ratio covenants of its subsidiary's credit facilities in
future quarters. However, there can be no assurance that the Company or its
subsidiary will have the ability to do so or will choose to do so.
The Company's long-term financing structure as of March 31, 2003 includes $8.0
billion of credit facility debt and $9.6 billion of high-yield debt.
Approximately $194 million of this financing matures during 2003 and the Company
expects to fund this through availability under its credit facilities and cash
on hand. Note 7 summarizes the Company's current availability under its credit
facilities and its long-term debt.
4. RESTATEMENT OF CONSOLIDATED FINANCIAL RESULTS
As discussed in the Company's 2002 Form 10-K, the Company identified a series of
adjustments that have resulted in the restatement of previously announced
quarterly results for the first three quarters of fiscal 2002. In summary, the
adjustments are grouped into the following categories: (i) launch incentives
from programmers; (ii) customer incentives and inducements; (iii) capitalized
labor and overhead costs; (iv) customer acquisition costs; (v) rebuild and
upgrade of cable systems; (vi) deferred tax liabilities/franchise assets; and
(vii) other adjustments. These adjustments have been reflected in the
accompanying consolidated financial statements and reduced revenues for the
three months ended March 31, 2002 by $4 million. The Company's consolidated net
loss increased by $407 million for the three months ended March 31, 2002. In
addition, as a result of certain of these adjustments, the Company's statement
of cash flows for the three months ended March 31, 2002 has been restated. Cash
flows from operating activities for the three months ended March 31, 2002
increased by $39 million. The more significant categories of adjustments relate
to the following as outlined below.
Launch Incentives from Programmers. Amounts previously recognized as advertising
revenue in connection with the launch of new programming channels have been
deferred and recorded in other long-term liabilities in the year such launch
support was provided, and amortized as a reduction of programming costs based
upon the relevant contract term. These adjustments decreased revenue by $2
million for the three months ended March 31, 2002. The corresponding
amortization of such deferred amounts reduced programming expenses by $12
million for the three months ended March 31, 2002.
Customer Incentives and Inducements. Marketing inducements paid to encourage
potential customers to switch from satellite providers to Charter branded
services and enter into multi-period service agreements were previously deferred
and recorded as property, plant and equipment and recognized as depreciation and
amortization expense over the life of customer contracts. These amounts have
been restated as a reduction of revenues of $2 million for the three months
ended March 31, 2002. Substantially all of these amounts are offset by reduced
depreciation and amortization expense.
Capitalized Labor and Overhead Costs. Certain elements of labor costs and
related overhead allocations previously capitalized as property, plant and
equipment as part of the Company's rebuild activities, customer installations
and new service introductions have been expensed in the period incurred. Such
adjustments increased operating expenses by $1 million for the three months
ended March 31, 2002.
9
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Customer Acquisition Costs. Certain customer acquisition campaigns were
conducted through third-party contractors in portions of 2002. The costs of
these campaigns were originally deferred and recorded as other assets and
recognized as amortization expense over the average customer contract life.
These amounts have been reported as marketing expense in the period incurred and
totaled $9 million for the three months ended March 31, 2002. The Company
discontinued this program in the third quarter of 2002 as contracts for
third-party vendors expired. Substantially all of these amounts are offset by
reduced depreciation and amortization expense.
Rebuild and Upgrade of Cable Systems. In 2000, the Company initiated a
three-year program to replace and upgrade a substantial portion of its network.
In connection with this plan, the Company assessed the carrying value of, and
the associated depreciable lives of, various assets to be replaced. It was
determined that $1 billion of cable distribution system assets, originally
treated as subject to replacement, were not part of the original replacement
plan but were to be upgraded and have remained in service. The Company also
determined that certain assets subject to replacement during the upgrade program
were misstated in the allocation of the purchase price of the acquisition. This
adjustment reduced property, plant and equipment and increased franchise assets
by $627 million. In addition, the depreciation period for the assets subject to
replacement was adjusted to more closely align with the intended service period
of these assets rather than the three-year straight-line life originally
assigned. As a result, adjustments were recorded to reduce depreciation expense
by $120 million for the three months ended March 31, 2002.
Deferred Tax Liabilities/Franchise Assets. Adjustments were made to record
deferred tax liabilities associated with the acquisition of various cable
television businesses. These adjustments increased amounts assigned to franchise
assets by $1.4 billion with a corresponding increase in deferred tax liabilities
of $0.6 billion and to member's equity of $0.8 billion. In addition, as
described above, a correction was made to reduce amounts assigned in purchase
accounting to assets identified for replacement over the three-year period of
the Company's rebuild and upgrade of its network. This reduced the amount
assigned to the network assets to be retained and increased the amount assigned
to franchise assets by $627 million with a resulting increase in amortization
expense for the years restated. Such adjustments increased the cumulative effect
of accounting change recorded upon adoption of Statement of Financial Accounting
Standards (SFAS) No. 142 by $199 million before tax effects for the three months
ended March 31, 2002.
Other Adjustments. In addition to the items described above, other adjustments
of expenses include additional amounts charged to special charges related to the
2001 restructuring plan, certain tax reclassifications from tax expense to
operating costs and other miscellaneous adjustments. The net impact of these
adjustments to net loss is an increase of $2 million for the three months ended
March 31, 2002.
The following tables summarize the effects of the adjustments on the
consolidated statements of operations and cash flows for the three-month period
ended March 31, 2002 (dollars in millions).
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
MARCH 31, 2002
------------------------------
AS PREVIOUSLY
REPORTED RESTATED
------------- ---------
Revenue $ 1,078 $ 1,074
Income (loss) from operations (38) 97
Minority interest (3) (3)
Cumulative effect of accounting change, net of tax -- (540)
Net loss (350) (757)
10
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31, 2002
------------------------------
AS PREVIOUSLY
REPORTED RESTATED
------------- ---------
Net cash flows from operating activities $ 45 $ 84
Net cash flows from investing activities (553) (589)
Net cash flows from financing activities 521 517
5. FRANCHISES AND GOODWILL
On January 1, 2002, the Company adopted SFAS No. 142, which eliminates the
amortization of indefinite lived intangible assets. Accordingly, beginning
January 1, 2002, all franchises that qualify for indefinite life treatment under
SFAS No. 142 are no longer amortized against earnings but instead will be tested
for impairment annually, or more frequently as warranted by events or changes in
circumstances. During the first quarter of 2002, the Company had an independent
appraiser perform valuations of its franchises as of January 1, 2002. Based on
the guidance prescribed in Emerging Issues Task Force (EITF) Issue No. 02-7,
Unit of Accounting for Testing of Impairment of Indefinite-Lived Intangible
Assets, franchises were aggregated into essentially inseparable asset groups to
conduct the valuations. The asset groups generally represent geographic clusters
of the Company's cable systems, which management believes represents the highest
and best use of those assets. Fair value was determined based on estimated
discounted future cash flows using reasonable and appropriate assumptions that
are consistent with internal forecasts. As a result, the Company determined that
franchises were impaired and recorded the cumulative effect of a change in
accounting principle of $540 million (approximately $572 million before tax
effects of $32 million). The effect of adoption was to increase net loss by $540
million. SFAS No. 142 does not permit the recognition of the customer
relationship asset not previously recognized. Accordingly, the impairment
included approximately $373 million, before tax effects, attributable to
customer relationship values as of January 1, 2002.
In determining whether its franchises have an indefinite life, the Company
considered the exclusivity of the franchise, its expected costs of franchise
renewals, and the technological state of the associated cable systems with a
view to whether or not the Company is in compliance with any technology
upgrading requirements. Certain franchises did not qualify for indefinite-life
treatment due to technological or operational factors that limit their lives.
These franchise costs will be amortized on a straight-line basis over 10 years.
The effect of the adoption of SFAS No. 142 as of March 31, 2003 and December 31,
2002 is presented in the following table (dollars in millions):
MARCH 31, 2003 DECEMBER 31, 2002
----------------------------------------- ------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------- ------------ -------- ------- ------------ --------
INDEFINITE-LIVED
INTANGIBLE ASSETS:
Franchises with
indefinite
lives $17,076 $ 3,428 $13,648 $17,076 $ 3,428 $13,648
Goodwill 54 -- 54 54 -- 54
------- ------- ------- ------- ------- -------
$17,130 $ 3,428 $13,702 $17,130 $ 3,428 $13,702
======= ======= ======= ======= ======= =======
FINITE-LIVED
INTANGIBLE ASSETS:
Franchises with
finite lives $ 103 $ 26 $ 77 $ 103 $ 24 $ 79
======= ======= ======= ======= ======= =======
Franchise amortization expense for each of the three months ended March 31, 2003
and 2002 was $2 million, which
11
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
represents the amortization relating to franchises that did not qualify for
indefinite-life treatment under SFAS No. 142, including costs associated with
franchise renewals. For each of the next five years, amortization expense
relating to these franchises is expected to be approximately $9 million.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of March 31,
2003 and December 31, 2002 (dollars in millions):
MARCH 31, DECEMBER 31,
2003 2002
------ ------
Accounts payable $ 159 $ 287
Capital expenditures 17 134
Accrued interest 340 234
Programming costs 254 237
Accrued general and administrative 92 91
Franchise fees 41 68
State sales tax 65 67
Other accrued expenses 178 192
------ ------
$1,146 $1,310
====== ======
7. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 2003 and December 31,
2002 (dollars in millions):
MARCH 31, 2003 DECEMBER 31, 2002
------------------------ ------------------------
FACE ACCRETED FACE ACCRETED
VALUE VALUE VALUE VALUE
------- ------- ------- -------
LONG-TERM DEBT
Charter Holdings:
March 1999
8.250% senior notes due 2007 600 599 600 599
8.625% senior notes due 2009 1,500 1,497 1,500 1,497
9.920% senior discount notes due 2011 1,475 1,339 1,475 1,307
January 2000
10.000% senior notes due 2009 675 675 675 675
10.250% senior notes due 2010 325 325 325 325
11.750% senior discount notes due 2010 532 434 532 421
January 2001
10.750% senior notes due 2009 900 900 900 900
11.125% senior notes due 2011 500 500 500 500
13.500% senior discount notes due 2011 675 468 675 454
May 2001
9.625% senior notes due 2009 350 350 350 350
10.000% senior notes due 2011 575 575 575 575
11.750% senior discount notes due 2011 1,018 713 1,018 693
January 2002
9.625% senior notes due 2009 350 348 350 348
10.000% senior notes due 2011 300 298 300 298
12.125% senior discount notes due 2012 450 288 450 280
12
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Renaissance:
10.00% senior discount notes due 2008 114 116 114 113
CC V Holdings:
11.875% senior discount notes due 2008 180 167 180 163
Other long-term debt 1 1 1 1
CREDIT FACILITIES
Charter Operating 4,641 4,641 4,542 4,542
CC VI 944 944 926 926
Falcon Cable 1,209 1,209 1,155 1,155
CC VIII Operating 1,191 1,191 1,166 1,166
------- ------- ------- -------
$18,505 $17,578 $18,309 $17,288
======= ======= ======= =======
For additional information regarding the Company's long-term debt, refer to Note
10 of the Notes to the Consolidated Financial Statements included in the
Company's 2002 Annual Report on Form 10-K.
The table below presents the unused total potential availability under each of
the Company's credit facilities and the availability as limited by financial
covenants as of March 31, 2003, which become more restrictive over the term of
each facility before becoming fixed (dollars in millions):
AVAILABILITY AS
UNUSED TOTAL LIMITED BY
POTENTIAL FINANCIAL
AVAILABILITY COVENANTS
------------ ----------------
Charter Operating $ 526 $182
CC VI 244 122
Falcon Cable 114 67
CC VIII Operating 281 281
------ ----
Total $1,165 $652
====== ====
8. COMPREHENSIVE LOSS
Certain marketable equity securities are classified as available-for-sale and
reported at market value with unrealized gains and losses recorded as
accumulated other comprehensive loss on the accompanying consolidated balance
sheets. The Company reports changes in the fair value of interest rate
agreements designated as hedging instruments of the variability of cash flows
associated with floating-rate debt obligations, that meet the effectiveness
criteria of SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," in accumulated other comprehensive loss. Comprehensive loss for the
three months ended March 31, 2003 and 2002 was $276 million and $774 million,
respectively.
9. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses interest rate risk management derivative instruments, such as
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) as required under the terms of
its credit facilities. The Company's policy is to manage interest costs using a
mix of fixed and variable rate debt. Using interest rate swap agreements, the
Company agrees to exchange, at specified intervals through 2007, the difference
between fixed and variable interest amounts calculated by reference to an
agreed-upon notional principal amount. Interest rate collar agreements are used
to limit the Company's exposure to and benefits from interest rate fluctuations
on variable rate debt to within a certain range of rates.
The Company has certain interest rate derivative instruments that have been
designated as cash flow hedging instruments. Such instruments are those that
effectively convert variable interest payments on certain debt
13
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows
derivative gains and losses to offset related results on hedged items in the
consolidated statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that receive hedge
accounting. For the three months ended March 31, 2003 and 2002, other expense
includes gains of $9 million and losses of $2 million, respectively, which
represent cash flow hedge ineffectiveness on interest rate hedge agreements
arising from differences between the critical terms of the agreements and the
related hedged obligations. Changes in the fair value of interest rate
agreements designated as hedging instruments of the variability of cash flows
associated with floating-rate debt obligations are reported in accumulated other
comprehensive loss. For the three months ended March 31, 2003 and 2002, a gain
of $7 million and a loss of $17 million, respectively, related to derivative
instruments designated as cash flow hedges was recorded in accumulated other
comprehensive loss. The amounts are subsequently reclassified into interest
expense as a yield adjustment in the same period in which the related interest
on the floating-rate debt obligations affects earnings (losses).
Certain interest rate derivative instruments are not designated as hedges as
they do not meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative instruments not
designated as hedges are marked to fair value with the impact recorded as a gain
or loss on interest rate agreements. For the three months ended March 31, 2003
and 2002, the Company recorded other income of $5 million and $35 million,
respectively, for interest rate derivative instruments not designated as hedges.
At both March 31, 2003 and December 31, 2002, the Company had outstanding $3.4
billion and $520 million in notional amounts of interest rate swaps and collars,
respectively. The notional amounts of interest rate instruments do not represent
amounts exchanged by the parties and, thus, are not a measure of exposure to
credit loss. The amounts exchanged are determined by reference to the notional
amount and the other terms of the contracts.
We do not hold collateral for these instruments and are therefore subject to
credit loss in the event of nonperformance by the counterparty to the interest
rate exchange agreement. However the counterparties are banks and we do not
anticipate nonperformance by any of them on any interest rate exchange
agreement.
10. REVENUES
Revenues consist of the following for the three months ended March 31, 2003 and
2002 (dollars in millions):
THREE MONTHS
ENDED MARCH 31,
----------------------
2003 2002
------ ------
Analog video $ 719 $ 691
Digital video 179 165
High-speed data 122 64
Advertising sales 57 58
Other 101 96
------ ------
$1,178 $1,074
====== ======
14
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. OPERATING EXPENSES
Operating expenses consist of the following for the three months ended March 31,
2003 and 2002 (dollars in millions):
THREE MONTHS
ENDED MARCH 31,
------------------
2003 2002
---- ----
Programming costs $314 $283
Advertising sales 21 19
Service costs 150 124
---- ----
$485 $426
==== ====
The Company has various contracts and other arrangements to obtain basic,
premium and digital programming from program suppliers that receive compensation
typically based on a monthly flat fee per customer. The cost of the right to
exhibit network programming under such arrangements is recorded in the month the
programming is available for exhibition.
12. SPECIAL CHARGES
In the fourth quarter of 2002, the Company recorded a special charge of $35
million, of which $31 million was associated with its workforce reduction
program and the consolidation of its operations from three divisions and ten
regions into five operating divisions, elimination of redundant practices and
streamlining its management structure. The remaining $4 million related to legal
and other costs associated with the Company's ongoing grand jury investigation,
shareholder lawsuits and SEC investigation. The $31 million charge related to
realignment activities, included severance costs of $28 million related to
approximately 1,400 employees identified for termination as of December 31, 2002
and lease termination costs of $3 million. In the first quarter of 2003, an
additional 300 employees were identified for termination, and additional
severance costs of $7 million were recorded in special charges. In total,
approximately 1,500 employees were terminated in the first quarter of 2003.
Severance payments are made over a period of up to twelve months with
approximately $7 million paid during the three months ended March 31, 2003. As
of March 31, 2003 and December 31, 2002, a liability of approximately $31
million is recorded on the accompanying consolidated balance sheet related to
the realignment activities. The additional severance costs were offset by a $5
million settlement from the Internet service provider Excite@Home related to the
conversion of approximately 145,000 high-speed data customers to our Charter
Pipeline service in 2001, for which costs of $15 million were recorded in the
fourth quarter of 2001.
In December 2001, the Company implemented a restructuring plan to reduce its
workforce in certain markets and reorganize its operating divisions from two to
three and operating regions from twelve to ten. The restructuring plan was
completed during the first quarter of 2002, resulting in the termination of
approximately 320 employees and severance costs of $4 million, of which $1
million was recorded in the first quarter of 2002.
13. INCOME TAXES
The Company is a single member limited liability company not subject to income
tax. The Company holds all operations through indirect subsidiaries. The
majority of these indirect subsidiaries are limited liability companies that are
not subject to income tax. However, certain of the Company's indirect
subsidiaries are corporations and are subject to income tax.
As of March 31, 2003 and December 31, 2002, the Company has net deferred income
tax liabilities of approximately $233 million. These relate to certain of the
Company's indirect subsidiaries, which file separate income tax returns. During
the three months ended March 31, 2003 and 2002, the Company recorded $1 million
of income tax expense
15
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and $32 million of income tax benefit, respectively. The income tax expense
recorded for the three months ended March 31, 2003 is the result of changes in
the deferred tax liabilities and state income taxes of certain of the Company's
indirect subsidiaries. The $32 million income tax benefit recorded for the three
months ended March 31, 2002 was the result of the adoption of SFAS No. 142 and
is netted against the cumulative effect of accounting change in the statement of
operations.
The Company is currently under examination by the Internal Revenue Service for
the tax years ending December 31, 1999 and 2000. Management does not expect the
results of this examination to have a material adverse effect on the Company's
consolidated financial position or results of operations.
14. CONTINGENCIES
Fourteen putative federal class action lawsuits (the "Federal Class Actions")
have been filed against Charter and certain of its former and present officers
and directors in various jurisdictions allegedly on behalf of all purchasers of
Charter's securities during the period from either November 8 or November 9,
1999 through July 17 or July 18, 2002. Unspecified damages are sought by the
plaintiffs. In general, the lawsuits allege that Charter utilized misleading
accounting practices and failed to disclose these accounting practices and/or
issued false and misleading financial statements and press releases concerning
its operations and prospects.
In October 2002, Charter filed a motion with the Judicial Panel on Multidistrict
Litigation (the "Panel") to transfer the Federal Class Actions to the Eastern
District of Missouri. On March 12, 2003, the Panel transferred the six Federal
Class Actions not filed in the Eastern District of Missouri to that district for
coordinated or consolidated pretrial proceedings with the eight Federal Class
Actions already pending there. The Panel's transfer order assigned the Federal
Class Actions to Judge Charles A. Shaw. By virtue of a prior court order,
StoneRidge Investment Partners LLC became lead plaintiff upon entry of the
Panel's transfer order. Charter has received a consolidated complaint from the
lead plaintiff, which includes as defendants several former and present officers
of Charter, as well as its and the Company's former outside auditors and a
vendor/supplier of digital set-top terminals. The court has not yet permitted
the filing of this consolidated complaint. No response from Charter will be due
until after the consolidated complaint has been filed.
On September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in Missouri state court against Charter and its current
directors, as well as its former auditors. A substantively identical derivative
action was later filed and consolidated into the State Derivative Action. The
plaintiffs allege that the individual defendants breached their fiduciary duties
by failing to establish and maintain adequate internal controls and procedures.
Unspecified damages, allegedly on Charter's behalf, are sought by the
plaintiffs.
Separately, on February 12, 2003, a shareholders derivative suit (the "Federal
Derivative Action"), was filed against Charter and its current directors in the
United States District Court for the Eastern District of Missouri. The plaintiff
alleges that the individual defendants breached their fiduciary duties and
grossly mismanaged Charter by failing to establish and maintain adequate
internal controls and procedures. Unspecified damages, allegedly on Charter's
behalf, are sought by the plaintiffs.
In addition to the Federal Class Actions, the State Derivative Action and the
Federal Derivative Action, six putative class action lawsuits have been filed
against Charter and certain of its current directors and officers in the Court
of Chancery of the State of Delaware (the "Delaware Class Actions"). The
Delaware Class Actions are substantively identical and generally allege that the
defendants breached their fiduciary duties by participating or acquiescing in a
purported and threatened attempt by Defendant Paul Allen to purchase shares and
assets of Charter at an unfair price. The lawsuits were brought on behalf of
Charter's securities holders as of July 29, 2002, and seek unspecified damages
and possible injunctive relief. No such proposed transaction by Mr. Allen has
been presented.
The lawsuits discussed above are each in preliminary stages and no dispositive
motions or other responses to any of the complaints have been filed. No reserves
have been established for those matters because the Company believes they are
either not estimable or not probable. Charter has advised the Company that it
intends to vigorously defend
16
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the lawsuits.
In August of 2002, Charter became aware of a grand jury investigation being
conducted by the United States Attorney's Office for the Eastern District of
Missouri into certain of its accounting and reporting practices, focusing on how
Charter reported customer numbers, refunds that Charter sought from programmers
and its reporting of amounts received from digital set-top terminal suppliers
for advertising. Charter has been advised by the U.S. Attorney's Office that no
member of the Board of Directors, including its Chief Executive Officer, is a
target of the investigation. Charter has advised the Company that it is fully
cooperating with the investigation.
On November 4, 2002, Charter received an informal, non-public inquiry from the
Staff of the Securities and Exchange Commission (SEC). The SEC has subsequently
issued a formal order of investigation dated January 23, 2003, and subsequent
document and testimony subpoenas. The investigation and subpoenas generally
concern Charter's prior reports with respect to its determination of the number
of customers, and various of its other accounting policies and practices
including its capitalization of certain expenses and dealings with certain
vendors, including programmers and digital set-top terminal suppliers. Charter
has advised the Company that it is actively cooperating with the SEC Staff.
Charter is unable to predict the outcome of the lawsuits and the government
investigations described above. An unfavorable outcome in the lawsuits or the
government investigations described above could have a material adverse effect
on Charter's results of operations and financial condition.
Charter is generally required to indemnify each of the named individual
defendants in connection with these matters pursuant to the terms of its Bylaws
and (where applicable) such individual defendants' employment agreements.
Pursuant to the terms of certain employment agreements and in accordance with
the Bylaws of Charter, in connection with the pending grand jury investigation,
SEC investigation and the above described lawsuits, Charter's current directors
and its current and former officers have been advanced certain costs and
expenses incurred in connection with their defense. Certain of the individual
defendants also serve or have served as officers and directors of the Company.
The limited liability company agreements of Charter Holdings and its limited
liability company subsidiaries, and the bylaws of its corporate subsidiaries may
require each such entity to indemnify Charter and the individual named
defendants in connection with the matters set forth above. Furthermore, the
management agreements with Charter Communications Operating, LLC, CC VI
Operating, LLC, CC VII Operating, LLC and CC VIII Operating, LLC contain
indemnification provisions with respect to management services not constituting
gross negligence or willful misconduct.
In addition to the matters set forth above, the Company is also party to other
lawsuits and claims that arose in the ordinary course of conducting its
business. In the opinion of management, after taking into account recorded
liabilities, the outcome of these other lawsuits and claims will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
Charter has directors' and officers' liability insurance coverage that it
believes is available for these matters, where applicable, and subject to the
terms, conditions and limitations of the respective policies.
15. STOCK-BASED COMPENSATION
The Company has historically accounted for stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, as permitted by
SFAS No. 123, "Accounting for Stock-Based Compensation." On January 1, 2003, the
Company adopted the fair value measurement provisions of SFAS No. 123 using the
prospective method under which the Company will recognize compensation expense
of a stock-based award to an employee over the vesting period based on the fair
value of the award on the grant date consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28 (FIN 28), Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.
Adoption of these provisions will result in utilizing a preferable accounting
method, as the consolidated financial statements will present the estimated fair
value of stock-based compensation in expense
17
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
consistently with other forms of compensation and other expense associated with
goods and services received for equity instruments. In accordance with SFAS No.
148, the fair value method will be applied only to awards granted or modified
after January 1, 2003, whereas awards granted prior to such date will continue
to be accounted for under APB No. 25, unless they are modified or settled in
cash. Management believes the adoption of these provisions will not have a
material impact on the consolidated results of operations or financial position
of the Company. The ongoing effect on consolidated results of operations or
financial position will be dependent upon future stock based compensation awards
granted by the Company. Had the Company adopted SFAS No. 123 as of January 1,
2002, using the prospective method, option compensation expense for the three
months ended March 31, 2002 would have been approximately $1 million.
SFAS No. 123 requires pro forma disclosure of the impact on earnings as if the
compensation expense for these plans had been determined using the fair value
method. The following table presents the Company's net loss applicable to common
stock and loss per common share as reported and the pro forma amounts that would
have been reported using the fair value method under SFAS 123 for the years
presented (dollars in millions):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
----- -----
Net loss $(283) $(757)
Pro forma (288) (786)
16. RELATED PARTIES
As part of the Bresnan acquisition in February 2000, CC VIII, an indirect
limited liability company subsidiary of Charter, issued Class A Preferred
Membership Interests (collectively, the CC VIII Interest) with a value and an
initial capital account of $630 million to certain sellers affiliated with AT&T
Broadband, now owned by Comcast Corporation (the Comcast Sellers). The CC VIII
Interest is entitled to a 2% priority return on its initial capital account, and
such priority return is entitled to preferential distributions from available
cash and upon liquidation of CC VIII. The CC VIII Interest generally does not
share in the profits and losses of CC VIII at present. The Comcast Sellers have
the right at their option to exchange the CC VIII Interest for shares of Charter
Class A common stock. Charter does not have the right to force such an exchange.
In connection with the Bresnan acquisition, Mr. Allen granted the Comcast
Sellers the right to sell to Mr. Allen the CC VIII Interest (or any Charter
Class A common stock that the Comcast Sellers would receive if they exercised
their exchange right) for $630 million plus 4.5% interest annually from February
2000 (the Comcast Put Right). In April 2002, in accordance with such put
agreement, the Comcast Sellers notified Mr. Allen of their exercise of the
Comcast Put Right in full, and the parties agreed to consummate the sale in
April 2003, although the parties also agreed to negotiate in good faith possible
alternatives to the closing. The parties have agreed to extend the closing until
May 30, 2003, subject to earlier closing on three days notice by either party to
the other. If the sale to Mr. Allen is consummated, Mr. Allen would become the
holder of the CC VIII Interest (or, if previously exchanged by the current
holders, any Charter Class A common stock issued to the current holders upon
such exchange). If the CC VIII Interest is transferred to Mr. Allen, then,
subject to the matters referenced in the next paragraph, Mr. Allen generally
thereafter would be allocated his pro rata share (based on number of membership
interests outstanding) of profits or losses of CC VIII. In the event of a
liquidation of CC VIII, Mr. Allen would not be entitled to any priority
distributions (except with respect to the 2% priority return, as to which such
priority would continue), and Mr. Allen's share of any remaining distributions
in liquidation would be equal to the initial capital account of the Comcast
Sellers of $630 million, increased or decreased by Mr. Allen's pro rata share of
CC VIII's profits or losses (as computed for capital account purposes) after the
date of the transfer of the CC VIII Interest to Mr. Allen.
An issue has arisen as to whether the documentation for the Bresnan transaction
was correct and complete with regard to the ultimate ownership of the CC VIII
Interest following consummation of the Comcast Put Right. Charter's Board of
Directors has formed a Special Committee comprised of Messrs. Tory, Wangberg and
Nelson to investigate and take any other appropriate action on behalf of the
Company with respect to this matter. Specifically, the Special Committee is
considering whether it should be the position of Charter that Mr. Allen should
be required
18
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
to contribute the CC VIII Interest to Charter Holdco in exchange for Charter
Holdco membership units, immediately after his acquisition of the CC VIII
Interest upon consummation of the Comcast Put Right. To the extent it is
ultimately determined that Mr. Allen must contribute the CC VIII Interest to
Charter Holdco following consummation of the Comcast Put Right, the Special
Committee may also consider what additional steps, if any, should be taken with
respect to the further disposition of the CC VIII Interest by Charter Holdco. If
necessary, following the completion of the Special Committee's investigation of
the facts and circumstances relating to this matter, the Special Committee and
Mr. Allen have agreed to a non-binding mediation process to resolve any dispute
relating to this matter as soon as practicable, but without any prejudice to any
rights of the parties if such dispute is not resolved as part of the mediation.
For additional information regarding the Company's related parties, refer to
Note 20 of the Notes to the Consolidated Financial Statements included in the
Company's 2002 Annual Report on Form 10-K.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Charter Communications Holdings, LLC ("Charter Holdings") is a holding company
whose primary assets as of March 31, 2003 are equity interests in its cable
operating subsidiaries. Charter Holdings is a subsidiary of Charter
Communications Holding Company, LLC ("Charter Holdco"), which is a subsidiary of
Charter Communications, Inc. ("Charter"). We own and operate cable systems
serving approximately 6.5 million customers at March 31, 2003. "We," "us" and
"our" refer to Charter Holdings and its subsidiaries. We own and operate cable
systems that provide a full range of video, data, telephony and other advanced
broadband services. We also provide commercial high-speed data, video, telephony
and Internet services as well as advertising sales and production services.
The following table presents various operating statistics as of March 31, 2003,
December 31, 2002 and March 31, 2002:
APPROXIMATE AS OF
--------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2003 (a) 2002 (a) 2002 (a)
---------- --------- ----------
VIDEO SERVICES:
ANALOG VIDEO:
Estimated homes passed (b) 11,925,300 11,925,000 11,777,300
Residential (non-bulk) analog video customers (c) 6,277,300 6,328,900 6,540,800
Multi-dwelling (bulk) and commercial unit customers (c) 250,900 249,900 237,900
---------- ---------- ----------
Total analog video customers (c) 6,528,200 6,578,800 6,778,700
========== ========== ==========
Estimated penetration of analog video homes passed (b)(c)(d) 55% 55% 58%
DIGITAL VIDEO:
Estimated digital homes passed (b) 11,547,000 11,547,000 10,894,000
Digital customers (e) 2,651,100 2,682,800 2,208,900
Estimated penetration of digital homes passed (b)(d)(e) 23% 23% 20%
Digital percentage of analog video customers (c)(e)(f) 41% 41% 33%
Digital set-top terminals deployed 3,749,400 3,772,600 3,055,900
Estimated video-on-demand homes passed (b) 3,279,000 3,195,000 1,994,700
HIGH-SPEED DATA SERVICES:
Estimated cable modem homes passed (b) 9,970,000 9,826,000 8,180,300
Residential cable modem customers (g) (h) 1,272,300 1,138,100 657,900
Estimated penetration of cable modem homes passed (b)(d)(g)(h) 13% 12% 8%
Dial-up customers 12,700 14,200 32,500
REVENUE GENERATING UNITS (I):
Analog video customers (c) 6,528,200 6,578,800 6,778,700
Digital customers (e) 2,651,100 2,682,800 2,208,900
Cable modem customers (g) (h) 1,272,300 1,138,100 657,900
Telephony customers (j) 22,800 22,800 15,700
---------- ---------- ----------
Total revenue generating units (i) 10,474,400 10,422,500 9,661,200
========== ========== ==========
Customer relationships (k) 6,584,900 6,634,700 6,804,800
(a) "Customers" include all persons corporate billing records show as
receiving service, regardless of their payment status, except for
complimentary accounts (such as our employees). The adequacy of previously
reported customer reductions, our disconnect policies, the application of
those policies and their effect on the customer totals reported by us
during 2001 and prior periods are currently under investigation by the
20
United States Attorney's Office for the Eastern District of Missouri and
the Securities and Exchange Commission. Those investigations are not
complete. Upon the completion of such investigations, and depending on
their outcome, we may make additional adjustments in the 2001 or prior
periods customer numbers if such adjustments are appropriate. When we
publicly announced our 2001 results on February 11, 2002, we also
announced that we expected the number of customers to decline by 120,000
during the first quarter of 2002. We ultimately reported a loss of 145,000
customers in that quarter. The customer reduction was primarily the result
of eliminating non-paying or delinquent customers from the customer
totals.
(b) Homes passed represents the estimated number of living units, such as
single family homes, apartment units and condominium units passed by the
cable distribution network in a given area to which we offer the service
indicated. Homes passed excludes commercial units passed by the cable
distribution network.
(c) Analog video customers include all customers who purchase video services
(including those who also purchase data and telephony services), but
excludes approximately 56,700, 55,900 and 26,100 customer relationships,
respectively, who pay for cable modem service only and who are only
counted as cable modem customers. This represents a change in our
methodology from prior reports through September 30, 2002, in which cable
modem only customer relationships were included within our analog video
customers. We made this change because we determined that most of these
customers were unable to receive our most basic level of analog service
because this service was physically secured or blocked, was unavailable in
certain areas or the customers were unaware that this service was
available to them. Commercial and multi-dwelling structures are calculated
on an equivalent bulk unit ("EBU") basis. EBU is calculated for a system
by dividing the bulk price charged to accounts in an area by the most
prevalent price charged to non-bulk residential customers in that market
for the comparable tier of service. The EBU method of estimating analog
video customers is consistent with the methodology used in determining
costs paid to programmers and has been consistently applied year over
year. As we increase our effective analog prices to residential customers
without a corresponding increase in the prices charged to commercial
service or multi-dwelling customers, our EBU count will decline even if
there is no real loss in commercial service or multi-dwelling customers.
Our policy is not to count complimentary accounts (such as our employees)
as customers.
(d) Penetration represents customers as a percentage of homes passed.
(e) Digital video customers include all households that have one or more
digital set-top terminals. Included in digital video customers at March
31, 2003, December 31, 2002 and March 31, 2002 are approximately 15,000,
27,500 and 31,000 customers, respectively, that receive digital video
service directly through satellite transmission.
(f) Represents the number of digital video customers as a percentage of analog
video customers.
(g) As noted above, all of these customers also receive video service and are
included in the video statistics above, except that the video statistics
do not include approximately 56,700, 55,900 and 26,100 customers at March
31, 2003, December 31, 2002 and March 31, 2002, respectively, who were
cable modem only customers.
(h) During the first three quarters of 2002, commercial cable modem or data
customers were calculated on an Equivalent Modem Unit or EMU basis, which
involves converting commercial revenues to residential customer counts.
Given the growth plans for our commercial data business, we do not believe
that converting commercial revenues to residential customer counts is the
most meaningful way to disclose or describe this growing business. We,
therefore, excluded 63,700 EMUs that were previously reported in our March
31, 2002 customer totals for comparative purposes.
(i) Revenue generating units represent the sum total of all primary analog
video, digital video, high-speed data and telephony customers, not
counting additional outlets within one household. For example, a customer
who receives two types of services (such as analog video and digital
video) would be treated as two revenue generating units, and if that
customer added on data service, the customer would be treated as three
revenue generating units. This statistic is computed in accordance with
the guidelines of the National Cable &
21
Telecommunications Association that have been adopted by eleven publicly
traded cable operators (including Charter ) as an industry standard.
(j) Telephony customers include all households purchasing telephone service.
(k) Customer relationships include the number of customers that receive at
least one level of service encompassing video, data and telephony
services, without regard to which service(s) such customers purchase. This
statistic is computed in accordance with the guidelines of the National
Cable & Telecommunications Association that have been adopted by eleven
publicly traded cable operators (including Charter) as an industry
standard.
RESTATEMENT OF CONSOLIDATED FINANCIAL RESULTS
As discussed in our 2002 Form 10-K, we identified a series of adjustments that
have resulted in the restatement of previously announced quarterly results for
the first three quarters of fiscal 2002. In summary, the adjustments are grouped
into the following categories: (i) launch incentives from programmers; (ii)
customer incentives and inducements; (iii) capitalized labor and overhead costs;
(iv) customer acquisition costs; (v) rebuild and upgrade of cable systems; (vi)
deferred tax liabilities/franchise assets; and (vii) other adjustments. These
adjustments have been reflected in the accompanying consolidated financial
statements and reduced revenues for the three months ended March 31, 2002 by $4
million. Our consolidated net loss increased by $407 million for the three
months ended March 31, 2002. In addition, as a result of certain of these
adjustments, our statement of cash flows for the three months ended March 31,
2002 has been restated. Cash flows from operating activities for the three
months ended March 31, 2002 increased by $39 million. The more significant
categories of adjustments relate to the following as outlined below.
Launch Incentives from Programmers. Amounts previously recognized as advertising
revenue in connection with the launch of new programming channels have been
deferred and recorded in other long-term liabilities in the year such launch
support was provided, and amortized as a reduction of programming costs based
upon the relevant contract term. These adjustments decreased revenue by $2
million for the three months ended March 31, 2002. The corresponding
amortization of such deferred amounts reduced programming expenses by $12
million for the three months ended March 31, 2002.
Customer Incentives and Inducements. Marketing inducements paid to encourage
potential customers to switch from satellite providers to Charter branded
services and enter into multi-period service agreements were previously deferred
and recorded as property, plant and equipment and recognized as depreciation and
amortization expense over the life of customer contracts. These amounts have
been restated as a reduction of revenues of $2 million for the three months
ended March 31, 2002. Substantially all of these amounts are offset by reduced
depreciation and amortization expense.
Capitalized Labor and Overhead Costs. Certain elements of labor costs and
related overhead allocations previously capitalized as property, plant and
equipment as part of our rebuild activities, customer installations and new
service introductions have been expensed in the period incurred. Such
adjustments increased operating expenses by $1 million for the three months
ended March 31, 2002.
Customer Acquisition Costs. Certain customer acquisition campaigns were
conducted through third-party contractors in portions of 2002. The costs of
these campaigns were originally deferred and recorded as other assets and
recognized as amortization expense over the average customer contract life.
These amounts have been reported as marketing expense in the period incurred and
totaled $9 million for the three months ended March 31, 2002. We discontinued
this program in the third quarter of 2002 as contracts for third-party vendors
expired. Substantially all of these amounts are offset by reduced depreciation
and amortization expense.
Rebuild and Upgrade of Cable Systems. In 2000, we initiated a three-year program
to replace and upgrade a substantial portion of our network. In connection with
this plan, we assessed the carrying value of, and the associated depreciable
lives of, various assets to be replaced. It was determined that $1 billion of
cable distribution system assets, originally treated as subject to replacement,
were not part of the original replacement plan but were to
22
be upgraded and have remained in service. We also determined that certain assets
subject to replacement during the upgrade program were misstated in the
allocation of the purchase price of the acquisition. This adjustment reduced
property, plant and equipment and increased franchise assets by $627 million. In
addition, the depreciation period for the assets subject to replacement was
adjusted to more closely align with the intended service period of these assets
rather than the three-year straight-line life originally assigned. As a result,
adjustments were recorded to reduce depreciation expense by $120 million for the
three months ended March 31, 2002.
Deferred Tax Liabilities/Franchise Assets. Adjustments were made to record
deferred tax liabilities associated with the acquisition of various cable
television businesses. These adjustments increased amounts assigned to franchise
assets by $1.4 billion with a corresponding increase in deferred tax liabilities
of $0.6 billion and to member's equity of $0.8 billion. In addition, as
described above, a correction was made to reduce amounts assigned in purchase
accounting to assets identified for replacement over the three-year period of
our rebuild and upgrade of its network. This reduced the amount assigned to the
network assets to be retained and increased the amount assigned to franchise
assets by $627 million with a resulting increase in amortization expense for the
years restated. Such adjustments increased the cumulative effect of accounting
change recorded upon adoption of Statement of Financial Accounting Standards No.
142 by $199 million, before tax effects, for the three months ended March 31,
2002.
Other Adjustments. In addition to the items described above, other adjustments
of expenses include additional amounts charged to special charges related to the
2001 restructuring plan, certain tax reclassifications from tax expense to
operating costs and other miscellaneous adjustments. The net impact of these
adjustments to net loss is an increase of $2 million for the three months ended
March 31, 2002.
The following tables summarize the effects of the adjustments on the
consolidated statements of operations and cash flows for the three-month period
ended March 31, 2002 (dollars in millions).
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED
MARCH 31, 2002
-----------------------------
AS PREVIOUSLY
REPORTED RESTATED
------------- --------
Revenue $ 1,078 $ 1,074
Income (loss) from operations (38) 97
Minority interest (3) (3)
Cumulative effect of accounting change, net of tax -- (540)
Net loss (350) (757)
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31, 2002
-----------------------------
AS PREVIOUSLY
REPORTED RESTATED
------------- --------
Net cash flows from operating activities $ 45 $ 84
Net cash flows from investing activities (553) (589)
Net cash flows from financing activities 521 517
OVERVIEW
We have had a history of net losses. Further, we expect to continue to report
net losses for the foreseeable future. The principal reasons for our prior net
losses include our depreciation and amortization expenses and interest costs on
borrowed money, which increased in the aggregate by $71 million for the three
months ended March 31, 2003 as compared to March 31, 2002. Continued net losses
could have a material adverse impact on our ability to access necessary capital,
including under our existing credit facilities.
23
For the three months ended March 31, 2003 and 2002, our income from operations,
which includes depreciation and amortization expense but excludes interest
expense, was $86 million and $97 million, respectively. These operating margins
decreased from 9% for the three months ended March 31, 2002 to 7% for the three
months ended March 31, 2003, principally due to an increase in depreciation and
amortization of $44 million primarily as a result of our rebuild and upgrade
program.
Since our inception and currently, our ability to conduct operations is
dependent on our continued access to credit pursuant to our subsidiaries' credit
facilities. The occurrence of an event of default under our subsidiaries' credit
facilities could result in borrowings from these facilities being unavailable to
us and could, in the event of a payment default or acceleration, also trigger
events of default under our outstanding public notes and would have a material
adverse effect on us. In addition, approximately $194 million of our financing
matures during 2003, which we expect to fund through availability under our
subsidiaries credit facilities and cash on hand.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We disclosed our critical accounting policies and the means by which we develop
estimates therefor in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2002 Annual Report on Form 10-K.
24
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
The following table sets forth the percentages of revenues that items in the
accompanying consolidated statements of operations constitute for the periods
presented (dollars in millions):
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
2003 2002
---------------------- ----------------------
Revenues $ 1,178 100% $ 1,074 100%
------- ------- ------- -------
Costs and expenses:
Operating (excluding depreciation and amortization and other
items listed below) 485 41% 426 40%
Selling, general and administrative 235 20% 222 21%
Depreciation and amortization 370 31% 326 30%
Option compensation expense, net -- -- 2 --
Special charges, net 2 1% 1 --
------- ------- ------- -------
1,092 93% 977 91%
------- ------- ------- -------
Income from operations 86 7% 97 9%
------- -------
Interest expense, net (370) (343)
Other, net 5 32
------- -------
(365) (311)
------- -------
Loss before minority interest, income taxes and
cumulative effect of accounting change (279) (214)
Minority interest (3) (3)
------- -------
Loss before income tax benefit and cumulative effect of
accounting change (282) (217)
Income tax expense (1) --
------- -------
Loss before cumulative effect of accounting change (283) (217)
Cumulative effect of accounting change, net of tax -- (540)
------- -------
Net loss $ (283) $ (757)
======= =======
REVENUES. Revenues increased by $104 million, or 10%, from $1.1 billion for the
three months ended March 31, 2002 to $1.2 billion for the three months ended
March 31, 2003. This increase is principally the result of increases in the
number of digital video and high-speed data customers as well as price
increases.
Average monthly revenue per customer relationship increased from $52 for the
three months ended March 31, 2002 to $59 for the three months ended March 31,
2003. Average monthly revenue per customer relationship represents total revenue
for the three months ended March 31, divided by three, divided by the average
number of customer relationships.
25
Revenues by service offering are as follows (dollars in millions):
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
------------------------- ------------------------ ----------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
------ -------- ------ -------- ------ ------
Analog video $ 719 61% $ 691 64% $ 28 4%
Digital video 179 15% 165 15% 14 8%
High-speed data 122 10% 64 6% 58 91%
Advertising sales 57 5% 58 6% (1) (2)%
Other 101 9% 96 9% 5 5%
------ --- ------ --- -----
$1,178 100% $1,074 100% $ 104 10%
====== === ====== === =====
Analog video revenues consist primarily of revenues from basic services. Analog
video revenues increased by $28 million, or 4%, to $719 million for the three
months ended March 31, 2003 as compared to $691 million for the three months
ended March 31, 2002. The increase was primarily due to general price increases,
offset somewhat by the decline in analog video customers. We do not expect an
increase in analog video customers; however, our goal is to sustain revenues by
reducing analog customer losses and to grow revenues through price increases on
certain services and packages as well as the sale of data services and digital
video services.
All of our digital video customers also receive basic analog video service, and
digital video revenues consist of the portion of revenues from digital video
customers in excess of the amount paid by these customers for analog video
service. Additionally, included within digital video revenues are revenues from
premium services and pay-per-view services. Digital video revenues increased by
$14 million, or 8%, to $179 million for the three months ended March 31, 2003 as
compared to $165 million for the three months ended March 31, 2002. The majority
of the increase resulted from the addition of approximately 442,200 digital
customers. While we expect to increase digital customers as a result of various
marketing plans we expect to initiate in upcoming periods, we experienced a loss
of digital customers since December 31, 2002. We expect any increase in digital
customers and service penetration will be less than levels experienced in prior
periods.
High-speed data revenues increased $58 million, or 91%, from $64 million for the
three months ended March 31, 2002 to $122 million for the three months ended
March 31, 2003. The majority of the increase was primarily due to the addition
of 614,400 high-speed data customers. We were able to offer this service to more
of our customers, as the estimated percentage of homes passed that could receive
high-speed data service increased from 69% for the three months ended March 31,
2002 to 84% for the three months ended March 31, 2003 as a result of our ongoing
system upgrades.
Advertising sales revenues consist primarily of revenues from commercial
advertising customers, programmers and other vendors. Advertising sales
decreased $1 million, or 2%, from $58 million for the three months ended March
31, 2002 to $57 million for the three months ended March 31, 2003. For the three
months ended March 31, 2003 and 2002, we received $4 million and $12 million,
respectively, in advertising revenue from programmers. We expect that
advertising provided to programmers will decline substantially in the future.
Such advertising purchases are made pursuant to written agreements that are
generally consistent with other third-party commercial advertising agreements
and at prices that we believe approximate fair value.
Other revenues consist primarily of revenues from franchise fees, commercial
high-speed data revenues, late payment fees, customer installations, wire
maintenance fees, home shopping, equipment rental, dial-up Internet service and
other miscellaneous revenues. Other revenues increased $5 million, or 5%, from
$96 million for the three months ended March 31, 2002 to $101 million for the
three months ended March 31, 2003. The increase was primarily due to an increase
in commercial high-speed data revenues as a result of our internal growth in
advanced services offset by decreases in late payment fees charged to customers
and other miscellaneous revenues.
26
OPERATING EXPENSES. Operating expenses increased $59 million, or 14%, from $426
million for the three months ended March 31, 2002 to $485 million for the three
months ended March 31, 2003. Total programming costs paid to programmers were
$314 million and $283 million, representing 29% of total costs and expenses for
the three months ended March 31, 2003 and 2002, respectively. Key expense
components as a percentage of revenues are as follows (dollars in millions):
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
--------------------- ---------------------- ----------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
------ -------- ------ -------- ------ ------
Programming costs $314 26% $283 26% $31 11%
Advertising sales 21 2% 19 2% 2 11%
Service costs 150 13% 124 12% 26 21%
---- ---- ---- --- ---
$485 41% $426 40% $59 14%
==== ==== ==== === ===
Programming costs consist primarily of costs paid to programmers for the
provision of basic, premium and digital channels and pay-per-view programs. The
increase in programming costs of $31 million, or 11%, was primarily due to price
increases, particularly in sports programming, an increased number of channels
carried on our systems and an increase in digital customers. The costs were
offset by the amortization of launch support against programming costs of $16
million and $13 million for the three months ended March 31, 2003 and 2002,
respectively.
Our cable programming costs have increased, in every year we have operated, in
excess of customary inflationary and cost-of-living type increases, and they are
expected to continue to increase due to a variety of factors, including
additional programming being provided to customers as a result of system
rebuilds that increase channel capacity, increased costs to produce or purchase
cable programming, increased costs from certain previously discounted
programming, and inflationary or negotiated annual increases. Our increasing
programming costs will result in declining video product margins to the extent
we are unable to pass on cost increases to our customers. We expect to partially
offset any resulting margin compression through increased incremental high-speed
data revenues.
Advertising sales expenses consist of costs related to traditional advertising
services, including salaries and benefits and commissions. Advertising sales
expenses increased $2 million, or 11%, primarily due to increased sales
commissions. Service costs consist primarily of service personnel salaries and
benefits, franchise fees, system utilities, internet service provider fees,
maintenance and pole rent expense. The increase in service costs of $26 million,
or 21%, resulted primarily from an increase in labor costs related to personnel
who had previously spent a majority of their time on capitalizable activities,
who now as a result of the decrease in rebuild and upgrade activities, are
spending their time on non-capitalizable activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $13 million, or 6%, from $222 million for
the three months ended March 31, 2002 to $235 million for the three months ended
March 31, 2003. Key components of expense as a percentage of revenues are as
follows (dollars in millions):
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
--------------------- ---------------------- ----------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
------ -------- ------ -------- ------ ------
General and administrative $215 18% $194 18% $ 21 11%
Marketing 20 2% 28 3% (8) (29)%
---- ---- ---- --- ---- ---
$235 20% $222 21% $ 13 6%
==== ==== ==== === ==== ===
General and administrative expenses consist primarily of salaries and benefits,
rent expense, billing costs, bad debt expense and property taxes. The increase
in general and administrative expenses of $21 million, or 11%, resulted
27
primarily from increases in salaries and benefits of $9 million, professional
fees of $6 million and insurance of $4 million. These increases were partially
offset by a decrease in bad debt expense of $10 million as we continue to
realize benefits from our strengthened credit policies.
Marketing expenses decreased $8 million, or 29%, due to reduced promotional
activity related to our service offerings including advertising, telemarketing
and direct sales. However, we expect marketing expenses to increase in
subsequent quarters over the first quarter of 2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
by $44 million, or 13%, from $326 million for the three months ended March 31,
2002 to $370 million for the three months ended March 31, 2003. This increase
was due primarily to an increase in depreciation expense related to additional
capital expenditures in 2003 and 2002.
OPTION COMPENSATION EXPENSE, NET. Option compensation expense decreased by
approximately $2 million for the three months ended March 31, 2003 as compared
to the three months ended March 31, 2002. Option compensation expense represents
expense related to exercise prices on certain options that were issued prior to
Charter's initial public offering in 1999 that were less than the estimated fair
values of Charter's Class A common stock at the time of grant. Compensation
expense is being accrued over the vesting period of such options and will
continue to be recorded until the last vesting period lapses in April 2004. On
January 1, 2003, we adopted SFAS No. 123 "Accounting for Stock-Based
Compensation" using the prospective method under which we will recognize
compensation expense of a stock-based award to an employee over the vesting
period based on the fair value of the award on the grant date. No new options
were granted during the quarter ended March 31, 2003, although we expect to
grant options to some of our officers and employees in 2003.
SPECIAL CHARGES, NET. Special charges of $2 million for the three months ended
March 31, 2003 represents $7 million of severance and related costs of our
on-going initiative to reduce our workforce, partially offset by a $5 million
credit from a settlement from the Internet service provider Excite@Home related
to the conversion of about 145,000 high-speed data customers to our Charter
Pipeline service in 2001. We expect to continue to record additional special
charges in 2003 related to the continued reorganization of our operations and
costs of litigation.
INTEREST EXPENSE, NET. Net interest expense increased by $27 million, or 8%,
from $343 million for the three months ended March 31, 2002 to $370 million for
the three months ended March 31, 2003. The increase in net interest expense was
a result of a $1.7 billion increase in average debt outstanding to $17.2 billion
for the first quarter of 2003 compared to $15.5 billion for the first quarter of
2002, partially offset by a decrease in our average borrowing rate from 8.4% in
the first quarter of 2002 to 8.1% in the first quarter of 2003. The increased
debt was primarily used for capital expenditures.
OTHER, NET. Other income decreased by $27 million from $32 million for the three
months ended March 31, 2002 to $5 million for the three months ended March 31,
2003. This decrease is primarily due to a decrease in gains on interest rate
agreements, which do not qualify for hedge accounting under SFAS No. 133, which
decreased from $33 million for the three months ended March 31, 2002 to $14
million for the three months ended March 31, 2003.
INCOME TAX EXPENSE. Income tax expense of $1 million was recognized for the
three months ended March 31, 2003. The income tax expense is realized through
increases in deferred tax liabilities and state income taxes related to our
indirect subsidiaries.
MINORITY INTEREST. Minority interest expense represents the 2% accretion of the
preferred membership interests in CC VIII, LLC.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Cumulative effect of accounting change
in 2002 represents the impairment charge recorded as a result of adopting SFAS
No. 142.
NET LOSS. Net loss decreased by $474 million, or 63%, from $757 million for the
three months ended March 31, 2002 to $283 million for the three months ended
March 31, 2003 as a result of the factors described above.
28
LIQUIDITY AND CAPITAL RESOURCES
INTRODUCTION
This section contains a discussion of our liquidity and capital resources,
including a discussion of our cash position, sources and uses of cash, access to
debt facilities and other financing sources, historical financing activities,
cash needs, capital expenditures and outstanding debt. The first part of this
section, entitled "Overview" provides an overview of these topics. The second
part of this section, entitled "Long-Term Debt" provides an overview of
long-term debt. The third part of this section, entitled "Historical Operating,
Financing and Investing Activities" provides information regarding the cash
provided from or used in our operating, financing and investing activities
during the three months ended March 31, 2003 and 2002. The fourth part of this
section, entitled "Capital Expenditures" provides more detailed information
regarding our historical capital expenditures and our planned capital
expenditures going forward.
OVERVIEW
Our business requires significant cash to fund capital expenditures, debt
service costs and ongoing operations. We have historically funded our operating
activities through cash flows from operating activities. We have funded capital
requirements through cash flows from operating activities, borrowings under the
credit facilities of our subsidiaries, issuances of debt securities and capital
contributions from Charter Holdco. The mix of funding sources changes from
period to period, but for the three months ended March 31, 2003, approximately
69% of our capital funding requirements were from cash flows from operating
activities and approximately 31% was from borrowings under the credit facilities
of our subsidiaries. We expect that our mix of sources of funds will continue to
change in the future based on our overall capital needs relative to our cash
flow and on the availability under the credit facilities of our subsidiaries,
our access to the bond and equity markets and our ability to generate free cash
flows. We define free cash flows as net cash flows from operating activities
plus net cash flows from investing activities less cost associated with
obtaining financing.
We believe that as a result of our significant level of debt, current market
conditions and recent downgrades to our debt securities, we have limited access
to the debt markets at this time. Accordingly, during 2003, we expect to fund
our liquidity and capital requirements principally through cash on hand, cash
flows from operating activities, and through borrowings under the credit
facilities of our subsidiaries and, subject to negotiation and execution of
definitive documentation, the Vulcan Inc. commitment, as discussed more fully in
the section entitled "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2002 Annual Report on Form 10-K. As
of March 31, 2003, we held $414 million in cash and cash equivalents and we had
total potential unused availability of $1.2 billion under the credit facilities
of our subsidiaries, although the actual availability at that time was only $652
million because of limits imposed under covenant restrictions. However,
continued access to these credit facilities is subject to our remaining in
compliance with the applicable covenants of these credit facilities.
As the principal amounts owing under our various debt obligations become due,
sustaining our liquidity and access to capital will become more difficult over
time. In the fourth quarter of 2003, our subsidiary, CC V Holdings, LLC ("CC
V"), will be required to repay approximately $66 million in principal amount of
the CC V bonds. In subsequent years, substantial additional amounts will become
due under our remaining obligations. In addition, a default under the covenants
governing any of our debt instruments could result in the acceleration of our
payment obligations under that debt and, under certain circumstances, in
cross-defaults under our other debt obligations.
We expect to remain in compliance with the covenants under the credit facilities
of our subsidiaries and indentures, and we expect that our cash on hand, cash
flows from operating activities and the amounts available under the credit
facilities should be sufficient to satisfy our liquidity needs through the end
of 2003. However, it is unclear whether we will have access to sufficient
capital to satisfy our principal repayment obligations, which are scheduled to
come due in future years. We do not expect that cash flows from operating
activities will be sufficient, on their own, to permit us to satisfy these
obligations. Our substantial debt levels and the recent downgrades in our debt
limit our access to the debt markets on reasonable terms at this time and for
the foreseeable future. In addition, the maximum allowable leverage ratios under
our credit facilities will decline over time and the total potential borrowing
available
29
under our subsidiaries' current credit facilities (subject to covenant
restrictions and limitations) will decrease from approximately $9.0 billion as
of the end of 2003 to $8.7 billion and $7.7 billion by the end of 2004 and 2005,
respectively. Although Mr. Allen and his affiliates have purchased equity from
Charter and Charter Holdco in the past, except for the commitment of Vulcan
Inc., an affiliate of Mr. Allen, described above, there is no obligation for Mr.
Allen or his affiliates to purchase equity from or contribute or loan funds to
us or to our subsidiaries in the future. We recognize the interim nature of this
facility and continue to evaluate our options and to consider steps to address
our leverage. Charter has hired a financial advisor to assist us in evaluating
alternatives.
If, at any time, additional capital or borrowing capacity is required beyond
amounts internally generated or available through existing credit facilities or
in traditional debt financings, we would consider:
- requesting waivers or amendments with respect to our credit
facilities, the availability and terms of which would be subject to
market conditions;
- further reducing our expenses and capital expenditures, which would
likely impair our ability to increase revenue;
- selling assets;
- issuing debt securities which may have structural or other
priorities over our existing high-yield debt; or
- issuing debt or equity at the Charter or Charter Holdco level, the
proceeds of which could be contributed to us.
Although there are no current plans to do so, we also may consider transactions
to reduce our leverage including seeking to exchange currently outstanding debt
for debt with a lower principal amount or, if opportunities arise, acquiring our
outstanding debt in the market.
If the above strategies were not successful, ultimately, we could be forced to
restructure our obligations or seek protection under the bankruptcy laws. In
addition, if we find it necessary to engage in a recapitalization or other
similar transaction, our noteholders might not receive all principal and
interest payments to which they are contractually entitled.
As a means of enhancing our liquidity, we are currently attempting to cut costs,
reduce capital expenditures and exploring sales of assets.
LONG-TERM DEBT
As of March 31, 2003 and December 31, 2002, long-term debt totaled approximately
$17.6 billion and $17.3 billion, respectively. This debt was comprised of
approximately $8.0 billion and $7.8 billion of bank debt and $9.6 billion and
$9.5 billion of high-yield bonds, respectively. As of March 31, 2003 and
December 31, 2002, the weighted average rate on the bank debt was approximately
5.7% and 5.6%, respectively, while the weighted average rate on the high-yield
debt was approximately 10.2%, resulting in a blended weighted average rate of
8.1%. Approximately 76% of our debt was effectively fixed including the effects
of our interest rate hedge agreements as of March 31, 2003 compared to
approximately 77% as of December 31, 2002. Traditionally, we have accessed the
high-yield bond market as a source of capital for our growth. Moody's Investor
Services downgraded our outstanding debt in October, 2002 and again in January,
2003. Moody's also reduced its liquidity rating of Charter to its lowest level.
In January 2003, Standard & Poor's downgraded our outstanding debt. We believe
that as a result of our significant level of debt, current market conditions and
these downgrades, we have limited access to the debt market at this time and we
expect to fund our cash needs during 2003 from cash on hand, cash from
operations and borrowings under the existing credit facilities of our
subsidiaries. Effective April 14, 2003, our subsidary entered into a commitment
letter with Vulcan Inc., which is an affiliate of Paul Allen, pursuant to which
Vulcan Inc. agreed to lend, or cause an affiliate to lend initially to Charter
Communications VII, LLC an aggregate amount of up to $300 million, which amount
includes a subfacility of up to $100 million for the issuance of letters of
credit, subject to negotiation and execution of definitive documentation. The
facility does not commit any party to provide funding to us. Under certain
circumstances, we could utilize (or cause a subsidiary to utilize) the facility
to provide funding to us to the extent necessary to comply with leverage ratio
covenants of our subsidiary's credit facilities in future quarters. However,
there can be no assurance that we or our subsidiary will have the ability to do
so or will choose to do so.
30
We recognize the interim nature of this facility and continue to evaluate our
options and to consider steps to address our leverage.
As noted above, our access to capital from the credit facilities of our
subsidiaries is contingent on compliance with a number of restrictive covenants,
including covenants tied to our operating performance. We may not be able to
comply with all of these restrictive covenants. If there is an event of default
under our subsidiaries' credit facilities, such as the failure to maintain the
applicable required financial ratios, we would be unable to borrow under these
credit facilities, which could materially adversely impact our ability to
operate our business and to make payments under our debt instruments. In
addition, an event of default under certain of our debt obligations, if not
waived, may result in the acceleration of those debt obligations, which could in
turn result in the acceleration of other debt obligations, and could result in
exercise of remedies by our creditors and could force us to seek the protection
of the bankruptcy laws.
Our significant amount of debt and the significant interest charges incurred to
service debt may adversely affect our ability to obtain financing in the future
and react to changes in our business. We may need additional capital if we do
not achieve our projected revenues, or if our operating expenses increase. If we
are not able to obtain such capital from increases in our cash flows from
operating activities, additional borrowings or other sources, we may not be able
to fund customer demand for digital video, data or telephony services, offer
certain services in certain of our markets or compete effectively. Consequently,
our financial condition and results of operations could suffer materially. See
the section "Liquidity and Capital Resources" of "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in our 2002 Annual Report on Form 10-K for a description of our credit
facilities and other long-term debt, including certain terms, restrictions and
covenants.
HISTORICAL OPERATING, FINANCING AND INVESTING ACTIVITIES
We held $414 million in cash and cash equivalents as of March 31, 2003 compared
to $310 million as of December 31, 2002. The increase in cash and cash
equivalents is primarily a result of our desire to increase our liquid assets.
OPERATING ACTIVITIES. Net cash provided by operating activities for the three
months ended March 31, 2003 and 2002 was $151 million and $84 million,
respectively. For the three months ended March 31, 2003, net cash provided by
operating activities increased primarily due to increased revenues of $104
million and changes in operating assets and liabilities that used $50 million
less cash during the three months ended March 31, 2003 compared to the
corresponding period in 2002.
INVESTING ACTIVITIES. Net cash used in investing activities for the three months
ended March 31, 2003 and 2002 was $220 million and $589 million, respectively.
Investing activities used $369 million less cash during the three months ended
March 31, 2003 than the corresponding period in 2002 primarily as a result of
reductions in capital expenditures and acquisitions. Purchases of property,
plant and equipment used $289 million less cash during the three months ended
March 31, 2003 than the corresponding period in 2002 as a result of our efforts
to reduce capital expenditures. Payments for acquisitions used $78 million less
cash during the three months ended March 31, 2003 than the corresponding period
in 2002.
FINANCING ACTIVITIES. Net cash provided by financing activities for the three
months ended March 31, 2003 and 2002 was $173 million and $517 million,
respectively. Financing activities provided $344 million less cash during the
three months ended March 31, 2003 than the corresponding period in 2002. The
decrease in cash provided during the three months ended March 31, 2003 as
compared to the corresponding period in 2002 was primarily due to a decrease in
issuances of long-term debt.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We made purchases
of property, plant and equipment, excluding acquisitions of cable systems, of
$101 million and $435 million for the three months ended March 31, 2003 and
2002, respectively. The majority of the capital expenditures relates to our
customer premise equipment and rebuild and upgrade program. Upgrading our cable
systems has enabled us to offer digital television, cable modem high-speed
Internet access, video-on-demand, interactive services, additional channels and
tiers, and
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expanded pay-per-view options to a larger customer base. Our capital
expenditures are funded primarily from cash flows from operating activities, the
issuance of debt and borrowings under credit facilities. In addition, during the
three months ended March 31, 2003 and 2002, our liabilities related to capital
expenditures decreased $117 million and $72 million, respectively.
During 2003, we expect to spend approximately $1.0 billion to $1.1 billion in
the aggregate on capital expenditures. We expect our capital expenditures in
2003 will be lower than 2002 levels because our rebuild and upgrade plans are
largely completed.
As first reported in our Form 10-Q for the third quarter of 2002, we adopted
capital expenditure disclosure guidance which was recently developed by eleven
publicly traded cable system operators, including Charter, with the support of
the National Cable & Telecommunications Association ("NCTA"). The new disclosure
is intended to provide more consistency in the reporting of operating statistics
in capital expenditures and customer relationships among peer companies in the
cable industry. These disclosure guidelines are not required disclosure under
GAAP, nor do they impact our accounting for capital expenditures under GAAP.
The following table presents our major capital expenditures categories in
accordance with NCTA disclosure guidelines for the three months ended March 31,
2003 and 2002 (dollars in millions):
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
Customer premise equipment (a) $ 64 $206
Scalable infrastructure (b) 8 44
Line extensions (c) 7 17
Upgrade/Rebuild (d) 15 126
Support capital (e) 7 42
---- ----
Total capital expenditures (f) $101 $435
==== ====
(a) Customer premise equipment includes costs incurred at the customer
residence to secure new customers, revenue units and additional
bandwidth revenues. It also includes customer installation costs in
accordance with SFAS 51 and customer premise equipment (e.g.,
set-top terminals and cable modems, etc.).
(b) Scalable infrastructure includes costs, not related to customer
premise equipment or our network, to secure growth of new customers,
revenue units and additional bandwidth revenues or provide service
enhancements (e.g., headend equipment).
(c) Line extensions include network costs associated with entering new
service areas (e.g., fiber/coaxial cable, amplifiers, electronic
equipment, make-ready and design engineering).
(d) Upgrade/rebuild includes costs to modify or replace existing
fiber/coaxial cable networks, including betterments.
(e) Support capital includes costs associated with the replacement or
enhancement of non-network assets due to technological and physical
obsolescence (e.g., non-network equipment, land, buildings and
vehicles).
(f) Represents all capital purchases made during the three months ended
March 31, 2003 and 2002, respectively.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties, in
addition to those discussed elsewhere in this Quarterly Report and in the
Critical Accounting Policies and Estimates section of "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
2002 Annual Report on Form 10-K, that could materially impact our business,
results of operations and financial condition.
LIQUIDITY. Our business requires significant cash to fund capital expenditures,
debt service costs and ongoing operations. Our ongoing operations will depend on
our ability to generate cash and to secure financing in the future. We have
historically funded liquidity and capital requirements through cash flows from
operating activities,
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borrowings under the credit facilities of our subsidiaries, issuances of debt
securities by us and our subsidiaries and our contributions of capital from
Charter and Charter Holdco. We believe, however, that at this time we have
limited access to the debt markets, and Charter and Charter Holdco have limited
access to equity markets at this time in light of general economic conditions,
our substantial leverage, the business condition of the cable,
telecommunications and technology industry, our current credit rating and recent
downgrades of our outstanding debt and liquidity ratings, and pending litigation
and investigations. See "-Substantial Leverage" below.
Our ability to conduct operations is dependent on our continued access to credit
pursuant to our subsidiaries' credit facilities. Our total potential borrowing
availability under the current credit facilities of our subsidiaries totaled
$1.2 billion as of March 31, 2003, although the actual availability at that time
was only $652 million because of limits imposed by covenant restrictions. Our
access to those funds is subject to our satisfaction of the covenants in those
credit facilities and the indentures governing our and our subsidiaries' public
debt. We may not be able to comply with all of the financial ratios and
restrictive covenants in our subsidiaries' credit facilities. If there is an
event of default under our subsidiaries' credit facilities, such as the failure
to maintain the applicable required financial ratios, we would be unable to
borrow under these credit facilities, which could materially adversely impact
our ability to operate our business and to make payments under our debt
instruments. In addition, an event of default under our credit facilities and
indentures, if not waived, could result in the acceleration of those debt
obligations, which would in turn result in the acceleration of other debt
obligations, and could result in exercise of remedies by our creditors and could
force us to seek the protection of the bankruptcy laws.
In addition, as the principal amounts owing under our various debt obligations
become due, sustaining our liquidity and access to capital will become more
difficult over time. It is unclear whether we will have access to sufficient
capital to satisfy our principal repayment obligations as they come due in
subsequent years. We do not expect that cash flows from operating activities
will be sufficient, on their own, to permit us to satisfy these obligations.
If our business does not generate sufficient cash flow from operating
activities, and sufficient future distributions are not available to us from
borrowings under our credit facilities or from other sources of financing, we
may not be able to repay our debt, grow our business, respond to competitive
challenges, or to fund our other liquidity and capital needs. As a means of
enhancing our liquidity, we are currently attempting to cut costs, reduce
capital expenditures and are exploring sales of assets.
If we need to seek alternative sources of financing, there can be no assurance
that we will be able to obtain the requisite financing or that such financing,
if available, would not have terms that are materially disadvantageous to our
existing debt holders. Although Mr. Allen and his affiliates have purchased
equity from Charter and Charter Holdco in the past, there is no obligation for
Mr. Allen or his affiliates to purchase equity or, except as described in "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our 2002 Annual Report on Form 10-K under "Funding Commitment of
Vulcan Inc.," with respect to the $300 million back-up credit facility
commitment, contribute or lend funds to us, our subsidiaries or to our parent in
the future. We recognize the interim nature of this facility and continue to
evaluate our options and to consider steps to address our leverage. Charter has
hired a financial advisor to assist us in evaluating alternatives.
If, at any time, additional capital or capacity is required beyond amounts
internally generated or available through existing credit facilities or in
traditional debt or equity financings, we would consider:
- requesting waivers or amendments with respect to our credit
facilities, which might not be granted on terms favorable to us or
at all;
- further reducing our expenses and capital expenditures, which would
likely impair our ability to increase revenue;
- selling assets;
- issuing debt securities which may have structural or other
priorities over our existing high-yield debt; or
- issuing debt or equity at the Charter or Charter Holdco level, the
proceeds of which could be contributed to us.
33
Although there are no current plans to do so, we also may consider transactions
to reduce our leverage, including seeking to exchange currently outstanding debt
for debt with a lower principal amount or, if opportunities arise, acquiring our
outstanding debt in the market.
If the above strategies were not successful, ultimately, we could be forced to
restructure our obligations or seek protection under the bankruptcy laws. In
addition, if we find it necessary to engage in a recapitalization or other
similar transaction, our noteholders might not receive all principal and
interest payments to which they are contractually entitled. For more
information, see the section entitled "Liquidity and Capital Resources."
SUBSTANTIAL LEVERAGE. We and our subsidiaries have a significant amount of debt.
As of March 31, 2003, our total debt was approximately $17.6 billion. Our
long-term debt begins to mature in the fourth quarter of 2003, when
approximately $66 million of principal is due on the CC V bonds. In subsequent
years, substantial additional amounts will become due under our remaining
obligations. If current debt levels increase, the related risks that we now face
will intensify, including a potential further deterioration of our existing
credit ratings. Moody's downgraded our debt once in October 2002, and again in
January 2003. Standard & Poor's also downgraded our debt in January 2003. We
believe that as a result of our significant levels of debt, current market
conditions and recent downgrades to our debt securities, we have limited access
to the debt markets at this time. Our difficulty in accessing these markets will
impact our ability to obtain future financing for operations, to fund our
planned capital expenditures and to react to changes in our business. If our
business does not generate sufficient cash flow from operating activities, and
sufficient future distributions are not available to us from borrowings under
our credit facilities or from other sources of financing, we may not be able to
repay our debt, grow our business, respond to competitive challenges, or to fund
our other liquidity and capital needs. If we find it necessary to engage in a
recapitalization or other similar transaction, our noteholders might not receive
all principal and interest payments to which they are contractually entitled.
For more information, see the section above entitled "Liquidity and Capital
Resources."
RESTRICTIVE COVENANTS. The credit facilities of our subsidiaries and the
indentures governing the publicly held notes of our subsidiaries contain a
number of significant covenants that could adversely impact our business. In
particular, the credit facilities and indentures of our subsidiaries restrict
our subsidiaries' ability to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- enter into related party transactions unless certain conditions are
met;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- grant liens; and
- pledge assets.
Furthermore, in accordance with our subsidiaries' credit facilities, a number of
our subsidiaries are required to maintain specified financial ratios and meet
financial tests. These financial ratios decrease over time and will become more
difficult to maintain during the latter half of 2003 and thereafter. 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 and could trigger acceleration of the
debt under the applicable agreement, and in certain cases under other agreements
governing our long-term indebtedness. Any default under our credit facilities or
indentures governing our outstanding debt might adversely affect our growth, our
financial condition and our results of operations and the ability to make
payments on the publicly held notes of Charter and those of our subsidiaries and
the credit facilities of our subsidiaries.
ACCELERATION OF INDEBTEDNESS OF OUR SUBSIDIARIES. In the event of a default
under our subsidiaries' credit facilities or public notes, our subsidiaries'
creditors could elect to declare all amounts borrowed, together with accrued and
unpaid interest and other fees, to be due and payable. In such event, our
subsidiaries' credit facilities and indentures will not permit our subsidiaries
to distribute funds to Charter Holdings to pay interest or principal on our
public
34
notes. If the amounts outstanding under such credit facilities or public notes
are accelerated, all of our subsidiaries' debt and liabilities would be payable
from our subsidiaries' assets, prior to any distribution of our subsidiaries'
assets to pay the interest and principal amounts on our public notes. In
addition, the lenders under our credit facilities could foreclose on their
collateral, which includes equity interests in our subsidiaries, and exercise
other rights of secured creditors. In any such case, we might not be able to
repay or make any payments on our public notes. Additionally, an acceleration or
payment default under our credit facilities would cause a cross-default in the
indentures governing the Charter Holdings notes and would trigger the
cross-default provision of the Charter Operating Credit Agreement. Any default
under any of our subsidiaries' credit facilities or public notes might adversely
affect the holders of our public notes and our growth, financial condition and
results of operations and could force us to examine all options, including
seeking the protection of the bankruptcy laws.
CHARTER LIQUIDITY CONCERNS. Because of its corporate structure, Charter has less
access to capital than its operating subsidiaries, and therefore Charter's
ability to repay its senior notes is subject to additional uncertainties.
Charter will not be able to make interest payments beginning in April, 2004, or
principal payments at maturity in 2005 and 2006, with respect to its convertible
senior notes unless it can obtain additional financing or it receives
distributions or other payments from its subsidiaries. The indentures governing
the Charter Holdings notes permit Charter Holdings to make distributions to
Charter Holdco only if, at the time of distribution, Charter Holdings can meet
a leverage ratio of 8.75 to 1.0, there is no default under the indentures and
other specified tests are met. Charter Holdings did not meet that leverage
ratio for the quarter ended March 31, 2003. Further, although the indentures
governing the Charter Holdings notes do not prohibit Charter Holdings and its
subsidiaries from making payments on its and their outstanding unsubordinated
intercompany debt to Charter, this debt had only an aggregate principal amount
of approximately $52 million as of March 31, 2003, which will not be sufficient
to enable Charter to make interest payments beginning in April, 2004 or to
repay all or any portion of its convertible senior notes at maturity. Because
Charter is our sole manager, any financial or liquidity problems of Charter
would be likely to cause serious disruption to our business and to have a
material adverse affect on our operations and results. Any such event would
likely adversely impact our own credit rating, and our relations with customers
and suppliers, which could in turn further impair our ability to obtain
financing and operate our business. Further, to the extent that any such event
results in a change of control of Charter (whether through a bankruptcy,
receivership or other reorganization of Charter and/or Charter Holdco, or
otherwise), it could result in an event of default under the credit facilities
of our subsidiaries and require a change of control repurchase offer under our
outstanding notes.
SECURITIES LITIGATION AND GOVERNMENT INVESTIGATIONS. As previously reported, a
number of Federal Class Actions were filed against Charter and certain of its
former and present officers and directors alleging violations of securities
laws. In addition, a number of other lawsuits have been filed against Charter in
other jurisdictions. A shareholders derivative suit was filed in the United
States District Court for the Eastern District of Missouri, and several class
action lawsuits were filed in Delaware state court against Charter and certain
of its directors and officers. Finally, two derivative suits were filed in
Missouri state court against Charter, its current directors and its former
independent auditor; these actions were consolidated during the fourth quarter
of 2002. The federal derivative suit, the Delaware class actions and the
consolidated derivative suit each allege that the defendants breached their
fiduciary duties.
In August of 2002, Charter became aware of a grand jury investigation being
conducted by the United States Attorney's Office for the Eastern District of
Missouri into certain of its accounting and reporting practices focusing on how
Charter reported customer numbers, refunds that Charter sought from programmers
and its reporting of amounts received from digital set-top terminal
manufacturers for advertising. Charter has been advised by the U.S. Attorney's
Office that no member of the board of directors of Charter, including its Chief
Executive Officer, is a target of the investigation. Charter has advised us that
it is fully cooperating with the investigation. In November 2002, Charter
received an informal, non-public inquiry from the Staff of the Securities and
Exchange Commission. The SEC has subsequently issued a formal order of
investigation dated January 23, 2003, and subsequent document and testimony
subpoenas. The investigation and subpoenas generally concern Charter's prior
reports with respect to the determination of its customers, and various of its
and our other accounting policies and practices, including Charter's
capitalization of certain expenses and dealings with certain vendors, including
programmers and digital set-top terminal suppliers. Charter has advised us that
it is actively cooperating with the SEC staff.
Due to the inherent uncertainties of litigation and investigations, Charter
cannot predict the ultimate outcome of these proceedings. In addition, its
restatement may lead to additional allegations in the pending securities class
and derivative actions against Charter, or to additional claims being filed or
to investigations being expanded or commenced. These proceedings, and Charter's
actions in response to these proceedings, could result in substantial costs,
substantial potential liabilities and the diversion of management's attention,
all of which could affect adversely the market price of our publicly-traded
notes, as well as our ability to meet future operating and financial estimates
and to execute our business and financial strategies. To the extent that the
foregoing matters are not covered by
35
insurance, the limited liability company agreements of Charter Holdings and its
limited liability company subsidiaries, and the bylaws of its corporate
subsidiaries, may require Charter Holdings or its subsidiaries, respectively, to
indemnify Charter and the above directors and current and former officers in
connection with such matters. Furthermore, the management agreements with
Charter Communications Operating, LLC, CC VI Operating, LLC, CC VII Operating,
LLC and CC VIII Operating, LLC contain indemnification provisions with respect
to management services not constituting gross negligence or willful misconduct.
COMPETITION. The industry in which we operate is highly competitive. In some
instances, we compete against companies with fewer regulatory burdens, easier
access to financing, greater personnel resources, greater brand name recognition
and long-standing relationships with regulatory authorities and customers.
Increasing consolidation in the cable industry and the repeal of certain
ownership rules may provide additional benefits to certain of our competitors,
either through access to financing, resources or efficiencies of scale.
In particular, we face competition within the subscription television industry,
which includes providers of paid television service employing technologies other
than cable, such as direct broadcast satellite, also known as DBS. Competition
from DBS, including intensive marketing efforts and aggressive pricing, has had
an adverse impact on our ability to retain customers. Local telephone companies
and electric utilities can compete in this area, and they increasingly may do so
in the future. The subscription television industry also faces competition from
broadcast companies distributing television broadcast signals without assessing
a subscription fee and from other communications and entertainment media,
including conventional radio broadcasting services, newspapers, movie theaters,
the Internet, live sports events and home video products. With respect to our
Internet access services, we face competition, including intensive marketing
efforts and aggressive pricing, from telephone companies and other providers of
"dial-up" and digital subscriber line technology, also known as DSL. Further
loss of customers to DBS or other alternative video and data services could have
a material negative impact on our business.
VARIABLE INTEREST RATES. At March 31, 2003, excluding the effects of hedging,
approximately 45% 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. As of March 31, 2003 and December 31, 2002, the weighted average
rate on the bank debt was approximately 5.7% and 5.6%, respectively, while the
weighted average rate on the high-yield debt was approximately 10.2%, resulting
in a blended weighted average rate of 8.1%. Approximately 76% of our debt was
effectively fixed including the effects of our interest rate hedge agreements as
of March 31, 2003 as compared to approximately 77% at December 31, 2002.
INTEGRATION OF OPERATIONS. In the past, we experienced rapid growth from
acquisitions of a number of smaller cable operators and the rapid rebuild and
rollout of advanced services. This activity 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. The failure to implement management,
operating or financial systems necessary to successfully integrate acquired
operations, including headend and call center consolidation, completion of
planned upgrades and standardization of operating procedures, could have a
material adverse effect on our business, results of operations and financial
condition. In addition, our ability to properly manage our operations will be
impacted by our ability to attract, retain and incentivize experienced,
qualified, professional management.
SERVICES. We expect that a substantial portion of our near term growth will be
achieved through revenues from high-speed data services, digital video, bundled
service packages, and to a lesser extent other services that take advantage of
cable's broadband capacity. The technology involved in our product and service
offerings generally requires that we have permission to use intellectual
property and that such property not infringe on rights claimed by others. We may
not be able to offer these advanced services successfully to our customers or
provide adequate customer service and these advanced services may not generate
adequate revenues. Also, if the vendors we use for these services are not
financially viable over time, we may experience disruption of service and incur
costs to find alternative vendors. In addition, if it is determined that the
product being utilized infringes on the rights of others, we may be sued or be
precluded from using the technology.
36
INCREASING PROGRAMMING COSTS. Programming has been, and is expected to continue
to be, our largest operating expense item. In recent years, the cable industry
has experienced a rapid escalation in the cost of programming, particularly
sports programming. This escalation may continue, and we may not be able to pass
programming cost increases on to our customers. The inability to pass these
programming cost increases on to our customers would have an adverse impact on
our cash flow and operating margins.
PUBLIC NOTES PRICE VOLATILITY. The market price of the publicly-traded notes
issued by us and our subsidiaries has been and is likely to continue to be
highly volatile. We expect that the price of our securities may fluctuate in
response to various factors, including the factors described throughout this
section and various other factors which may be beyond our control. These factors
beyond our control could include: financial forecasts by securities analysts;
new conditions or trends in the cable or telecommunications industry; general
economic and market conditions and specifically, conditions related to the cable
or telecommunications industry; any further downgrade of our debt ratings;
announcement of the development of improved or competitive technologies; the use
of new products or promotions by us or our competitors; changes in accounting
rules; and new regulatory legislation adopted in the United States.
In addition, the securities market in general, and the market for cable
television securities in particular, have experienced significant price
fluctuations. Volatility in the market price for companies may often be
unrelated or disproportionate to the operating performance of those companies.
These broad market and industry factors may seriously harm the market price of
our subsidiaries' public notes, regardless of our operating performance. In the
past, securities litigation has often commenced following periods of volatility
in the market price of a company's securities, and recently such purported class
action lawsuits were filed against Charter.
ECONOMIC SLOWDOWN; GLOBAL CONFLICT. It is difficult to assess the impact that
the general economic slowdown and global conflict will have on future
operations. However, the economic slowdown has resulted and the slowdown and the
war could continue to result in reduced spending by customers and advertisers,
which could reduce our revenues and operating cash flow, and also could affect
our ability to collect accounts receivable and maintain customers. In addition,
any prolonged military conflict would materially and adversely affect our
revenues from our systems providing services to military installations. If we
experience reduced operating revenues, it could negatively affect our ability to
make expected capital expenditures and could also result in our inability to
meet our obligations under our financing agreements. These developments could
also have a negative impact on our financing and variable interest rate
agreements through disruptions in the market or negative market conditions.
LONG-TERM INDEBTEDNESS -- CHANGE OF CONTROL PAYMENTS. We may not have the
ability to raise the funds necessary to fulfill our obligations under our public
notes and the public notes and credit facilities of our subsidiaries following a
change of control. A change of control under our public notes and our
subsidiaries' credit facilities and indentures governing their public notes
would require the repayment of borrowings under those credit facilities and
indentures. A failure by us or our subsidiaries to make a change of control
offer or to repurchase the amounts outstanding under their credit facilities
would place us or them in default of these agreements.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level, including rate regulation of basic service and
equipment and municipal approval of franchise agreements and their terms, such
as franchise requirements to upgrade cable plant and meet specified customer
service standards. Cable operators also face significant regulation of their
channel carriage. They currently can be required to devote substantial capacity
to the carriage of programming that they would not carry voluntarily, including
certain local broadcast signals, local public, educational and government access
programming, and unaffiliated commercial leased access programming. This
carriage burden could increase in the future, particularly if the Federal
Communications Commission were to require cable systems to carry both the analog
and digital versions of local broadcast signals or multiple channels added by
digital broadcasters. The Federal Communications Commission 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. In addition, the carriage of new high-definition broadcast and
satellite programming services over the next few years may consume significant
amounts of system capacity without contributing to proportionate increases in
system revenue.
37
There is also uncertainty whether local franchising authorities, state
regulators, the Federal Communications Commission, or the U.S. Congress will
impose obligations on cable operators to provide unaffiliated Internet service
providers with regulated access to cable plant. 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. Multiple federal courts have now struck down open-access
requirements imposed by several different franchising authorities as unlawful.
In March 2002, the Federal Communications Commission officially classified
cable's provision of high-speed Internet service in a manner that makes open
access requirements unlikely. At the same time, the Federal Communications
Commission initiated a rulemaking proceeding that leaves open the possibility
that the Commission may assert regulatory control in the future. As we offer
other advanced services over our cable system, we are likely to face additional
calls for regulation of our capacity and operation. These regulations, if
adopted, could adversely affect our operations.
The Federal Communications Commission's March 2002 ruling also held that
Internet access service provided by cable operators was not subject to franchise
fees assessed by local franchising authorities. A number of local franchise
authorities and Internet service providers have appealed this decision. The
matter is scheduled to be argued in May 2003. As a result of this ruling, we
have stopped collecting franchise fees for cable modem service.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No material changes in reported market risks have occurred since the filing of
our December 31, 2002 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Within 90 days prior to the filing date of this report, management, including
our Chief Executive Officer and interim Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with respect to the information generated for use in this Quarterly
Report. The evaluation was based in part upon reports and affidavits provided by
a number of executives. Based upon, and as of the date of that evaluation, our
Chief Executive Officer and interim Chief Financial Officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
In designing and evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance of
achieving the desired control objectives and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based upon the above evaluation, our management
believes that its controls do provide such reasonable assurances.
38
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
SECURITIES CLASS ACTIONS AND DERIVATIVE SUITS.
Fourteen putative federal class action lawsuits (the "Federal Class Actions")
have been filed against Charter and certain of its former and present officers
and directors in various jurisdictions allegedly on behalf of all purchasers of
Charter's securities during the period from either November 8 or November 9,
1999 through July 17 or July 18, 2002. Unspecified damages are sought by the
plaintiffs. In general, the lawsuits allege that Charter utilized misleading
accounting practices and failed to disclose these accounting practices and/or
issued false and misleading financial statements and press releases concerning
Charter's operations and prospects.
The Federal Class Actions consist of:
In the United States District Court for the Eastern District of Missouri:
- Carmen Rodriguez, on behalf of herself and all others similarly
situated, v. Charter Communications, Inc., Jerald L. Kent, Carl E.
Vogel and Kent D. Kalkwarf, filed on August 5, 2002;
- Andrew Budman and Krupa Budman, together and on behalf of all others
similarly situated, v. Charter Communications, Inc., Paul G. Allen,
Jerald L. Kent and Carl Vogel, filed on August 7, 2002;
- Jill D. Martin, on behalf of herself and all others similarly
situated, v. Charter Communications, Inc., Jerald L. Kent, Carl E.
Vogel and Kent D. Kalkwarf, filed on August 9, 2002;
- James L. Gessford, on behalf of himself and all others similarly
situated, v. Charter Communications, Inc., Jerald L. Kent, Carl E.
Vogel and Kent D. Kalkwarf, filed on August 13, 2002;
- Lee Posner, on behalf of himself and all others similarly situated,
v. Charter Communications, Inc., Carl E. Vogel and Kent Kalkwarf,
filed on September 9, 2002;
- Laurence Balfus, on behalf of himself and all others similarly
situated, v. Charter Communications, Inc., Paul Allen, Jerald L.
Kent, Carl E. Vogel and Kent Kalkwarf, filed on September 12, 2002;
- John Dortch, on behalf of himself and all others similarly situated,
v. Charter Communications, Inc., Jerald L. Kent, Carl E. Vogel and
Kent D. Kalkwarf, filed on September 12, 2002; and
- StoneRidge Investment Partners LLC, by itself and on behalf of all
others similarly situated, v. Charter Communications, Inc., Paul G.
Allen, Jerald L. Kent, Carl E. Vogel and Kent Kalkwarf, filed on
September 30, 2002
- In the United States District Court for the Central District of
California
- Mytien Ngo, individually and on behalf of all others similarly
situated, v. Charter Communications, Inc., Carl E. Vogel and Kent
Kalkwarf, filed on July 31, 2002;
- David Birnbaum, individually and on behalf of all others similarly
situated, v. Charter Communications, Inc., Carl E. Vogel and Kent
Kalkwarf, filed on August 6, 2002;
- Fred B. Storey, individually and on behalf of all others similarly
situated, v. Charter Communications, Inc., Carl E. Vogel and Kent
Kalkwarf, filed on August 12, 2002; and
39
- Patricia Morrow, individually and on behalf of all others similarly
situated, v. Charter Communications, Inc., Carl E. Vogel and Kent
Kalkwarf, filed on August 13, 2002
In the United States District Court for the Southern District of Illinois
- George Pike, for himself and on behalf of all others similarly
situated, v. Charter Communications, Inc., Paul G. Allen, Jerald L.
Kent and Carl E. Vogel, filed on August 15, 2002
In the United States District Court for the District of Columbia
- Evelyn Gadol, individually and on behalf of all others similarly
situated, v. Charter Communications, Inc., Carl E. Vogel and Kent
Kalkwarf, filed on August 27, 2002
In October 2002, Charter filed a motion with the Judicial Panel on Multidistrict
Litigation (the "Panel") to transfer the Federal Class Actions to the Eastern
District of Missouri. On March 12, 2003, the Panel transferred the six Federal
Class Actions not filed in the Eastern District of Missouri to that district for
coordinated or consolidated pretrial proceedings with the eight Federal Class
Actions already pending there. The Panel's transfer order assigned the Federal
Class Actions to Judge Charles A. Shaw. By virtue of a prior court order,
StoneRidge Investment Partners LLC became lead plaintiff upon entry of the
Panel's transfer order. Charter has received a consolidated complaint from the
lead plaintiff which includes as defendants several former and present officers
of Charter, as well as its and our former outside auditors and a vendor/supplier
of digital set-top terminals. The court has not yet permitted the filing of this
consolidated complaint. No response from Charter will be due until after the
consolidated complaint has been filed.
On September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in Missouri state court against Charter and its current
directors, as well as its former auditors. A substantively identical derivative
action was later filed and consolidated into the State Derivative Action. The
plaintiffs allege that the individual defendants breached their fiduciary duties
by failing to establish and maintain adequate internal controls and procedures.
Unspecified damages, allegedly on our behalf, are sought by the plaintiffs.
The State Derivative Action is entitled:
- Kenneth Stacey, Derivatively on behalf of Nominal Defendant Charter
Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B.
Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E.
Vogel, Larry W. Wangberg, and Charter Communications, Inc.
Separately, on February 12, 2003, a shareholders derivative suit (the "Federal
Derivative Action"), was filed against Charter and its current directors in the
United States District Court for the Eastern District of Missouri. The plaintiff
alleges that the individual defendants breached their fiduciary duties and
grossly mismanaged Charter by failing to establish and maintain adequate
internal controls and procedures. Unspecified damages, allegedly on Charter's
behalf, are sought by the plaintiffs.
The Federal Derivative Action is entitled:
- Arthur Cohn, Derivatively on behalf of Nominal Defendant Charter
Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B.
Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E.
Vogel, Larry W. Wangberg, and Charter Communications, Inc.
In addition to the Federal Class Actions, the State Derivative Action and the
Federal Derivative Action, six putative class action lawsuits have been filed
against Charter and certain of its current directors and officers in the Court
of Chancery of the State of Delaware (the "Delaware Class Actions"). The
Delaware Class Actions are substantively identical and generally allege that the
defendants breached their fiduciary duties by participating or acquiescing in a
purported and threatened attempt by Defendant Paul Allen to purchase shares and
assets of Charter at an unfair price. The lawsuits were brought on behalf of
Charter's
40
securities holders as of July 29, 2002, and seek unspecified damages and
possible injunctive relief. No such purported or threatened transaction by Mr.
Allen has been presented.
The Delaware Class Actions consist of:
- Eleanor Leonard, v. Paul G. Allen, Larry W. Wangberg, John H. Tory,
Carl E. Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L.
Nelson, William Savoy, and Charter Communications, Inc., filed on
August 12, 2002;
- Helene Giarraputo, on behalf of herself and all others similarly
situated, v. Paul G. Allen, Carl E. Vogel, Marc B. Nathanson, Ronald
L. Nelson, Nancy B. Peretsman, William Savoy, John H. Tory, Larry W.
Wangberg, and Charter Communications, Inc., filed on August 13,
2002;
- Ronald D. Wells, Whitney Counsil and Manny Varghese, on behalf of
themselves and all others similarly situated, v. Charter
Communications, Inc., Ronald L. Nelson, Paul G. Allen, Marc B.
Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl E.
Vogel, Larry W. Wangberg, filed on August 13, 2002;
- Gilbert Herman, on behalf of himself and all others similarly
situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E.
Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson,
William Savoy, and Charter Communications, Inc., filed on August 14,
2002;
- Stephen Noteboom, on behalf of himself and all others similarly
situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E.
Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson,
William Savoy, and Charter Communications, Inc., filed on August 16,
2002; and
- John Fillmore on behalf of himself and all others similarly
situated, v. Paul G. Allen, Larry W. Wangberg, John H. Tory, Carl E.
Vogel, Marc B. Nathanson, Nancy B. Peretsman, Ronald L. Nelson,
William Savoy, and Charter Communications, Inc., filed on October
18, 2002.
All of the lawsuits discussed above are each in preliminary stages, and no
dispositive motions or other responses to any of the complaints have been filed.
Charter has advised us that it intends to vigorously defend the lawsuits.
GOVERNMENT INVESTIGATIONS. In August of 2002, Charter became aware of a grand
jury investigation being conducted by the United States Attorney's Office for
the Eastern District of Missouri into certain of its accounting and reporting
practices, focusing on how Charter reported customer numbers, refunds that
Charter sought from programmers and its reporting of amounts received from
digital set-top terminal suppliers for advertising. We have been advised by the
U.S. Attorney's Office that no member of the Board of Directors, including our
Chief Executive Officer, is a target of the investigation. Charter has advised
us that it is fully cooperating with the investigation.
On November 4, 2002, Charter received an informal, non-public inquiry from the
Staff of the Securities and Exchange Commission. The SEC has subsequently issued
a formal order of investigation dated January 23, 2003, and subsequent document
and testimony subpoenas. The investigation and subpoenas generally concern
Charter's prior reports with respect to its determination of the number of
customers, and various of its accounting policies and practices including its
capitalization of certain expenses and dealings with certain vendors, including
programmers and digital set-top terminal suppliers. Charter has advised us that
it is actively cooperating with the SEC Staff.
OUTCOME. Charter is unable to predict the outcome of the lawsuits and the
government investigations described above. An unfavorable outcome in the
lawsuits or the government investigations described above could have a material
adverse effect on its results of operations and financial condition.
INDEMNIFICATION. Charter is generally required to indemnify each of the named
individual defendants in connection with these matters pursuant to the terms of
its Bylaws and (where applicable) such individual defendants'
41
employment agreements. Pursuant to the terms of certain employment agreements
and in accordance with the Bylaws of Charter, in connection with the pending
grand jury investigation, SEC investigation and the above described lawsuits,
Charter's current directors and its current and former officers have been
advanced certain costs and expenses incurred in connection with their defense.
To the extent that the foregoing matters are not covered by insurance, the
limited liability company agreements of Charter Holdings and its limited
liability company subsidiaries, and the bylaws of its corporate subsidiaries,
may require Charter Holdings or its subsidiaries, respectively, to indemnify
Charter and the individual named defendants in connection with such matters.
Furthermore, the management agreements with Charter Communications Operating, CC
VI, CC VII and CC VIII contain indemnification provisions with respect to
management services not constituting gross negligence or willful misconduct.
INSURANCE. Charter has directors' and officers' liability insurance coverage
that it believes is available for these matters, where applicable, and subject
to the terms, conditions and limitations of the respective policies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
Exhibit Number Description of Document
Exhibit Number Description of Document
- -------------- -----------------------
3.1(a) Certificate of Formation of Charter Communications Holdings,
LLC (Incorporated by reference to Exhibit 3.1 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 Amended and Restated Limited Liability Company Agreement of
Charter Communications Holdings, LLC, dated as of October 30,
2001. (Incorporated by reference to Exhibit 3.2 to the annual
report on Form 10-K filed by Charter Communications Holding
Company on March 29, 2002 (File No. 333-77499)).
3.3 Certificate of Incorporation of Charter Communications
Holdings Capital Corporation (Incorporated by reference to
Exhibit 3.3 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)).
3.4(a) By-Laws of Charter Communications Holdings Capital Corporation
(Incorporated by reference to Exhibit 3.4 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)).
3.4(b) Amendment to By-Laws of Charter Communications Holdings
Capital Corporation, dated as of October 30, 2001.
(Incorporated by reference to Exhibit 3.4(b) to the annual
report on Form 10-K filed by Charter Communications Holding
Company on March 29, 2002 (File No. 333-77499)).
15.1 Letter re Unaudited Interim Financial Statements. *
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer). *
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer). *
* filed herewith
(B) REPORTS ON FORM 8-K
None.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation have duly caused this Quarterly Report to be signed
on their behalf by the undersigned, thereunto duly authorized.
CHARTER COMMUNICATIONS HOLDINGS, LLC
Registrant
By: CHARTER COMMUNICATIONS, INC., Sole Manager
Dated: May 15, 2003 By: /s/ STEVEN A. SCHUMM
-----------------------------------------
Name: Steven A. Schumm
Title: Executive Vice President and
Chief Administrative Officer and
Interim Chief Financial Officer
(Principal Financial Officer)
By: /s/ PAUL E. MARTIN
-----------------------------------------
Name: Paul E. Martin
Title: Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
Registrant
Dated: May 15, 2003 By: /s/ STEVEN A. SCHUMM
-----------------------------------------
Name: Steven A. Schumm
Title: Executive Vice President and
Chief Administrative Officer and
Interim Chief Financial Officer
(Principal Financial Officer)
By: /s/ PAUL E. MARTIN
-----------------------------------------
Name: Paul E. Martin
Title: Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
43
CERTIFICATIONS
I, Carl E. Vogel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants' other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrants, including their
consolidated subsidiaries, are made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrants' disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrants' other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants' auditors and the audit
committee of registrants' board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants' ability to
record, process, summarize and report financial data and have
identified for the registrants' auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrants' other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Carl E. Vogel
- -----------------------
Carl E. Vogel
Chief Executive Officer
44
I, Steven A Schumm, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants' other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrants and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrants, including their
consolidated subsidiaries, are made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrants' disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrants' other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants' auditors and the audit
committee of registrants' board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants' ability to
record, process, summarize and report financial data and have
identified for the registrants' auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrants' other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Steven A. Schumm
- --------------------------------
Steven A. Schumm
Chief Administrative Officer and
interim Chief Financial Officer
45