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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to .
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Commission File Numbers:
333-75415
333-75415-03
CC V HOLDINGS, LLC*
CC V HOLDINGS FINANCE, INC.*
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(Exact names of registrants as specified in their charters)
DELAWARE 13-4029965
DELAWARE 13-4029969
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12405 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
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(Address of principal executive offices) (Zip Code)
(314) 965-0555
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(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date:
All of the issued and outstanding shares of capital stock of CC V
Holdings Finance, Inc. are held by CC V Holdings, LLC. All of the
limited liability company membership interests of CC V Holdings, LLC
are held by CCO NR Holdings, LLC, an indirect subsidiary of Charter
Communications Holdings, LLC which is a reporting company under the
Exchange Act. There is no public trading market for any of the
aforementioned limited liability company membership interests or shares
of capital stock.
*CC V Holdings, LLC and CC V Holdings Finance, Inc. meet the conditions set
forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and are therefore
filing this Form with the reduced disclosure format.
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CC V HOLDINGS, LLC
CC V HOLDINGS FINANCE, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PAGE
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - CC V Holdings, LLC and Subsidiaries 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 34
EXHIBIT INDEX 35
Note: Separate financial statements of CC V Holdings Finance, Inc. have not been
presented as this entity had no operations and substantially no assets or equity
during the periods reported. Accordingly, management has determined that such
financial statements are not material.
This Quarterly Report on Form 10-Q is for the three and nine months ended
September 30, 2003. This Quarterly Report modifies and supersedes documents
filed prior to this Quarterly Report. The SEC allows the Company to "incorporate
by reference" information that the Company files with it, which means that the
Company can disclose important information to you by referring you directly to
those documents. Information incorporated by reference is considered to be part
of this Quarterly Report. In addition, information that the Company files with
the SEC in the future will automatically update and supersede information
contained in this Quarterly Report. In this Quarterly Report, the "Company"
refers to of CC V Holdings, LLC and all of its wholly-owned subsidiaries, unless
the context requires otherwise.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the "Results of Operations" and
"Liquidity and Capital Resources" sections under Part I, Item 2 ("Management's
Discussion and Analysis of Financial Condition and Results of Operations") in
this Quarterly Report. Although we believe that our plans, intentions and
expectations reflected in or suggested by these forward-looking statements are
reasonable, we cannot assure you that we will achieve or realize these plans,
intentions or expectations. Forward-looking statements are inherently subject to
risks, uncertainties and assumptions including, without limitation, the factors
described under "Certain Trends and Uncertainties" under Part I, Item 2
("Management's Discussion and Analysis of Financial Condition and Results of
Operations") in this Quarterly Report. Many of the forward-looking statements
contained in this Quarterly Report may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "will," "may," "intend," "estimated" and "potential," among others.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this Quarterly Report are set forth in
this Quarterly Report and in other reports or documents that we file from time
to time with the 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, our parent companies and our subsidiaries' ability to comply with
all covenants in our indenture and our subsidiary's credit facilities,
any violation of which would result in a violation of the indenture or
the applicable facility and could trigger a default of other
obligations of our affiliates under cross default provisions;
- our, our parent companies' and our subsidiaries' ability to refinance
remaining debt as it becomes due;
- availability of funds to meet interest payment obligations under our
and our parents and subsidiary companies' debt and to fund our
operations and necessary capital expenditures, either through cash
flows from operating activities, further borrowings or other sources;
- any adverse consequences arising out of our prior restatement of the
financial statements described herein;
- the results of the pending grand jury investigation by the United
States Attorney's Office for the Eastern District of Missouri, the
pending SEC Division of Enforcement investigation and the putative
class action and derivative shareholders litigation against Charter
Communications, Inc., our indirect parent;
- our ability to obtain programming at reasonable prices or pass cost
increases on to our customers;
- general business conditions, economic uncertainty or slowdown; and
- the effects of governmental regulation, including but not limited to
local franchise taxing authorities, 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 undertake no duty or obligation to update any of the forward-looking
statements after the date of this Quarterly Report.
3
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
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(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,787 $ 50,069
Accounts receivable, less allowance for doubtful accounts of $1,975 and
$1,949, respectively 9,946 9,637
Prepaid expenses and other current assets 1,558 1,549
---------- ----------
Total current assets 20,291 61,255
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INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated depreciation of
$350,146 and $233,224, respectively 850,888 917,853
Franchises, net of accumulated amortization of $470,025 and $468,320,
respectively 2,124,588 2,126,293
---------- ----------
Total investment in cable properties, net 2,975,476 3,044,146
---------- ----------
OTHER NONCURRENT ASSETS 7,000 8,311
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Total assets $3,002,767 $3,113,712
========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 105,213 $ 139,112
Payables to manager of cable systems - related parties 891 36,281
---------- ----------
Total current liabilities 106,104 175,393
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LONG-TERM DEBT 1,277,057 1,329,844
OTHER LONG-TERM LIABILITIES 135,350 137,967
MINORITY INTEREST 678,089 667,961
MEMBER'S EQUITY 806,167 802,547
---------- ----------
Total liabilities and member's equity $3,002,767 $3,113,712
========== ==========
See accompanying notes to the condensed consolidated financial statements.
4
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
(RESTATED) (RESTATED)
REVENUES $ 168,378 $ 155,955 $ 495,717 $ 443,960
--------- --------- --------- ---------
COSTS AND EXPENSES:
Operating (excluding depreciation and amortization and
other items listed below) 63,474 55,253 188,632 166,216
Selling, general and administrative 31,055 28,919 92,732 90,481
Depreciation and amortization 39,184 36,324 126,824 103,961
Option compensation expense, net 40 -- 50 --
Special charges, net 207 -- 370 --
--------- --------- --------- ---------
133,960 120,496 408,608 360,658
--------- --------- --------- ---------
Income from operations 34,418 35,459 87,109 83,302
--------- --------- --------- ---------
OTHER INCOME AND EXPENSE:
Interest expense, net (22,078) (22,891) (68,394) (65,578)
Gain (loss) on derivative instruments and hedging
activities, net 6,007 (23,983) 2,312 (34,502)
Other, net -- (361) -- (343)
--------- --------- --------- ---------
(16,071) (47,235) (66,082) (100,423)
--------- --------- --------- ---------
Income (loss) before minority interest, income taxes
and cumulative effect of accounting change 18,347 (11,776) 21,027 (17,121)
MINORITY INTEREST (3,504) (3,301) (10,128) (9,796)
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of accounting change 14,843 (15,077) 10,899 (26,917)
--------- --------- --------- ---------
INCOME TAX BENEFIT (EXPENSE) (484) 1,032 (1,344) 2,123
--------- --------- --------- ---------
Income (loss) before cumulative effect of accounting
change 14,359 (14,045) 9,555 (24,794)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX -- -- -- (414,756)
--------- --------- --------- ---------
Net income (loss) $ 14,359 $ (14,045) $ 9,555 $(439,550)
========= ========= ========= =========
See accompanying notes to the condensed consolidated financial statements.
5
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
--------- ----------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,555 $(439,550)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities:
Depreciation and amortization 126,824 103,961
Minority interest 10,128 9,796
Noncash interest expense 14,978 13,380
(Gain) loss on derivative instruments and hedging instruments (2,312) 34,502
Deferred income taxes 1,344 (2,123)
Stock compensation expense 50 --
Cumulative effect of accounting change -- 414,756
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable (309) (949)
Prepaid expenses and other assets (291) 3,058
Accounts payable, accrued expenses and other (32,219) (33,490)
Payables to manager of cable systems - related party (39,403) (17,794)
--------- ---------
Net cash flows from operating activities 88,345 85,547
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (48,398) (185,994)
Change in accounts payable and accrued expenses related to capital expenditures (8,670) (11,095)
Other -- (55)
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Net cash flows from investing activities (57,068) (197,144)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 80,000 315,000
Repayments of long-term debt (146,559) (206,506)
Borrowings from related party -- 38,060
Repayments to related party -- (65,060)
Payment of deferred financing costs -- (3,704)
Contributions from manager - related party -- 108,967
Distributions to manager - related party (6,000) (15,000)
--------- ---------
Net cash flows from financing activities (72,559) 171,757
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (41,282) 60,160
CASH AND CASH EQUIVALENTS, beginning of period 50,069 --
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 8,787 $ 60,160
========= =========
CASH PAID FOR INTEREST $ 52,231 $ 52,199
========= =========
See accompanying notes to the condensed consolidated financial statements.
6
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of CC V Holdings,
LLC include the accounts of CC V Holdings, LLC and all of its wholly-owned
subsidiaries (collectively, the Company). In June and July of 2003, the Company
was part of a reorganizational restructuring of its parent company. As part of
the reorganization, Charter Communications Holdings LLC (Charter Holdings), the
Company's direct parent prior to the reorganization, formed CCH II, LLC (CCH
II). Charter Holdings then contributed all of its equity interests in all of its
subsidiaries (except Charter Communications Capital Corporation and Charter
Communications Operating, LLC), including the Company, to a newly-formed
subsidiary (CCO NR Holdings, LLC), and then contributed CCO NR Holdings, LLC to
Charter Communications Operating, LLC. Charter Communications Operating, LLC was
then contributed to a newly-formed parent (CCO Holdings, LLC), which was then
contributed to CCH II. Thereafter, CCH I, LLC (CCH I) was formed as a new
subsidiary of Charter Holdings, and Charter Holdings contributed its interest in
CCH II to CCH I. These companies along with Charter Communications, Inc.
(Charter), Charter Holdings' indirect parent and the Company's manager, are
collectively referred to herein as the "Parent Companies".
As of September 30, 2003, the Company owns and operates cable systems serving
approximately 941,500 customers. The Company owns and operates cable systems
that provide a full range of video, data and other advanced broadband services.
The Company also provides commercial high-speed data and video services and
sells advertising and production services. The Company operates primarily in the
states of Michigan, Minnesota and Wisconsin and in the New England area.
The accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures typically included in the Company's Annual Report on Form
10-K have been condensed or omitted for this Quarterly Report. The accompanying
condensed consolidated financial statements are unaudited and are subject to
review by regulatory authorities. However, in the opinion of management, such
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 and franchises, 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.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company has achieved net income of $14 million and $10 million for the three
and nine months ended September 30, 2003, respectively, and has incurred net
losses of $14 million and $440 million for the three and nine months ended
September 30, 2002, respectively. The Company's net cash flows from operating
activities were $88 million and $86 million for the nine months ended September
30, 2003 and 2002, respectively. The Company has historically required
significant cash to fund capital expenditures and debt service costs.
Historically, the Company has funded these requirements through cash flows from
operating activities, borrowings under the credit facilities of the Company's
subsidiary, equity contributions from Charter Holdings, borrowings from related
parties and cash on hand. The mix of funding sources changes from period to
period, but for the nine months ended September 30, 2003, approximately 68% of
the Company's capital funding requirements were from cash flows from operating
activities and 32% was from cash on hand.
7
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
The Company expects that cash on hand, cash flows from operating activities and
the funds available under its subsidiary's credit facilities will be adequate to
meet its 2003 cash needs. As of September 30, 2003, the Company held $9 million
in cash and cash equivalents and it had total potential unused availability of
$328 million under the CC VIII Operating credit facilities, $317 million of
which was available based upon the Company's financial covenants at that time.
However, continued access to these credit facilities is 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 covenants, or if other events of
noncompliance occur, funding under the credit facilities may not be available
and defaults on some or potentially all debt obligations could occur.
The Company's long-term financing structure as of September 30, 2003 includes
$1.1 billion of credit facility debt and $177 million of high-yield debt.
Approximately $86 million of this financing matures during 2003 and the Company
expects to fund this through availability under its credit facilities. Note 6
discusses the Company's current availability and long-term obligations.
3. 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 condensed consolidated financial statements and reduced revenues
for the three and nine months ended September 30, 2002 by $3 million and $9
million, respectively. The Company's consolidated net loss decreased by $14
million and increased by $354 million for the three and nine months ended
September 30, 2002, respectively. In addition, as a result of certain of these
adjustments, the Company's statement of cash flows for the nine months ended
September 30, 2002 has been restated. Cash flows from operating activities for
the nine months ended September 30, 2002 were decreased by $4 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 revenues by $2
million and $4 million for the three and nine months ended September 30, 2002,
respectively. The corresponding amortization of such deferred amounts reduced
programming expenses by $2 million and $5 million for the three and nine months
ended September 30, 2002, respectively.
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 $213 and $874 for the three and nine
months ended September 30, 2002, respectively. 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 $2 million and $4 million for the
three and nine months ended September 30, 2002, respectively.
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 $3 million and $6 million for the three and nine months ended September
30, 2002, respectively. The Company discontinued this program in the third
quarter of 2002 as
8
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
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, Charter initiated a three-year
program to replace and upgrade a substantial portion of its network, which
included a substantial portion of the Company's 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 a portion 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 $54 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 $20 million and $64 million for the
three and nine months ended September 30, 2002, respectively.
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 $254 million with a corresponding increase in deferred tax liabilities
of $39 million. The balance of the entry was recorded to member's equity. 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 approximately $54 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 on January 1, 2002 by
$93 million.
Other Adjustments. In addition to the items described above, other adjustments
of expenses include 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 and $5 million for the three and nine
months ended September 30, 2002, respectively.
The following tables summarize the effects of the adjustments on the condensed
consolidated statements of operations and cash flows for the three and nine
months ended September 30, 2002.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------------------- -------------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
---------- ---------- ---------- ----------
Revenues $ 159,350 $ 155,955 $ 452,844 $ 443,960
Income from operations 22,375 35,459 27,342 83,302
Minority interest (3,301) (3,301) (9,796) (9,796)
Cumulative effect of accounting change, net of tax -- -- (3,813) (414,756)
Net loss (27,935) (14,045) (85,767) (439,550)
9
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30, 2002
--------------------------------
AS PREVIOUSLY
REPORTED RESTATED
-------------- ----------
Net cash flows from operating activities $ 89,469 $ 85,547
Net cash flows from investing activities (201,066) (197,144)
Net cash flows from financing activities 171,757 171,757
4. FRANCHISES
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 $415 million (net of $3 million of tax benefit). SFAS
No. 142 does not permit the recognition of the customer relationship asset not
previously recognized. Accordingly, the impairment included approximately $324
million 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 following table presents the Company's indefinite-lived and finite-lived
intangible assets as of September 30, 2003 and December 31, 2002 (dollars in
thousands):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------------------------------------- --------------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
---------- ------------ ---------- ---------- ------------ ----------
Franchises with
indefinite lives $2,568,685 $ 462,879 $2,105,806 $2,568,685 $ 462,879 $2,105,806
Franchises with
finite lives $ 25,928 $ 7,146 $ 18,782 $ 25,928 $ 5,441 $ 20,487
Franchise amortization expense for each of the nine months ended September 30,
2003 and 2002 was $2 million, which represents the amortization relating to
franchises that did not qualify for indefinite-life treatment under SFAS No.
142, including costs associated with franchise renewals. For each of the next
five years, amortization expense relating to these franchises is expected to be
approximately $2 million. Actual amortization expense to be reported in future
periods could differ from these estimates as a result of new intangible asset
acquisitions, changes in useful lives and other relevant factors.
10
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of the dates
presented:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Accounts payable $ 9,792 $ 21,881
Capital expenditures 4,636 13,306
Accrued interest 12,957 11,244
Programming costs 35,268 37,536
Accrued general and administrative 8,403 18,566
State sales tax 8,127 8,672
Other accrued expenses 26,030 27,907
-------- --------
$105,213 $139,112
======== ========
6. LONG-TERM DEBT
Long-term debt consists of the following as of the dates presented (dollars in
thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
CC VIII Operating credit facilities $ 1,100,451 $ 1,166,000
CC V Holdings senior discount notes 179,750 179,750
Other -- 1,004
----------- -----------
1,280,201 1,346,754
Less: unamortized net discount (3,144) (16,910)
----------- -----------
$ 1,277,057 $ 1,329,844
=========== ===========
As of September 30, 2003, outstanding borrowings were $1.1 billion under the CC
VIII Operating credit facilities, and unused total potential availability was
$328 million, $317 million of which would have been available based on financial
covenants as of September 30, 2003.
7. COMPREHENSIVE LOSS
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, in accumulated other comprehensive loss. Comprehensive income for
the three and nine months ended September 30, 2003 was $17 million and $10
million, respectively. Comprehensive loss for the three and nine months ended
September 30, 2002 was $25 million and $455 million, respectively.
8. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses interest rate risk management derivative instruments, such as
interest rate swap agreements (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.
11
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
The Company does not hold or issue derivative instruments for trading purposes.
The Company does, however, have certain interest rate derivative instruments
that have been designated as cash flow hedging instruments. Such instruments are
those that effectively convert variable interest payments on certain debt
instruments into fixed payments. For qualifying hedges, SFAS No. 133 allows
derivative gains and losses to offset related results on hedged items in the
consolidated statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that receive hedge
accounting. For the three months ended September 30, 2003 and 2002, other
expense includes gains of $332 and $474, respectively, and for the nine months
ended September 30, 2003 and 2002, other expenses includes gains of $470 and
losses of $872, 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
September 30, 2003 and 2002, a gain of $3 million and a loss of $11 million,
respectively, and for the nine months ended September 30, 2003 and 2002, a gain
of $20 and a loss of $15 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 September 30,
2003 and 2002, the Company recorded other income of $6 million and other expense
of $24 million, respectively, and for the nine months ended September 30, 2003
and 2002, recorded other income of $2 million and other expense of $34 million,
respectively, for interest rate derivative instruments not designated as hedges.
As of September 30, 2003 and December 31, 2002, the Company had outstanding $700
million in notional amounts of interest rate swaps. 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.
The Company does not hold collateral for these instruments and is 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.
9. SPECIAL CHARGES
In the fourth quarter of 2002, the Company recorded a special charge of $3
million for severance costs associated with its workforce reduction program and
the consolidation of its operations, elimination of redundant practices and
streamlining its management structure. The Company intended to terminate
approximately 138 employees, of which 19 employees were terminated in the fourth
quarter of 2002. In total, approximately 9 and 157 employees were terminated
during the three and nine months ended September 30, 2003, respectively.
Severance payments are made over a period of up to twelve months with
approximately $1 million and $2 million paid during the three and nine months
ended September 30, 2003, respectively. As of September 30, 2003 and December
31, 2002, a liability of approximately $1 million and $3 million, respectively,
is recorded on the accompanying condensed consolidated balance sheet related to
the realignment activities. In addition, for the nine months ended September 30,
2003, a $0.3 million settlement was received related to the transition of data
customers in 2001 from the Internet service provider Excite@Home to our Charter
Pipeline service which was recorded in special charges.
10. 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
12
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
to income tax.
As of September 30, 2003 and December 31, 2002, the Company has net deferred
income tax liabilities of approximately $18 million. These relate to certain of
the Company's indirect subsidiaries, which file separate income tax returns.
During the three months ended September 30, 2003 and 2002, the Company recorded
$484 of income tax expense and $1 million of income tax benefit, respectively.
During the nine months ended September 30, 2003 and 2002, the Company recorded
$1.3 million of income tax expense and $2.1 million of income tax benefit,
respectively. The income tax expense recorded for the three and nine months
ended September 30, 2003 is the result of federal and state income taxes payable
of certain of the Company's indirect subsidiaries. The income tax benefit
recorded for the three and nine months ended September 30, 2002 was the result
of changes in deferred taxes related to the differences in accounting for
franchises.
The Company is currently under examination by the Internal Revenue Service for
the tax years ending December 31, 2000 and 1999. 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.
11. CONTINGENCIES
Fourteen putative federal class action lawsuits (the "Federal Class Actions")
have been filed against Charter, the Company's manager and indirect parent, and
certain of Charter's 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.
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. StoneRidge subsequently filed a Consolidated Amended
Complaint. The Court subsequently consolidated the Federal Class Actions for
pretrial purposes. On June 19, 2003, following a pretrial conference with the
parties, the Court issued a Case Management Order setting forth a schedule for
the pretrial phase of the consolidated class action. Motions to dismiss the
Consolidated Amended Complaint have been filed.
On September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in Missouri state court against Charter and its then 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 then 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 then 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
13
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
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. 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 the lawsuits.
In August 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 and its reporting of amounts received from
digital set-top terminal suppliers for advertising. The U.S. Attorney's Office
has publicly stated that Charter is not currently a target of the investigation.
Charter has also been advised by the U.S. Attorney's Office that no member of
its board of directors, including its Chief Executive Officer, is a target of
the investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated subscriber account numbers. On July 25, 2003,
one of the former officers who was indicted entered a guilty plea. 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 fully cooperating with the SEC Staff.
Charter has advised us that it 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 and the Company'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.
In addition to the matters set forth above, Charter and the Company are 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.
12. MINORITY INTEREST - RELATED PARTY
As part of the acquisition of the cable television systems owned by Bresnan
Communications Company Limited Partnership in February 2000, CC VIII, LLC (CC
VIII), the Company's indirect limited liability company subsidiary, issued Class
A Preferred Membership Interests (collectively, the "CC VIII Interest") with a
value and an initial capital account of approximately $630 million to certain
sellers affiliated with AT&T Broadband, now owned by Comcast Corporation (the
"Comcast Sellers"). While held by the Comcast Sellers, the CC VIII Interest was
entitled to a 2% priority return on its initial capital amount and such priority
return was entitled to preferential distributions from available cash and upon
liquidation of CC VIII. While held by the Comcast Sellers, the CC VIII Interest
generally did not share in the profits and losses of CC VIII. Paul Allen granted
the Comcast Sellers the right to sell to him the CC VIII Interest for
approximately $630 million plus 4.5% interest annually from February 2000
14
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
(the "Comcast Put Right"). In April 2002, the Comcast Sellers exercised the
Comcast Put Right in full, and this transaction was consummated on June 6, 2003.
Accordingly, Mr. Allen has become the holder of the CC VIII Interest indirectly
through an affiliate. Consequently, subject to the matters referenced in the
next paragraph, Mr. Allen generally thereafter will be allocated his pro rata
share (based on the number of membership interests outstanding) of profits or
losses of CC VIII. In the event of a liquidation of CC VIII, Mr. Allen will not
be entitled to any priority distributions (except with respect to the 2%
priority return, as to which such priority will continue to accrete), and Mr.
Allen's share of any remaining distributions in liquidation will be equal to the
initial capital account of the Comcast Sellers of approximately $630 million,
increased or decreased by Mr. Allen's pro rata share of CC VIII's profits or
losses (as computed for capital account purposes) after June 6, 2003. At
September 30, 2003, Mr. Allen's CC VIII Interest was $678 million. The limited
liability company agreement of CC VIII does not provide for a mandatory
redemption of the CC VIII Interest.
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 formed a Special Committee initially comprised of Messrs. Tory,
Wangberg and Nelson to investigate and take any other appropriate action on its
behalf with respect to this matter. Charter's Board of Directors recently
appointed David Merritt to the Special Committee to take the place of Mr.
Nelson, who is no longer a director of Charter. After conducting an
investigation of the facts and circumstances relating to this matter, the
Special Committee has reached a preliminary determination that, due to a mistake
that occurred in preparing the Bresnan transaction documents, Charter should
seek the reformation of certain contractual provisions in such documents and has
notified Mr. Allen of this conclusion. The Special Committee also has
preliminarily determined that, as part of such contract reformation, Mr. Allen
should be required to contribute the CC VIII Interest to Charter Communications
Holding Company, LLC (Charter Holdco) in exchange for Charter Holdco membership
units. The Special Committee also has recommended to the Board of Directors
that, to the extent the contract reformation is achieved, the Board should
consider whether the CC VIII Interest should ultimately be held by Charter
Holdco or Charter Holdings or another entity owned directly or indirectly by
them. Mr. Allen has notified the Special Committee that he disagrees with the
Special Committee's preliminary determinations. The parties engaged in a process
of non-binding mediation to seek to resolve this matter, without success. The
Special Committee is evaluating what further actions or processes it may
undertake to resolve this dispute, which may include alternative dispute
resolution proceedings or the initiation of judicial proceedings in the Delaware
Court of Chancery.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to "Certain Trends and Uncertainties" of this section and
"Cautionary Statement Regarding Forward-Looking Statements," which describe
important factors that could cause actual results to differ from expectations
and non-historical information contained herein. In addition, this section
should be read in conjunction with the Annual Reports on Form 10-K of CC V
Holdings, LLC and subsidiaries and Charter Communications Holdings, LLC
("Charter Holdings") for the year ended December 31, 2002.
All comparisons and references in this Form 10-Q to results for the nine months
ended September 30, 2002 are to the restated results. See "Restatement of
Consolidated Financial Statements" below and Note 3 to our condensed
consolidated financial statements contained in "Item 1. Financial Statements"
for a more detailed discussion of the restatement.
As used herein, the "Company" refers to CC V Holdings, LLC and subsidiaries.
"We", "us" and "our" refer to the Company and CC V Finance, Inc., collectively.
Our "parent companies" refers collectively to CCO NR Holdings, Charter
Communications Operating, LLC (Charter Operating), CCO Holdings, LLC (CCO
Holdings), CCH II, LLC (CCH II), CCH I, LLC (CCH I), Charter Holdings and
Charter Communications, Inc. (Charter).
INTRODUCTION
We have a history of net losses. Historically our net losses were principally
attributable to the substantial interest costs we incurred because of our high
level of debt, the significant depreciation expenses that we incurred resulting
from the extensive capital investments we had made in our cable properties and
the amortization and impairment of our franchise intangibles. We expect interest
cost and depreciation expenses will remain substantial. However, with the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142, we no
longer are required to amortize indefinite-lived assets (franchises) but rather
test for impairment on an annual basis.
The first cash interest payment on our public notes was due in October 2003. We
are now required to pay interest in cash each April and October. In addition,
our outstanding public notes will mature in 2008. We expect that we will be
reliant on loans and capital contributions from our parent companies to repay
our public notes at maturity. However, there can be no assurance that our parent
companies will have sufficient liquidity to provide funds to us to satisfy this
payment when due.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
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 condensed consolidated
financial statements and reduced revenues for the three and nine months ended
September 30, 2002 by $3 million and $9 million, respectively. Our consolidated
net loss decreased by $14 million and increased by $354 million for the three
and nine months ended September 30, 2002, respectively. In addition, as a result
of certain of these adjustments, our statement of cash flows for the nine months
ended September 30, 2002 has been restated. Cash flows from operating activities
for the nine months ended September 30, 2002 decreased by $4 million. The more
significant categories of adjustments relate to the following as outlined below
(dollars in thousands, except where indicated).
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 revenues by $2
million and $4 million for the three and nine months ended September 30, 2002,
respectively. The corresponding amortization of such deferred amounts reduced
programming expenses by $2 million and $5 million for the three and nine months
ended September 30, 2002, respectively.
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
16
over the life of customer contracts. These amounts have been restated as a
reduction of revenues of $213 and $874 for the three and nine months ended
September 30, 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 $2 million and $4 million for the
three and nine months ended September 30, 2002, respectively.
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 $3 million and $6 million for the three and nine months ended September
30, 2002, respectively. 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, Charter initiated a three-year
program to replace and upgrade a substantial portion of its network, which
included a 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 a portion 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. 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 $54 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 $20 million and $64 million for the three and nine months ended September 30,
2002, respectively.
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 $254 million with a corresponding increase in deferred tax liabilities
of $39 million. The balance of the entry was recorded to member's equity. 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 $54 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 on January 1, 2002 by $93 million.
Other Adjustments. In addition to the items described above, other adjustments
of expenses include 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 and $5 million for the three and nine
months ended September 30, 2002, respectively.
The following tables summarize the effects of the adjustments on the condensed
consolidated statements of operations and cash flows for the three and nine
months ended September 30, 2002 (dollars in thousands).
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------------------ ------------------------------
AS AS
PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
---------- ---------- ----------- ---------
Revenues $ 159,350 $ 155,955 $ 452,844 $ 443,960
Income from operations 22,375 35,459 27,342 83,302
Minority interest (3,301) (3,301) (9,796) (9,796)
Cumulative effect of accounting change, net of tax -- -- (3,813) (414,756)
Net loss (27,935) (14,045) (85,767) (439,550)
17
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30, 2002
--------------------------------
AS PREVIOUSLY
REPORTED RESTATED
-------------- ----------
Net cash flows from operating activities $ 89,469 $ 85,547
Net cash flows from investing activities (201,066) (197,144)
Net cash flows from financing activities 171,757 171,757
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.
18
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
The following table summarizes amounts and the percentages of total revenues for
certain items for the periods indicated (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2003 2002
----------------- ------------------
Revenues $ 495,717 100% $ 443,960 100%
- -------- --------- --- --------- ---
Costs and expenses:
Operating (excluding depreciation and amortization and other items
listed below) 188,632 38% 166,216 38%
Selling, general and administrative 92,732 19% 90,481 20%
Depreciation and amortization 126,824 25% 103,961 23%
Option compensation expense, net 50 --% -- --%
Special charges, net 370 --% -- --%
--------- --- --------- ---
408,608 82% 360,658 81%
--------- --- --------- ---
Income from operations 87,109 18% 83,302 19%
--------- --- --------- ---
Other income and expense:
Interest expense, net (68,394) (65,578)
Gain (loss) on derivative instruments and hedging activities, net 2,312 (34,502)
Other, net -- (343)
--------- ---------
(66,082) (100,423)
--------- ---------
Income (loss) before minority interest, income taxes and
cumulative effect of accounting change 21,027 (17,121)
Minority interest (10,128) (9,796)
--------- ---------
Income (loss) before income taxes and cumulative effect of
accounting change 10,899 (26,917)
--------- ---------
Income tax benefit (expense) (1,344) 2,123
--------- ---------
Income (loss) before cumulative effect of accounting change 9,555 (24,794)
Cumulative effect of accounting change, net of tax -- (414,756)
--------- ---------
Net income (loss) $ 9,555 $(439,550)
========= =========
REVENUES. Revenues increased $51.8 million, or 12%, to $495.7 million for the
nine months ended September 30, 2003 from $444.0 million for the nine months
ended September 30, 2002. This increase is principally the result of increases
in the number of high-speed data and digital video customers as well as price
increases for video and data services, and is offset somewhat by the decline in
analog video customers. At September 30, 2003, we have 17,100 analog video
customers, 18,800 digital video customers and 16,400 high-speed data customers
that were obtained through promotional programs and are in their free service
period. These free service periods generally expire in November 2003. We believe
this strategy will reposition our services to these consumers and build a
foundation for expected increases in revenues in the future. We have instituted
specific retention programs in the fourth quarter for customers added from these
promotional offers which include offering additional incremental services such
as video-on-demand, subscription video-on-demand and increased speed and
broadband content for our high-speed data platform. Our goal is to increase
revenues by reversing our analog video customer losses, implementing limited
price increases on certain services and packages and increasing revenues from
incremental high-speed data services, digital video and commercial services to
new and existing customers.
19
In the third quarter of 2003, we changed our revenue classifications. Commercial
revenue, which was included within the video, high-speed data, and other revenue
line items on our statements of operations, is now broken out as a separate
component of revenue. Revenues by service offering are as follows (dollars in
thousands):
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
--------------------------- --------------------------- ----------------------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES CHANGE % CHANGE
-------- -------- -------- -------- -------- --------
Video $344,630 70% $327,292 74% $ 17,338 5%
High-speed data 66,975 13% 39,893 9% 27,082 68%
Advertising sales 23,524 5% 25,231 6% (1,707) (7)%
Commercial 29,516 6% 23,572 5% 5,944 25%
Other 31,072 6% 27,972 6% 3,100 11%
-------- -------- -------- -------- --------
$495,717 100% $443,960 100% $ 51,757 12%
======== ======== ======== ======== ========
Video revenues consist primarily of revenues from analog and digital video
services. Video revenues increased by $17.3 million, or 5%, to $344.6 million
for the nine months ended September 30, 2003 as compared to $327.3 million for
the nine months ended September 30, 2002. The increase was primarily due to rate
increases and the addition of digital video customers, offset somewhat by the
decline in analog video customers.
High-speed data revenues increased $27.1 million, or 68%, from $39.9 million for
the nine months ended September 30, 2002 to $67.0 million for the nine months
ended September 30, 2003. The increase was primarily due to the addition of
high-speed data customers. We increased the number of our high-speed data
customers within our existing service areas and 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 as a result of our system upgrades.
Advertising sales revenues consist primarily of revenues from commercial
advertising customers, programmers and other vendors. Advertising sales
decreased $1.7 million, or 7%, from $25.2 million for the nine months ended
September 30, 2002 to $23.5 million for the nine months ended September 30,
2003. For the nine months ended September 30, 2003 and 2002, we received $827
and $6.9 million, respectively, in advertising revenue from vendors.
Commercial revenues consist primarily of revenues from commercial analog,
digital and high-speed data services. Commercial revenues increased $5.9
million, or 25%, from $23.6 million for the nine months ended September 2002 to
$29.5 million for the nine months ended September 30, 2003 primarily due to an
increase in commercial high-speed data revenues.
Other revenues consist primarily of revenues from franchise fees, late payment
fees, customer installations, wire maintenance fees, home shopping, equipment
rental, dial-up Internet service and other miscellaneous revenues. Other
revenues increased $3.1 million, or 11%, from $28.0 million for the nine months
ended September 2002 to $31.1 million for the nine months ended September 30,
2003 primarily due to an increase in customer installation and wire maintenance
fees.
20
OPERATING EXPENSES. Operating expenses increased $22.4 million, or 13%, to
$188.6 million for the nine months ended September 30, 2003 from $166.2 million
for the nine months ended September 30, 2002. Total programming costs paid to
programmers were $125.0 million and $112.3 million, representing 31% of total
costs and expenses for the nine months ended September 30, 2003 and 2002,
respectively. Key components of operating expenses as a percentage of revenues
are as follows (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
--------------------------- --------------------------- ----------------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
-------- -------- -------- -------- -------- --------
Programming costs $124,984 25% $112,315 25% $ 12,669 11%
Advertising sales 8,940 2% 7,973 2% 967 12%
Service costs 54,708 11% 45,928 11% 8,780 19%
-------- -- -------- -- --------
$188,632 38% $166,216 38% $ 22,416 13%
======== == ======== == ========
Programming costs consist primarily of costs paid to programmers for the
provision of analog, premium and digital channels and pay-per-view programs. The
increase in programming costs of $12.7 million, or 11%, was primarily due to
price increases, particularly in sports programming, and an increased number of
channels carried on our systems and an increase in digital video customers,
partially offset by decreases in analog video customers. Programming costs were
offset by the amortization of payments received from programmers in support of
launches of new channels against programming costs of $6 million for each of the
nine months ended September 30, 2003 and 2002. Programming costs for the nine
months ended September 30, 2003 also include a $1.3 million reduction related to
changes in estimates of programmer-related disputes, which represented 1% of the
nine months programming costs.
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 from our traditional core services with
revenue from other video services, increased incremental high-speed data
revenues, advertising revenues and commercial services revenue.
Advertising sales expenses consist of costs related to traditional advertising
services, including salaries and benefits and commissions. Advertising sales
expenses increased $967 due to an increase in 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 $8.8 million, or 19%, resulted
primarily from additional activity associated with on-going infrastructure
maintenance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.3 million, or 2%, from $90.5 million for
the nine months ended September 30, 2002 to $92.7 million for the nine months
ended September 30, 2003. Key components of expense as a percentage of revenues
are as follows (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
-------------------------- -------------------------- --------------------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES CHANGE % CHANGE
------- -------- ------- -------- -------- --------
General and
administrative $80,962 16% $74,467 17% $ 6,495 9%
Marketing 11,770 3% 16,014 3% (4,244) (27)%
------- -- ------- -- -------
$92,732 19% $90,481 20% $ 2,251 2%
======= == ======= == =======
21
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 $6.5 million, or 9%, resulted
primarily from increases in customer service costs and network related expenses.
Marketing expenses decreased $4.2 million, or 27%, due to reduced promotional
activity related to our service offerings including reductions in advertising,
telemarketing and direct sales activities. However, we expect marketing expenses
to increase in subsequent quarters.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
by $22.9 million, or 22%, from $104.0 million for the nine months ended
September 30, 2002 to $126.8 million for the nine months ended September 30,
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. On January 1, 2003, we adopted SFAS No. 123
"Accounting for Stock-Based Compensation" using the prospective method under
which we 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.
Option compensation expense of $50 was recognized for the nine months ended
September 30, 2003.
SPECIAL CHARGES, NET. Special charges of $0.4 million for the nine months ended
September 30, 2003 primarily represents $0.7 million of severance and related
costs of our ongoing initiative to reduce our workforce coupled with a $0.3
million credit from a settlement from the Internet service provider Excite@Home
related to our conversion of certain high-speed data customers to Charter
Pipeline service in 2001. We expect to continue to record additional special
charges in 2003 related to the continued reorganization of our operations.
INTEREST EXPENSE, NET. Interest expense increased by $2.8 million, or 4%, to
$68.4 million for the nine months ended September 30, 2003 from $65.6 million
for the nine months ended September 30, 2002. The increase was primarily due to
an increase in our weighted average debt outstanding to $1.34 billion during the
nine months ended September 30, 2003 from $1.25 billion during the nine months
ended September 30, 2002 partially offset by a decrease in our average borrowing
rate from 6.4% during the nine months ended September 30, 2002 to 6.3% during
the nine months ended September 30, 2003.
OTHER, NET. Other expense of $343 for the nine months ended September 30, 2002
represents various miscellaneous expenses.
MINORITY INTEREST. Minority interest expense represents the 2% accretion of the
preferred membership interests in CC VIII, LLC and since June 6, 2003, the pro
rata share of the profits of CC VIII.
INCOME TAX BENEFIT (EXPENSE). Income tax expense of $1.3 million and income tax
benefit of $2.1 million for the nine months ended September 30, 2003 and 2002,
respectively, represents state income tax benefits or expense primarily related
to certain indirect corporate subsidiaries of the Company which file separate
income tax returns.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Cumulative effect of accounting change
in 2002 represents the impairment charge recorded as a result of changes in
deferred taxes related to the differences in accounting for franchises.
NET INCOME (LOSS). Net loss decreased by $449.1 million from a net loss of
$439.6 million for the nine months ended September 30, 2002 to net income of
$9.6 million for the nine months ended September 30, 2003 as a result of the
combination of factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
INTRODUCTION
This section contains a discussion of our liquidity and capital resources,
including a discussion of our cash position, sources and uses of cash, access to
debt facilities and other financing sources, historical financing activities,
cash needs, capital expenditures and outstanding debt. The first part of this
section, entitled "Overview" summarizes our outstanding debt and provides an
overview of these topics. The second 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 nine months ended September 30, 2003 and 2002. The third
22
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 the Company's subsidiary, equity contributions from our
parent companies, borrowings from related parties and cash on hand. The mix of
funding sources changes from period to period, but for the nine months ended
September 30, 2003, approximately 68% of the Company's capital funding
requirements were from cash flows from operating activities and 32% was from
cash on hand. 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 subsidiary, our parent
companies' ability to make additional contributions and our ability to generate
cash flows from operating activities.
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 CC VIII Operating credit facilities. As of
September 30, 2003, we held $9 million in cash and cash equivalents and we had
total potential unused availability of $328 million under the CC VIII Operating
credit facilities, $317 million of which was available based upon our financial
covenants at that time. However, continued access to these credit facilities is
subject to our remaining in compliance with the applicable covenants of these
credit facilities. In that regard, our indirect parent 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 to CCO Holdings 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, to provide funding to the extent
necessary to comply with leverage ratio covenants of subsidiary's credit
facilities, including ours, in future quarters. In November 2003, CCO Holdings
completed a private placement of 8.75% senior notes for $500 million aggregate
principal amount due 2013, and we now intend to terminate the Vulcan commitment.
As of September 30, 2003 and December 31, 2002, long-term debt totaled
approximately $1.3 billion. This debt was comprised of approximately $1.1
billion and $1.2 billion of debt under the CC VIII Operating credit facilities,
and $177 million and $163 million of high yield debt at September 30, 2003 and
December 31, 2002, respectively. As of September 30, 2003, we had unused total
potential availability of $328 million under the CC VIII Operating credit
facilities, $317 million of which would have been available to us based on our
financial covenants at that time. Continued access to these credit facilities is
subject to our remaining in compliance with the applicable covenants of these
credit facilities. 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.
As of September 30, 2003 and December 31, 2002, the weighted average interest
rate on our bank debt was approximately 5.4%, and the weighted average interest
rate on our high yield debt was approximately 11.9%, resulting in a blended
weighted average interest rate of 6.3% and 6.2%, respectively. Approximately 69%
of our debt effectively bore fixed interest rates including the effects of our
interest rate hedge agreements as of September 30, 2003 as compared to
approximately 65% at December 31, 2002. The fair value of our total fixed-rate
debt was $180 million and $118 million at September 30, 2003 and December 31,
2002, respectively. The fair value of variable-rate debt was $1.0 billion and
$943 million at September 30, 2003 and December 31, 2002, respectively. The fair
value of fixed-rate debt and variable rate debt is based on quoted market
prices.
We expect that our subsidiary will remain in compliance with the covenants under
its credit facilities and that we will remain in compliance with the covenants
in our indenture. We also expect that 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, as the principal amounts owing under our various debt obligations
become due, sustaining our liquidity will become more difficult over time. Our
public notes begin to mature in the fourth quarter of 2003, when approximately
$66 million of accreted interest is due on our notes. Thereafter, cash interest
will accrue on the CC V notes at the annual rate of 11.875% and will be payable
each June and December, commencing June 2004, until the CC V notes mature in
December 2008. 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
23
that debt and, under certain circumstances, in cross-defaults under our
affiliates other debt obligations, which could adversely affect our parent
companies' ability to provide us with funding.
While we believe we will have access to sufficient capital to make the accreted
interest payment on the CC V notes in the amount of approximately $66 million in
December 2003 as required by the indenture governing the CC V notes, it is
unclear whether we will have sufficient continuing access to capital to satisfy
our cash interest payments commencing June 2004 or to repay the CC V notes at
maturity in December 2008. Cash flows from operating activities and other
existing sources of funds may not be sufficient, on their own, to permit us to
satisfy these obligations. In addition, the maximum allowable leverage ratios
under the CC VIII Operating credit facilities will decline over time and the
total potential borrowing available under those facilities (subject to covenant
restrictions and limitations) will decrease from approximately $1.4 billion as
of the end of 2003 to $1.3 billion and $1.1 billion by the end of 2004 and 2005,
respectively.
Traditionally, we have relied on our affiliates' ability to access the public
debt and equity markets as a source of capital. Charter's and Charter Holding's
outstanding debt, liquidity and corporate credit ratings have been downgraded by
Moody's Investors Service Inc. and Standard and Poor's Rating Services.
As noted above, our access to capital from the CC VIII Operating credit
facilities 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 any of these facilities, such as the failure to maintain the applicable
required financial ratios, we would be unable to borrow under those facilities,
which could materially adversely impact our ability to operate our business and
to make payments under the CC V notes and our other obligations. In addition, an
event of default under those facilities, if not waived, may result in the
acceleration of those facilities, which in turn result in the acceleration of
the CC V notes and our other obligations, and could result in an exercise of
remedies by our creditors and could force us to seek the protection of the
bankruptcy laws.
We may also 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, contributions from affiliates or other sources, we may not be able
to fund customer demand for digital video or data services, to offer certain
services in certain of our markets or to compete effectively. Consequently, our
financial condition and results of operations could suffer materially.
If, at any time, additional capital or borrowing capacity is required beyond
amounts internally generated or available through our existing credit facilities
or in traditional debt financings by us, 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; or
- - seeking funding from our parent companies through the issuance of debt or
equity by our parent companies, including Charter, Charter Holdings, CCH
II, CCO Holdings or Charter Operating, the proceeds of which could be
contributed to us.
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 need to raise additional capital or 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.
Although in the past, Mr. Allen and his affiliates have purchased equity from
Charter and Charter Communications Holding Company, LLC (Charter Holdco) for the
purpose of funding capital contributions to us, there is no obligation for Mr.
Allen or his affiliates to purchase equity from or contribute or loan funds to
us (other than the Vulcan commitment which we intend to terminate) or to our
subsidiaries in the future.
As a means of enhancing our liquidity, we are currently attempting to cut costs
and reduce capital expenditures.
24
HISTORICAL OPERATING, FINANCING AND INVESTING ACTIVITIES
We held $9 million in cash and cash equivalents as of September 30, 2003
compared to $50 million in cash and cash equivalents as of December 31, 2002.
OPERATING ACTIVITIES. Net cash provided by operating activities for the nine
months ended September 30, 2003 and 2002 was $88 million and $86 million,
respectively. Operating activities provided $2 million more cash during the nine
months ended September 30, 2003 compared to the corresponding period in 2002
primarily due to increased revenues of $52 million, offset by an increase in
operating expenses of $22 million and by the change in operating assets and
liabilities of $23 million during the nine months ended September 30, 2003
compared to the corresponding period in 2002.
INVESTING ACTIVITIES. Net cash used in investing activities for the nine months
ended September 30, 2003 and 2002 was $57 million and $197 million,
respectively. Investing activities used $140 million less cash during the nine
months ended September 30, 2003 compared to the corresponding period in 2002 as
a result of reductions in capital expenditures.
FINANCING ACTIVITIES. Net cash used in financing activities for the nine months
ended September 30, 2003 was $73 million and net cash provided by financing
activities for the nine months ended September 30, 2002 was $172 million,
respectively. Financing activities used more cash during the nine months ended
September 30, 2003 compared to the corresponding period in 2002 primarily due to
a reduction in contributions from manager - related party and less net
borrowings in 2003.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We made purchases
of property, plant and equipment of $48 million and $186 million for the nine
months ended September 30, 2003 and 2002, respectively. The majority of the
capital expenditures in 2003 related to customer premise equipment and our
rebuild and upgrade program. Upgrading our cable systems has enabled us to offer
digital television, high-speed data services, video-on-demand, interactive
services, additional channels and tiers, and expanded pay-per-view options to a
larger customer base. Our funding of capital expenditures in 2003 were funded
primarily from cash flows from operating activities and cash on hand. In
addition, during the nine months ended September 30, 2003 and 2002, our
liabilities related to capital expenditures decreased by $9 million and $11
million, respectively.
During 2003, we expect to spend approximately $90 million to $120 million in the
aggregate on capital expenditures. We expect our capital expenditures in 2003
will be lower than 2002 levels because our rebuild and upgrade activities are
largely completed, as a greater portion of our workforce is focused on
maintenance and period related activities, our purchases of digital set-top
terminals have declined and the value of installation related activities has
declined.
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 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, borrowings under the credit facilities of our subsidiary
and capital contributions from our indirect parent companies and cash on hand.
We believe, however, that at this time we have limited access to the debt
markets, our indirect parent companies have limited access to the debt and
equity markets in light of their significant levels of debt, current market
conditions and downgrades to their debt securities.
Our ability to conduct operations is dependent on our continued access to
borrowings under the CC VIII Operating credit facilities. The potential
borrowing availability under the CC VIII Operating credit facilities totaled
$328 million as of September 30, 2003, $317 million of which would have been
available based on our financial covenants at that time. Our access to those
funds is subject to our satisfaction of the covenants in those credit
facilities. We may not be able to comply with all of the financial ratios and
restrictive covenants in the CC VIII Operating credit facilities. If there is an
event of default under the CC VIII Operating credit facilities, such as the
25
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 those facilities, if not
waived, may result in the acceleration of those facilities, which could in turn
result in the acceleration of our notes and our other obligations, and could
result in an exercise of remedies by our creditors and could force us to seek
the protection of the bankruptcy laws.
In addition, as cash interest begins to accrue on our notes in December 2003 and
as the principal amounts owing under our various debt obligations become due,
sustaining our liquidity will become more difficult over time. It is unclear
whether we will have access to sufficient capital to satisfy our debt service
obligations which are scheduled to come due in future years. Cash flows from
operating activities and other existing sources of funds may not 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 subsidiary's 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 and
reduce capital expenditures.
If we or our parent companies 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,
Mr. Allen and his affiliates are not obligated 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 "Overview" with respect to the $300 million back-up credit facility
commitment, which we intend to terminate, contribute or lend funds to us or to
our subsidiaries in the future.
If we are unable to raise needed capital, 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.
RESTRICTIVE COVENANTS. The credit facilities of our subsidiary and the indenture
governing our publicly held notes contain a number of significant covenants that
could adversely impact our business. In particular, the credit facilities of our
subsidiary and our indenture restrict our and 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 subsidiary's credit facilities, CC VIII and
its subsidiaries are required to maintain specified financial ratios and meet
financial tests. These financial ratios become more restrictive over time and
will become more difficult to maintain going forward. 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 CC VIII
credit facilities and in certain cases under other agreements governing our
long-term indebtedness. Any default under our credit facilities or indenture
governing our outstanding debt might adversely affect our growth, our financial
condition and our results of operations and our ability to make payments on our
publicly held notes and the CC VIII credit facilities.
ACCELERATION OF INDEBTEDNESS OF OUR SUBSIDIARIES. In the event of a default
under any of CC VIII Operating's credit facilities, 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, those credit
facilities will not permit our subsidiaries to distribute funds to CC V
Operating to pay interest or principal on our public notes. If the amounts
outstanding under
26
such credit facilities 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 the CC VIII
Operating credit facilities could foreclose on their collateral, which includes
equity interests in CC VIII Operating, 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. Any default under any of our subsidiary's credit facilities
or our 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.
PARENT LEVEL LIQUIDITY CONCERNS. Our indirect parent companies have a
substantial amount of debt. Any financial or liquidity problems of our indirect
parent companies would likely cause serious disruption to our business and have
a material adverse effect on our operations and results. Any such event would
likely adversely impact our 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
require a change of control repurchase offer under our outstanding notes.
SECURITIES LITIGATION AND GOVERNMENT INVESTIGATIONS. A number of Federal Class
Actions were filed against Charter and certain of its former and present
officers and directors alleging violations of securities law. The Federal Class
Actions have been consolidated for pretrial purposes into a Consolidated Federal
Class Action. 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 then current directors and officers. Finally, two derivative
suits were filed in Missouri state court against Charter, its then 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 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
it reported customer numbers and Charter's reporting of amounts received from
digital set-top terminal suppliers for advertising. The U.S. Attorney's Office
has publicly stated that Charter is not currently a target of the investigation.
Charter has also been advised by the U.S. Attorney's Office that no member of
its board of directors, including its Chief Executive Officer, is a target of
the investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated subscriber account numbers. On July 25, 2003,
one of the former officers who was indicted entered a guilty plea. 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 (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 the determination of the number
of its 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 us that it is fully cooperating with the SEC staff.
Due to the inherent uncertainties of litigation and investigations, Charter has
advised us that it 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 insurance, our limited
liability company agreement and those of our limited liability company
subsidiaries, and the bylaws of our corporate subsidiary, may require each
entity to indemnify Charter and the above directors and current and former
officers in connection with such matters.
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
27
name recognition and long-established relationships with regulatory authorities
and customers. Increasing consolidation in the cable industry and the repeal of
certain ownership rules may provide additional benefits to certain of our
competitors, either through access to financing, resources or efficiencies of
scale.
Our principal competitor for video services throughout our territory is direct
broadcast satellite television services, 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
free broadcast television and from other communications and entertainment media.
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.
Mergers, joint ventures and alliances among franchise, wireless or private cable
operators, satellite television providers, local exchange carriers and others,
and the repeal of certain ownership rules may provide additional benefits to
some of our competitors, either through access to financing, resources or
efficiencies of scale, or the ability to provide multiple services in direct
competition with us.
VARIABLE INTEREST RATES. At September 30, 2003, excluding the effects of
hedging, approximately 86% 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 September 30, 2003 and December 31, 2002, the
weighted average rate on the bank debt was approximately 5.4%, and the weighted
average rate on the high-yield debt was approximately 11.9%, resulting in a
blended weighted average rate of 6.3% and 6.2%, respectively. Approximately 69%
of our debt was effectively fixed including the effects of our interest rate
hedge agreements as of September 30, 2003 as compared to approximately 65% at
December 31, 2002.
STREAMLINING OF OPERATIONS. In the past, Charter (our manager) experienced rapid
growth from acquisitions of a number of smaller cable operators and the rapid
rebuild and rollout of advanced services. Our future success will depend in part
on our ability to standardize and streamline our operations. The failure to
implement a consistent corporate culture and management, operating or financial
systems or procedures necessary to standardize and streamline our operations and
effectively operate our enterprise 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 various commercial 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.
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 our publicly-traded notes 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 or our affiliates' 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.
28
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 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 could continue to
result in reduced spending by customers and advertisers, which could reduce our
revenues, 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 credit facilities of our subsidiary following a change of control.
A change of control under our public notes and our subsidiary's credit
facilities would require the repayment of borrowings under the credit facility
and indenture. A failure by us or our subsidiary to make or complete a change of
control offer or to repurchase the amounts outstanding under the credit facility
would place us or our subsidiary in default of this agreement.
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.
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 open access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. The United States Court of Appeals for the Ninth Circuit
recently vacated in part a Federal Communications Commission ruling defining
cable modem service as an "information service" and remanded for further
proceedings. The Ninth Circuit held that cable modem service is not "cable
service" but is part "telecommunications service" and part "information
service." The decision will likely be appealed, but it may possibly lead to
cable operators having to contribute to the federal government's universal
service fund, to open access requirements, and to other common carrier
regulations. 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.
A recent court decision concerning the Digital Millenium Copyright Act ("DMCA")
has enabled copyright owners to obtain expedited subpoenas compelling disclosure
by Internet service providers of the names of customers that are otherwise known
only by an Internet protocol, or IP, address or screen name. This has led to a
marked increase in the volume of subpoenas received by us, as copyright owners
seek to constrain the use of peer-to-peer networks for unauthorized copying and
distribution of copyrighted works. Internet service providers also have a DMCA
obligation to adopt and implement a policy of terminating the accounts of repeat
copyright infringers. The increased activity and responsibilities in this area
pose an additional burden on our operations.
29
CONTINGENCIES
SECURITIES CLASS ACTIONS AND DERIVATIVE SUITS AGAINST CHARTER. Fourteen putative
federal class action lawsuits (the "Federal Class Actions") have been filed
against Charter, our manager and indirect parent, 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 were specifically and individually identified in prior public filings
made by Charter. 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. StoneRidge subsequently filed a
Consolidated Amended Complaint. The Court subsequently consolidated the Federal
Class Actions for pretrial purposes. On June 19, 2003, following a pretrial
conference with the parties, the Court issued a Case Management Order setting
forth a schedule for the pretrial phase of the consolidated class action.
Motions to dismiss the Consolidated Amended Complaint have been filed.
On September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in Missouri state court against Charter and its then 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 then 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 then 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. No reserves have
been established for those matters because the Company believes they are either
not estimable or not probable. Charter has advised us that it intends to
vigorously defend the lawsuits.
GOVERNMENT INVESTIGATIONS. In August 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 and its reporting
of amounts received from digital set-top terminal suppliers for advertising. The
U.S. Attorney's Office has publicly stated that Charter is not currently a
target of the investigation. Charter has also been advised by the U.S.
Attorney's Office that no member of its board of directors, including its Chief
Executive Officer, is a target of the investigation. On July 24, 2003, a federal
grand jury charged four former officers of Charter with conspiracy and mail and
wire fraud, alleging improper accounting and reporting practices focusing on
revenue from digital set-top terminal suppliers and inflated subscriber account
numbers. On July 25, 2003, one of the former officers who was indicted entered a
guilty plea. 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 (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
30
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 fully cooperating
with the SEC Staff.
OUTCOME. Charter has advised us that it 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 and our 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' 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 our officers and directors.
The limited liability company agreements of the Company and its limited
liability company subsidiaries, and the bylaws of its corporate subsidiary, may
require each such entity to indemnify Charter and the individual named
defendants in connection with the matters set forth above.
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 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.
As of the end of the period covered by 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 was no change in our internal control over financial reporting during the
quarter ended September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
In designing and evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance of
achieving the desired control objectives and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based upon the above evaluation, our management
believes that our controls do provide such reasonable assurances.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In addition to those matters disclosed under the heading "Contingencies" of Part
I, Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations", we are involved from time to time in routine legal
matters and other claims incidental to our business. We believe that the
resolution of such routine matters and other incidental claims, taking into
account established reserves and insurance, will not have a material adverse
impact on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 23, 2003, at the annual meeting of CC V Holdings Finance, Inc., the sole
shareholder voted 100 shares (100% of outstanding shares) in favor of electing
Carl E. Vogel as the sole director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit
Number Description of Document
3.1 Certificate of Formation of CC V Holdings, LLC (formerly Known
as Avalon Cable LLC). (Incorporated by reference to Amendment
No. 1 to the Registration Statement on Form S-4 (File No.
333-75415) filed by CC V Holdings, LLC (formerly known as
Avalon Cable LLC), CC V Holdings Finance, Inc. (formerly known
as Avalon Cable Holdings Finance, Inc.), Avalon Cable of
Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. on
May 28, 1999).
3.1(a) Amendment to Certificate of Formation of CC V Holdings,
LLC(formerly known as Avalon Cable LLC). (Incorporated by
reference to the Annual Report on Form 10-K of CC V Holdings,
LLC and CC V Holdings Finance, Inc. (File Nos. 333-75415 and
333-75415-03, respectively) filed on March 30, 2000).
3.2 Certificate of Incorporation of CC V Holdings Finance, Inc.
(formerly known as Avalon Cable Holdings Finance, Inc.).
(Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 333-75415) filed
by CC V Holdings, LLC (formerly known as Avalon Cable LLC), CC
V Holdings Finance, Inc. (formerly known as Avalon Cable
Holdings Finance, Inc.), Avalon Cable of Michigan Holdings,
Inc. and Avalon Cable of Michigan, Inc. on May 28, 1999).
3.5 Amended and Restated Limited Liability Company Agreement of CC
V Holdings, LLC (formerly known as Avalon Cable LLC).
(Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 333-75415) filed
by CC V Holdings, LLC (formerly known as Avalon Cable LLC), CC
V Holdings Finance, Inc. (formerly known as Avalon Cable
Holdings Finance, Inc.), Avalon Cable of Michigan Holdings,
Inc. and Avalon Cable of Michigan, Inc. on May 28, 1999).
3.6 Amended and Restated By-Laws of CC V Holdings Finance, Inc.
(formerly known as Avalon Cable Holdings Finance, Inc.).
(Incorporated by reference to the Annual Report on Form 10-K
of CC V Holdings, LLC and CC V Holdings Finance, Inc. (File
Nos. 333-75415 and 333-75415-03, respectively) filed on March
30, 2000).
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934. *
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934. *
32.1 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). *
32.2 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
32
(b) REPORTS ON FORM 8-K
None.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrants have duly caused this Quarterly Report to be signed on their
behalf by the undersigned thereunto duly authorized.
CC V HOLDINGS, LLC
Dated: November 12, 2003 By: CHARTER COMMUNICATIONS, INC.,
------------------------------
Registrants' Manager
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)
of Charter Communications, Inc. (Manager) and
CC V Holdings, LLC
By: /s/ Paul E. Martin
-------------------
Name: Paul E. Martin
Title: Senior Vice President and Corporate
Controller (Principal Accounting Officer) of
Charter Communications, Inc. (Manager) and CC V
Holdings, LLC
CC V HOLDINGS FINANCE, INC.
Dated: November 12, 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)
of Charter Communications, Inc. (Manager) and CC
V Holdings Finance, Inc.
By: /s/ Paul E. Martin
-------------------
Name:Paul E. Martin
Title: Senior Vice President - Corporate
Controller (Principal Accounting Officer) of
Charter Communications, Inc. (Manager) and CC V
Holdings Finance, Inc.
34
EXHIBIT INDEX
Exhibit
Number Description of Document
3.1 Certificate of Formation of CC V Holdings, LLC (formerly Known
as Avalon Cable LLC). (Incorporated by reference to Amendment
No. 1 to the Registration Statement on Form S-4 (File No.
333-75415) filed by CC V Holdings, LLC (formerly known as
Avalon Cable LLC), CC V Holdings Finance, Inc. (formerly known
as Avalon Cable Holdings Finance, Inc.), Avalon Cable of
Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. on
May 28, 1999).
3.1(a) Amendment to Certificate of Formation of CC V Holdings, LLC
(formerly known as Avalon Cable LLC). (Incorporated by
reference to the Annual Report on Form 10-K of CC V Holdings,
LLC and CC V Holdings Finance, Inc. (File Nos. 333-75415 and
333-75415-03, respectively) filed on March 30, 2000).
3.2 Certificate of Incorporation of CC V Holdings Finance, Inc.
(formerly known as Avalon Cable Holdings Finance, Inc.).
(Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 333-75415) filed
by CC V Holdings, LLC (formerly known as Avalon Cable LLC), CC
V Holdings Finance, Inc. (formerly known as Avalon Cable
Holdings Finance, Inc.), Avalon Cable of Michigan Holdings,
Inc. and Avalon Cable of Michigan, Inc. on May 28, 1999).
3.5 Amended and Restated Limited Liability Company Agreement of CC
V Holdings, LLC (formerly known as Avalon Cable LLC).
(Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 333-75415) filed
by CC V Holdings, LLC (formerly known as Avalon Cable LLC), CC
V Holdings Finance, Inc. (formerly known as Avalon Cable
Holdings Finance, Inc.), Avalon Cable of Michigan Holdings,
Inc. and Avalon Cable of Michigan, Inc. on May 28, 1999).
3.6 Amended and Restated By-Laws of CC V Holdings Finance, Inc.
(formerly known as Avalon Cable Holdings Finance, Inc.).
(Incorporated by reference to the Annual Report on Form 10-K
of CC V Holdings, LLC and CC V Holdings Finance, Inc. (File
Nos. 333-75415 and 333-75415-03, respectively) filed on March
30, 2000).
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934. *
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934. *
32.1 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). *
32.2 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
35