1


     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000


                                                      REGISTRATION NO. 333-77499
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- - - --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                               AMENDMENT NO. 1 TO


                                    FORM S-4
                          REGISTRATION STATEMENT UNDER
                           THE SECURITIES ACT OF 1933
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                      CHARTER COMMUNICATIONS HOLDINGS, LLC

                                      AND
                        CHARTER COMMUNICATIONS HOLDINGS
                              CAPITAL CORPORATION
           (EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)


                                                                    
              DELAWARE                               4841                              43-1843179
              DELAWARE                               4841                              43-1843177
    (STATE OR OTHER JURISDICTION         (PRIMARY STANDARD INDUSTRIAL              (FEDERAL EMPLOYER
 OF INCORPORATION OR ORGANIZATION)       CLASSIFICATION CODE NUMBER)            IDENTIFICATION NUMBERS)
12444 POWERSCOURT DRIVE ST. LOUIS, MISSOURI 63131 (314) 965-0555 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES) CURTIS S. SHAW, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY 12444 POWERSCOURT DRIVE ST. LOUIS, MISSOURI 63131 (314) 965-0555 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: DANIEL G. BERGSTEIN, ESQ. ALVIN G. SEGEL, ESQ. LEIGH P. RYAN, ESQ. IRELL & MANELLA LLP PATRICIA M. CARROLL, ESQ. 1800 AVENUE OF THE STARS, SUITE 900 PAUL, HASTINGS, JANOFSKY & WALKER LLP LOS ANGELES, CALIFORNIA 90067-4276 399 PARK AVENUE (310) 277-1010 NEW YORK, NEW YORK 10022 (212) 318-6000
------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------------------- THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 2 $1,532,000,000 Offer to Exchange 10.00% Senior Notes due 2009, 10.25% Senior Notes due 2010 and 11.75% Senior Discount Notes due 2010 for any and all outstanding 10.00% Senior Notes due 2009, 10.25% Senior Notes due 2010 and 11.75% Senior Discount Notes due 2010, respectively, of CHARTER COMMUNICATIONS HOLDINGS, LLC and CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION ------------------------- - This exchange offer expires at 5:00 p.m., New York City time, on May , 2000, unless extended. - No public market exists for the original notes or the new notes. We do not intend to list the new notes on any securities exchange or to seek approval for quotation through any automated quotation system. ------------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR ORIGINAL NOTES IN THE EXCHANGE OFFER AND BY PURCHASERS OF THE NOTES FROM PERSONS ELIGIBLE TO USE THIS PROSPECTUS FOR RESALES. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any State in which the offer or sale would be unlawful. NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-b OF THE NEW HAMPSHIRE UNIFORM SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-b IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH. The date of this prospectus is April , 2000. 3 TABLE OF CONTENTS
PAGE ---- Summary..................................................... 1 Risk Factors................................................ 15 Forward-Looking Statements.................................. 29 Use of Proceeds............................................. 30 Capitalization.............................................. 31 Unaudited Pro Forma Financial Statements.................... 33 Selected Historical Financial Data.......................... 45 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 46 The Exchange Offer.......................................... 67 Business.................................................... 76 Regulation and Legislation.................................. 104 Management.................................................. 112 Principal Equity Holders.................................... 123 Certain Relationships and Related Transactions.............. 126 Description of Certain Indebtedness......................... 142 Description of Notes........................................ 157 Material United States Federal Income Tax Considerations.... 198 Plan of Distribution........................................ 205 Legal Matters............................................... 206 Experts..................................................... 206 Index to Financial Statements............................... F-1 Index to Supplemental Consolidated Financial Statements..... F-484
i 4 SUMMARY The following summary contains a general discussion of our business, the exchange offer and summary financial information. It likely does not contain all the information that is important to you in making a decision to tender your original notes in exchange for new notes. For a more complete understanding of the exchange offer, you should read this entire prospectus and the other documents to which we refer. Unless stated otherwise, the discussion of our business in this prospectus includes Charter Holdings and its direct and indirect subsidiaries after giving effect to the Kalamazoo transaction described below. OUR BUSINESS We are the fourth largest operator of cable systems in the United States, serving approximately 6.2 million customers. After giving effect to the Kalamazoo transaction, as described below, we will serve approximately 6.3 million customers. We offer a full range of traditional cable television services and have begun to offer digital cable television services to customers in some of our systems. Digital technology enables cable operators to increase the number of channels a cable system can carry by permitting a significantly increased number of video signals to be transmitted over a cable system's existing bandwidth. Bandwidth is a measure of the information-carrying capacity. It is the range of usable frequencies that can be carried by a cable system. We have also started to introduce a number of other new products and services, including interactive video programming, which allows information to flow in both directions, and high-speed Internet access to the World Wide Web. We are also exploring opportunities in telephony, which will integrate telephone services with the Internet through the use of cable. The introduction of these new services represents an important step toward the realization of our Wired World(TM) vision, where cable's ability to transmit voice, video and data at high speeds will enable it to serve as the primary platform for the delivery of new services to the home and workplace. We are accelerating the upgrade of our systems to more quickly provide these new services. We have grown rapidly over the past five years. During this period, our management team has successfully completed 34 acquisitions, including fourteen acquisitions closed since January 1, 1999 and a merger with Marcus Cable Holdings, LLC in April 1999. In addition, we have expanded our customer base through significant internal growth. In 1999, our internal customer growth, without giving effect to the cable systems we acquired during that period, was 3.1%, compared to the national industry average of 1.8%. In 1998, our internal customer growth, without giving effect to the cable systems we acquired in that year, was 4.8%, more than twice the national industry average of 1.7%. Our principal executive offices are located at 12444 Powerscourt Drive, St. Louis, Missouri 63131. Our telephone number is (314) 965-0555 and our web site is located at www.chartercom.com. The information on our web site is not part of this prospectus. 1 5 BUSINESS STRATEGY Our objective is to increase our operating cash flow by increasing our customer base and the amount of cash flow per customer. To achieve this objective, we are pursuing the following strategies: - rapidly integrate acquired cable systems and apply our core operating strategies to raise the financial and operating performance of these acquired systems; - expand the array of services we offer to our customers through the implementation of our Wired World vision; - upgrade the bandwidth capacity of our systems to 550 megahertz or greater to enable greater channel capacity and add two-way capability to facilitate interactive communication. Two-way capability is the ability to have bandwidth available for upstream, or two-way, communication; - maximize customer satisfaction by providing reliable, high-quality service offerings, superior customer service and attractive programming choices at reasonable rates; - employ innovative marketing programs tailored to local customer preferences to generate additional revenues; - emphasize local management autonomy to better serve our customers while providing support from regional and corporate offices and maintaining centralized financial controls; and - improve the geographic clustering of our cable systems by selectively trading or acquiring systems to increase operating efficiencies and improve operating margins. Clusters refer to cable systems under common ownership which are located within geographic proximity to each other. 2 6 CHARTER ORGANIZATIONAL STRUCTURE The new notes to be issued in the exchange offer will be issued by Charter Communications Holdings, LLC and Charter Communications Capital Corporation, the co-issuers of the original notes. The chart below sets forth our organizational structure and that of our direct and indirect parent companies and assumes that: (1) none of the outstanding options to purchase membership units of Charter Communications Holding Company have been exercised. See "Management -- Option Plan." (2) the pending merger of Cablevision of Michigan, Inc. with and into Charter Communications, Inc. has been completed. See "-- Pending Kalamazoo Transaction"; and (3) none of the outstanding membership units in Charter Communications Holding Company or membership units in an indirect subsidiary of Charter Holdings, held by certain sellers in the Bresnan acquisition, have been exchanged for shares of Class A common stock in Charter Communications, Inc. See "Business -- Charter Organizational Structure -- Bresnan Sellers." Our cable systems, which are managed by Charter Communications, Inc., are owned by our wholly owned subsidiaries. [CHARTER COMMUNICATIONS FLOW CHART] * In this merger, Charter Communications, Inc. will issue shares of its Class A common stock in exchange for shares of Cablevision of Michigan, Inc. The number of shares to be issued will be based upon the average NASDAQ closing price for the 20 trading days preceding the closing date of this merger. No estimate of the number of shares is provided here and the percentages of equity ownership in Charter Communications, Inc. by Mr. Allen and the public indicated on the 3 7 chart do not reflect the decrease that will occur upon the issuance of shares in the merger transaction. ** These equity interests are exchangeable for shares of Class A common stock in Charter Communications, Inc. For a more detailed description of each entity and how it relates to us, see "Business -- Charter Organizational Structure." 4 8 RECENT EVENTS ACQUISITIONS IN 1999 AND 2000 AND RECENT TRANSFERS Since January 1, 1999, we completed eleven acquisitions of cable systems, including the Bresnan acquisition completed in February 2000. On January 1, 2000, Charter Holdings and Charter Communications Holding Company effected a number of transactions to transfer cable systems acquired in the Fanch, Falcon and Avalon acquisitions to Charter Holdings. These transactions are referred to in this prospectus as the "recent transfers". As a result of these transactions, Charter Holdings became the indirect parent of the Fanch, Falcon and Avalon cable systems. A summary of information regarding these acquisitions and recent transfers is as follows:
AS OF AND FOR THE YEAR ENDED PURCHASE PRICE DECEMBER 31, 1999 ACQUISITION (INCLUDING ----------------------------- OR TRANSFER ASSUMED DEBT) REVENUES DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) ----------- -------------- ---------- --------------- Renaissance Media Group LLC................. 4/99 $ 459 134,000 $ 62,428 American Cable Entertainment, LLC........... 5/99 240 69,000 37,216 Cable systems of Greater Media Cablevision, Inc....................................... 6/99 500 176,000 85,933 Helicon Partners I, L.P. and affiliates..... 7/99 550 171,000 85,224 Vista Broadband Communications, L.L.C. ..... 7/99 126 26,000 14,112 Cable system of Cable Satellite of South Miami, Inc................................ 8/99 22 9,000 4,859 Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications Partners, LLLP... 9/99 1,460 463,000 219,878 Cable systems of InterMedia Capital Partners IV, L.P., InterMedia Partners and affiliates................................ 10/99 873+ 420,000 179,259 systems swap (142,000)(a) (53,056)(b) --------- ---------- 278,000 126,203 Cable systems of Fanch Cablevision L.P. and affiliates................................ 1/00 2,400 528,000 218,197 Falcon Communications, L.P. ................ 1/00 3,481 955,000 427,668 Avalon Cable of Michigan Holdings, Inc. .... 1/00 845(c) 258,000(c) 109,943(d) Bresnan Communications Company Limited Partnership....................... 2/00 3,100 686,000(e) 290,697(f) Cable systems of Falcon/Capital Cable Partners, L.P............................. 4/00 60 27,000 11,555 Cable systems of Farmington Cablevision Company................................... 4/00 15 6,000 1,968 ------------ --------- ---------- Total..................................... $ 14,131 3,786,000 $1,695,881 ============ ========= ==========
- - - --------------- (a) As part of the transaction with InterMedia, we agreed to "swap" some of our non-strategic cable systems located in Indiana, Montana, Utah and northern Kentucky, representing 142,000 basic customers. We transferred cable systems with 112,000 customers to InterMedia in connection with this swap in October 1999. The remaining Indiana cable system, with customers totaling 30,000, was transferred in March 2000 after receipt of the necessary regulatory approvals. (b) Includes revenues for all swapped InterMedia systems, except the retained Indiana system, for the nine months ended September 30, 1999, the date of the transfer of these systems, and includes revenues for the Indiana system for the year ended December 31, 1999. 5 9 (c) Includes approximately 5,400 customers served by cable systems that we acquired from certain former affiliates of Avalon in February 2000. The $845 million purchase price for Avalon includes the purchase price for these systems of approximately $13 million. (d) Includes revenues of approximately $1.6 million related to cable systems acquired from certain former affiliates of Avalon. (e) Includes approximately 19,400 customers served by cable systems acquired by Bresnan since December 31, 1999. (f) Includes revenues of approximately $7.1 million related to the cable systems acquired by Bresnan since December 31, 1999. PENDING KALAMAZOO TRANSACTION In March 2000, Charter Communications, Inc. entered into an agreement providing for the merger of Cablevision of Michigan, Inc., the indirect owner of a cable system in Kalamazoo, Michigan, with and into Charter Communications, Inc. After the merger, Charter Communications, Inc. will contribute 100% of the equity interests of the direct owner of the Kalamazoo cable system to Charter Communications Holding Company, which in turn will contribute such interests to Charter Holdings. Information regarding the Kalamazoo transaction is as follows:
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 ----------------------------- ANTICIPATED PURCHASE PRICE REVENUES PENDING TRANSACTION CLOSING DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) - - - ------------------- ---------------- -------------- ---------- --------------- Kalamazoo........................... 3rd Quarter 2000 $172.5 49,000 $20,259
PENDING SWAP TRANSACTION On December 1, 1999, Charter Communications, Inc. entered into a non-binding letter of intent with AT&T Broadband & Internet Services to exchange certain of our cable systems. This exchange of cable systems is referred to in this prospectus as the "Swap Transaction". The Swap Transaction would involve cable systems owned by AT&T located in municipalities in Alabama, Georgia, Illinois and Missouri serving approximately 705,000 customers and certain of our cable systems located in municipalities in California, Connecticut, Massachusetts, Texas and other states serving approximately 631,000 customers. As part of the Swap Transaction, we would pay AT&T approximately $108 million in cash, which represents the difference in the agreed values of the systems being exchanged. The Swap Transaction is subject to the negotiation and execution of a definitive exchange agreement, regulatory approvals and other conditions typical in transactions of this type. We cannot assure you that the Swap Transaction will be completed. INITIAL PUBLIC OFFERING OF COMMON STOCK OF CHARTER COMMUNICATIONS, INC., OUR MANAGER In November 1999, Charter Communications, Inc. completed an initial public offering of 195,500,000 shares of its Class A common stock for total net proceeds of $3.57 billion. At that time, Paul G. Allen purchased 50,000 shares of high vote Class B common stock of Charter Communications, Inc. at the initial public offering price. In addition, at the closing of the initial public offering, Mr. Allen through Vulcan Cable III Inc. invested $750 million in cash to purchase membership units from Charter Communications Holding Company at the initial public offering price, net of underwriters' discounts. These membership units are exchangeable at any time for shares of Class A common stock of Charter Communications, Inc. All of the proceeds from Charter Communications, Inc.'s public offering were used to purchase membership units in Charter Communications Holding Company, which used a portion of the funds received from Charter 6 10 Communications, Inc. along with the funds received from Vulcan Cable III Inc. to pay a portion of the purchase prices of the Fanch, Falcon, Avalon and Bresnan acquisitions. APRIL 1999 MERGER WITH MARCUS HOLDINGS On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable Company, L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The total purchase price was approximately $3.2 billion, including $1.8 billion in assumed liabilities. On February 22, 1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests of Marcus Cable. On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, with Charter Holdings surviving the merger. The operating subsidiaries of Marcus Holdings became subsidiaries of our subsidiary, Charter Communications Operating, LLC. MARCH 1999 CHARTER HOLDINGS NOTES On March 17, 1999, Charter Holdings and Charter Capital issued $3.6 billion principal amount of senior notes, referred to in this prospectus as the "March 1999 Charter Holdings notes," consisting of $600 million in aggregate principal amount of 8.250% senior notes due 2007, referred to in this prospectus as the "March 1999 8.250% Charter Holdings notes," $1.5 billion in aggregate principal amount of 8.625% senior notes due 2009, referred to in this prospectus as the "March 1999 8.625% Charter Holdings notes," and $1.475 billion in aggregate principal amount at maturity of 9.920% senior discount notes due 2011, referred to in this prospectus as the "March 1999 9.920% Charter Holdings notes." The net proceeds of approximately $2.99 billion, combined with borrowings under our credit facilities, were used to consummate tender offers for publicly held debt of several of our subsidiaries, to refinance borrowings under our previous credit facilities, for working capital purposes and to finance a number of acquisitions. 7 11 THE EXCHANGE OFFER Resales Without Further Registration............. We believe that the new notes issued pursuant to the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act of 1933, as amended, provided that: - you are acquiring the new notes issued in the exchange offer in the ordinary course of your business; - you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, the distribution of the new notes issued to you in the exchange offer, and; - you are not our "affiliate," as defined under Rule 405 of the Securities Act. Each of the participating broker-dealers that receives new notes for its own account in exchange for original notes that were acquired by such broker or dealer as a result of market-making or other activities must acknowledge that it will deliver a prospectus in connection with the resale of the new notes. Expiration Date............ 5:00 p.m., New York City time, on May , 2000 unless we extend the exchange offer. Exchange and Registration Rights Agreements........ You have the right to exchange the original notes that you hold for new notes with substantially identical terms. This exchange offer is intended to satisfy these rights. Once the exchange offer is complete, you will no longer be entitled to any exchange or registration rights with respect to your original notes. Accrued Interest on the New Notes and Original Notes.................... The new notes will bear interest from January 12, 2000. Holders of original notes which are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest on such original notes accrued to the date of issuance of the new notes. Conditions to the Exchange Offer.................... The exchange offer is conditioned upon certain customary conditions which we may waive and upon compliance with securities laws. Procedures for Tendering Original Notes........... Each holder of original notes wishing to accept the exchange offer must: - complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal; or 8 12 - arrange for the Depository Trust Company to transmit certain required information to the exchange agent in connection with a book-entry transfer. You must mail or otherwise deliver such documentation together with the original notes to the exchange agent. Special Procedures for Beneficial Holders....... If you beneficially own original notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your original notes in the exchange offer, you should contact such registered holder promptly and instruct them to tender on your behalf. If you wish to tender on your own behalf, you must, before completing and executing the letter of transmittal for the exchange offer and delivering your original notes, either arrange to have your original notes registered in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Guaranteed Delivery Procedures............... You must comply with the applicable procedures for tendering if you wish to tender your original notes and: - time will not permit your required documents to reach the exchange agent by the expiration date of the exchange offer; or - you cannot complete the procedure for book-entry transfer on time; or - your original notes are not immediately available. Withdrawal Rights.......... You may withdraw your tender of original notes at any time prior to 5:00 p.m., New York City time, on the date the exchange offer expires. Failure to Exchange Will Affect You Adversely..... If you are eligible to participate in the exchange offer and you do not tender your original notes, you will not have further exchange or registration rights and your original notes will continue to be subject to some restrictions on transfer. Accordingly, the liquidity of the original notes will be adversely affected. Material United States Federal Income Tax Consideration............ The disclosure in this prospectus represents our legal counsel's opinion as to the material United States Federal income tax consequences of participating in the exchange offer and in connection with the ownership and disposition of the new notes. The exchange of original notes for new notes pursuant to the exchange offer will not result in a taxable event. Accordingly, it is our legal counsel's opinion that: - no gain or loss will be realized by a U.S. holder upon receipt of a new note; 9 13 - a holder's holding period for new notes will include the holding period for original notes; and - the adjusted tax basis of the new notes will be the same as the adjusted tax basis of the original notes exchanged at the time of such exchange. Paul, Hastings, Janofsky & Walker LLP has rendered the above-referenced opinion in connection with the exchange offer. See "Material United States Federal Income Tax Considerations." Exchange Agent............. Harris Trust and Savings Bank is serving as exchange agent. Use of Proceeds............ We will not receive any proceeds from the exchange offer. 10 14 SUMMARY TERMS OF NEW NOTES Issuers....................... Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation. Notes Offered................. $675.0 million in principal amount of 10.00% senior notes due 2009. $325.0 million in principal amount of 10.25% senior notes due 2010. $532.3 million in principal amount at maturity of 11.75% senior discount notes due 2010. The form and terms of the new notes will be the same as the form and terms of the outstanding notes except that: - the new notes will bear a different CUSIP number from the original notes; - the new notes will have been registered under the Securities Act of 1933 and, therefore, will not bear legends restricting their transfer; and - you will not be entitled to any exchange or registration rights with respect to the new notes. The new notes will evidence the same debt as the original notes. They will be entitled to the benefits of the indentures governing the original notes and will be treated under the indentures as a single class with the original notes.
MATURITY DATE ISSUE PRICE INTEREST ---------------- --------------------------- --------------------------- 10.00% Notes..... April 1, 2009 100.00% plus accrued 10.00% per annum, payable interest, if any, from every six months on April 1 January 12, 2000 and October 1, beginning April 1, 2000 10.25% Notes..... January 15, 2010 100.00%, plus accrued 10.25% per annum, payable interest, if any, from every six months on January January 12, 2000 15 and July 15, beginning July 15, 2000 11.75% Notes..... January 15, 2010 56.448%, with original Interest to accrete at a issue discount to accrete rate of 11.75% per annum to from January 12, 2000 an aggregate amount of $532.0 million by January 15, 2005; thereafter, cash interest will be payable every six months on January 15 and July 15 at a rate of 11.75% per annum, beginning July 15, 2005
Ranking.................... The new notes will be senior debts. They will rank equally with the current and future unsecured and unsubordinated debt of Charter Holdings, including the March 1999 Charter Holdings notes and trade payables, which are accounts payable to vendors, suppliers and service 11 15 providers. Charter Holdings is a holding company and conducts all of its operations through its direct and indirect subsidiaries. If it defaults, your right to payment under the new notes will rank below all existing and future liabilities, including trade payables, of the subsidiaries of Charter Holdings. As of December 31, 1999, all of our outstanding debt, other than the March 1999 Charter Holdings notes and the original notes, but including our credit facilities, was incurred by our subsidiaries. As of that date, as adjusted to give effect to the sale of the original notes, acquisitions completed since that date, the recent transfer to us of the Fanch, Falcon and Avalon cable systems and the repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures and the Kalamazoo transaction as if such transactions had occurred on that date, our debt would have totaled approximately $11.2 billion, $6.4 billion of which would have ranked senior to the new notes. Optional Redemption........ We will not have the right to redeem the 10.00% notes prior to their maturity date on April 1, 2009. On or after January 15, 2005, we may redeem some or all of the 10.25% notes and the 11.75% discount notes at any time at the redemption prices listed in the "Description of Notes" section under the heading "Optional Redemption." Before January 15, 2003, we may redeem up to 35% of the 10.25% notes and the 11.75% discount notes with the proceeds of certain offerings of equity securities at the prices listed in the "Description of Notes" section under the heading "Optional Redemption." Mandatory Offer to Repurchase................. If Charter Holdings, Charter Communications Holding Company or Charter Communications, Inc. experiences certain changes of control, we must offer to repurchase any then-outstanding new notes at 101% of their principal amount plus accrued and unpaid interest or accreted value, as applicable. Basic Covenants of Indentures The indentures governing the notes will, among other things, restrict our ability and the ability of certain of our subsidiaries to: - pay dividends on stock or repurchase stock; - make investments; - borrow money; - create certain liens; - sell all or substantially all of our assets or merge with or into other companies; - sell assets; - in the case of our restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to us; and - engage in certain transactions with affiliates. These covenants are subject to important exceptions. See "Description of Notes -- Certain Covenants." RISK FACTORS You should carefully consider all of the information in this prospectus. In particular, you should evaluate the specific risk factors under "Risk Factors" for a discussion of risks associated with an investment in the new notes. 12 16 UNAUDITED SUMMARY PRO FORMA DATA You should read the following unaudited summary pro forma financial data of Charter Holdings in conjunction with the historical financial statements and other financial information appearing elsewhere in this prospectus, including "Capitalization," "Unaudited Pro Forma Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 -------------------------------------------------------------------------------------- CHARTER ACQUISITIONS AND KALAMAZOO OFFERING HOLDINGS RECENT TRANSFERS SUBTOTAL TRANSACTION ADJUSTMENTS TOTAL ----------- ---------------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS: Revenues................................ $ 1,451,010 $ 1,479,616 $ 2,930,626 $ 20,259 $ -- $ 2,950,885 ----------- ----------- ----------- -------- -------- ----------- Operating expenses: Operating, general and administrative...................... 752,630 747,972 1,500,602 12,006 -- 1,512,608 Depreciation and amortization......... 739,453 944,010 1,683,463 13,104 -- 1,696,567 Option compensation expense........... 79,979 -- 79,979 -- -- 79,979 Corporate expense charges(a).......... 48,158 61,656 109,814 816 -- 110,630 Management fees....................... -- 16,224 16,224 -- -- 16,224 ----------- ----------- ----------- -------- -------- ----------- Total operating expenses............ 1,620,220 1,769,862 3,390,082 25,926 -- 3,416,008 ----------- ----------- ----------- -------- -------- ----------- Loss from operations.................... (169,210) (290,246) (459,456) (5,667) (465,123) Interest expense........................ (456,895) (530,528) (987,423) -- (34,187) (1,021,610) Interest income......................... 3,956 1,335 5,291 -- -- 5,291 Other expense........................... (375) (481) (856) (189) -- (1,045) ----------- ----------- ----------- -------- -------- ----------- Loss before income taxes, minority interest and extraordinary item....... (622,524) (819,920) (1,442,444) (5,856) (34,187) (1,482,487) Income tax expense...................... -- (3,747) (3,747) -- -- (3,747) Minority interest....................... -- (12,589) (12,589) -- -- (12,589) ----------- ----------- ----------- -------- -------- ----------- Loss before extraordinary item.......... $ (622,524) $ (836,256) $(1,458,780) $ (5,856) $(34,187) $(1,498,823) =========== =========== =========== ======== ======== =========== OTHER FINANCIAL DATA: EBITDA(b)............................... $ 569,868 $ 653,283 $ 1,223,151 $ 7,248 $ 1,230,399 EBITDA margin(c)........................ 39.3% 44.2% 41.7% 35.8% 41.7% Adjusted EBITDA(d)...................... $ 698,380 $ 731,644 $ 1,430,024 $ 8,253 $ 1,438,277 Cash flows from operating activities.... 409,166 474,383 883,549 11,368 894,917 Cash flows used in investing activities............................ (3,544,087) (635,471) (4,179,558) (6,253) (4,185,811) Cash flows from financing activities.... 3,218,309 243,024 3,461,333 -- 3,461,333 Cash interest expense................... 847,958 Capital expenditures.................... 766,788 539,069 1,305,857 6,253 1,312,110 Total debt to EBITDA.................... 9.1x Total debt to adjusted EBITDA........... 7.8 EBITDA to cash interest expense......... 1.5 EBITDA to interest expense.............. 1.2 Deficiency of earnings to cover fixed charges(e)............................ $ 1,498,823 BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................ $12,005,197 $10,080,965 $22,086,162 $176,510 $ 50,282 $22,312,954 Total debt.............................. 6,971,612 4,116,852 11,088,464 -- 66,422 11,154,886 Minority interest(f).................... -- 629,488 629,488 -- -- 629,488 Member's equity......................... 4,344,262 5,144,868 9,489,130 172,500 -- 9,661,630 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGE): Homes passed(g)......................... 4,040,000 5,874,000 9,914,000 60,000 9,974,000 Basic customers(h)...................... 2,274,000 3,897,000 6,171,000 49,000 6,220,000 Basic penetration(i).................... 56.3% 66.3% 62.2% 81.7% 62.4% Premium units(j)........................ 1,445,000 1,712,000 3,157,000 30,000 3,187,000 Premium penetration(k).................. 63.5% 43.9% 51.2% 61.2% 51.2% Average monthly revenue per basic customer(l)........................... $ 39.53
13 17 (a) From January 1, 1999 through November 9, 1999, the date of the initial public offering of Charter Communications, Inc., Charter Investment, Inc. provided management services to subsidiaries of Charter Operating. From and after the initial public offering of Charter Communications Inc., such management services were provided by Charter Communications, Inc. See "Certain Relationships and Related Transactions." (b) EBITDA represents earnings (loss) before extraordinary item before interest, income taxes, depreciation and amortization, and minority interest. EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. Management's discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. (c) EBITDA margin represents EBITDA as a percentage of revenues. (d) Adjusted EBITDA means EBITDA before option compensation expense, corporate expense charges, management fees and other expense. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service its indebtedness. However, adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. Adjusted EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by adjusted EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. (e) Earnings include net income (loss) plus fixed charges. Fixed charges consist of interest expense and an estimated interest component of rent expense. (f) Represents preferred membership units in an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers, which are exchangeable on a one-for-one basis for shares of Class A common stock of Charter Communications, Inc. (g) Homes passed are the number of living units, such as single residence homes, apartments and condominium units, passed by the cable television distribution network in a given cable system service area. (h) Basic customers are customers who receive basic cable service. (i) Basic penetration represents basic customers as a percentage of homes passed. (j) Premium units represent the total number of subscriptions to premium channels. (k) Premium penetration represents premium units as a percentage of basic customers. (l) Average monthly revenue per basic customer represents revenues divided by twelve divided by the number of basic customers at December 31, 1999. 14 18 RISK FACTORS The new notes, like the original notes, entail the following risks. You should carefully consider these risk factors, as well as the other information in this prospectus, before exchanging the original notes for new notes. OUR BUSINESS WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL ADDITIONAL DEBT, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND OUR ABILITY TO OBTAIN FINANCING IN THE FUTURE AND REACT TO CHANGES IN OUR BUSINESS. We have a significant amount of debt. As of December 31, 1999, pro forma for the sale of the original notes, acquisitions completed since that date, the recent transfer to us of the Fanch, Falcon, and Avalon cable systems, the repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures and the Kalamazoo transaction, our total debt would have been approximately $11.2 billion, our total member's equity would have been approximately $9.7 billion and the deficiency of our earnings available to cover fixed charges would have been approximately $1.5 billion. Our significant amount of debt could have important consequences to you. For example, it could: - make it more difficult for us to satisfy our obligations to you under the notes, to our lenders under our credit facilities and to our other public noteholders; - increase our vulnerability to general adverse economic and cable industry conditions, including interest rate fluctuations, because much of our borrowings are and will continue to be at variable rates of interest; - require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which will reduce our funds available for working capital, capital expenditures, acquisitions of additional systems and other general corporate expenses; - limit our flexibility in planning for, or reacting to, changes in our business and the cable industry generally; - place us at a disadvantage compared to our competitors that have proportionately less debt; and - limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our debt. The agreements and instruments governing our debt do not prohibit us from incurring additional debt, although they do place certain limitations on such additional debt. Further, the agreements and instruments governing our debt allow for the incurrence of debt by our subsidiaries, all of which would rank senior to the notes. We anticipate incurring significant additional debt in the future to fund the expansion, maintenance and upgrade of our cable systems. We have received a commitment for bridge loan facility and we may incur debt to finance additional acquisitions in the future. If new debt is added to our current debt levels, the related risks that we and you now face could intensify. 15 19 THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT THE HOLDERS OF THE NOTES AND OUR ABILITY TO OPERATE OUR BUSINESS. Our credit facilities and the indentures governing the notes and our other public debt contain a number of significant covenants that could adversely impact the holders of the notes and our business. These covenants, among other things, restrict our ability and the ability of our subsidiaries to: - pay dividends or make other distributions; - make certain investments or acquisitions; - dispose of assets or merge; - incur additional debt; - issue equity; - repurchase or redeem equity interests and debt; - create liens; and - pledge assets. Furthermore, in accordance with our credit facilities, we are required to maintain specified financial ratios and meet financial tests. The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants will result in a default under the applicable debt agreement or instrument, which could place us in default under the indentures governing the notes. OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO REPAY THE NOTES, SERVICE OUR OTHER DEBT AND GROW OUR BUSINESS DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our ability to make payments on the notes and our other debt and to fund our planned capital expenditures for upgrading our cable systems and our ongoing operations will depend on our ability to generate cash and to secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If our business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to us under our credit facilities or from other sources of financing, we may not be able to repay the notes or our other debt, to grow our business or to fund our other liquidity needs. IF WE DEFAULT UNDER OUR CREDIT FACILITIES, WE MAY NOT HAVE THE ABILITY TO MAKE PAYMENTS ON THE NOTES, WHICH WOULD PLACE US IN DEFAULT UNDER THE INDENTURES GOVERNING THE NOTES. In the event of a default under our credit facilities, lenders could elect to declare all amounts borrowed, together with accrued and unpaid interest and other fees, to be due and payable. In any event, when a default exists under our subsidiaries' credit facilities, funds may not be distributed by our subsidiaries to Charter Holdings to pay interest or principal on the notes. If the amounts outstanding under such credit facilities are accelerated, thereby causing an acceleration of amounts outstanding under the notes, we may not be able to repay such amounts or the notes. Any default under any of our credit facilities or our debt instruments may adversely affect the holders of the notes and our growth, financial condition and results of operations. 16 20 CHARTER HOLDINGS IS A HOLDING COMPANY WHICH HAS NO OPERATIONS AND WILL DEPEND ON ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED IN THEIR ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF THE NOTES AND OUR OTHER OBLIGATIONS. As a holding company, Charter Holdings will depend entirely on its operating subsidiaries for the cash necessary to satisfy its obligations to you as a holder of the notes. These operating subsidiaries may not be able to make funds available to Charter Holdings. Charter Holdings will not hold any significant assets other than its direct and indirect interests in its subsidiaries which conduct all of its operations. Charter Holdings' cash flow will depend upon the cash flow of its operating subsidiaries and the payment of funds by these operating subsidiaries to Charter Holdings. This may adversely affect the ability of Charter Holdings to meet its obligations to the holders of the notes. Our operating subsidiaries are not obligated to make funds available for payment of these obligations in the form of loans, distributions or otherwise. In addition, our operating subsidiaries' ability to make any such loans, distributions or other payments to Charter Holdings will depend on their earnings, business and tax considerations and legal restrictions. Covenants in the indentures and credit agreements governing the debt of Charter Holdings' subsidiaries restrict their ability to make loans, distributions or other payments to Charter Holdings. This could adversely impact our ability to pay interest and principal due on the notes. See "Description of Certain Indebtedness." BECAUSE OF OUR HOLDING COMPANY STRUCTURE, THE NOTES WILL BE SUBORDINATED TO ALL LIABILITIES OF OUR SUBSIDIARIES. The borrowers and guarantors under the Charter Operating credit facilities, the Falcon credit facilities, the Fanch credit facilities, the Avalon credit facilities and the Bresnan credit facilities are direct or indirect subsidiaries of Charter Holdings. A number of Charter Holdings' subsidiaries are also obligors under other debt instruments. As of December 31, 1999, as adjusted to give effect to the sale of the original notes, acquisitions completed since that date, the recent transfers to us of the Fanch, Falcon and Avalon cable systems, and the repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures and the Kalamazoo transaction, as if such transactions had occurred on that date, indebtedness of Charter Holdings and its subsidiaries would have totaled approximately $11.2 billion, $6.4 billion of which would have ranked senior to the notes. The lenders under all of these credit facilities and the holders of the other debt instruments will have the right to be paid before Charter Holdings from any of our subsidiaries' assets. In the event of bankruptcy, liquidation or dissolution of a subsidiary, following payment by such subsidiary of its liabilities, such subsidiary may not have sufficient assets remaining to make payments to Charter Holdings as a shareholder or otherwise. This will adversely affect our ability to make payments to you as a holder of the notes. WE HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE. We commenced active operations in 1994 and have grown rapidly since then through acquisitions of cable systems. As of December 31, 1999, after giving effect to acquisitions completed since that date, the recent transfer to us of the Fanch, Falcon and Avalon cable systems to us, our systems served approximately 392% more customers than were served as of December 31, 1998. As a result, historical financial information about us may not be indicative of the future or of results that we can achieve with the cable systems which will be under our control. Our recent growth in revenue over our short operating history is not necessarily indicative of future performance. 17 21 WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES. CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE FUTURE OPERATIONS. We have had a history of net losses and expect to continue to report net losses for the foreseeable future. We expect our net losses to increase as a result of acquisitions completed in 1999 and 2000, the recent transfer to us of the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction. We reported net losses from continuing operations before extraordinary items of $5 million for 1997, $23 million for 1998 and $578 million for 1999. On a pro forma basis, giving effect to the merger of Charter Holdings and Marcus Holdings, acquisitions completed in 1999 and 2000, the recent transfer to us of the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction, we had net losses from continuing operations before extraordinary item of $1.5 billion for 1999. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future. IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. If we are unable to grow our cash flow sufficiently, we may be unable to repay the notes or our other debt, to grow our business or to fund our other liquidity needs. We expect that a substantial portion of our future growth will be achieved through revenues from new products and services and the acquisition of additional cable systems. We may not be able to offer these new products and services successfully to our customers and these new products and services may not generate adequate revenues. In addition, we cannot predict the success of our acquisition strategy. In the past year, the cable television industry has undergone dramatic consolidation which has reduced the number of future acquisition prospects. This consolidation may increase the purchase price of future acquisitions, and we may not be successful in identifying attractive acquisition targets in the future. Additionally, those acquisitions we do complete are not likely to have a positive net impact on our operating results in the near future. If we are unable to grow our cash flow sufficiently, we may be unable to fulfill our obligations to you under the notes or obtain alternative financing. OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOW AND OPERATING MARGINS. Programming has been, and is expected to continue to be, our largest single 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. In addition, as we upgrade the channel capacity of our systems, add programming to our basic and expanded basic programming tiers and reposition premium services to the basic tier, we may face additional market constraints on our ability to pass programming costs on to our customers. Basic programming includes a variety of entertainment and local programming. Expanded basic programming offers more services than basic programming. Premium service includes unedited, commercial-free movies, sports and other special event entertainment programming. 18 22 WE MAY NOT BE ABLE TO OBTAIN CAPITAL SUFFICIENT TO FUND OUR PLANNED UPGRADES AND OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW PRODUCTS AND SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We intend to upgrade a significant portion of our cable systems over the coming years and make other capital investments. For the three years ending December 31, 2002, we plan to spend approximately $6.0 billion for capital expenditures, approximately $3.5 billion of which will be used to upgrade and rebuild our systems to bandwidth capacity of 550 megahertz or greater and add two-way capability so that we may offer advanced services. The remaining $2.5 billion will be used for extensions of systems, development of new products and services, purchases of converters and system maintenance. We cannot assure you that these amounts will be sufficient to accomplish our planned system upgrades, maintenance and expansion. If we cannot obtain the necessary funds from increases in our operating cash flow, additional borrowings or other sources, we may not be able to fund our planned upgrades and expansion and offer new products and services on a timely basis. Consequently, our growth, financial condition and results of operations could suffer materially. THE COMMITMENT WE HAVE RECEIVED FOR A BRIDGE LOAN FACILITY IS SUBJECT TO A NUMBER OF CONDITIONS. IF THESE CONDITIONS ARE NOT MET, THESE FUNDS WILL NOT BE AVAILABLE TO US. AS A RESULT, WE MAY BE UNABLE TO FUND OUR PROJECTED CAPITAL EXPENDITURES. The bridge loan facility will not close unless specified closing conditions are satisfied. Some of these closing conditions are not under our control, and we cannot assure you that all closing conditions will be satisfied. For example, the closing conditions for the bridge loan facility include: - the absence of various types of material adverse changes, including adverse changes in the financial and capital markets; and - receipt of required approvals from third parties. See "Description of Certain Indebtedness" for a description of the material closing conditions for this facility. If we are not able to obtain financing under this facility, we will need to arrange other sources of financing to meet our projected capital expenditures budget. We cannot assure you that alternate financing sources will be available to us. As a result we may be unable to fund our capital expenditures as projected in this prospectus. WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS AND SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY. CONSEQUENTLY, OUR GROWTH, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER MATERIALLY. The cable business is characterized by rapid technological change and the introduction of new products and services. We cannot assure you that we will be able to fund the capital expenditures necessary to keep pace with technological developments, or that we will successfully anticipate the demand of our customers for products and services requiring new technology. This type of rapid technological change could adversely affect our plans to upgrade or expand our systems and respond to competitive pressures. Our inability to upgrade, maintain and expand our systems and provide enhanced services in a timely manner, or to anticipate the demands of the market place, could adversely affect our ability to compete. Consequently, our growth, financial condition and results of operations could suffer materially. 19 23 WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS. The industry in which we operate is highly competitive. In some instances, we compete against companies with fewer regulatory burdens, easier access to financing, greater personnel resources, greater brand name recognition and long-standing relationships with regulatory authorities. Mergers, joint ventures and alliances among any of the following businesses could result in providers capable of offering cable television, Internet and other telecommunications services in direct competition with us: - cable television operators; - regional telephone companies; - long distance telephone service providers; - electric utilities; - local exchange carriers, which are local phone companies that provide local area telephone services and access to long distance services to customers; - providers of cellular and other wireless communications services; and - Internet service providers. We face competition within the subscription television industry, which includes providers of paid television service employing technologies other than cable, such as direct broadcast satellite or DBS, and excludes broadcast companies that transmit their signal to customers without assessing a subscription fee. We also face competition from broadcast companies distributing television broadcast signals without assessing a subscription fee and from other communications and entertainment media, including conventional off-air television and radio broadcasting services, newspapers, movie theaters, the Internet, live sports events and home video products. We cannot assure you that upgrading our cable systems will allow us to compete effectively. Additionally, as we expand and introduce new and enhanced services, including Internet and telecommunications services, we will be subject to competition from telecommunications providers and Internet service providers. We cannot predict the extent to which competition may affect our business and operations in the future. See "Business -- Competition." WE MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON FAVORABLE TERMS AND OUR CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY. THIS COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The expansion and upgrade of our existing systems and the systems we plan to acquire will require us to hire contractors and enter into a number of construction agreements. We may have difficulty hiring civil contractors, and the contractors we hire may encounter cost overruns or delays in construction. Our construction costs may increase significantly over the next few years as existing contracts expire and as demand for cable construction services continues to grow. We cannot assure you that we will be able to construct new systems or expand or upgrade existing or acquired systems in a timely manner or at a reasonable cost. This may adversely affect our growth, financial condition and results of operations. THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR OBLIGATIONS IN THE FUTURE. In the past, Mr. Allen and his affiliates have contributed funds to Charter Holdings, Charter Communications, Inc. and Charter Communications Holding Company. There should be no expectation that Mr. Allen or his affiliates will contribute funds to Charter Holdings, Charter 20 24 Communications, Inc., Charter Communications Holding Company or to our subsidiaries in the future. A SALE BY MR. ALLEN OF HIS DIRECT OR INDIRECT EQUITY INTERESTS COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR BUSINESS. Mr. Allen is not prohibited by any agreement from selling the shares of Class B common stock he holds in Charter Communications, Inc. or causing Charter Investment, Inc. or Vulcan Cable III Inc. to sell their membership units in Charter Communications Holding Company after the last day of the 180-day lock-up period following Charter Communications, Inc.'s November 1999 initial public offering. We cannot assure you that Mr. Allen or any of his affiliates will maintain all or any portion of his direct or indirect ownership interests in Charter Communications, Inc. or Charter Communications Holding Company. In the event he sells all or any portion of his direct or indirect ownership interest in Charter Communications, Inc. or Charter Communications Holding Company, we cannot assure you that he would continue as Chairman of Charter Communications, Inc.'s board of directors or otherwise participate in our management. The disposition by Mr. Allen or any of his affiliates of these equity interests or the loss of his services by Charter Communications, Inc. and/or Charter Communications Holding Company could adversely affect our growth, financial condition and results of operations. THE LOSS OF KEY EXECUTIVES COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR BUSINESS. Our success is substantially dependent upon the retention and the continued performance of Mr. Allen, Chairman of Charter Communications, Inc.'s board of directors, and Jerald L. Kent, Charter Communications, Inc.'s President and Chief Executive Officer. The loss of the services of Mr. Allen or Mr. Kent could adversely affect our growth, financial condition and results of operations. CHARTER'S STRUCTURE MR. ALLEN MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS. Mr. Allen controls approximately 93.6% of the voting power of Charter Communications, Inc. Charter Communications, Inc., in turn, controls Charter Communications Holding Company, our 100% parent. Accordingly, Mr. Allen has the ability to control fundamental corporate transactions, including, but not limited to, approval of merger transactions involving us and the sale of all or substantially all of our assets. Mr. Allen's control over our management and affairs could create conflicts of interest if he is faced with decisions that could have implications both for him and for us and the holders of the notes. Further, Mr. Allen could cause us to enter into contracts with another entity in which he owns an interest or cause us to decline a transaction that he or an entity in which he owns an interest ultimately enters into. Mr. Allen may engage in other businesses involving the operation of cable television systems, video programming, high-speed Internet access, telephony or electronic commerce, which is business and financial transactions conducted through broadband interactivity and Internet services. Mr. Allen may also engage in other businesses that compete or may in the future compete with us. In addition, Mr. Allen currently engages and may engage in the future in businesses that are complementary to our cable television business. Accordingly, conflicts could arise with respect to the allocation of corporate opportunities between us and Mr. Allen. Current or future agreements between us and Mr. Allen or his affiliates may not be the result of arm's-length negotiations. Consequently, such agreements may be less favorable to us than agreements that we could otherwise have entered into with unaffiliated third 21 25 parties. Further, many past and future transactions with Mr. Allen or his affiliates are informal in nature. As a result, there will be some discretion left to the parties, who are subject to the potentially conflicting interests described above. We cannot assure you that the interests of either Mr. Allen or his affiliates will not conflict with the interests of the holders of the notes. We have not instituted any formal plans to address conflicts of interest that may arise. WE ARE NOT PERMITTED TO ENGAGE IN ANY BUSINESS ACTIVITY OTHER THAN THE CABLE TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR. ALLEN AUTHORIZES US TO PURSUE THAT PARTICULAR BUSINESS ACTIVITY. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW PRODUCTS AND SERVICES OUTSIDE OF THE CABLE TRANSMISSION BUSINESS AND ENTER INTO NEW BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Charter Communications, Inc.'s certificate of incorporation and Charter Communications Holding Company's limited liability company agreement provide that Charter Communications, Inc. and Charter Communications Holding Company and their subsidiaries, including Charter Holdings and its subsidiaries, cannot engage in any business activity outside the cable transmission business except for the joint venture through Broadband Partners, Inc. and incidental businesses engaged in as of the closing of Charter Communications, Inc.'s initial public offering in November 1999. This will be the case unless the opportunity to pursue the particular business activity is first offered to Mr. Allen, he decides not to pursue it and he consents to our engaging in the business activity. The cable transmission business means the business of transmitting video, audio, including telephone services, and data over cable television systems owned, operated or managed by us from time to time. These provisions may limit our ability to take advantage of attractive business opportunities. Consequently, our ability to offer new products and services outside of the cable transmission business and enter into new businesses could be adversely affected, resulting in an adverse effect on our growth, financial condition and results of operations. See "Certain Relationships and Related Transactions -- Allocation of Business Opportunities with Mr. Allen." OUR MANAGEMENT MAY BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND MAY NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD GIVE RISE TO CONFLICTS OF INTEREST AND IMPAIR OUR OPERATING RESULTS. Mr. Allen and certain other of our affiliates may from time to time in the future acquire cable systems in addition to those owned by us or to be acquired by us in the Kalamazoo transaction. We cannot assure you that Charter Communications, Inc., Charter Communications Holding Company or any of their affiliates will contribute any future acquisitions to Charter Holdings or to any of its subsidiaries. Charter Communications, Inc., as well as some of the officers of Charter Communications, Inc. who currently manage our cable systems, may have a substantial role in managing outside cable systems that may be acquired in the future. As a result, the time they devote to managing our systems may be correspondingly reduced. This could adversely affect our growth, financial condition and results of operations. Moreover, allocating managers' time and other resources of Charter Communications, Inc. and Charter Communications Holding Company between our systems and outside systems that may be held by our affiliates could give rise to conflicts of interest. Charter Communications, Inc. and Charter Communications Holding Company do not have or plan to create formal procedures for determining whether and to what extent outside cable television systems acquired in the future will receive priority with respect to personnel requirements. 22 26 ACQUISITIONS WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW CABLE SYSTEMS THAT WE ACQUIRE AND THE CUSTOMERS THEY SERVE WITH OUR EXISTING CABLE SYSTEMS. THIS COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND GROWTH STRATEGY. We have grown rapidly through acquisitions of cable systems, and now own and operate cable systems serving approximately 6.2 million customers. We will acquire additional cable systems if the Swap Transaction and the Kalamazoo transaction are completed and we may acquire more cable systems in the future, through direct acquisition, system swaps or otherwise. The integration of the cable systems we have recently acquired and plan to acquire poses a number of significant risks, including: - our acquisitions may not have a positive impact on our cash flows from operations; - the integration of these new systems and customers will place significant demands on our management and our operations, information services, and financial, legal and marketing resources. Our current operating and financial systems and controls and information services may not be adequate, and any steps taken to improve these systems and controls may not be sufficient; - our current information systems may be incompatible with the information systems we have acquired or plan to acquire. We may be unable to integrate these information systems at a reasonable cost or in a timely manner; - acquired businesses sometimes result in unexpected liabilities and contingencies which could be significant; and - our continued growth will also increase our need for qualified personnel. We may not be able to hire such additional qualified personnel. We cannot assure you that we will successfully integrate any acquired systems into our operations. THE FAILURE TO OBTAIN NECESSARY REGULATORY APPROVALS, OR TO SATISFY OTHER CLOSING CONDITIONS, COULD IMPEDE THE CONSUMMATION OF A PENDING TRANSACTION. THIS WOULD PREVENT OR DELAY OUR STRATEGY TO EXPAND OUR BUSINESS AND INCREASE REVENUES. The Swap Transaction and the Kalamazoo transaction are subject to federal, state and local regulatory approvals. We cannot assure you that we will be able to obtain any necessary approvals. These transactions are also subject to a number of other closing conditions. We cannot assure you as to when, or if, each such transaction will be consummated. Any delay, prohibition or modification could adversely affect the terms of such transactions or could require us to abandon an otherwise attractive opportunity and possibly forfeit earnest money. IF CHARTER COMMUNICATIONS, INC. AND CHARTER COMMUNICATIONS HOLDING COMPANY DO NOT HAVE SUFFICIENT CAPITAL TO FUND POSSIBLE RESCISSION LIABILITIES, THEY COULD SEEK FUNDS FROM CHARTER HOLDINGS AND ITS SUBSIDIARIES. The Rifkin, Falcon and Bresnan sellers who acquired Charter Communications Holding Company membership units or, in the case of Bresnan, additional equity interests in one of our subsidiaries, in connection with the respective Rifkin, Falcon and Bresnan acquisitions, and the Helicon sellers who acquired shares of Class A common stock in Charter Communications, Inc.'s initial public offering may have rescission rights against Charter Communications, Inc. and Charter Communications Holding Company arising out of possible violations of Section 5 of the Securities 23 27 Act. If all of these equity holders successfully exercise their possible rescission rights, Charter Communications, Inc. or Charter Communications Holding Company would become obligated to repurchase all such equity interests and the total repurchase obligation would be up to approximately $1.8 billion. We cannot assure you that Charter Communications, Inc. and Charter Communications Holding Company would be able to obtain capital sufficient to fund any required repurchases. If Charter Communications, Inc. and Charter Communications Holding Company fail to obtain capital sufficient to fund any required repurchases, they could seek such funds from us and our subsidiaries. This could adversely affect our financial condition and results of operations. REGULATORY AND LEGISLATIVE MATTERS OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION. THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES. Regulation of the cable industry has increased the administrative and operational expenses and limited the revenues of cable systems. Cable operators are subject to, among other things: - limited rate regulation; - requirements that, under specified circumstances, a cable system carry a local broadcast station or obtain consent to carry a local or distant broadcast station; - rules for franchise renewals and transfers; and - other requirements covering a variety of operational areas such as equal employment opportunity, technical standards and customer service requirements. Additionally, many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. There are also ongoing efforts to amend or expand the state and local regulation of some of our cable systems, which may compound the regulatory risks we already face. Certain states and localities, led by Florida, are considering new telecommunications taxes that could increase operating expenses. We cannot predict whether in response to these efforts any of the states or localities in which we now operate will expand regulation of our cable systems in the future or how they will do so. WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE PROVIDERS. THIS COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY AFFECT THE UPGRADE OF OUR SYSTEMS OR OUR ABILITY TO PROVIDE NEW PRODUCTS AND SERVICES. Recently, a number of companies, including telephone companies and Internet service providers, have requested local authorities and the Federal Communications Commission to require cable operators to provide access to cable's broadband infrastructure, which allows cable to deliver a multitude of channels and/or services, so that these companies may deliver Internet services directly to customers over cable facilities. Certain local franchising authorities are considering or have already approved such "open access" requirements. A federal district court in Portland, Oregon has upheld the legality of an open access requirement, but that case has been appealed to the Ninth Circuit. We believe that allocating a portion of our bandwidth capacity to other Internet service providers: - would impair our ability to use our bandwidth in ways that would generate maximum revenues; - would strengthen our Internet service provider competitors; and 24 28 - may cause us to decide not to upgrade our systems which would prevent us from introducing our planned new products and services. In addition, we cannot assure you that if we were required to provide access in this manner, it would not have a significant adverse impact on our profitability. This could impact us in many ways, including by: - increasing competition; - increasing the expenses we incur to maintain our systems; and/or - increasing the expense of upgrading and/or expanding our systems. OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR BUSINESS IN A KEY MARKET. Our cable systems generally operate pursuant to franchises, permits or licenses typically granted by a municipality or other state or local government controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and establish monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with material provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal, which have been and may continue to be costly to us. In some instances, franchises have not been renewed at expiration, and we have operated under either temporary operating agreements or without a license while negotiating renewal terms with the local franchising authorities. We cannot assure you that we will be able to comply with all material provisions of our franchise agreements or that we will be able to renew our franchises in the future. A termination of and/or a sustained failure to renew a franchise could adversely affect our business in the affected geographic area. WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY. Our cable systems are operated under franchises granted by local franchising authorities. These franchises are non-exclusive. Consequently, such local franchising authorities can grant additional franchises to competitors in the same geographic area. As a result, competing operators may build systems in areas in which we hold franchises. In some cases municipal utilities may legally compete with us without obtaining a franchise from the local franchising authority. The existence of more than one cable system operating in the same territory is referred to as an overbuild. These overbuilds could adversely affect our growth, financial condition and results of operations by increasing competition or creating competition where none existed previously. As of December 31, 1999, pro forma for the recent transfers to us of the Fanch, Falcon and Avalon cable systems and the Bresnan acquisition, we are aware of overbuild situations impacting 115,000 of our customers and potential overbuild situations in areas servicing another 134,000 basic customers, together representing a total of 249,000 customers. Additional overbuild situations may occur in other systems. 25 29 LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY CONSTRAINTS ON OUR BUSINESS. THIS CAN FURTHER INCREASE OUR EXPENSES. In addition to the franchise document, cable authorities have also adopted in some jurisdictions cable regulatory ordinances that further regulate the operation of cable systems. This additional regulation increases our expenses in operating our business. We cannot assure you that the local franchising authorities will not impose new and more restrictive requirements. Local franchising authorities also have the power to reduce rates and order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. Basic service tier rates are the prices charged for basic programming services. As of December 31, 1999, we have refunded a total of approximately $835,000 since our inception. We may be required to refund additional amounts in the future. DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS COULD CAUSE US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS OR IMPAIR OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS. On March 31, 1999, the pricing of expanded basic cable programming packages was deregulated, permitting cable operators to set their own rates. This deregulation was not applicable to basic services. However, the Federal Communications Commission and the United States Congress continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the Federal Communications Commission or the United States Congress will again restrict the ability of cable television operators to implement rate increases. Should this occur, it would impede our ability to raise our rates. If we are unable to raise our rates in response to increasing costs, our financial condition and results of operations could be materially adversely affected. IF WE OFFER TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL REGULATORY BURDENS CAUSING US TO INCUR ADDITIONAL COSTS. If we enter the business of offering telecommunications services, we may be required to obtain federal, state and local licenses or other authorizations to offer these services. We may not be able to obtain such authorizations in a timely manner, or at all, and conditions could be imposed upon such licenses or authorizations that may not be favorable to us. Furthermore, telecommunications companies, including Internet protocol telephony companies, generally are subject to significant regulation as well as higher fees for pole attachments. Internet protocol telephony companies are companies that have the ability to offer telephone services over the Internet. Pole attachments are cable wires that are attached to poles. In particular, cable operators who provide telecommunications services and cannot reach agreement with local utilities over pole attachment rates in states that do not regulate pole attachment rates will be subject to a methodology prescribed by the Federal Communications Commission for determining the rates. These rates may be higher than those paid by cable operators who do not provide telecommunications services. The rate increases are to be phased in over a five- year period beginning on February 8, 2001. If we become subject to telecommunications regulation or higher pole attachment rates, we may incur additional costs which may be material to our business. A recent court decision suggests that the provision of Internet service may subject cable systems to higher pole attachment rates. 26 30 THE EXCHANGE OFFER THERE IS NO MARKET FOR THE NOTES. AN ACTIVE TRADING MARKET MAY NOT DEVELOP CAUSING DIFFICULTIES FOR YOU IF YOU TRY TO RESELL THE NOTES. The new notes will be new securities for which there is currently no public market. We do not intend to list the new notes on any national exchange or quotation system. There can be no assurance as to the development of any market or liquidity of any market that may develop for the new notes. If a trading market does not develop or is not maintained, you may experience difficulty in reselling new notes or you may be unable to sell them at all. IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES FOR NEW NOTES, SUCH ORIGINAL NOTES WILL REMAIN SUBJECT TO RESTRICTIONS ON TRANSFER. ACCORDINGLY, THE LIQUIDITY OF THE MARKET FOR THE ORIGINAL NOTES COULD BE ADVERSELY AFFECTED. Holders of original notes who do not exchange their original notes for new notes pursuant to the exchange offer will continue to be subject to the restrictions on transfer of the original notes set forth in the legend on the original notes. This is a consequence of the issuance of the original notes pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. In general, original notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. If we complete the exchange offer, we will not be required to register the original notes, and we do not anticipate that we will register the original notes, under the Securities Act. Additionally, to the extent that original notes are tendered and accepted in the exchange offer, the aggregate principal amount of original notes outstanding will decrease, with a resulting decrease in the liquidity of the market for the original notes. WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES FOLLOWING A CHANGE OF CONTROL. THIS WOULD PLACE US IN DEFAULT UNDER THE INDENTURES GOVERNING THE NOTES. Under the indentures governing the notes, upon the occurrence of specified change of control events, we will be required to offer to repurchase all outstanding notes. However, we may not have sufficient funds at the time of the change of control event to make the required repurchase of the notes. In addition, a change of control would require the repayment of borrowings under our other publicly held debt and our credit facilities. Because our credit facilities and other publicly held debt, other than the existing senior notes and senior discount notes of Charter Holdings, are obligations of subsidiaries of Charter Holdings, the credit facilities and such debt would have to be repaid by our subsidiaries before their assets could be available to Charter Holdings to repurchase the notes. Our failure to make or complete an offer to repurchase the notes would place us in default under the indentures governing the notes. You should also be aware that a number of important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a change of control under the indentures governing the notes. IF WE DO NOT FULFILL OUR OBLIGATIONS TO YOU UNDER THE NOTES, YOU WILL NOT HAVE ANY RECOURSE AGAINST CHARTER COMMUNICATIONS, INC., CHARTER COMMUNICATIONS HOLDING COMPANY, MR. ALLEN OR THEIR EQUITY HOLDERS OR THEIR AFFILIATES. The notes will be issued solely by Charter Holdings and Charter Capital. None of our equity holders, directors, officers, employees or affiliates, including Charter Communications, Inc., Charter Communications Holding Company and Mr. Allen, will be an obligor or guarantor under the notes. Furthermore, the indentures governing the notes expressly provide that these parties will not have any 27 31 liability for our obligations under the notes or the indentures governing the notes. By accepting the notes, you waive and release all such liability as consideration for issuance of the notes. Consequently, if the issuers of the notes do not fulfill their obligations to you under the notes, you will have no recourse against any of these parties. Additionally, our equity holders, including Charter Communications, Inc., Charter Communications Holding Company and Mr. Allen, will be free to manage other entities, including other cable companies. If we do not fulfill our obligations to you under the notes, you will have no recourse against those other entities or their assets. THE 11.75% DISCOUNT NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT. CONSEQUENTLY, HOLDERS OF THE 11.75% DISCOUNT NOTES WILL GENERALLY BE REQUIRED TO INCLUDE AMOUNTS IN GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES IN ADVANCE OF RECEIVING CASH. The 11.75% discount notes will be issued at a substantial discount from their stated principal amount. As a result, purchasers of the 11.75% discount notes generally will be required to include the accrued portion of this discount in gross income, as interest, for United States federal income tax purposes in advance of the receipt of cash payments of this interest. IF A BANKRUPTCY PETITION WERE FILED BY OR AGAINST US, YOU MAY RECEIVE A LESSER AMOUNT FOR YOUR CLAIM THAN YOU WOULD BE ENTITLED TO RECEIVE UNDER THE INDENTURE GOVERNING THE 11.75% DISCOUNT NOTES, AND YOU MAY REALIZE TAXABLE GAIN OR LOSS UPON PAYMENT OF YOUR CLAIM. If a bankruptcy petition were filed by or against us under the U.S. Bankruptcy Code after the issuance of the 11.75% discount notes, the claim by a holder of the 11.75% discount notes for the principal amount of the 11.75% discount notes may be limited to an amount equal to the sum of: (1) the initial offering price for the 11.75% discount notes; and (2) that portion of the original issue discount that does not constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any original issue discount that was not amortized as of the date of the bankruptcy filing would constitute unmatured interest. Accordingly, holders of 11.75% discount notes under these circumstances may receive a lesser amount than they would be entitled to receive under the terms of the indenture governing the 11.75% discount notes, even if sufficient funds are available. In addition, to the extent that the U.S. Bankruptcy Code differs from the Internal Revenue Code in determining the method of amortization of original issue discount, a holder of 11.75% discount notes may realize taxable gain or loss upon payment of that holder's claim in bankruptcy. 28 32 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements regarding, among other things, our plans, strategies and prospects, both business and financial. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Many of the forward-looking statements contained in this prospectus may be identified by the use of forward-looking words such as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential," among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in this prospectus and in other reports or documents that we file from time to time with the SEC and include, but are not limited to: - Our plans to achieve growth by offering new products and services and through acquisitions and swaps; - Our anticipated capital expenditures for our planned upgrades and the ability to fund these expenditures; - Our beliefs regarding the effects of governmental regulation on our business; and - Our ability to effectively compete in a highly competitive environment. All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by those cautionary statements. 29 33 USE OF PROCEEDS This exchange offer is intended to satisfy certain of our obligations under the exchange and registration rights agreements entered into in connection with the offering of the original notes. We will not receive any proceeds from the exchange offer. In consideration for issuing the new notes, we will receive original notes with the same original principal amount at maturity. The form and terms of the original notes are the same as the form and terms of the new notes, except as otherwise described in this prospectus. The original notes surrendered in exchange for new notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the new notes will not result in any increase in our outstanding debt. We received proceeds totaling approximately $1.3 billion from the private placement of the original notes. These proceeds were used to finance the Avalon, Falcon and Bresnan change of control offers, including accrued and unpaid interest. The break-down of the uses of proceeds is as follows (in millions): Change of control offers: Falcon 8.375% senior debentures due 2010...................... $ 388.0 9.285% senior discount debentures due 2010............. 328.1 Avalon 9.375% senior subordinated notes due 2008.............. 153.7 11.875% senior discount notes due 2008................. 10.5 Bresnan 8.0% senior notes due 2005............................. 173.7 9.25% senior discount notes due 2009................... 196.0 Discounts and commissions................................... 26.8 Expenses.................................................... 23.5 -------- Total....................................................... $1,300.3 ========
30 34 CAPITALIZATION The following table sets forth as of December 31, 1999 on a consolidated basis: - the actual capitalization of Charter Holdings; - the pro forma capitalization of Charter Holdings, assuming that as of December 31, 1999: (1) all acquisitions closed since December 31, 1999 had been completed (including the transfer of an Indiana cable system in the InterMedia acquisition); (2) the recent transfer to Charter Holdings of the Fanch, Falcon and Avalon cable systems had occurred and the Kalamazoo transaction had been completed; and - the pro forma as adjusted capitalization of Charter Holdings to reflect: (1) the issuance and sale of the original notes; and (2) the repurchase of a portion of the Avalon 11.875% senior discount notes and all the Avalon 9.375% senior subordinated notes, all of the Falcon debentures and all of the Bresnan notes pursuant to the Avalon, Falcon and Bresnan change of control offers at prices equal to 101% of their aggregate principal amounts, plus accrued and unpaid interest, or their accreted value, as applicable. This table should be read in conjunction with the "Unaudited Pro Forma Financial Statements" and the accompanying notes included elsewhere in this prospectus.
AS OF DECEMBER 31, 1999 ----------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Long-term debt: Credit facilities: Charter Operating(a)................................. $ 2,906,000 $ 3,862,096 $ 3,862,096 CC V -- Avalon....................................... -- 170,000 170,000 CC VI -- Fanch....................................... -- 850,000 850,000 CC VII -- Falcon..................................... -- 1,038,500 1,038,500 CC VIII Operating -- Bresnan(b)...................... -- 631,200 631,200 8.250% senior notes due 2007........................... 598,557 598,557 598,557 8.625% senior notes due 2009........................... 1,495,787 1,495,787 1,495,787 9.920% senior discount notes due 2011.................. 977,807 977,807 977,807 10.00% senior notes due 2009........................... -- -- 675,000 10.25% senior notes due 2010........................... -- -- 325,000 11.75% senior discount notes due 2010.................. -- -- 300,303 9.375% senior subordinated notes -- Avalon............. -- 151,500 -- 11.875% senior discount notes -- Avalon(c)............. -- 129,212 118,675 8.375% senior debentures -- Falcon..................... -- 378,750 -- 9.285% senior discount debentures -- Falcon............ -- 325,381 -- 8.0% senior notes -- Bresnan........................... -- 171,700 -- 9.25% senior discount notes -- Bresnan................. -- 196,013 -- Other notes(d)......................................... 87,461 87,961 87,961 Loans payable to parent companies -- related parties(e)........................................... 906,000 24,000 24,000 ----------- ----------- ----------- Total long-term debt................................. 6,971,612 11,088,464 11,154,886 ----------- ----------- ----------- Minority interest(f)..................................... -- 629,488 629,488 Member's equity(g)....................................... 4,344,262 9,661,630 9,661,630 ----------- ----------- ----------- Total capitalization................................. $11,315,874 $21,379,582 $21,446,004 =========== =========== ===========
31 35 - - - ------------------------- (a) The increase in the Charter Operating credit facilities is related to additional borrowings to finance the purchase prices of the Capital Cable and Farmington acquisitions and to repay loans payable to parent companies -- related parties. (b) The Bresnan credit facilities in place on December 31, 1999 were amended and the borrowing availability thereunder was increased in February 2000. The Pro Forma and Pro Forma As Adjusted represent $534.2 million in outstanding borrowings under the Bresnan credit facilities on December 31, 1999 and $97.0 million in additional borrowings under these credit facilities used to fund a portion of the Bresnan acquisition purchase price. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financing Activities" and "Description of Certain Indebtedness." (c) A portion of the Avalon 11.875% senior discount notes were repurchased through a change of control offer using a portion of the proceeds from the sale of the original notes. (d) Primarily represents outstanding notes of our Renaissance subsidiary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financing Activities" and "Description of Certain Indebtedness." (e) Represents loans payable to Charter Communications Holding Company and Charter Communications, Inc., the direct and indirect parent companies of Charter Holdings. (f) Represents preferred membership units in an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers, which are exchangeable on a one-for-one basis for shares of Class A common stock in Charter Communications, Inc. (g) The increase in member's equity is primarily a result of the transfers to Charter Holdings of the Fanch, Falcon and Avalon cable systems; the acquisition of a portion of Bresnan by Charter Communications Holding Company and subsequent contribution to Charter Holdings; and the acquisition of the Kalamazoo cable system by Charter Communications, Inc. and subsequent contribution to Charter Holdings. 32 36 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The following Unaudited Pro Forma Financial Statements are based on the historical financial statements of Charter Holdings. Since January 1, 1999, Charter Holdings has closed numerous acquisitions. In addition, Charter Holdings merged with Marcus Holdings in April 1999. Our financial statements, on a consolidated basis, are adjusted on a pro forma basis to illustrate the estimated effects of acquisitions closed since December 31, 1999, the recent transfers to Charter Holdings of the Fanch, Falcon and Avalon cable systems, the repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures, the Kalamazoo transaction and the issuance and sale of the original notes as if such transactions had occurred on December 31, 1999 for the Unaudited Pro Forma Balance Sheet and to illustrate the estimated effects of the following transactions as if they had occurred on January 1, 1999 for the Unaudited Pro Forma Statement of Operations: (1) the acquisition of Marcus Cable by Mr. Allen and Marcus Holdings' merger with and into Charter Holdings effective March 31, 1999; (2) the acquisitions by Charter Holdings and its subsidiaries completed since January 1, 1999, including the Bresnan acquisition; (3) the completion of the Fanch, Falcon and Avalon acquisitions and recent transfers; (4) the refinancing of the previous credit facilities of the Charter Companies and certain subsidiaries acquired by us or transferred to us in 1999 and 2000; and (5) the sale of the March 1999 Charter Holdings notes and the original notes, and the repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures. The Unaudited Pro Forma Financial Statements reflect the application of the principles of purchase accounting to the transactions listed in items (1) and (2) above. The Unaudited Pro Forma Balance Sheet reflects the historical balance sheets of the entities listed in item (3) to which the principles of purchase accounting were applied upon their respective acquisitions by Charter Communications Holding Company. The allocation of certain purchase prices is based, in part, on preliminary information, which is subject to adjustment upon obtaining complete valuation information of intangible assets and is subject to post-closing purchase price adjustments. We believe that these adjustments will not have a material impact on our results of operations or financial position. The Unaudited Pro Forma Financial Statements of Charter Holdings do not purport to be indicative of what our financial position or results of operations would actually have been had the transactions described above been completed on the dates indicated or to project our results of operations for any future date. 33 37
UNAUDITED PRO FORMA DATA AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 -------------------------------------------------------------------------------------- CHARTER ACQUISITIONS AND KALAMAZOO OFFERING HOLDINGS RECENT TRANSFERS TRANSACTION ADJUSTMENTS (NOTE A) (NOTE B) SUBTOTAL (NOTE B) (NOTE C) TOTAL ----------- ---------------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS: Revenues................................. $ 1,451,010 $ 1,479,616 $ 2,930,626 $ 20,259 $ -- $ 2,950,885 ----------- ----------- ----------- -------- -------- ----------- Operating expenses: Operating, general and administrative....................... 752,630 747,972 1,500,602 12,006 -- 1,512,608 Depreciation and amortization.......... 739,453 944,010 1,683,463 13,104 -- 1,696,567 Option compensation expense............ 79,979 -- 79,979 -- -- 79,979 Corporate expense charges (Note D)..... 48,158 61,656 109,814 816 -- 110,630 Management fees........................ -- 16,224 16,224 -- -- 16,224 ----------- ----------- ----------- -------- -------- ----------- Total operating expenses............. 1,620,220 1,769,862 3,390,082 25,926 -- 3,416,008 ----------- ----------- ----------- -------- -------- ----------- Loss from operations..................... (169,210) (290,246) (459,456) (5,667) -- (465,123) Interest expense......................... (456,895) (530,528) (987,423) -- (34,187) (1,021,610) Interest income.......................... 3,956 1,335 5,291 -- -- 5,291 Other expense............................ (375) (481) (856) (189) -- (1,045) ----------- ----------- ----------- -------- -------- ----------- Loss before income taxes, minority interest and extraordinary item........ (622,524) (819,920) (1,442,444) (5,856) (34,187) (1,482,487) Income tax expense....................... -- (3,747) (3,747) -- -- (3,747) Minority interest (Note E)............... -- (12,589) (12,589) -- -- (12,589) ----------- ----------- ----------- -------- -------- ----------- Loss before extraordinary item........... $ (622,524) $ (836,256) $(1,458,780) $ (5,856) $(34,187) $(1,498,823) =========== =========== =========== ======== ======== =========== OTHER FINANCIAL DATA: EBITDA (Note F).......................... $ 569,868 $ 653,283 $ 1,223,151 $ 7,248 $ 1,230,399 EBITDA margin (Note G)................... 39.3% 44.2% 41.7% 35.8% 41.7% Adjusted EBITDA (Note H)................. $ 698,380 $ 731,644 $ 1,430,024 $ 8,253 $ 1,438,277 Cash flows from operating activities..... 409,166 474,383 883,549 11,368 894,917 Cash flows used in investing activities............................. (3,544,087) (635,471) (4,179,558) (6,253) (4,185,811) Cash flows from financing activities..... 3,218,309 243,024 3,461,333 -- 3,461,333 Cash interest expense.................... 847,958 Capital expenditures..................... 766,788 539,069 1,305,857 6,253 1,312,110 Total debt to EBITDA..................... 9.1x Total debt to adjusted EBITDA............ 7.8 EBITDA to cash interest expense.......... 1.5 EBITDA to interest expense............... 1.2 Deficiency of earnings to cover fixed charges (Note I)....................... $ 1,498,823 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGE): Homes passed (Note J).................... 4,040,000 5,874,000 9,914,000 60,000 9,974,000 Basic customers (Note K)................. 2,274,000 3,897,000 6,171,000 49,000 6,220,000 Basic penetration (Note L)............... 56.3% 66.3% 62.2% 81.7% 62.4% Premium units (Note M)................... 1,445,000 1,712,000 3,157,000 30,000 3,187,000 Premium penetration (Note N)............. 63.5% 43.9% 51.2% 61.2% 51.2% Average monthly revenue per basic customer (Note O)...................... $ 39.53
34 38 NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS NOTE A: Pro forma operating results for Charter Holdings consist of the following (dollars in thousands):
HISTORICAL ----------------------------- 1/1/99 YEAR ENDED THROUGH 12/31/99 3/31/99 CHARTER MARCUS PRO FORMA HOLDINGS HOLDINGS(a) ADJUSTMENTS TOTAL -------------- ----------- ----------- ---------- Revenues................................................. $1,325,830 $125,180 $ -- $1,451,010 ---------- -------- -------- ---------- Operating expenses: Operating, general and administrative.................. 683,646 68,984 -- 752,630 Depreciation and amortization.......................... 675,786 51,688 11,979(b) 739,453 Option compensation expense............................ 79,979 -- -- 79,979 Corporate expense charges.............................. 48,158 -- -- 48,158 Management fees........................................ -- 4,381 (4,381)(c) -- ---------- -------- -------- ---------- Total operating expenses............................. 1,487,569 125,053 7,598 1,620,220 ---------- -------- -------- ---------- Income (loss) from operations............................ (161,739) 127 (7,598) (169,210) Interest expense......................................... (434,995) (27,067) 5,167(d) (456,895) Interest income.......................................... 18,821 104 (14,969)(e) 3,956 Other expense............................................ (217) (158) -- (375) ---------- -------- -------- ---------- Loss before extraordinary item........................... $ (578,130) $(26,994) $(17,400) $ (622,524) ========== ======== ======== ==========
- - - ------------------------- (a) Marcus Holdings represents the results of operations of Marcus Holdings through March 31, 1999, the date of its merger with Charter Holdings. (b) As a result of Mr. Allen acquiring a controlling interest in Marcus Cable, a large portion of the purchase price was recorded as franchises ($2.5 billion) that are amortized over 15 years. This resulted in additional amortization for the period from January 1, 1999 through March 31, 1999. The adjustment to depreciation and amortization expense consists of the following (dollars in millions):
WEIGHTED AVERAGE USEFUL LIFE DEPRECIATION/ FAIR VALUE (IN YEARS) AMORTIZATION ---------- ---------------- ------------- Franchises.................................................. $2,500.0 15 $ 40.8 Cable distribution systems.................................. 720.0 8 21.2 Land, buildings and improvements............................ 28.3 10 0.7 Vehicles and equipment...................................... 13.6 3 1.0 ------ Total depreciation and amortization....................... 63.7 Less -- historical depreciation and amortization of Marcus Cable................................................... (51.7) ------ Adjustment.............................................. $ 12.0 ======
(c) Reflects the elimination of management fees. (d) As a result of the acquisition of Marcus Cable by Mr. Allen, the carrying value of outstanding debt was recorded at estimated fair value, resulting in a debt premium that is to be amortized as an offset to interest expense over the term of the debt. This resulted in a reduction of interest expense. Interest expense was further reduced by the effects of the extinguishment of substantially all of our long-term debt in March 1999, excluding borrowings under our previous credit facilities, and the refinancing of all previous credit facilities. (e) Reflects the elimination of interest income on excess cash since we assumed substantially all such cash was used to finance a portion of the acquisitions completed in 1999. 35 39 NOTE B: Pro forma operating results for our acquisitions completed in 1999 and 2000, recent transfers and the Kalamazoo transaction consist of the following (dollars in thousands):
YEAR ENDED DECEMBER 31, 1999 ACQUISITIONS -- HISTORICAL ------------------------------------------------------------------- GREATER AMERICAN MEDIA RENAISSANCE(a) CABLE(a) SYSTEMS(a) HELICON(a) RIFKIN(a) -------------- -------- ---------- ---------- --------- Revenues...................................... $20,396 $12,311 $42,348 $ 49,564 $152,364 ------- ------- ------- -------- -------- Operating expenses: Operating, general and administrative........ 9,382 6,465 26,067 31,563 95,077 Depreciation and amortization................ 8,912 5,537 5,195 16,617 77,985 Management fees.............................. -- 369 -- 2,511 2,513 ------- ------- ------- -------- -------- Total operating expenses................... 18,294 12,371 31,262 50,691 175,575 ------- ------- ------- -------- -------- Income (loss) from operations................. 2,102 (60) 11,086 (1,127) (23,211) Interest expense.............................. (6,321) (3,218) (565) (20,682) (34,926) Interest income............................... 122 32 -- 124 -- Other income (expense)........................ -- 2 (398) -- (12,742) ------- ------- ------- -------- -------- Income (loss) before income taxes and extraordinary item........................... (4,097) (3,244) 10,123 (21,685) (70,879) Income tax expense (benefit).................. (65) 5 4,535 -- (1,975) ------- ------- ------- -------- -------- Income (loss) before extraordinary item....... $(4,032) $(3,249) $ 5,588 $(21,685) $(68,904) ======= ======= ======= ======== ======== YEAR ENDED DECEMBER 31, 1999 ACQUISITIONS -- HISTORICAL ---------------------------------- INTERMEDIA SYSTEMS(a) BRESNAN OTHER(b) ---------- -------- -------- Revenues...................................... $152,789 $283,574 $24,826 -------- -------- ------- Operating expenses: Operating, general and administrative........ 84,174 176,611 14,232 Depreciation and amortization................ 79,325 59,752 6,792 Management fees.............................. 2,356 -- 910 -------- -------- ------- Total operating expenses................... 165,855 236,363 21,934 -------- -------- ------- Income (loss) from operations................. (13,066) 47,211 2,892 Interest expense.............................. (17,636) (67,291) (6,180) Interest income............................... 187 -- (20) Other income (expense)........................ (2,719) (344) (30) -------- -------- ------- Income (loss) before income taxes and extraordinary item........................... (33,234) (20,424) (3,338) Income tax expense (benefit).................. (2,681) -- -- -------- -------- ------- Income (loss) before extraordinary item....... $(30,553) $(20,424) $(3,338) ======== ======== =======
YEAR ENDED DECEMBER 31, 1999 RECENT TRANSFERS -- HISTORICAL --------------------------------------------------------------------- FALCON FANCH --------------------------------- --------------------------------- BEFORE AFTER BEFORE AFTER ACQUISITION BY ACQUISITION BY ACQUISITION BY ACQUISITION BY CHARTER CHARTER CHARTER CHARTER COMMUNICATIONS COMMUNICATIONS COMMUNICATIONS COMMUNICATIONS HOLDING COMPANY HOLDING COMPANY HOLDING COMPANY HOLDING COMPANY --------------- --------------- --------------- --------------- Revenues.......................... $ 371,617 $ 56,051 $185,917 $ 32,281 --------- -------- -------- -------- Operating expenses: Operating, general and administrative................. 220,108 29,548 85,577 16,569 Depreciation and amortization.... 196,260 37,550 62,097 24,141 Equity-based deferred compensation................... 44,600 -- -- -- Corporate expense charges........ -- 1,704 -- 979 Management fees.................. -- -- 6,162 -- --------- -------- -------- -------- Total operating expenses....... 460,968 68,802 153,836 41,689 --------- -------- -------- -------- Income (loss) from operations..... (89,351) (12,751) 32,081 (9,408) Interest expense.................. (114,993) (19,106) -- (10,252) Interest income................... -- -- -- -- Other income (expense)............ 8,021 -- (7,796) (26) --------- -------- -------- -------- Income loss before income taxes and extraordinary item........... (196,323) (31,857) 24,285 (19,686) --------- -------- -------- -------- Income tax expense (benefit)...... 2,509 84 197 946 --------- -------- -------- -------- Income (loss) before extraordinary item............................. $(198,832) $(31,941) $ 24,088 $(20,632) ========= ======== ======== ======== YEAR ENDED DECEMBER 31, 1999 RECENT TRANSFERS -- HISTORICAL ---------------------------------------------- AVALON --------------------------------- BEFORE AFTER ACQUISITION BY ACQUISITION BY CHARTER CHARTER COMMUNICATIONS COMMUNICATIONS HOLDING COMPANY HOLDING COMPANY TOTAL --------------- --------------- ---------- Revenues.......................... $ 94,383 $ 13,930 $1,492,351 -------- -------- ---------- Operating expenses: Operating, general and administrative................. 53,089 8,281 856,743 Depreciation and amortization.... 39,943 7,838 627,944 Equity-based deferred compensation................... -- -- 44,600 Corporate expense charges........ -- 501 3,184 Management fees.................. -- -- 14,821 -------- -------- ---------- Total operating expenses....... 93,032 16,620 1,547,292 -------- -------- ---------- Income (loss) from operations..... 1,351 (2,690) (54,941) Interest expense.................. (40,162) (7,523) (348,855) Interest income................... 764 -- 1,209 Other income (expense)............ 4,499 2 (11,531) -------- -------- ---------- Income loss before income taxes and extraordinary item........... (33,548) (10,211) (414,118) -------- -------- ---------- Income tax expense (benefit)...... (13,936) -- (10,381) -------- -------- ---------- Income (loss) before extraordinary item............................. $(19,612) $(10,211) $ (403,737) ======== ======== ==========
36 40
YEAR ENDED DECEMBER 31, 1999 -------------------------------------------------------------------------- ACQUISITIONS AND RECENT TRANSFERS -------------------------------------------------------------------------- PRO FORMA ------------------------------------------------------------- HISTORICAL ACQUISITIONS(c) DISPOSITIONS(d) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- ---------- Revenues........................... $1,492,351 $43,861 $(53,626) $ (2,970)(e) $1,479,616 ---------- ------- -------- --------- ---------- Operating expenses: Operating, general and administrative.................. 856,743 25,370 (25,493) (108,648)(f) 747,972 Depreciation and amortization..... 627,944 11,165 (22,850) 327,751(g) 944,010 Equity-based deferred compensation.................... 44,600 -- -- (44,600)(h) -- Corporate expense charges......... 3,184 1,279 -- 57,193(f) 61,656 Management fees................... 14,821 1,403 -- -- 16,224 ---------- ------- -------- --------- ---------- Total operating expenses.......... 1,547,292 39,217 (48,343) 231,696 1,769,862 ---------- ------- -------- --------- ---------- Income (loss) from operations...... (54,941) 4,644 (5,283) (234,666) (290,246) Interest expense................... (348,855) (2,402) 37 (179,308)(j) (530,528) Interest income.................... 1,209 126 -- -- 1,335 Other income (expense)............. (11,531) 49,024 (2,576) (35,398)(1) (481) ---------- ------- -------- --------- ---------- Income (loss) before income taxes, minority interest and extraordinary item................ (414,118) 51,392 (7,822) (449,372) (819,920) Income tax expense (benefit)....... (10,381) (47) -- 14,175(m) 3,747 Minority interest.................. -- -- -- (12,589)(n) (12,589) ---------- ------- -------- --------- ---------- Income (loss) before extraordinary item.............................. $ (403,737) $51,439 $ (7,822) $(476,136) $ (836,256) ========== ======= ======== ========= ========== YEAR ENDED DECEMBER 31, 1999 ------------------------------------ KALAMAZOO TRANSACTION ------------------------------------ PRO FORMA ---------------------- HISTORICAL ADJUSTMENTS TOTAL ----------- ----------- ------- Revenues........................... $ 20,259 $ -- $20,259 --------- --------- ------- Operating expenses: Operating, general and administrative.................. 12,321 (315)(f) 12,006 Depreciation and amortization..... 3,534 9,570(g) 13,104 Equity-based deferred compensation.................... 1,868 (1,868)(i) -- Corporate expense charges......... 501 315(f) 816 Management fees................... -- -- -- --------- --------- ------- Total operating expenses.......... 18,224 7,702 25,926 --------- --------- ------- Income (loss) from operations...... 2,035 (7,702) (5,667) Interest expense................... -- -- -- Interest income.................... 4,120 (4,120)(k) -- Other income (expense)............. (189) -- (189) --------- --------- ------- Income (loss) before income taxes, minority interest and extraordinary item................ 5,966 (11,822) (5,856) Income tax expense (benefit)....... -- -- -- Minority interest.................. -- -- -- --------- --------- ------- Income (loss) before extraordinary item.............................. $ 5,966 $ (11,822) $(5,856) ========= ========= =======
- - - ------------------------- (a) Renaissance represents the results of operations of Renaissance through April 30, 1999, the date of acquisition by Charter Holdings. American Cable represents the results of operations of American Cable through May 7, 1999, the date of acquisition by Charter Holdings. Greater Media Systems represents the results of operations of Greater Media Systems through June 30, 1999, the date of acquisition by Charter Holdings. Helicon represents the results of operations of Helicon through July 30, 1999, the date of acquisition by the Charter Holdings. InterMedia represents the results of operations of InterMedia through October 1, 1999, the date of acquisition by Charter Holdings. Rifkin includes the results of operations of Rifkin Acquisition Partners, L.L.L.P., Rifkin Cable Income Partners L.P., Indiana Cable Associates, Ltd. and R/N South Florida Cable Management Limited Partnership, all under common ownership through September 13, 1999, the date of acquisition by Charter Holdings, as follows (dollars in thousands):
RIFKIN RIFKIN INDIANA SOUTH ACQUISITION CABLE INCOME CABLE FLORIDA OTHER TOTAL ----------- ------------ ------- -------- --------- -------- Revenues............................. $ 68,829 $3,807 $ 6,034 $ 17,516 $ 56,178 $152,364 Income (loss) from operations........ (6,954) 146 (3,714) (14,844) 2,155 (23,211) Loss before extraordinary item....... (21,571) (391) (4,336) (15,605) (27,001) (68,904)
(b) Represents the results of operations of Vista through July 30, 1999, the date of acquisition by Charter Holdings, Cable Satellite through August 4, 1999, the date of acquisition by Charter Holdings, Capital Cable for the year ended December 31, 1999 and Farmington for the year ended December 31, 1999. (c) Represents the historical results of operations for the period from January 1, 1999 through the date of purchase for acquisitions completed by Rifkin, Fanch and Bresnan and for the year ended December 31, 1999 for the systems acquired by Bresnan after December 31, 1999. 37 41 These acquisitions were accounted for using the purchase method of accounting. The purchase price in millions and closing dates for significant acquisitions are as follows:
RIFKIN FANCH BRESNAN ACQUISITIONS ACQUISITIONS ACQUISITIONS ------------- ------------- ------------ Purchase price................................. $165.0 $42.2 $40.0 Closing date................................... February 1999 February 1999 January 1999 Purchase price................................. $53.8 $248.0 $27.0 Closing date................................... July 1999 February 1999 March 1999 Purchase price................................. $70.5 Closing date................................... March 1999 Purchase price................................. $50.0 Closing date................................... June 1999
(d) Represents the elimination of the operating results related to the cable systems transferred to InterMedia as part of a swap of cable systems in October 1999. The agreed value of our systems transferred to InterMedia was $420.0 million. This number includes 30,000 customers served by an Indiana cable system that we did not transfer at the time of the InterMedia closing because some of the necessary regulatory approvals were still pending. This system was transferred in March 2000. No material gain or loss occurred on the disposition as these systems were recently acquired and recorded at fair value at that time. Also represents the elimination of the operating results related to the sale of a Bresnan cable system sold in January 1999. (e) Reflects the elimination of historical revenues and expenses associated with an entity not included in the purchase by Charter. (f) Reflects a reclassification of expenses representing corporate expenses that would have occurred at Charter Investment, Inc. totaling $57.5 million. The remaining adjustment primarily relates to the elimination of severance payments of $32.2 million and the write-off of debt issuance costs of $7.4 million that were included in operating, general and administrative expense. (g) Represents additional depreciation and amortization as a result of our acquisitions completed in 1999 and 2000 and the recent transfers. A large portion of the purchase price was allocated to franchises ($12.6 billion) that are amortized over 15 years. The adjustment to depreciation and amortization expense consists of the following (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/ FAIR VALUE USEFUL LIFE AMORTIZATION ---------- ---------------- ------------- Franchises............................................... $12,583.4 15 $ 735.1 Cable distribution systems............................... 1,754.9 8 194.3 Land, buildings and improvements......................... 54.7 10 4.5 Vehicles and equipment................................... 90.4 3 23.2 ------- Total depreciation and amortization................................................. 957.1 Less-historical depreciation and amortization....................................... (619.8) ------- Adjustment..................................................................... $ 337.3 =======
(h) Reflects the elimination of approximately $44.6 million of change in control payments under the terms of Falcon's equity-based compensation plans that were triggered by the acquisition of Falcon by Charter Communications Holding Company. These plans were terminated and the employees will participate in the option plan of Charter Communications Holding Company. As such, these costs will not recur. (i) Reflects the elimination of approximately $1.9 million of change in control payments under the terms of Cablevision's stock appreciation rights plan that were triggered by the acquisition of Kalamazoo by Charter 38 42 Communications, Inc. These employees will participate in the option plan of Charter Communications Holding Company. As such, these costs will not recur. (j) Reflects additional interest expense on borrowings, which were used to finance the acquisitions as follows (dollars in millions): $170.0 million of credit facilities at a composite current rate of 8.6% -- Avalon.................................... $ 14.7 $150.0 million 9.375% senior subordinated notes -- Avalon... 14.1 $196.0 million 11.875% senior discount notes -- Avalon...... 14.8 $850.0 million of credit facilities at a composite current rate of 8.5% -- Fanch..................................... 72.2 $1.0 billion of credit facilities at a composite current rate of 8.0% -- Falcon.................................... 82.8 $375.0 million 8.375% senior debentures -- Falcon........... 31.4 $435.3 million 9.285% senior discount debentures -- Falcon...................................... 30.0 $631.2 million of credit facilities at a composite current rate of 8.4% -- Bresnan................................... 52.9 $170.0 million 8.0% senior notes -- Bresnan................. 13.6 $275.0 million 9.25% senior discount notes -- Bresnan....... 17.7 Interest expense on additional borrowings used to finance acquisitions at a composite current rate of 8.8%.......... 186.3 ------- Total pro forma interest expense....................... 530.5 Less-historical interest expense from acquired companies............................................. (351.2) ------- Adjustment........................................... $ 179.3 =======
An increase in the interest rate of 0.125% on all variable rate debt would result in an increase in interest expense of $8.2 million. (k) Represents interest income on a historical related party receivable, which will be retained by the seller. (l) Represents the elimination of gain (loss) on sale of cable television systems whose results of operations have been eliminated in (d) above. (m) Reflects the elimination of income tax expense (benefit) as a result of being acquired by a limited liability company. (n) Represents 2% accretion of the preferred membership units of an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers. NOTE C: The offering adjustment of approximately $34.2 million in higher interest expense consists of the following (dollars in millions):
INTEREST DESCRIPTION EXPENSE ----------- -------- $675.0 million of 10.00% senior notes....................... $ 67.5 $325.0 million of 10.25% senior notes....................... 33.3 $532.0 million of 11.75% senior discount notes.............. 36.3 Amortization of debt issuance costs......................... 5.0 ------- Total pro forma interest expense.......................... 142.1 Less-historical interest expense.......................... (107.9) ------- Adjustment............................................. $ 34.2 =======
NOTE D: From January 1, 1999 through November 9, 1999, the date of the initial public offering of Charter Communications, Inc., Charter Investment, Inc. provided management services to subsidiaries of Charter Operating. From and after the initial public offering of Charter Communications Inc., such management services were provided by Charter Communications, Inc. See "Certain Relationships and Related Transactions." 39 43 NOTE E: Represents the 2% accretion of the preferred membership units in an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers, which are exchangeable on a one-for-one basis for shares of Class A common stock of Charter Communications, Inc. NOTE F: EBITDA represents earnings (loss) before extraordinary item before interest, income taxes, depreciation and amortization, and minority interest. EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE G: EBITDA margin represents EBITDA as a percentage of revenues. NOTE H: Adjusted EBITDA means EBITDA before option compensation expense, corporate expense charges, management fees and other income (expense). Adjusted EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. Adjusted EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by adjusted EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE I: Earnings include net income (loss) plus fixed charges. Fixed charges consist of interest expense and an estimated interest component of rent expense. NOTE J: Homes passed are the number of living units, such as single residence homes, apartments and condominium units, passed by the cable television distribution network in a given cable system service area. NOTE K: Basic customers are customers who receive basic cable service. NOTE L: Basic penetration represents basic customers as a percentage of homes passed. NOTE M: Premium units represent the total number of subscriptions to premium channels. NOTE N: Premium penetration represents premium units as a percentage of basic customers. NOTE O: Average monthly revenue per basic customer represents revenues divided by twelve divided by the number of basic customers at December 31, 1999. 40 44
UNAUDITED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1999 -------------------------------------------------------------------------------------- ACQUISITIONS AND KALAMAZOO OFFERING CHARTER RECENT TRANSFERS TRANSACTION ADJUSTMENTS HOLDINGS (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL ----------- ---------------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents........ $ 84,305 $ 23,592 $ 107,897 $ 168 $ -- $ 108,065 Accounts receivable, net......... 68,522 34,412 102,934 607 -- 103,541 Receivable from related party.... 14,500 -- 14,500 -- -- 14,500 Prepaid expenses and other....... 15,082 19,567 34,649 211 -- 34,860 ----------- ----------- ----------- --------- -------- ----------- Total current assets........ 182,409 77,571 259,980 986 -- 260,966 Property, plant and equipment.... 2,525,854 1,330,779 3,856,633 18,402 -- 3,875,035 Franchises....................... 9,162,331 8,584,619 17,746,950 157,122 -- 17,904,072 Other assets..................... 134,603 87,996 222,599 -- 50,282 272,881 ----------- ----------- ----------- --------- -------- ----------- Total assets................ $12,005,197 $10,080,965 $22,086,162 $ 176,510 $ 50,282 $22,312,954 =========== =========== =========== ========= ======== =========== LIABILITIES AND MEMBER'S EQUITY Accounts payable and accrued expenses....................... $ 553,174 $ 128,319 $ 681,493 $ 4,010 $(16,140) $ 669,363 Payables to manager of cable systems -- related parties..... 6,713 14,735 21,448 -- -- 21,448 ----------- ----------- ----------- --------- -------- ----------- Total current liabilities... 559,887 143,054 702,941 4,010 (16,140) 690,811 Long-term debt................... 6,065,612 4,998,852 11,064,464 -- 66,422 11,130,886 Loans payable to parent companies -- related parties... 906,000 (882,000) 24,000 -- -- 24,000 Deferred management fees -- related parties........ 19,831 1,791 21,622 -- -- 21,622 Other long-term liabilities...... 109,605 44,912 154,517 -- -- 154,517 Minority interest................ -- 629,488 629,488 -- -- 629,488 Member's equity.................. 4,344,262 5,144,868 9,489,130 172,500 -- 9,661,630 ----------- ----------- ----------- --------- -------- ----------- Total liabilities and member's equity........... $12,005,197 $10,080,965 $22,086,162 $ 176,510 $ 50,282 $22,312,954 =========== =========== =========== ========= ======== ===========
41 45 NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET NOTE A: Pro forma balance sheets for the recent transfers, the Bresnan acquisition and the Kalamazoo transaction consist of the following (dollars in thousands):
AS OF DECEMBER 31, 1999 ---------------------------------------------------------------------- ACQUISITIONS AND RECENT TRANSFERS -- HISTORICAL --------------------------------------------------------- FALCON FANCH AVALON BRESNAN OTHER TOTAL ---------- ---------- -------- --------- -------- ---------- Cash and cash equivalents........................... $ 10,556 $ 12,428 $ 6,806 $ 6,285 $ 220 $ 36,295 Accounts receivable, net............................ 21,110 2,191 1,920 9,006 197 34,424 Prepaid expenses and other.......................... 17,982 785 663 -- 84 19,514 ---------- ---------- -------- --------- -------- ---------- Total current assets.............................. 49,648 15,404 9,389 15,291 501 90,233 Property, plant and equipment....................... 580,838 262,595 121,285 375,106 8,590 1,348,414 Franchises.......................................... 2,957,655 2,139,750 721,744 328,068 1,098 6,148,315 Other assets........................................ 76,679 7,494 1,983 19,038 504 105,698 ---------- ---------- -------- --------- -------- ---------- Total assets...................................... $3,664,820 $2,425,243 $854,401 $ 737,503 $ 10,693 7,692,660 ========== ========== ======== ========= ======== ========== Accounts payable and accrued expenses............... $ 86,634 $ 35,482 $ 25,132 $ 66,261 $ 4,758 $ 218,267 Payables to manager of cable systems -- related parties........................................... 9,740 3,362 1,557 -- 76 14,735 ---------- ---------- -------- --------- -------- ---------- Total current liabilities......................... 96,374 38,844 26,689 66,261 4,834 233,002 Long-term debt...................................... 1,569,631 850,000 451,212 895,607 39,617 3,806,067 Loans payable to parent companies -- related parties........................................... 173,000 -- -- -- 540 173,540 Deferred management fees -- related parties......... 982 547 262 -- -- 1,791 Other long-term liabilities......................... 31,425 53 3,414 10,020 -- 44,912 Equity (deficit).................................... 1,793,408 1,535,799 372,824 (234,385) (34,298) 3,433,348 ---------- ---------- -------- --------- -------- ---------- Total liabilities and equity (deficit)............ $3,664,820 $2,425,243 $854,401 $ 737,503 $ 10,693 $7,692,660 ========== ========== ======== ========= ======== ==========
AS OF DECEMBER 31, 1999 ----------------------------------------------------------------------------- ACQUISITIONS AND RECENT TRANSFERS ----------------------------------------------------------------------------- PRO FORMA ---------------------------------------------------------------- HISTORICAL ACQUISITIONS(a) DISPOSITIONS(b) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- ----------- Cash and cash equivalents.......... $ 36,295 $ 441 $ (144) $ (13,000)(c) $ 23,592 Accounts receivable, net........... 34,424 168 (180) -- 34,412 Receivable from related party...... -- 125 -- (125)(d) -- Prepaid expenses and other......... 19,514 119 (66) -- 19,567 ---------- ------ -------- ---------- ----------- Total current assets.............. 90,233 853 (390) (13,125) 77,571 Property, plant and equipment...... 1,348,414 4,572 (22,207) -- 1,330,779 Franchises......................... 6,148,315 -- (67,832) 2,504,136(e) 8,584,619 Other assets....................... 105,698 819 (72) (18,449)(f) 87,996 ---------- ------ -------- ---------- ----------- Total assets...................... $7,692,660 $6,244 $(90,501) $2,472,562 $10,080,965 ========== ====== ======== ========== =========== Accounts payable and accrued expenses.......................... 218,267 553 (90,501) -- 128,319 Payables to manager of cable systems -- related parties........ 14,735 -- -- -- 14,735 ---------- ------ -------- ---------- ----------- Total current liabilities......... 233,002 553 (90,501) -- 143,054 Long-term debt..................... 3,806,067 2,702 -- 1,190,083(g) 4,998,852 Loans payable to parent companies -- related parties...... 173,540 -- -- (1,055,540)(g) (882,000) Deferred management fees -- related parties........................... 1,791 -- -- -- 1,791 Other long-term liabilities........ 44,912 -- -- -- 44,912 Minority interest.................. -- -- -- 629,488(h) 629,488 Equity (deficit)................... 3,433,348 2,989 -- 1,708,531(i) 5,144,868 ---------- ------ -------- ---------- ----------- Total liabilities and equity (deficit)....................... $7,692,660 $6,244 $(90,501) $2,472,562 $10,080,965 ========== ====== ======== ========== =========== AS OF DECEMBER 31, 1999 -------------------------------------- KALAMAZOO TRANSACTION -------------------------------------- PRO FORMA ------------------------- HISTORICAL ADJUSTMENTS TOTAL ---------- ----------- -------- Cash and cash equivalents.......... $ 168 $ -- $ 168 Accounts receivable, net........... 607 -- 607 Receivable from related party...... 59,112 (59,112)(d) -- Prepaid expenses and other......... 211 -- 211 ------- -------- -------- Total current assets.............. 60,098 (59,112) 986 Property, plant and equipment...... 18,402 -- 18,402 Franchises......................... -- 157,122(e) 157,122 Other assets....................... 253 (253)(f) -- ------- -------- -------- Total assets...................... $78,753 $ 97,757 $176,510 ======= ======== ======== Accounts payable and accrued expenses.......................... 4,010 -- 4,010 Payables to manager of cable systems -- related parties........ -- -- -- ------- -------- -------- Total current liabilities......... 4,010 -- 4,010 Long-term debt..................... -- -- -- Loans payable to parent companies -- related parties...... -- -- -- Deferred management fees -- related parties........................... -- -- -- Other long-term liabilities........ -- -- -- Minority interest.................. -- -- -- Equity (deficit)................... 74,743 97,757(j) 172,500 ------- -------- -------- Total liabilities and equity (deficit)....................... $78,753 $ 97,757 $176,510 ======= ======== ========
42 46 - - - ------------------------- (a) Represents the historical balance sheets as of December 31, 1999 for acquisitions completed subsequent to December 31, 1999. (b) Represents the historical assets and liabilities as of December 31, 1999 of an Indiana cable system transferred in March 2000 to InterMedia as part of a swap of cable systems. The cable system swapped was accounted for at fair value. No gain or loss was recorded in conjunction with the swap. See "Business -- Acquisitions Completed in 1999 and 2000 -- InterMedia Systems." (c) Represents Charter Holdings' historical cash used to finance a portion of an acquisition that occurred after December 31, 1999. (d) Reflects assets retained by the seller. (e) Substantial amounts of the purchase prices have been allocated to franchises based on estimated fair values. The allocation of these purchase prices are as follows (dollars in thousands):
BRESNAN OTHER KALAMAZOO ---------- -------- --------- Working capital....................................... $ (50,894) $ (4,257) $ (3,024) Property, plant and equipment......................... 376,541 8,590 18,402 Franchises............................................ 2,753,699 69,839 157,122 Other................................................. 1,697 -- -- ---------- -------- -------- $3,081,043 $ 74,172 $172,500 ========== ======== ========
The Bresnan acquisition was financed through the issuance of $1.0 billion of equity to the Bresnan sellers, $964.4 million in debt assumed and additional borrowings under the CC VIII Operating -- Bresnan credit facilities. The other acquisitions were financed through additional borrowings under the Charter Operating credit facilities. The Kalamazoo transaction will be financed through the issuance of $172.5 million of Class A common stock in Charter Communications, Inc. to the Kalamazoo sellers. (f) Represents the elimination of the unamortized historical cost of goodwill and deferred financing costs based on the allocation of the purchase price (see (e) above). (g) Represents the following (dollars in millions): Total pro forma debt not assumed............................ $ (938.5) Repayment of loans payable to parent companies -- related parties................................................... (882.0) Long-term debt: 8.0% senior notes -- Bresnan........................... 171.7 9.25% senior discount notes -- Bresnan................. 196.0 Credit facilities: Charter Operating.................................... 956.1 CC VIII Operating -- Bresnan......................... 631.2 -------- Total long-term debt................................... 1,955.0 -------- Adjustment............................................. $ 134.5 ========
(h) Represents the preferred membership interests in an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers, which are exchangable on a one-for-one basis for shares of Class A common stock in Charter Communications, Inc. (i) Represents the elimination of the historical deficits of $268.7 million related to the Bresnan, Capital Cable and Farmington cable systems and an additional contribution of $1.4 billion made to us related to the Bresnan acquisition. (j) Represents the elimination of the historical equity of Kalamazoo and the contribution of the Kalamazoo system to Charter Holdings. 43 47 NOTE B: Offering adjustments represent additional long-term debt of $1.3 billion from the issuance and sale of the original notes, the use of the proceeds from the original notes to repurchase the Avalon 9.375% senior subordinated notes, Falcon debentures and Bresnan notes including accrued and unpaid interest, pursuant to the Avalon, Falcon and Bresnan change of control offers, and the addition to other assets of the expenses paid in connection with the issuance and sale of the original notes which were capitalized and will be amortized over the term of the related debt. 44 48 SELECTED HISTORICAL FINANCIAL DATA The selected historical financial data below for the period from October 1, 1995 through December 31, 1995, for the years ended December 31, 1996 and 1997, for the periods from January 1, 1998 through December 23, 1998 and from December 24, 1998 through December 31, 1998, and the year ended December 31, 1999 are derived from the consolidated financial statements of Charter Holdings. The consolidated financial statements of Charter Holdings for the year ended December 31, 1997, for the periods from January 1, 1998 through December 23, 1998 and from December 24, 1998 through December 31, 1998 and for the year ended December 31, 1999 have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The consolidated financial statements of Charter Holdings for the period from October 1, 1995 through December 31, 1995 and the year ended December 31, 1996, have been audited by Arthur Andersen LLP, independent public accountants, and are not included elsewhere in this prospectus. The selected historical financial data for the period from January 1, 1995 through September 30, 1995 are derived from the unaudited financial statements of Charter Holdings' predecessor business and are not included elsewhere in this prospectus. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of Charter Holdings and related notes included elsewhere in this prospectus.
PREDECESSOR OF CHARTER HOLDINGS CHARTER HOLDINGS ---------------- -------------------------------------------------------------------------- YEAR ENDED 1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98 YEAR ENDED THROUGH THROUGH ----------------- THROUGH THROUGH DECEMBER 31, 9/30/95 12/31/95 1996 1997 12/23/98 12/31/98 1999 ---------------- -------- ------- ------- -------- ---------- ------------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS: Revenues...................... $ 5,324 $ 1,788 $14,881 $18,867 $ 49,731 $ 13,713 $ 1,325,830 ------- ------- ------- ------- -------- ---------- ----------- Operating expenses: Operating, general and administrative............ 2,581 931 8,123 11,767 25,952 7,134 683,646 Depreciation and amortization.............. 2,137 648 4,593 6,103 16,864 8,318 675,786 Option compensation expense................... -- -- -- -- -- 845 79,979 Management fees/corporate expense charges........... 224 54 446 566 6,176 473 48,158 ------- ------- ------- ------- -------- ---------- ----------- Total operating expenses................ 4,942 1,633 13,162 18,436 48,992 16,770 1,487,569 ------- ------- ------- ------- -------- ---------- ----------- Income (loss) from operations.................. 382 155 1,719 431 739 (3,057) (161,739) Interest expense.............. -- (691) (4,415) (5,120) (17,277) (2,353) (434,995) Interest income............... -- 5 20 41 44 133 18,821 Other income (expense)........ 38 -- (47) 25 (728) -- (217) ------- ------- ------- ------- -------- ---------- ----------- Income (loss) before extraordinary item.......... 420 (531) (2,723) (4,623) (17,222) (5,277) (578,130) Extraordinary item -- loss from early extinguishment of debt........................ -- -- -- -- -- -- (7,794) ------- ------- ------- ------- -------- ---------- ----------- Net income (loss)............. $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (5,277) $ (585,924) ======= ======= ======= ======= ======== ========== =========== BALANCE SHEET DATA (AT END OF PERIOD): Total assets.................. $26,342 $31,572 $67,994 $55,811 $281,969 $4,335,527 $12,005,197 Total debt.................... 10,480 28,847 59,222 41,500 274,698 2,002,206 6,971,612 Member's equity (deficit)..... 15,311 971 2,648 (1,975) (8,397) 2,147,379 4,344,262
45 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Reference is made to the "Certain Trends and Uncertainties" section below in this Management's Discussion and Analysis for a discussion of important factors that could cause actual results to differ from expectations and non-historical information contained herein. We do not believe that our historical financial condition and results of operations are accurate indicators of future results because of certain past significant events, including: (1) the acquisition by Mr. Allen of CCA Group, Charter Communications Properties Holdings, LLC (CCPH) and CharterComm Holdings, LLC, referred to together with their subsidiaries as the Charter companies; (2) the merger of Marcus Holdings with and into Charter Holdings; (3) our acquisitions completed since January 1, 1999, the recent transfers, the Bresnan acquisition and the Kalamazoo transaction; (4) the refinancing or replacement of the previous credit facilities of the Charter companies and certain of our subsidiaries acquired in 1999 acquisitions, the recent transfers and the Bresnan acquisition; and (5) the purchase of publicly held notes that had been issued by several of the direct and indirect subsidiaries of Charter Holdings. Provided below is a discussion of our organizational history consisting of: (1) the operations and development of the Charter companies prior to the acquisition by Mr. Allen, together with the acquisition of the Charter companies by Mr. Allen; (2) the merger of Marcus Holdings with and into Charter Holdings; and (3) our 1999 acquisitions, the recent transfers, the Bresnan acquisition and the Kalamazoo transaction. ORGANIZATIONAL HISTORY Prior to the acquisition of the Charter companies by Mr. Allen on December 23, 1998 and the merger of Marcus Holdings with and into Charter Holdings effective April 7, 1999, the cable systems of the Charter and Marcus companies were operated under four groups of companies. Three of these groups were comprised of companies that were managed by Charter Investment prior to the acquisition of the Charter companies by Mr. Allen and the fourth group was comprised of companies that were subsidiaries of Marcus Holdings. Charter's management began managing Marcus Holdings in October 1998. The following is an explanation of how: (1) CCPH, the operating companies that formerly comprised CCA Group and CharterComm Holdings, and the Marcus companies became wholly owned subsidiaries of Charter Operating; (2) Charter Operating became a wholly owned subsidiary of Charter Holdings; (3) Charter Holdings became a wholly owned subsidiary of Charter Communications Holding Company; and 46 50 (4) Charter Communications Holding Company became a wholly owned subsidiary of Charter Investment and, later, of Charter Communications, Inc. THE CHARTER COMPANIES Prior to Charter Investment acquiring the remaining interests that it did not previously own in two of the three groups of Charter companies, namely CCA Group and CharterComm Holdings, as described below, the operating subsidiaries of the three groups of Charter companies were parties to separate management agreements with Charter Investment pursuant to which Charter Investment provided management and consulting services. Prior to our acquisition by Mr. Allen, the Charter companies were as follows: (1) CCPH CCPH was a wholly owned subsidiary of Charter Investment. The primary subsidiary of CCPH, which owned the cable systems, was Charter Communications Properties, LLC. In connection with Mr. Allen's acquisition on December 23, 1998, CCPH was merged out of existence and Charter Communications Properties became a direct, wholly owned subsidiary of Charter Investment. On May 20, 1998, CCPH acquired certain cable systems from Sonic Communications, Inc. for a total purchase price, net of cash acquired, of $228.4 million, including $60.9 million of assumed debt. (2) CCA Group The controlling interests in CCA Group were held by affiliates of Kelso & Co. Charter Investment had only a minority interest. Effective December 23, 1998, prior to Mr. Allen's acquisition, Charter Investment acquired from the Kelso affiliates the interests the Kelso affiliates held in CCA Group. Consequently, the companies comprising CCA Group became wholly owned subsidiaries of Charter Investment. CCA Group consisted of the following three sister companies: (a) CCT Holdings, LLC; (b) CCA Holdings, LLC; and (c) Charter Communications Long Beach, LLC. The cable systems were owned by the various subsidiaries of these three sister companies. The financial statements for these three sister companies historically were combined and the term "CCA Group" was assigned to these combined entities. In connection with Mr. Allen's acquisition on December 23, 1998, the three sister companies and some of the non-operating subsidiaries were merged out of existence, leaving certain of the operating subsidiaries owning all of the cable systems under this former group. These operating subsidiaries became indirect, wholly owned subsidiaries of Charter Investment. (3) CharterComm Holdings, LLC The controlling interests in CharterComm Holdings were held by affiliates of Charterhouse Group International Inc. Charter Investment had only a minority interest. Effective December 23, 1998, prior to Mr. Allen's acquisition Charter Investment acquired from the Charterhouse Group affiliates the interests the Charterhouse Group affiliates held in CharterComm Holdings. Consequently, CharterComm Holdings became a wholly owned subsidiary of Charter Investment. The cable systems were owned by the various subsidiaries of CharterComm Holdings. In connection with Mr. Allen's acquisition on December 23, 1998, some of the non-operating subsidiaries were merged out of existence, leaving certain of the operating subsidiaries owning all of 47 51 the cable systems under this former group. CharterComm Holdings was merged out of existence. Charter Communications, LLC became a direct, wholly owned subsidiary of Charter Investment. Our acquisition by Mr. Allen became effective on December 23, 1998, through a series of transactions in which Mr. Allen acquired approximately 94% of the equity interests of Charter Investment for an aggregate purchase price of $2.2 billion, excluding $2.0 billion in assumed debt. Charter Communications Properties and the operating companies that formerly comprised CCA Group and CharterComm Holdings were contributed to Charter Operating subsequent to Mr. Allen's acquisition. CCPH is deemed to be our predecessor. Consequently, the contribution of Charter Communications Properties was accounted for as a reorganization under common control. Accordingly, Charter Holdings results of operations for periods prior to and including December 23, 1998 include the accounts of CCPH. The contributions of the operating companies that formerly comprised CCA Group and CharterComm Holdings were accounted for in accordance with purchase accounting. Accordingly, Charter Holdings results of operations for periods after December 23, 1998 include the accounts of Charter Communications Properties, CCA Group and CharterComm Holdings. In February 1999, Charter Holdings was formed as a wholly owned subsidiary of Charter Investment and Charter Operating was formed as a wholly owned subsidiary of Charter Holdings. All of Charter Investment's direct interests in the entities described above were transferred to Charter Operating. All of the prior management agreements were terminated and a new management agreement was entered into between Charter Investment and Charter Operating. In May 1999, Charter Holdco was formed as a wholly owned subsidiary of Charter Investment. All of Charter Investment's interests in Charter Holdings were transferred to Charter Communications Holding Company. In July 1999, Charter Communications, Inc. was formed as a wholly owned subsidiary of Charter Investment. Also in November 1999, Charter Communications Holding Company sold membership units to Vulcan Cable III. In the initial public offering of Charter Communications, Inc., substantially all of its equity interests were sold to the public and less than 1% of its equity interests were sold to Mr. Allen. Charter Communications, Inc. contributed substantially all of the proceeds of the initial public offering to Charter Communications Holding Company which issued membership units to Charter Communications, Inc. In November 1999, the management agreement between Charter Investment and Charter Operating was amended and assigned from Charter Investment to Charter Communications, Inc. THE MARCUS COMPANIES In April 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable, and agreed to acquire the remaining interests. The owner of the remaining partnership interests retained voting control of Marcus Cable. In October 1998, Marcus Cable entered into a management consulting agreement with Charter Investment, pursuant to which Charter Investment provided management and consulting services to Marcus Cable and its subsidiaries which own cable systems. This agreement placed the Marcus cable systems under common management with the cable systems of the Charter companies acquired by Mr. Allen in December 1998. In March 1999, all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings, a then newly formed company. Later in March 1999, Mr. Allen acquired the remaining interests in Marcus Cable, including voting control, which interests were transferred to Marcus Holdings. In April 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable systems they owned came under the ownership of Charter Holdings and, in turn, Charter Operating. For financial reporting purposes, the 48 52 merger of Marcus Holdings with and into Charter Holdings was accounted for as an acquisition of Marcus Holdings effective March 31, 1999, and accordingly, the results of operations of Marcus Holdings have been included in the consolidated financial statements of Charter Communications Holding Company since that date. ACQUISITIONS Since the beginning of 1999, our direct or indirect subsidiaries completed the Renaissance, American Cable, Greater Media, Helicon, Vista, Cable Satellite, Rifkin (including InterLink) and InterMedia acquisitions for an aggregate purchase price of approximately $4.2 billion including assumed debt of $354 million. These acquisitions were funded through excess cash from the issuance by Charter Holdings of the March 1999 Charter Holdings notes, borrowings under the Charter Operating credit facilities, capital contributions to Charter Holdings by Mr. Allen through Vulcan Cable III and the assumption of the outstanding Renaissance, Helicon and Rifkin notes. In addition to these acquisitions, in November 1999, Charter Communications Holding Company acquired the Fanch, Falcon and Avalon cable systems. In February 2000, we and Charter Communications Holding Company acquired equity interests in the entity that owned the Bresnan cable systems. The aggregate purchase price for the Fanch, Falcon, Avalon and Bresnan acquisitions was $9.8 billion including assumed debt of $3.0 billion. The purchase prices for these acquisitions were paid with the net proceeds of the initial public offering of the common stock of Charter Communications, Inc., an equity contribution to Charter Communications Holding Company by Mr. Allen through Vulcan Cable III, borrowings under credit facilities, the assumption of outstanding notes issued by Falcon, Avalon and Bresnan, equity issued to specific sellers in the Falcon and Bresnan acquisitions and the assumption of Falcon and Bresnan notes and debentures. On January 1, 2000, as a result of transfers from Charter Communications Holding Company, Charter Holdings became the indirect owner of the Fanch, Falcon and Avalon cable systems. On February 14, 2000, as a result of the transfer to us by Charter Communications Holding Company of the equity interests it had purchased in the Bresnan systems, we became the indirect owner of the Bresnan cable systems. In April 2000, one of our subsidiaries acquired cable systems from Capital Cable and Farmington for an aggregate purchase of approximately $75 million. These acquisitions were funded with borrowings under the Charter Operating credit facilities. In the Falcon acquisition, certain of the Falcon sellers received a total of $550 million of the Falcon purchase price in the form of membership units in Charter Communications Holding Company. In the Bresnan acquisition, the Bresnan sellers received $1.0 billion of the Bresnan purchase price in the form of common membership units in Charter Communications Holding Company and preferred membership units in an indirect subsidiary of Charter Holdings. In addition, certain Rifkin sellers received a total of $133.3 million of the Rifkin purchase price in the form of preferred membership units in Charter Communications Holding Company. Under the Helicon purchase agreement, $25 million of the purchase price was paid in the form of preferred limited liability company interests of Charter-Helicon, LLC, our indirect subsidiary. 49 53 The following table sets forth additional information on our acquisitions since the beginning of 1999 and the recent transfers:
AS OF AND FOR THE YEAR ENDED PURCHASE PRICE DECEMBER 31, 1999 ACQUISITION (INCLUDING ----------------------------- OR TRANSFER ASSUMED DEBT) REVENUES DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) ----------- -------------- --------- -------------- Renaissance........................ 4/99 $ 459 134,000 $ 62,428 American Cable..................... 5/99 240 69,000 37,216 Greater Media systems.............. 6/99 500 176,000 85,933 Helicon............................ 7/99 550 171,000 85,224 Vista.............................. 7/99 126 26,000 14,112 Cable Satellite.................... 8/99 22 9,000 4,859 Rifkin............................. 9/99 1,460 463,000 219,878 InterMedia systems................. 10/99 873+ 420,000 179,259 systems swap (142,000)(a) (53,056)(b) --------- ---------- 278,000 126,203 Fanch.............................. 1/00 2,400 528,000 218,197 Falcon............................. 1/00 3,481 955,000 427,668 Avalon............................. 1/00 845(c) 258,000(c) 109,943(d) Bresnan............................ 2/00 3,100 686,000(e) 290,697(f) Capital Cable...................... 4/00 60 27,000 11,555 Farmington......................... 4/00 15 6,000 1,968 ------------ --------- ---------- Total.............................. $ 14,131 3,786,000 $1,695,881 ============ ========= ==========
- - - --------------- (a) As part of the transaction with InterMedia, we agreed to "swap" some of our non-strategic cable systems located in Indiana, Montana, Utah and northern Kentucky, representing 142,000 basic customers. We transferred cable systems with 112,000 customers to InterMedia in connection with this swap in October 1999. The remaining Indiana cable system, with customers totaling 30,000, was transferred in March 2000 after receipt of the necessary regulatory approvals. (b) Includes revenues for all swapped InterMedia systems, except for the retained Indiana system, for the nine months ended September 30, 1999, the date of the transfer of these systems, and includes revenues for the Indiana system for the year ended December 31, 1999. (c) Includes approximately 5,400 customers served by cable systems that we acquired from certain former affiliates of Avalon in February 2000. The $845 million purchase price for Avalon includes the purchase price for these systems of approximately $13 million. (d) Includes revenues of approximately $1.6 million related to the cable systems acquired from certain former affiliates of Avalon. (e) Includes approximately 19,400 customers served by cable systems acquired by Bresnan since December 31, 1999. (f) Includes revenues of approximately $7.1 million related to the cable systems acquired by Bresnan since December 31, 1999. PENDING KALAMAZOO TRANSACTION In March 2000, Charter Communications, Inc. entered into an agreement providing for the merger of Cablevision of Michigan, Inc., the indirect owner of a cable system in Kalamazoo, Michigan, with and into Charter Communications, Inc. As a result of the merger, Charter Communications, Inc. will become the indirect owner of the Kalamazoo system. The merger 50 54 consideration of approximately $172.5 million will be paid in Class A common stock of Charter Communications, Inc. After the merger, Charter Communications, Inc. will contribute 100% of the equity interests of the direct owner of the Kalamazoo system to Charter Communications Holding Company in exchange for membership units. Charter Communications Holding Company will in turn contribute 100% of the assets and 100% of equity interests to us. The Kalamazoo cable system has approximately 49,000 customers and had revenue of approximately $20.3 million for the year ended December 31, 1999. We anticipate that this acquisition will close in the third quarter of 2000. POSSIBLE SWAP TRANSACTION On December 1, 1999, Charter Communications, Inc. and AT&T entered into a non-binding letter of intent to exchange certain of our cable systems for cable systems owned by AT&T. As part of the Swap Transaction, we will be required to pay to AT&T approximately $108 million in cash, which represents the difference in the agreed values of the systems to be exchanged. The Swap Transaction is subject to the negotiation and execution of a definitive exchange agreement, regulatory approvals and other conditions typical in transactions of this type. We cannot assure that these conditions will be satisfied. In addition, we have had discussions with several other cable operators about the possibility of "swapping" cable systems that would further complement our regional operating clusters. OVERVIEW Approximately 87% of our historical revenues for the year ended December 31, 1999 are attributable to monthly subscription fees charged to customers for our basic, expanded basic and premium cable television programming services, equipment rental and ancillary services provided by our cable television systems. In addition, we derive other revenues from installation and reconnection fees charged to customers to commence or reinstate service, pay-per-view programming, where users are charged a fee for individual programs requested, advertising revenues and commissions related to the sale of merchandise by home shopping services. We have generated increased revenues in each of the past three fiscal years, primarily through internal customer growth, basic and expanded tier rate increases, acquisitions and innovative marketing. We are beginning to offer our customers several other services, which are expected to significantly contribute to our revenues. One of these services is digital cable, which provides customers with additional programming options. We are also offering high-speed Internet access to the World Wide Web through cable modems. Our television-based Internet access allows us to offer the services provided by WorldGate Communications, Inc., which provides users with TV-based e-mail and other Internet access. Our expenses primarily consist of operating costs, general and administrative expenses, depreciation and amortization expense and management fees/corporate expense charges. Operating costs primarily include programming costs, cable service related expenses, marketing and advertising costs, franchise fees and expenses related to customer billings. Programming costs accounted for approximately 44% of our operating, general and administrative expenses for the year ended December 31, 1999. Programming costs have increased in recent years and are expected to continue to increase due to additional programming being provided to customers, increased cost to produce or purchase cable programming, inflation and other factors affecting the cable television industry. In each year we have operated, our costs to acquire programming have exceeded customary inflationary increases. Significant factors with respect to increased programming costs are the rate increases and surcharges imposed by national and regional sports networks directly tied to escalating costs to acquire programming for professional sports packages in a competitive market. We benefited in the past from our membership in an industry cooperative that provides members with volume discounts from programming networks. We believe our membership kept increases in our programming costs below what the increases would otherwise have been. We have been able to negotiate favorable terms with premium networks in conjunction with the premium packages we offer, which minimized the 51 55 impact on margins and provided substantial volume incentives to grow the premium category. Although we believe that we will be able to pass future increases in programming costs through to customers, there can be no assurance that we will be able to do so. General and administrative expenses primarily include accounting and administrative personnel and professional fees. Depreciation and amortization expense relates to the depreciation of our tangible assets and the amortization of our franchise costs. Management fees/corporate expense charges are fees paid or charges for management services. Charter Holdings records actual expense charges incurred by Charter Communications, Inc. on behalf of Charter Holdings. Prior to the acquisition of us by Mr. Allen, the CCA Group and CharterComm Holdings recorded management fees payable to Charter Investment, Inc. equal to 3.0% to 5.0% of gross revenues plus certain expenses. In October 1998, Charter Investment, Inc. began managing the cable operations of Marcus Holdings under a management agreement, which was terminated in February 1999 and replaced by a master management fee arrangement. In connection with Charter Communications, Inc.'s initial public offering of common stock in November 1999, the management agreement between Charter Investment, Inc. and Charter Operating was assigned to Charter Communications, Inc. and Charter Communications, Inc. entered into a new management agreement with Charter Communications Holding Company. These management agreements are substantially similar to the previous management agreement with Charter Operating except that Charter Communications, Inc. is only entitled to receive reimbursement of its expenses as consideration for its providing management services. In addition, the Falcon, Fanch, Avalon and Bresnan cable systems are managed pursuant to agreements that entitle Charter Communications, Inc. to receive reimbursement of its expenses as consideration for its provision of management services. Our credit facilities limit the amount of such reimbursements to 3.5% of gross revenues. We have had a history of net losses and expect to continue to report net losses for the foreseeable future. The principal reasons for our prior and anticipated net losses include depreciation and amortization expenses associated with our acquisitions, capital expenditures related to construction and upgrading of our systems, and interest costs on borrowed money. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future. RESULTS OF OPERATIONS The following discusses the results of operations for: (1) Charter Holdings, for the year ended December 31, 1997, and for the period from January 1, 1998 through December 23, 1998; (2) Charter Holdings, comprised of CCPH, CCA Group and CharterComm Holdings, for the period from December 24, 1998 through December 31, 1998; and (3) Charter Holdings, comprised of the following for the year ended December 31, 1999: - CCPH, CCA Group and CharterComm Holdings for the entire period; - Marcus Holdings for the period from March 31, 1999, the date Mr. Allen acquired voting control, through December 31, 1999; - Renaissance Media Group LLC for the period from April 30, 1999, the acquisition date, through December 31, 1999; - American Cable Entertainment, LLC for the period from May 7, 1999, the acquisition date, through December 31, 1999; 52 56 - Cable systems of Greater Media Cablevision, Inc. for the period from June 30, 1999, the acquisition date, through December 31, 1999; - Helicon Partners I, L.P. and affiliates for the period from July 30, 1999, the acquisition date, through December 31, 1999; - Vista Broadband Communications, L.L.C. for the period from July 30, 1999, the acquisition date, through December 31, 1999; - Cable system of Cable Satellite of South Miami, Inc. for the period from August 4, 1999, the acquisition date, through December 31, 1999; - Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications Partners, LLLP for the period from September 13, 1999, the acquisition date, through December 31, 1999; - Cable systems of InterMedia Capital Partners IV, L.P., InterMedia Partners and affiliates for the period from October 1, 1999, "swap" transaction date, through December 31, 1999; No operating results are included for the Fanch, Falcon, Avalon, Bresnan, Capital Cable and Farmington cable systems transferred to or acquired by us after December 31, 1999. On January 1, 2000, Charter Communications Holding Company and Charter Holdings effected a number of transactions in which cable systems acquired by Charter Communications Holding Company in November 1999 were contributed to Charter Holdings. Effective January 1, 2000, Charter Holdings accounted for the contribution of the transferred systems as a reorganization of entities under common control in a manner similar to pooling of interests. Charter Holdings revised its financial statements as of and for the year ended December 31, 1999 to reflect this reorganization. The accounts of the transferred systems have been included in Charter Holdings' financial statements from the date the transferred systems were acquired by Charter Communications Holding Company. This revision has been reflected in Charter Holdings' supplemental financial statements contained in this prospectus. The following table sets forth the percentages of revenues that items in the statements of operations constitute for the indicated periods (dollars in thousands).
YEAR ENDED 1/1/98 12/24/98 YEAR ENDED DECEMBER 31, THROUGH THROUGH DECEMBER 31, 1997 12/23/98 12/31/98 1999 ---------------- ----------------- ---------------- ------------------- STATEMENTS OF OPERATIONS: Revenues..................................... $18,867 100.0% $ 49,731 100.0% $13,713 100.0% $1,325,830 100.0% ------- ------ -------- ------ ------- ------ ---------- ------ Operating expenses: Operating costs............................ 9,157 48.5% 18,751 37.7% 4,757 34.7% 461,363 34.8% General and administrative costs........... 2,610 13.8% 7,201 14.5% 2,377 17.3% 222,283 16.8% Depreciation and amortization.............. 6,103 32.3% 16,864 33.9% 8,318 60.7% 675,786 51.0% Option compensation expense................ -- -- -- -- 845 6.2% 79,979 6.0% Management fees/corporate expense charges.................................. 566 3.0% 6,176 12.4% 473 3.4% 48,158 3.6% ------- ------ -------- ------ ------- ------ ---------- ------ Total operating expenses..................... 18,436 97.7% 48,992 98.5% 16,770 122.3% 1,487,569 112.2% ------- ------ -------- ------ ------- ------ ---------- ------ Income (loss) from operations................ 431 2.3% 739 1.5% (3,057) (22.3%) (161,739) (12.2%) Interest income.............................. 41 0.2% 44 0.1% 133 1.0% 18,821 1.4% Interest expense............................. (5,120) (27.1%) (17,277) (34.7%) (2,353) (17.2%) (434,995) (32.8%) Other income (expense)....................... 25 0.1% (728) (1.5%) -- -- (217) -- ------- ------ -------- ------ ------- ------ ---------- ------ Loss before extraordinary item............... (4,623) (24.5%) (17,222) (34.6%) (5,277) (38.5%) (578,130) (43.6%) Extraordinary item -- loss from early extinguishment of debt..................... -- -- -- -- -- -- (7,794) (0.6%) ------- ------ -------- ------ ------- ------ ---------- ------ Net loss..................................... $(4,623) (24.5%) $(17,222) (34.6%) $(5,277) (38.5%) $ (585,924) (44.2%) ======= ====== ======== ====== ======= ====== ========== ======
53 57 FISCAL 1999 COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 REVENUES. Revenues increased by $1,276.1 million, from $49.7 million for the period from January 1, 1998 through December 23, 1998 to $1,325.8 million in 1999. The increase in revenues primarily resulted from the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional revenues from these entities included for the year ended December 31, 1999 were $618.8 million, $386.7 million and $247.8 million, respectively. OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and administrative costs increased by $657.7 million, from $26.0 million for the period from January 1, 1998 through December 23, 1998 to $683.6 million in 1999. This increase was due primarily to the acquisition of the CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional operating, general and administrative expenses from these entities included for the year ended December 31, 1999 were $338.5 million, $209.3 million and $104.4 million, respectively. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $658.9 million, from $16.9 million, for the period from January 1, 1998 through December 23, 1998 to $675.8 million in 1999. There was a significant increase in amortization expense resulting from the acquisitions of the CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional depreciation and amortization expense from these entities included for the year ended December 31, 1999 were $346.3 million, $203.5 million and $125.6 million, respectively. The increases were offset by the elimination of depreciation and amortization expense related to dispositions of cable systems. OPTION COMPENSATION EXPENSE. Option compensation expense in 1999 was $80.0 million due to the granting of options to employees in December 1998, February 1999 and April 1999. The exercise prices of the options on the date of grant were deemed to be less than the estimated fair values of the underlying membership units, resulting in compensation expense accrued over the vesting period of each grant that varies from four to five years. MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate expense charges increased by $42.0 million, from $6.2 million, for the period from January 1, 1998 through December 23, 1998 to $48.2 million in 1999. The increase in 1998 compared to 1999 was the result of the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. INTEREST INCOME. Interest income increased by $18.8 million, from $44,000 for the period from January 1, 1998 through December 23, 1998 to $18.8 million in 1999 and the sale of the March 1999 Charter Holdings notes. The increase was primarily due to investing excess cash that resulted from required credit facilities drawdowns and the sale of the March 1999 Charter Holdings notes. INTEREST EXPENSE. Interest expense increased by $417.7 million, from $17.3 million for the period from January 1, 1998 through December 23, 1998 to $435.0 million in 1999. This increase resulted primarily from interest on the notes and credit facilities used to finance the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. NET LOSS. Net loss increased by $568.7 million, from $17.2 million for the period from January 1, 1998 through December 23, 1998 to $585.9 million in 1999. The increase in revenues that resulted from the acquisitions of CCA Group, CharterComm Holdings and Marcus Holdings was not sufficient to offset the operating expenses associated with the acquired systems. PERIOD FROM DECEMBER 24, 1998 THROUGH DECEMBER 31, 1998 This period is not comparable to any other period presented. The financial statements represent eight days of operations. This period not only contains the results of operations of CCPH, but also 54 58 the results of operations of those entities purchased in the acquisition of the Charter companies by Mr. Allen. As a result, no comparison of the operating results for this eight-day period is presented. PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997 REVENUES. Revenues increased by $30.9 million, or 163.6%, from $18.9 million in 1997 to $49.7 million for the period from January 1, 1998 through December 23, 1998. The increase in revenues primarily resulted from the acquisition of Sonic, which had revenues for that period of $29.8 million. OPERATING COSTS. Operating costs increased by $9.6 million, or 104.8%, from $9.2 million in 1997 to $18.8 million for the period from January 1, 1998 through December 23, 1998. This increase was due primarily to the acquisition of Sonic, which had operating costs for that period of $9.4 million, partially offset by the loss of $1.4 million on the sale of a cable system in 1997. GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs increased by $4.6 million, or 175.9%, from $2.6 million in 1997 to $7.2 million for the period from January 1, 1998 through December 23, 1998. This increase was due primarily to the acquisition of Sonic, which had general and administrative costs for that period of $6.0 million. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $10.8 million, or 176.3%, from $6.1 million in 1997 to $16.9 million for the period from January 1, 1998 through December 23, 1998. There was a significant increase in amortization resulting from the acquisition of Sonic. Incremental depreciation and amortization expenses of the acquisition of Sonic were $9.9 million. MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $5.6 million, or 991.2% from $0.6 million in 1997 to $6.2 million for the period from January 1, 1998 through December 23, 1998. The increase from 1997 compared to the period from January 1, 1998 through December 23, 1998 was the result of additional Charter Investment, Inc. charges related to equity appreciation rights plans of $3.8 million for the period from January 1, 1998 through December 23, 1998 and an increase of $0.9 million in management services provided by Charter Investment, Inc. as a result of the acquisition of Sonic. INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%, from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998 through December 23, 1998. This increase resulted primarily from the indebtedness of $220.6 million, including a note payable for $60.9 million, incurred in connection with the acquisition of Sonic resulting in additional interest expense. NET LOSS. Net loss increased by $12.6 million, or 272.5%, from $4.6 million in 1997 to $17.2 million for the period from January 1, 1998 through December 23, 1998. The increase in revenues that resulted from cable television customer growth was not sufficient to offset the operating expenses related to the acquisition of Sonic. OUTLOOK Our business strategy emphasizes the increase of our operating cash flow by increasing our customer base and the amount of cash flow per customer. We believe that there are significant advantages in increasing the size and scope of our operations, including: - improved economies of scale in management, marketing, customer service, billing and other administrative functions; - reduced costs for our cable systems and our infrastructure in general; - increased leverage for negotiating programming contracts; and - increased influence on the evolution of important new technologies affecting our business. 55 59 We seek to "cluster" cable systems in suburban and ex-urban areas surrounding selected metropolitan markets. We believe that such "clustering" offers significant opportunities to increase operating efficiencies and to improve operating margins and cash flow by spreading fixed costs over an expanding subscriber base. In addition, we believe that by concentrating "clusters" in markets, we will be able to generate higher growth in revenues and operating cash flow. Through strategic acquisitions and "swaps" of cable systems, we seek to enlarge the coverage of our current areas of operations, and, if feasible, develop "clusters" in new geographic areas within existing regions. Swapping of cable systems allows us to trade systems that do not coincide with our operating strategy while gaining systems that meet our objectives. Several significant swaps have been announced. These swaps have demonstrated the industry's trend to cluster operations. To date, we have participated in one swap in connection with the transaction with InterMedia. In addition, Charter Communications, Inc. has entered into a non-binding letter of intent providing for the exchange of certain of our cable systems for systems owned by AT&T. LIQUIDITY AND CAPITAL RESOURCES Our business requires significant cash to fund acquisitions, capital expenditures, debt service costs and ongoing operations. We have historically funded and expect to fund future liquidity and capital requirements through cash flows from operations, equity contributions, borrowings under our credit facilities and debt and equity financings. Our historical cash flows from operating activities in 1998 were $30.2 million, and in 1999 were $382.2 million. Pro forma for our merger with Marcus Holdings, the sale of the original notes, acquisitions completed since January 1, 1999, the Fanch, Falcon and Avalon transfers and the Kalamazoo transaction, our cash flows from operating activities for 1999 were $894.9 million. CAPITAL EXPENDITURES We have substantial ongoing capital expenditure requirements. We make capital expenditures primarily to upgrade, rebuild and expand our cable systems, as well as for system maintenance, the development of new products and services, and converters. Converters are set-top devices added in front of a subscriber's television receiver to change the frequency of the cable television signals to a suitable channel. The television receiver is then able to tune and to allow access to premium service. Upgrading our cable systems will enable us to offer new products and services, including digital television, additional channels and tiers, expanded pay-per-view options, high-speed Internet access and interactive services. Capital expenditures for 1999, pro forma for acquisitions completed since January 1, 1999, the recent transfers and the Kalamazoo transaction were approximately $1.3 billion. In 1999, we made capital expenditures, excluding cable systems acquired in 1999 and in our merger with Marcus Holdings, of $709.7 million. The majority of the capital expenditures related to rebuilding existing cable systems. Those expenditures were funded from cash flows from operations and borrowings under credit facilities. For the period from January 1, 2000 to December 31, 2002, we plan to spend approximately $6.0 billion for capital expenditures, approximately $3.5 billion of which will be used to upgrade and rebuild our systems to a bandwidth capacity of 550 megahertz or greater and add two-way capability, so that we may offer advanced services. The remaining $2.5 billion will be used for extensions of systems, development of new products and services, converters and system maintenance. Capital expenditures for 2000 are expected to be approximately $2.7 billion and aggregate capital expenditures for 2001 and 2002 are expected to be approximately $3.3 billion. We currently expect to finance the anticipated capital expenditures with cash generated from operations and additional borrowings under credit facilities including a bridge loan for which we have received a commitment. 56 60 We cannot assure you that these amounts will be sufficient to accomplish our planned system upgrade, expansion and maintenance. If we are not able to obtain amounts sufficient for our planned upgrades and other capital expenditures, it could adversely affect our ability to offer new products and services and compete effectively, and could adversely affect our growth, financial condition and results of operations. FINANCING ACTIVITIES As of December 31, 1999, pro forma for the sale of the original notes, the recent transfers, acquisitions completed since this date, the repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures, our debt would have been approximately $11.2 billion, and the deficiency of earnings available to cover fixed charges would have been approximately $1.5 billion. Our significant amount of debt may adversely affect our ability to obtain financing in the future and react to changes in our business. Our credit facilities and other debt instruments contain, various financial and operating covenants that could adversely impact our ability to operate our business, including restrictions on the ability of our operating subsidiaries to distribute cash to their parents. See "-- Certain Trends and Uncertainties -- Restrictive Covenants," for further information. MARCH 1999 CHARTER HOLDINGS NOTES. On March 17, 1999, Charter Holdings and Charter Capital issued $3.6 billion principal amount of senior notes. The March 1999 Charter Holdings notes consisted of $600 million in aggregate principal amount of 8.250% senior notes due 2007, $1.5 billion in aggregate principal amount of 8.625% senior notes due 2009, and $1.475 billion in aggregate principal amount at maturity of 9.920% senior discount notes due 2011. The net proceeds of approximately $3.0 billion, combined with the borrowings under our credit facilities, were used to consummate tender offers for publicly held debt of several of our subsidiaries, as described below, to refinance borrowings under our previous credit facilities, for working capital purposes and to finance a number of acquisitions. As of December 31, 1999, a total of $2.1 billion was outstanding under the 8.250% notes and the 8.625% notes, and the accreted value of the outstanding 9.920% notes was $977.8 million. NOTES OF THE CHARTER COMPANIES AND THE MARCUS COMPANIES. In February and March 1999, we commenced cash tender offers to purchase the 14% senior discount notes issued by Charter Communications Southeast Holdings, LLC, the 11.25% senior notes issued by Charter Communications Southeast, LLC, the 13.50% senior subordinated discount notes issued by Marcus Cable Operating Company, L.L.C., and the 14.25% senior discount notes issued by Marcus Cable. All such notes, except for $1.1 million in principal amount, were repaid in full for an aggregate amount of $1.0 billion. The remaining $1.1 million of such notes were repaid in September 1999. CHARTER OPERATING CREDIT FACILITIES. The Charter Operating credit facilities provide for two term facilities, one with a principal amount of $1.0 billion that matures in September 2007 (Term A), and the other with a principal amount of $2.45 billion that matures in March 2008 (Term B). The Charter Operating credit facilities also provide for a $1.25 billion revolving credit facility with a maturity date in September 2007 and, at the option of the lenders, supplemental credit facilities in the amount of $1.0 billion available until March 18, 2002. Amounts under the Charter Operating credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.22% to 9.25% as of December 31, 1999). A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. As of December 31, 1999, outstanding borrowings were approximately $2.9 billion and the unused availability was $1.2 billion. In March 2000, $600.0 million of the supplemental credit facility was drawn down. The maturity date for this drawdown is September 18, 2008. CHARTER HOLDINGS COMMITTED SENIOR BRIDGE LOAN FACILITY. Morgan Stanley Senior Funding, Inc. has committed to provide Charter Holdings and Charter Capital with senior increasing rate 57 61 bridge loans in an aggregate principal amount of up to $1.0 billion. The commitment to provide the bridge loans expires on October 14, 2000. Each bridge loan must be in a principal amount not less than $400.0 million and the bridge loans mature one year from the date of the initial loan. The first loan will initially bear interest at an annual rate equal to the yield corresponding to the bid price on our 10.25% notes less 0.25%, calculated as of the initial date of funding of the loan. If the first loan is not repaid within 90 days following its initial date of funding, the interest rate will increase by 1.25% at the end of such 90-day period and will increase by an additional 0.50% at the end of each additional 90-day period. The second loan will initially bear interest at an annual rate equal to the greater of: (a) the interest rate on the first loan in effect on the date of funding of the second loan; or (b) the yield corresponding to the bid price on our 10.25% notes as of the date of funding of the second loan. If the second loan is not repaid in whole by the last day of each 90-day period following its funding, the interest rate on the loan will increase on the last day of each 90-day period by an amount equal to the increase in interest rate on the first loan on such day. Unless additional default interest is assessed, the interest rate on the bridge loans will be between 9% and 15% annually. The bridge loan facility will not close unless specified closing conditions are satisfied. We cannot assure you that all closing conditions will be satisfied. For additional information on the closing conditions and other terms of this facility, see "Description of Certain Indebtedness." RENAISSANCE NOTES. When we acquired Renaissance in April 1999, Renaissance had outstanding $163.2 million principal amount at maturity of 10% senior discount notes due 2008. The Renaissance 10% notes do not require the payment of interest until April 15, 2003. From and after April 15, 2003, the Renaissance 10% notes bear interest, payable semi-annually in cash, on April 15 and October 15, commencing on October 15, 2003. The Renaissance 10% notes are due on April 15, 2008. In May 1999, $48.8 million aggregate face amount of the Renaissance Notes were repurchased at 101% of their accreted value plus accrued and unpaid interest. As of December 31, 1999, the accreted value of the Renaissance 10% notes that remained outstanding was approximately $83.0 million. HELICON NOTES. We acquired Helicon in July 1999 and assumed Helicon's $115.0 million in principal amount of 11% senior secured notes due 2003. On November 1, 1999, we redeemed all of the Helicon 11% notes at a purchase price equal to 103% of their principal amount, plus accrued and unpaid interest, for $124.8 million. RIFKIN NOTES. We acquired Rifkin in September 1999 and assumed Rifkin's outstanding $125.0 million in principal amount of 11.125% senior subordinated notes due 2006. In October 1999, we repurchased an individually held $3.0 million Rifkin promissory note for $3.4 million and publicly held notes with a total outstanding principal amount of $124.1 million for a total of $140.6 million, including a consent fee of $30 per $1,000 to note holders who delivered timely consents to amend the indenture governing those notes to eliminate substantially all of the restrictive covenants. As of December 31, 1999, there was $0.9 million in principal amount outstanding of Rifkin notes. In February 2000, we repurchased $0.5 million in principal amount of these notes. FALCON DEBENTURES. When Falcon was acquired by Charter Communications Holding Company in November 1999, it had outstanding $375 million in principal amount of 8.375% senior debentures due 2010 and 9.285% senior discount debentures due 2010 with an accreted value of approximately $319.1 million. Falcon's 11.56% subordinated notes due 2001 were paid off for a total of $16.3 million, including principal, accrued and unpaid interest and a premium at the closing of the Falcon acquisition. As of December 31, 1999, $375.0 million total principal amount of the Falcon 8.375% debentures were outstanding and the accreted value of the Falcon 9.285% debentures was approximately $323.0 million. 58 62 On December 10, 1999, change of control offers were commenced to repurchase the Falcon debentures at purchase prices of 101% of principal amount, plus accrued and unpaid interest, or accreted value, as applicable. Pursuant to the change of control offers and in purchases in the "open market," all of the 8.375% senior debentures were repurchased for $388.0 million and all of the 9.285% senior discount debentures were repurchased for $328.1 million in February 2000. FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the previous Falcon credit facilities were amended to provide for two term facilities, one with a principal amount of $198.0 million as of December 31, 1999 that matures June 2007 (Term B), and the other with the principal amount of $297.0 million as of December 31, 1999 that matures December 2007 (Term C). The Falcon credit facilities also provide for a $646.0 million revolving credit facility with a maturity date of December 2006 and, at the option of the lenders, supplemental credit facilities in the amounts of $700.0 million with a maturity date in December 2007. At December 31, 1999, $110.0 million was outstanding under the supplemental credit facilities. Amounts under the Falcon credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.5% (7.57% to 9.25% as of December 31, 1999). A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance. As of December 31, 1999, outstanding borrowings were $865.5 million and unused availability was $385.5 million. However, debt covenants limited the amount that could be borrowed to $342.0 million at December 31, 1999. AVALON NOTES. When Avalon was acquired by Charter Communications Holding Company in November 1999, it had outstanding $150 million in principal amount of 11.875% senior discount notes due 2008 and 9.375% senior subordinated notes due 2008 with an accreted value of $123.3 million. As of December 31, 1999, the accreted value of the Avalon 11.875% notes was $124.8 and $150.0 million in principal of the Avalon 9.375% notes remained outstanding. After December 1, 2003, cash interest on the Avalon 11.875% notes will be payable semi-annually on June 1 and December 1 of each year, commencing June 1, 2004. In January 2000, we completed change of control offers in which we repurchased $16.3 million aggregate principal amount of the 11.875% discount notes at a purchase price of 101% of accreted value as of January 28, 2000 for $10.5 million. As of February 29, 2000, Avalon 11.875% notes with an aggregate principal amount of $179.8 million at maturity remained outstanding with an accreted value of $116.4 million. In January 2000, we also completed a change of control offer in which we repurchased $134.0 million aggregate principal amount of the Avalon 9.375% notes at 101% of their principal amount, plus accrued and unpaid interest thereon through January 28, 2000 for $137.4 million. These repurchases were funded with equity contributions from Charter Holdings which made the cash available from the proceeds of the sale of the original notes. In addition to the above change of control repurchase, we repurchased the remaining Avalon 9.375% notes, including accrued and unpaid interest, in the "open market" for $16.3 million. AVALON CREDIT FACILITIES. The Avalon credit facilities have maximum borrowings of $300.0 million, consisting of a revolving facility in the amount of $175.0 million that matures May 15, 2008, and a Term B loan in the amount of $125.0 million that matures on November 15, 2008. The Avalon credit facilities also provide, at the option of the lenders, for supplemental credit facilities in amounts of $75 million available until December 31, 2003. Amounts under the Avalon credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin up to 2.75% (7.995% to 8.870% as of December 31, 1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. The Company borrowed $170.0 million under the Avalon credit facilities to fund a portion of the Avalon purchase price. As of December 31, 1999, outstanding borrowings were $170.0 million and unused availability was $130.0 million. 59 63 FANCH CREDIT FACILITIES. The Fanch credit facilities provide for two term facilities, one with a principal amount of $450 million that matures May 2008 (Term A), and the other with a principal amount of $400 million that matures November 2008 (Term B). The Fanch credit facilities also provide for a $350 million revolving credit facility with a maturity date in May 2008 and, at the option of the lenders, supplemental credit facilities in the amount of $300.0 million available until December 31, 2004. Amounts under the Fanch credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 3.0% (8.12% to 8.87% as of December 31, 1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. The Company used $850.0 million of the credit facilities to fund a portion of the Fanch purchase price. As of December 31, 1999, outstanding borrowings were $850.0 million and unused availability was $350.0 million. BRESNAN NOTES. We and Charter Communications Holding Company acquired Bresnan in February 2000 and assumed Bresnan's $170 million in principal amount of 8% senior notes due 2009 and $275 million in principal amount at maturity of 9.25% senior discount notes due 2009. In March 2000, we repurchased all of the outstanding Bresnan notes at 101% of the outstanding principal amounts plus accrued and unpaid interest or accreted value, as applicable, for a total of $369.7 million. BRESNAN CREDIT FACILITIES. Upon the closing of the Bresnan acquisition, we amended and assumed the previous Bresnan credit facilities. The Bresnan facilities provide for borrowings of up to $900.0 million. The Bresnan credit facilities provide for two term facilities, one with a principal amount of $403 million (Term A), and the other with a principal amount of $297 million (Term B). The Bresnan credit facilities also provide for a $200 million revolving credit facility with a maturity date in June 2007 and, at the option of lenders, supplemental facilities in the amount of $200 million. Amounts under the Bresnan credit facilities bear interest at the Base Rate or the Eurodollar Rate, as defined, plus a margin of up to 2.75% (7.57% to 9.00% as of December 31, 1999). A quarterly commitment fee of between 0.250% and 0.375% is payable on the unborrowed balance of Term A and the revolving credit facility. At the closing of the Bresnan acquisition, we borrowed approximately $601.2 million to replace the borrowings outstanding under the previous credit facilities and an additional $30.0 million to fund a portion of the Bresnan purchase price. As of February 29, 2000, $647.9 million was outstanding and $252.1 million was available for borrowing. JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter Holdings and Charter Capital issued $1.5 billion principal amount of senior notes. The January 2000 Charter Holdings notes consisted of $675 million in aggregate principal amount of 10.00% senior notes due 2009, $325 million in aggregate principal amount of 10.25% senior notes due 2010, and $532 million in aggregate principal amount at maturity of 11.75% senior discount notes due 2010. The net proceeds of approximately $1.3 billion were used to consummate change of control offers for certain of the Falcon, Avalon and Bresnan notes and debentures. Semi-annual interest payments with respect to the 10.00% notes and the 10.25% notes will be approximately $50.4 million. Payments commenced for the 10.00% notes on April 1, 2000 and will commence July 15, 2000 for the 10.25% notes. No interest will be payable on the 11.75 notes prior to January 15, 2005. Thereafter semi-annual interest payments will be approximately $81.7 in the aggregate commencing on July 15, 2005. As of February 29, 2000, $1.0 billion of the original 10.00% and 10.25% senior notes were outstanding, and the accreted value of the original 11.75% senior discount notes was approximately $304.9 million. CONTRIBUTIONS BY AFFILIATES. In August 1999, Vulcan Cable III Inc. contributed to Charter Communications Holding Company $500 million in cash and, in September 1999, an additional $825 million, of which approximately $644.3 million was in cash and approximately $180.7 million was in the form of equity interests acquired by Vulcan Cable III Inc. in connection with the Rifkin 60 64 acquisition. Charter Communications Holding Company in turn contributed the cash and equity interests to Charter Holdings. In November 1999, in connection with Charter Communications, Inc.'s initial public offering, Vulcan Cable III contributed to Charter Communications Holding Company $750 million in cash. In connection with the Rifkin, Falcon and Bresnan acquisitions, Charter Communications Holding Company issued equity interests totaling approximately $1.1 billion and certain subsidiaries of Charter Holdings issued preferred equity interests totaling $629.5 million to sellers in the Bresnan acquisition. For a description of our acquisitions completed in 1999 and 2000 and the pending Kalamazoo transaction, see "Business -- Acquisitions." CERTAIN TRENDS AND UNCERTAINTIES The following discussion highlights a number of trends and uncertainties, in addition to those discussed elsewhere in this prospectus that could materially impact our business, results of operations and financial condition. SUBSTANTIAL LEVERAGE. As of December 31, 1999, pro forma for the recent transfers, acquisitions completed since this date, the sale of the original notes and the Kalamazoo transaction, our total debt was approximately $11.2 billion. We anticipate incurring significant additional debt in the future to fund the expansion, maintenance and the upgrade of our cable systems. Our ability to make payments on our debt and to fund our planned capital expenditures for upgrading our cable systems and our ongoing operations will depend on our ability to generate cash and secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our existing credit facilities, new facilities or from other sources of financing at acceptable rates or in an amount sufficient to enable us to repay our debt, to grow our business or to fund our other liquidity and capital needs. VARIABLE INTEREST RATES. A significant portion 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. See discussion on "-- Interest Rate Risk." RESTRICTIVE COVENANTS. Our credit facilities and the indentures governing our outstanding debt contain a number of significant covenants that, among other things, restrict our ability and the ability of our subsidiaries to: - pay dividends or make other distributions; - make certain investments or acquisitions; - dispose of assets or merge; - incur additional debt; - issue equity; - repurchase or redeem equity interests and debt; - create liens; and - pledge assets. Furthermore, in accordance with our credit facilities we are required to maintain specified financial ratios and meet financial tests. The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants will result in a default under the 61 65 applicable debt agreement or instrument, which could trigger acceleration of the debt. Any default under our credit facilities or the indentures governing our outstanding debt may adversely affect our growth, our financial condition and our results of operations. IMPORTANCE OF GROWTH STRATEGY AND RELATED RISKS. We expect that a substantial portion of any of our future growth will be achieved through revenues from additional services and the acquisition of additional cable systems. We cannot assure you that we will be able to offer new services successfully to our customers or that those new services will generate revenues. In addition, the acquisition of additional cable systems may not have a positive net impact on our operating results. Acquisitions involve a number of special risks, including diversion of management's attention, failure to retain key acquired personnel, risks associated with unanticipated events or liabilities and difficulties in assimilation of the operations of the acquired companies, some or all of which could have a material adverse effect on our business, results of operations and financial condition. If we are unable to grow our cash flow sufficiently, we may be unable to fulfill our obligations or obtain alternative financing. MANAGEMENT OF GROWTH. As a result of the acquisition of the Charter companies by Mr. Allen, the merger of Charter Holdings with Marcus Holdings, our acquisitions completed since January 1, 1999, the recent transfers and the Kalamazoo transaction, we have experienced and will continue to experience rapid growth that has placed and is expected to continue to place a significant strain on our management, operations and other resources. Our future success will depend in part on our ability to successfully integrate the operations acquired and to be acquired and to attract and retain qualified personnel. Historically, acquired entities have had minimal employee benefit related costs and all benefit plans have been terminated with acquired employees transferring to our 401(k) plan. No significant severance cost was incurred in conjunction with acquisitions in 1999 and 2000. The failure to retain or obtain needed personnel or to implement management, operating or financial systems necessary to successfully integrate acquired operations or otherwise manage growth when and as needed could have a material adverse effect on our business, results of operations and financial condition. In connection with our acquisitions over the past year, we maintain multi-disciplinary teams to formulate plans for establishing customer service centers, identifying property, plant and equipment requirements and possible reduction of headends. Headends are the control centers of a cable television system where incoming signals are amplified, converted, processed and combined for transmission to customers. These teams also determine market position and how to attract talented personnel. Our goals include rapid transition in achieving performance objectives and implementing "best practice" procedures. REGULATION AND LEGISLATION. Cable systems are extensively regulated at the federal, state, and local level. These regulations have increased the administrative and operational expenses of cable television systems and affected the development of cable competition. Rate regulation of cable systems has been in place since passage of the Cable Television Consumer Protection and Competition Act of 1992, although the scope of this regulation recently was sharply contracted. Since March 31, 1999, rate regulation exists only with respect to the lowest level of basic cable service and associated equipment. This change affords cable operators much greater pricing flexibility, although Congress could revisit this issue if confronted with substantial rate increases. Cable operators also face significant regulation of their channel capacity. They currently can be required to devote substantial capacity to the carriage of programming that they would not carry voluntarily, including certain local broadcast signals, local public, educational and government access users, and unaffiliated commercial leased access programmers. This carriage burden could increase in the future, particularly if the Federal Communications Commission were to require cable systems to carry both the analog and digital versions of local broadcast signals. The FCC is currently conducting a proceeding in which it is considering this channel usage possibility. The FCC recently rejected a 62 66 request to allow unaffiliated Internet service providers seeking direct cable access to invoke commercial leased access rights originally devised for video programmers. There is also uncertainty whether local franchising authorities, the FCC, or the U.S. Congress will impose obligations on cable operators to provide unaffiliated Internet service providers with access to cable plant on non-discriminatory terms. If they were to do so, and the obligations were found to be lawful, it could complicate our operations in general, and our Internet operations in particular, from a technical and marketing standpoint. These access obligations could adversely impact our profitability and discourage system upgrades and the introduction of new products and services. POSSIBLE RESCISSION LIABILITY. The Rifkin, Falcon and Bresnan sellers who acquired Charter Communications Holding Company membership units or, in the case of Bresnan, additional equity interests in one of our subsidiaries, in connection with the respective Rifkin, Falcon and Bresnan acquisitions, and the Helicon sellers who acquired shares of Class A common stock in Charter Communications, Inc.'s initial public offering may have rescission rights against Charter Communications, Inc. and Charter Communications Holding Company arising out of possible violations of Section 5 of the Securities Act in connection with the offers and sales of these equity interests. If all of these equity holders successfully exercised their possible rescission rights, Charter Communications, Inc. or Charter Communications Holding Company would become obligated to repurchase all such equity interests and the total repurchase obligation would be up to approximately $1.8 billion. If Charter Communications, Inc. and Charter Communications Holding Company fail to obtain capital sufficient to fund any required repurchases, they could seek funds from us and our subsidiaries. This could adversely affect our financial condition and results of operations. These rescission rights expire one year from the dates of issuance of these equity interests. INTEREST RATE RISK The use of interest rate risk management instruments, such as interest rate exchange agreements, interest rate cap agreements and interest rate collar agreements is required under the terms of the credit facilities of our subsidiaries. Our policy is to manage interest costs using a mix of fixed and variable rate debt. Using interest rate swap agreements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Interest rate cap agreements are used to lock in a maximum interest rate should variable rates rise, but enable us to pay lower market rates. Collars limit our exposure to and benefits from interest rate fluctuations on variable rate debt to within a certain range of rates. Our participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. 63 67 The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us as of December 31, 1999 (dollars in thousands):
EXPECTED MATURITY DATE -------------------------------------------------------------------------------- FAIR VALUE AT 2000 2001 2002 2003 2004 THEREAFTER TOTAL DECEMBER 31, 1999 ---------- -------- -------- -------- -------- ---------- ---------- ----------------- DEBT Fixed Rate................. -- -- -- -- -- $3,690,313 $3,690,313 $2,914,820 Average Interest Rate.... -- -- -- -- -- 9.1% 9.1% Variable Rate.............. $ 88,875 $156,000 $168,500 $2,492,625 $2,906,000 $2,906,000 Average Interest Rate.... 8.8% 8.8% 8.8% 9.6% 9.5% INTEREST RATE INSTRUMENTS Variable to Fixed Swaps.... $2,375,000 $660,000 $250,000 $ 30,000 -- -- $3,315,000 $ 17,951 Average Pay Rate......... 8.5% 7.9% 7.8% 8.0% -- -- 8.4% Average Receive Rate..... 8.3% 9.2 9.2% 9.2% -- -- 8.6% Collars.................... $ 195,000 $ 45,000 -- -- -- -- $ 240,000 $ (199) Average Cap Rate......... 8.8% 8.7% -- -- -- -- 8.8% Average Floor Rate....... 7.8% 7.6% -- -- -- -- 7.7%
The notional amounts of interest rate instruments, as presented in the above table, are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The estimated fair value approximates the costs (proceeds) to settle the outstanding contracts. Interest rates on variable debt are estimated using the average implied forward London Interbank Offering Rate (LIBOR) rates for the year of maturity based on the yield curve in effect at December 31, 1999. While swaps, caps and collars represent an integral part of our interest rate risk management program, their incremental effect on interest expense for the years ended December 31, 1999, 1998, and 1997 was not significant. YEAR 2000 ISSUES GENERAL. Many existing computer systems and applications, and other control devices and embedded computer chips use only two digits, rather than four, to identify a year in the date field, failing to consider the impact of the change in the century. Computer chips are the physical structure upon which integrated circuits are fabricated as components of systems, such as telephone systems, computers and memory systems. As a result, such systems, applications, devices, and chips could create erroneous results or might fail altogether unless corrected to properly interpret data related to the year 2000 and beyond. These errors and failures may result, not only from a date recognition problem in the particular part of a system failing, but may also result as systems, applications, devices and chips receive erroneous or improper data from third-parties suffering from the year 2000 problem. In addition, two interacting systems, applications, devices or chips, each of which has individually been fixed so that it will properly handle the year 2000 problem, could nonetheless result in a failure because their method of dealing with the problem is not compatible. We have not experienced significant disruptions or any other problems since the beginning of 2000. We cannot assure you, however, that such problems will not arise in connection with customer billing or other periodic information gathering. COST. The total cost of our year 2000 remediation programs was approximately $9.8 million. We do not anticipate significant additional expenditures. OPTIONS In accordance with an employment agreement and a related option agreement with Jerald L. Kent, our President and Chief Executive Officer, Mr. Kent was issued an option to purchase 7,044,127 membership units in Charter Communications Holding Company in December 1998. The option vests over a four-year period from the date of grant and expires ten years from the date of grant. 64 68 In February 1999, Charter Holdings adopted an option plan, which was assumed by Charter Communications Holding Company in May 1999, providing for the grant of options to employees, consultants and directors of Charter Communications Holding Company and its affiliates to purchase up to 25,009,798 Charter Communications Holding Company membership units. Options granted under the plan will be fully vested after five years from the date of grant. Options not exercised accumulate and are exercisable, in whole or in part, in any subsequent period, but not later than ten years from the date of grant. Membership units received upon exercise of the options issued to Mr. Kent and to optionees under the plan are automatically exchanged for shares of Class A common stock of Charter Communications, Inc. on a one-for-one basis. The following chart sets forth the number of options outstanding and the exercise price of such options as of March 31, 1999.
OPTIONS OPTIONS OUTSTANDING EXERCISABLE ----------------------------- REMAINING ----------- NUMBER OF EXERCISE TOTAL LIFE NUMBER OF OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS(4) ---------- ------------ ------------ ---------- ----------- Outstanding as of January 1, 1999 (1)................... 7,044,127 $ 20.00 $140,882,540 10.0(3) 3,081,808(5) Granted: February 9, 1999 (2).................. 9,111,681 20.00 182,233,620 130,000 April 5, 1999 (2)..................... 473,000 20.73 9,805,290 -- November 8, 1999 (2).................. 4,781,400 19.00 90,846,600 240,000 February 15, 2000(2).................. 5,566,600 19.47 108,375,022 -- Cancelled............................... (960,600) 19.00-20.73 (19,017,756) -- ---------- ------------ ------------ ---- --------- Outstanding as of March 31, 1999........................ 26,016,208 $ 19.72(3) $513,125,316 9.1(3) 3,451,808(5) ========== ============ ============ ==== =========
- - - --------------- (1) Granted to Jerald L. Kent pursuant to his employment agreement and related option agreement. (2) Granted pursuant to the option plan. (3) Weighted average. (4) As of March 31, 2000. (5) The weighted average exercise price for options exercisable was $20.00 and $19.93 at December 31, 1998 and March 31, 2000, respectively. The weighted average fair value of options granted was $12.59 and $12.50 at December 31, 1999 and 1998, respectively. We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for options issued under the option plan and the options held by Mr. Kent. We recorded option compensation expense of $845,000 for the period from December 24, 1998 through December 31, 1998 and $80.0 million for the year ended December 31, 1999 in the financial statements since the exercise prices were less than the estimated fair values of the underlying membership units on the date of grant. The estimated fair value was determined using the valuation inherent in Mr. Allen's acquisition of Charter and valuations of public companies in the cable industry adjusted for factors specific to us. Compensation expense is accrued over the vesting period of each grant that varies from four to five years. As of December 31, 1999, deferred compensation remaining to be recognized in future periods totaled $79.4 million. ACCOUNTING STANDARD NOT YET IMPLEMENTED In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments 65 69 embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB No. 133" has delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We have not yet quantified the impacts of adopting SFAS No. 133 on our consolidated financial statements nor have we determined the timing or method of our adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). 66 70 THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER GENERAL We sold the original notes on January 12, 2000 in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended. The initial purchasers of the notes subsequently resold the original notes to qualified institutional buyers in reliance on Rule 144A and under Regulation S under the Securities Act. In connection with the sale of original notes to the initial purchasers pursuant to the Purchase Agreement, dated January 6, 2000, among us and Goldman, Sachs & Co., Chase Securities Inc., Credit Suisse First Boston, FleetBoston Robertson Stephens, Merrill & Co., Morgan Stanley Dean Witter, TD Securities, First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities, the holders of the original notes became entitled to the benefits of the exchange and registration rights agreements dated January 12, 2000, among us and the initial purchasers. Under the registration rights agreements, the issuers became obligated to file a registration statement in connection with an exchange offer within 120 days after January 12, 2000 and to use their reasonable best efforts to have the exchange offer registration statement declared effective within 180 days after January 12, 2000. The exchange offer being made by this prospectus, if consummated within the required time periods, will satisfy our obligations under the registration rights agreements. This prospectus, together with the letter of transmittal, is being sent to all beneficial holders of original notes known to the issuers. Upon the terms and subject to the conditions set forth in this prospectus and in the accompanying letter of transmittal, the issuers will accept all original notes properly tendered and not withdrawn prior to the expiration date. The issuers will issue $1,000 principal amount of new notes in exchange for each $1,000 principal amount of outstanding original notes accepted in the exchange offer. Holders may tender some or all of their original notes pursuant to the exchange offer. Based on no-action letters issued by the staff of the Securities and Exchange Commission to third parties we believe that holders of the new notes issued in exchange for original notes may offer for resale, resell and otherwise transfer the new notes, other than any holder that is an affiliate of ours within the meaning of Rule 405 under the Securities Act, without compliance with the registration and prospectus delivery provisions of the Securities Act. This is true as long as the new notes are acquired in the ordinary course of the holder's business, the holder has no arrangement or understanding with any person to participate in the distribution of the new notes and neither the holder nor any other person is engaging in or intends to engage in a distribution of the new notes. A broker-dealer that acquired original notes directly from the issuers cannot exchange the original notes in the exchange offer. Any holder who tenders in the exchange offer for the purpose of participating in a distribution of the new notes cannot rely on the no-action letters of the staff of the Securities and Exchange Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives new notes for its own account in exchange for original notes, where original notes were acquired by such broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new notes. See "Plan of Distribution" for additional information. We shall be deemed to have accepted validly tendered original notes when, as and if we have given oral or written notice of the acceptance of such notes to the exchange agent. The exchange agent will act as agent for the tendering holders of original notes for the purposes of receiving the new notes from the issuers and delivering new notes to such holders. 67 71 If any tendered original notes are not accepted for exchange because of an invalid tender or the occurrence of the conditions set forth under "-- Conditions" without waiver by us, certificates for any such unaccepted original notes will be returned, without expense, to the tendering holder of any such original notes as promptly as practicable after the expiration date. Holders of original notes who tender in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of original notes, pursuant to the exchange offer. We will pay all charges and expenses, other than certain applicable taxes in connection with the exchange offer. See "-- Fees and Expenses." SHELF REGISTRATION STATEMENT Pursuant to the registration rights agreements, if the exchange offer is not completed prior to the date on which the earliest of any of the following events occurs: (a) applicable interpretations of the staff of the Securities and Exchange Commission do not permit us to effect the exchange offer, (b) any holder of notes notifies us that either: (1) such holder is not eligible to participate in the exchange offer, or (2) such holder participates in the exchange offer and does not receive freely transferable new notes in exchange for tendered original notes, or (c) the exchange offer is not completed within 210 days after January 12, 2000, we will, at our cost: - file a shelf registration statement covering resales of the original notes, - use our reasonable best efforts to cause the shelf registration statement to be declared effective under the Securities Act at the earliest possible time, but no later than 90 days after the time such obligation to file arises, and - use our reasonable best efforts to keep effective the shelf registration statement until the earlier of two years after the date as of which the Securities and Exchange Commission declares such shelf registration statement effective or the shelf registration otherwise becomes effective, or the time when all of the applicable original notes are no longer outstanding. If any of the events described occurs, we will refuse to accept any original notes and will return all tendered original notes. We will, if and when we file the shelf registration statement, provide to each holder of the original notes copies of the prospectus which is a part of the shelf registration statement, notify each holder when the shelf registration statement has become effective and take other actions as are required to permit unrestricted resales of the original notes. A holder that sells original notes pursuant to the shelf registration statement generally must be named as a selling security-holder in the related prospectus and must deliver a prospectus to purchasers, a seller will be subject to civil liability provisions under the Securities Act in connection with these sales. A seller of the original notes also will be bound by applicable provisions of the registration rights agreements, including indemnification obligations. In addition, each holder of original notes must deliver information to be used in connection with the shelf registration statement and provide comments on the shelf registration statement in order to have its original notes included in the shelf registration statement and benefit from the provisions regarding any liquidated damages in the registration rights agreement. 68 72 INCREASE IN INTEREST RATE If: (1) the registration statement, of which this prospectus is a part, has not been declared effective by the Securities and Exchange Commission within 180 days of the issuance of the original notes, and we have not used or are not continuing to use our reasonable best efforts to cause the registration statement to become effective, or (2) the exchange offer has not been completed within 30 business days after the initial effective date of the exchange offer registration statement, or (3) the exchange offer registration statement is either withdrawn by us or subject to an effective stop order without being followed immediately by an additional registration statement filed and declared effective, or (4) we are required to file the shelf registration statement and either (a) the shelf registration statement has not become effective or been declared effective on or before the 90th calendar day following the date such obligation to file arises, or (b) the shelf registration statement has been declared effective and such shelf registration statement ceases to be effective, except as specifically permitted in the registration rights agreements, without being succeeded promptly by an additional registration statement filed and declared effective, the interest rate borne by the original notes will be increased by 0.25% per year for the first 90 days of default, 0.50% per year for the second 90 days of default, 0.75% per year for the third 90 days of default and 1.0% per year for the remaining period of time in default. The sole remedy available to the holders of the original notes will be the immediate increase in the interest rate on the original notes as described above. Any amounts of additional interest due as described above will be payable in cash on the same interest payments dates as the original notes. EXPIRATION DATE; EXTENSIONS; AMENDMENT We will keep the exchange offer open for not less than 30 days, or longer if required by applicable law, after the date on which notice of the exchange offer is mailed to the holders of the old notes. The term "expiration date" means the expiration date set forth on the cover page of this prospectus, unless we extend the exchange offer, in which case the term "expiration date" means the latest date to which the exchange offer is extended. In order to extend the expiration date, we will notify the exchange agent of any extension by oral or written notice and will issue a public announcement of the extension, each prior to 5:00 p.m., New York City time, on the next business day after the previously scheduled expiration date. We reserve the right (a) to delay accepting any original notes, to extend the exchange offer or to terminate the exchange offer and not accept original notes not previously accepted if any of the conditions set forth under "-- Conditions" shall have occurred and shall not have been waived by us, if permitted to be waived by us, by giving oral or written notice of such delay, extension or termination to the exchange agent, or (b) to amend the terms of the exchange offer in any manner deemed by us to be advantageous to the holders of the original notes. 69 73 Any delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice. If the exchange offer is amended in a manner determined by us to constitute a material change, we promptly will disclose such amendment in a manner reasonably calculated to inform the holders of the original notes of such amendment. Depending upon the significance of the amendment, we may extend the exchange offer if it otherwise would expire during such extension period. Without limiting the manner in which we may choose to make a public announcement of any extension, amendment or termination of the exchange offer, we will not be obligated to publish, advertise, or otherwise communicate any such announcement, other than by making a timely release to an appropriate news agency. PROCEDURES FOR TENDERING To tender in the exchange offer, a holder must complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, have the signatures on the letter of transmittal guaranteed if required by instruction 2 of the letter of transmittal, and mail or otherwise deliver such letter of transmittal or such facsimile or an agent's message in connection with a book entry transfer, together with the original notes and any other required documents. To be validly tendered, such documents must reach the exchange agent before 5:00 p.m., New York City time, on the expiration date. Delivery of the original notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the exchange agent prior to the expiration date. The term "agent's message" means a message, transmitted by a book-entry transfer facility to, and received by, the exchange agent, forming a part of a confirmation of a book-entry transfer, which states that such book-entry transfer facility has received an express acknowledgment from the participant in such book-entry transfer facility tendering the original notes that such participant has received and agrees to be bound by the terms of the letter of transmittal and that we may enforce such agreement against such participant. The tender by a holder of original notes will constitute an agreement between such holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal. Delivery of all documents must be made to the exchange agent at its address set forth below. Holders may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect such tender for such holders. THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE SENT TO US. Only a holder of original notes may tender original notes in the exchange offer. The term "holder" with respect to the exchange offer means any person in whose name original notes are registered on our books or any other person who has obtained a properly completed bond power from the registered holder. Any beneficial holder whose original notes are registered in the name of its broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on its behalf. If such beneficial holder wishes to tender on its own behalf, such registered holder must, prior to completing and executing the letter of transmittal and delivering its original notes, either make appropriate 70 74 arrangements to register ownership of the original notes in such holder's name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. Signatures on a letter of transmittal or a notice of withdrawal, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States referred to as an "eligible institution", unless the original notes are tendered (a) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal or (b) for the account of an eligible institution. In the event that signatures on a letter of transmittal or a notice of withdrawal, are required to be guaranteed, such guarantee must be by an eligible institution. If the letter of transmittal is signed by a person other than the registered holder of any original notes listed therein, such original notes must be endorsed or accompanied by appropriate bond powers and a proxy which authorizes such person to tender the original notes on behalf of the registered holder, in each case signed as the name of the registered holder or holders appears on the original notes. If the letter of transmittal or any original notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by us, evidence satisfactory to us of their authority so to act must be submitted with the letter of transmittal. All questions as to the validity, form, eligibility, including time of receipt, and withdrawal of the tendered original notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right to reject any and all original notes not properly tendered or any original notes our acceptance of which, in the opinion of counsel for us, would be unlawful. We also reserve the right to waive any irregularities or conditions of tender as to particular original notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of original notes must be cured within such time as we shall determine. None of us, the exchange agent or any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of original notes, nor shall any of them incur any liability for failure to give such notification. Tenders of original notes will not be deemed to have been made until such irregularities have been cured or waived. Any original notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost to such holder by the exchange agent to the tendering holders of original notes, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date. In addition, we reserve the right in our sole discretion to (a) purchase or make offers for any original notes that remain outstanding subsequent to the expiration date or, as set forth under "-- Conditions," to terminate the exchange offer in accordance with the terms of the registration rights agreements and (b) to the extent permitted by applicable law, purchase original notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers may differ from the terms of the exchange offer. 71 75 By tendering, each holder will represent to us that, among other things, (a) the new notes acquired pursuant to the exchange offer are being obtained in the ordinary course of business of such holder or other person, (b) neither such holder nor such other person is engaged in or intends to engage in a distribution of the new notes, (c) neither such holder or other person has any arrangement or understanding with any person to participate in the distribution of such new notes, and (d) such holder or other person is not our "affiliate," as defined under Rule 405 of the Securities Act, or, if such holder or other person is such an affiliate, will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. We understand that the exchange agent will make a request promptly after the date of this prospectus to establish accounts with respect to the original notes at the Depository Trust Company for the purpose of facilitating the exchange offer, and subject to the establishment of such accounts, any financial institution that is a participant in the Depository Trust Company's system may make book-entry delivery of original notes by causing the Depository Trust Company to transfer such original notes into the exchange agent's account with respect to the original notes in accordance with the Depository Trust Company's procedures for such transfer. Although delivery of the original notes may be effected through book-entry transfer into the exchange agent's account at the Depository Trust Company, an appropriate letter of transmittal properly completed and duly executed with any required signature guarantee, or an agent's message in lieu of the letter of transmittal, and all other required documents must in each case be transmitted to and received or confirmed by the exchange agent at its address set forth below on or prior to the expiration date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to Depository Trust Company does not constitute delivery to the exchange agent. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their original notes and (a) whose original notes are not immediately available or (b) who cannot deliver their original notes, the letter of transmittal or any other required documents to the exchange agent prior to the expiration date, may effect a tender if: (1) the tender is made through an eligible institution; (2) prior to the expiration date, the exchange agent receives from such eligible institution a properly completed and duly executed Notice of Guaranteed Delivery, by facsimile transmission, mail or hand delivery, setting forth the name and address of the holder of the original notes, the certificate number or numbers of such original notes and the principal amount of original notes tendered, stating that the tender is being made thereby, and guaranteeing that, within three business days after the expiration date, the letter of transmittal, or facsimile thereof or agent's message in lieu of the letter of transmittal, together with the certificate(s) representing the original notes to be tendered in proper form for transfer and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and (3) such properly completed and executed letter of transmittal (or facsimile thereof) together with the certificate(s) representing all tendered original notes in proper form for 72 76 transfer and all other documents required by the letter of transmittal are received by the exchange agent within three business days after the expiration date. WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, tenders of original notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. However, where the expiration date has been extended, tenders of original notes previously accepted for exchange as of the original expiration date may not be withdrawn. To withdraw a tender of original notes in the exchange offer, a written or facsimile transmission notice of withdrawal must be received by the exchange agent at its address set forth in this prospectus prior to 5:00 p.m., New York City time, on the expiration date. Any such notice of withdrawal must: (a) specify the name of the depositor, who is the person having deposited the original notes to be withdrawn, (b) identify the original notes to be withdrawn, including the certificate number or numbers and principal amount of such original notes or, in the case of original notes transferred by book-entry transfer, the name and number of the account at Depository Trust Company to be credited, (c) be signed by the depositor in the same manner as the original signature on the letter of transmittal by which such original notes were tendered, including any required signature guarantees, or be accompanied by documents of transfer sufficient to have the trustee with respect to the original notes register the transfer of such original notes into the name of the depositor withdrawing the tender and (d) specify the name in which any such original notes are to be registered, if different from that of the depositor. All questions as to the validity, form and eligibility, including time of receipt, of such withdrawal notices will be determined by us, and our determination shall be final and binding on all parties. Any original notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer and no new notes will be issued with respect to the original notes withdrawn unless the original notes so withdrawn are validly retendered. Any original notes which have been tendered but which are not accepted for exchange will be returned to its holder without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn original notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the expiration date. CONDITIONS Notwithstanding any other term of the exchange offer, we will not be required to accept for exchange, or exchange, any new notes for any original notes, and may terminate or amend the exchange offer before the expiration date, if the exchange offer violates any applicable law or interpretation by the staff of the Securities and Exchange Commission. If we determine in our reasonable discretion that the foregoing condition exists, we may (1) refuse to accept any original notes and return all tendered original notes to the tendering holders, (2) extend the exchange offer and retain all original notes tendered prior to the expiration of the exchange offer, subject, however, to the rights of holders who tendered such original notes to withdraw their tendered original notes, or 73 77 (3) waive such condition, if permissible, with respect to the exchange offer and accept all properly tendered original notes which have not been withdrawn. If such waiver constitutes a material change to the exchange offer, we will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the holders, and we will extend the exchange offer as required by applicable law. EXCHANGE AGENT Harris Trust and Savings Bank has been appointed as exchange agent for the exchange offer. Questions and requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal should be directed to Harris Trust and Savings Bank addressed as follows: For Information by Telephone: (212) 701-7624 HARRIS TRUST AND SAVINGS BANK By Registered or Certified Mail By Hand or Overnight Mail: c/o Harris Trust Company of New York c/o Harris Trust Company of New York Wall Street Station Wall Street Plaza P.O. Box 1023 88 Pine Street New York, New York 10268-1023 19th Floor New York, New York 10005 Attention: Reorganization Trust Department
By Facsimile Transmission: (212) 701-7637 (Telephone Confirmation) (212) 701-7624 Harris Trust and Savings Bank is an affiliate of the trustee under the indentures governing the notes. FEES AND EXPENSES We have agreed to bear the expenses of the exchange offer pursuant to the exchange and registration rights agreements. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We, however, will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection with providing the services. The cash expenses to be incurred in connection with the exchange offer will be paid by us. Such expenses include fees and expenses of Harris Trust and Savings Bank as exchange agent, accounting and legal fees and printing costs, among others. ACCOUNTING TREATMENT The new notes will be recorded at the same carrying value as the original notes as reflected in our accounting records on the date of exchange. Accordingly, no gain or loss for accounting purposes will be recognized by us. The expenses of the exchange offer and the unamortized expenses related to the issuance of the original notes will be amortized over the term of the notes. 74 78 CONSEQUENCES OF FAILURE TO EXCHANGE Holders of original notes who are eligible to participate in the exchange offer but who do not tender their original notes will not have any further registration rights, and their original notes will continue to be subject to restrictions on transfer. Accordingly, such original notes may be resold only - to us, upon redemption of these notes or otherwise, - so long as the original notes are eligible for resale pursuant to Rule 144A under the Securities Act, to a person inside the United States whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A, - in accordance with Rule 144 under the Securities Act, or under another exemption from the registration requirements of the Securities Act, and based upon an opinion of counsel reasonably acceptable to us, - outside the United States to a foreign person in a transaction meeting the requirements of Rule 904 under the Securities Act, or - under an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. REGULATORY APPROVALS We do not believe that the receipt of any material federal or state regulatory approval will be necessary in connection with the exchange offer, other than the effectiveness of the exchange offer registration statement under the Securities Act. OTHER Participation in the exchange offer is voluntary and holders of original notes should carefully consider whether to accept the terms and condition of this exchange offer. Holders of the original notes are urged to consult their financial and tax advisors in making their own decisions on what action to take with respect to the exchange offer. 75 79 BUSINESS OVERVIEW We are the fourth largest operator of cable television systems in the United States, serving approximately 6.2 million customers. After giving effect to the Kalamazoo transaction, we will serve approximately 6.3 million customers. We offer a full range of traditional cable television services. Our service offerings include the following programming packages: - basic programming; - expanded basic programming; - premium service; and - pay-per-view television programming. As part of our Wired World vision, we are also beginning to offer an array of new services including: - digital television; - interactive video programming; and - high-speed Internet access. We are also exploring opportunities in telephony. The new products and services described above will take advantage of the significant bandwidth of our cable systems. We are accelerating the upgrade of our cable systems to more quickly provide these products and services. For the year ended December 31, 1999, pro forma for our merger with Marcus Holdings, the acquisitions completed since the beginning of 1999, the recent transfer to Charter Holdings of the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction, our revenues would have been approximately $3.0 billion. Mr. Allen, the principal owner of Charter Communications, Inc. and one of the computer industry's visionaries, has long believed in a Wired World in which cable technology will facilitate the convergence of television, computers and telecommunications. We believe cable's ability to deliver voice, video and data at high speeds will enable it to serve as the primary platform for the delivery of new services to the home and workplace. BUSINESS STRATEGY Our objective is to increase our operating cash flow by increasing our customer base and the amount of cash flow per customer. To achieve this objective, we are pursuing the following strategies: INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate acquired cable systems and apply our core operating strategies to raise the financial and operating performance of these acquired systems. Our integration process occurs in three stages: System Evaluation. We conduct an extensive evaluation of each system we acquire. This process begins prior to reaching an agreement to purchase the system and focuses on the system's: - demographic profile of the market as well as the number of homes passed and customers; 76 80 - business plan; - customer service standards; - management capabilities; and - technological capacity and compatibility. We also evaluate opportunities to consolidate headends and billing and other administrative functions. Based upon this evaluation, we formulate plans for customer service centers, plant upgrades, market positioning, new product and service launches and human resource requirements. Implementation of Our Core Operating Strategies. To achieve our high standards for customer satisfaction and financial and operating performance, we: - attract and retain high quality local management; - empower local managers with a high degree of day-to-day operational autonomy; - set key financial and operating benchmarks for management to meet, such as revenue and cash flow per subscriber, subscriber growth, customer service and technical standards; and - provide incentives to all employees through grants of cash bonuses and equity options. Ongoing Support and Monitoring. We provide local managers with regional and corporate management guidance, marketing and other support for implementation of their business plans. We monitor performance of our acquired cable systems on a frequent basis to ensure that performance goals can be met. The turn-around in our Fort Worth system, which our management team began to manage in October 1998, is an example of our success in integrating newly acquired cable systems into our operations. We introduced a customer care team that has worked closely with city governments to improve customer service and local government relations, and each of our customer service representatives attended a training program. We also conducted extensive training programs for our technical and engineering, dispatch, sales and support, and management personnel. We held a series of sales events and service demonstrations to increase customer awareness and enhance our community exposure and reputation. We reduced the new employee hiring process from two to three weeks to three to five days. As a result of these and other actions taken by the Charter management team, relations with local franchising authorities are greatly improved, customer service has been significantly enhanced, and the number of customers and operating cash flow have increased. OFFER NEW PRODUCTS AND SERVICES. We intend to expand the array of products and services we offer to our customers to implement our Wired World vision. Using digital technology, we plan to offer additional channels on our existing service tiers, create new service tiers, introduce multiple packages of premium services and increase the number of pay-per-view channels. We also plan to add digital music services and interactive program guides which are comprehensive guides to television program listings that can be accessed by network, time, date or programming genre. In addition, we have begun to roll out advanced services, including interactive video programming and high-speed Internet access, and we are currently exploring opportunities in telephony. We have entered into agreements with several providers of high-speed Internet and other interactive services, including High-Speed Access Corp., EarthLink Network, Inc., Excite@Home Corporation, Convergence.com, WorldGate Communications, Inc. and Wink Communications, Inc. We have recently entered into a joint venture with Vulcan Ventures Inc. and Go2Net, Inc. to deliver high-speed Internet portal services to our customers. 77 81 UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. We plan to spend approximately $6.0 billion from 2000 to 2002 for capital expenditures. Approximately $3.5 billion will be used to upgrade our systems to bandwidth capacity of 550 megahertz or greater. Upgrading to at least 550 megahertz of bandwidth capacity will allow us to: - offer advanced services, such as digital television, Internet access and other interactive services; - increase channel capacity up to 82 analog channels, or even more programming channels if some of our bandwidth is used for digital services; and - permit two-way communication which will give our customers the ability to send and receive signals over the cable system so that high-speed cable services, such as Internet access, will not require a separate telephone line and will enable our systems to provide telephony services. The remaining capital will be spent on plant extensions, new services, converters and system maintenance. As of December 31, 1999, approximately 45% of our customers were served by cable systems with at least 550 megahertz bandwidth capacity, and approximately 30% of our customers had two-way communication capability. By year-end 2003, we expect that approximately 98% of our customers will be served by cable systems with at least 550 megahertz bandwidth capacity and two-way communication capability and approximately 92% of our customers will be served by cable systems with at least 750 megahertz bandwidth and two-way communication capability. Our planned upgrades are designed to reduce the number of headends from 1,257 at year-end 1999, including the Fanch, Falcon, Avalon and Bresnan cable systems and the Kalamazoo transaction, to 459 at year-end 2003. Reducing the number of headends will reduce headend equipment and maintenance expenditures and, together with other upgrades, will provide enhanced picture quality and system reliability. In addition, by year-end 2003, we expect that approximately 90% of our customers will be served by headends serving at least 10,000 customers. MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we operate our business to provide reliable, high-quality products and services, superior customer service and attractive programming choices at reasonable rates. We have implemented stringent internal customer service standards which we believe meet or exceed those established by the National Cable Television Association, the Washington, D.C.-based trade association for the cable television industry. We believe that our customer service efforts have contributed to our superior customer growth, and will strengthen the Charter brand name and increase acceptance of our new products and services. EMPLOY INNOVATIVE MARKETING. We have developed and successfully implemented a variety of innovative marketing techniques to attract new customers and increase revenue per customer. Our marketing efforts focus on tailoring Charter-branded entertainment and information services that provide value, choice, convenience and quality to our customers. We use demographic "cluster codes" to address messages to target audiences through direct mail and telemarketing. Cluster codes identify customers by marketing type such as young professionals, retirees or families. In addition, we promote our services on radio, in local newspapers and by door-to-door selling. In many of our systems, we offer discounts to customers who purchase multiple premium services such as Home Box Office or Showtime. We also have a coordinated strategy for retaining customers that includes televised retention advertising to reinforce the link between quality service and the Charter brand name and to encourage customers to purchase higher service levels. Successful implementation of these marketing techniques has contributed to internal customer growth rates in excess of the cable industry average 78 82 in each year from 1996 through 1999 for the systems we owned in each of those years. We have begun to implement our marketing programs in all of the systems we have recently acquired. EMPHASIZE LOCAL MANAGEMENT AUTONOMY WHILE PROVIDING REGIONAL AND CORPORATE SUPPORT AND CENTRALIZED FINANCIAL CONTROLS. Our local cable systems are organized into eleven operating regions. A regional management team oversees multiple local system operations in each region. We believe that a strong management presence at the local system level: - improves our customer service; - increases our ability to respond to customer needs and programming preferences; - reduces the need for a large centralized corporate staff; - fosters good relations with local governmental authorities; and - strengthens community relations. Our regional management teams work closely with both local managers and senior management in our corporate office to develop budgets and coordinate marketing, programming, purchasing and engineering activities. Our centralized financial management enables us to set financial and operating benchmarks and monitor performance on an ongoing basis. In order to attract and retain high quality managers at the local and regional operating levels, we provide a high degree of operational autonomy and accountability along with cash and equity-based compensation. Charter Communications Holding Company has a plan to distribute to directors, consultants and substantially all employees, including members of corporate management and key regional and system-level management personnel, options exercisable for up to 25,009,798 Charter Communications Holding Company membership units that are automatically exchanged for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve operating margins and increase operating efficiencies, we regularly seek to improve the geographic clustering of our cable systems by selectively swapping our cable systems for systems of other cable operators or acquiring systems in close proximity to our systems. We believe that by concentrating our systems in clusters, we will be able to generate higher growth in revenues and operating cash flow. Clustering enables us to consolidate headends and spread fixed costs over a larger subscriber base. Charter Communications, Inc. and AT&T Broadband & Internet Services have entered into a non-binding letter of intent to exchange certain cable systems. If completed, this transaction will allow us to improve the clustering of our cable systems in certain key markets. We are negotiating with several other cable operators whose systems we consider to be potential acquisition or swapping candidates. CHARTER ORGANIZATIONAL STRUCTURE Each of the entities in our organizational structure and how it relates to us is described below. In our discussion of the following entities, we make the same assumptions as described on page 3 with respect to our organizational chart. OWNERSHIP OF CHARTER COMMUNICATIONS, INC. Mr. Allen owns less than 2% of the outstanding capital stock of Charter Communications, Inc. and controls approximately 93.7% of the voting power of Charter Communications, Inc.'s capital stock. The remaining equity interest and voting control are held by the public. Mr. Allen's voting control arises from his ownership of Charter Communications, Inc.'s high vote Class B common stock, his Class A common stock, and his ownership of Vulcan Cable III Inc., which owns membership units in Charter Communications Holding Company that are exchangeable for shares of high vote Class B common stock of Charter Communications, Inc. 79 83 VULCAN CABLE III INC. Mr. Allen owns 100% of the equity of Vulcan Cable III. Vulcan Cable III has a 19.0% equity interest and no voting rights in Charter Communications Holding Company. In August 1999, Mr. Allen, through Vulcan Cable III, contributed to Charter Communications Holding Company $500 million in cash. In September 1999, he contributed an additional $825 million through Vulcan Cable III, of which approximately $644.3 million was in cash and approximately $180.7 million was in the form of equity interests Vulcan Cable III acquired in connection with the Rifkin acquisition. Upon each of these contributions, Vulcan Cable III received Charter Communications Holding Company membership units at a price per membership unit of $20.73. In addition, in November 1999, Mr. Allen, through Vulcan Cable III, made a $750 million cash equity contribution to Charter Communications Holding Company for which Vulcan Cable III received additional membership units at a price per membership unit of $18.24. CHARTER INVESTMENT, INC. Charter Investment, Inc. has a 38.8% equity interest and no voting rights in Charter Communications Holding Company. Mr. Allen owns approximately 96.8% of the outstanding stock of Charter Investment, Inc. The remaining 3.2% equity is beneficially owned by our founders, Jerald L. Kent, Barry L. Babcock and Howard L. Wood. BRESNAN SELLERS. Under the terms of the Bresnan acquisition, some of the sellers received a portion of their purchase price in Charter Communications Holding Company common membership units rather than in cash. These common membership units are exchangeable for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. In addition, certain other Bresnan sellers received a portion of the purchase price in preferred membership units in an indirect subsidiary of Charter Holdings. The preferred membership units are also exchangeable for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. If all of the Bresnan sellers exchanged their membership units in Charter Communications Holding Company or such indirect subsidiary, as applicable, these equity holders as a group would have a 14.9% equity interest in Charter Communications, Inc. CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications Holding Company is the direct 100% parent of Charter Communications Holdings. Charter Communications Holding Company is owned 39.6% by Charter Communications, Inc., 19.0% by Vulcan Cable III Inc., 38.8% by Charter Investment, Inc. and 2.6% by certain sellers in our Bresnan acquisition. All of the outstanding units in Charter Communications Holding Company are exchangeable for shares of Class A common stock of Charter Communications, Inc. on a one-for-one basis at any time. Charter Communications, Inc. has 100% of the voting power of Charter Communications Holding Company. CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer of $3.575 billion aggregate principal of notes issued in March 1999 (referred to as the March 1999 Charter Holdings notes) and $1.532 billion aggregate principal amount of the original notes issued in January 2000. Charter Holdings owns 100% of Charter Capital, the co-issuer of the March 1999 Charter Holdings notes, the original notes and the notes to be issued in the exchange offer. Charter Holdings also owns the various subsidiaries that conduct all of our cable operations, including the Charter, Falcon, Fanch, Avalon and Bresnan companies described below. CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Capital is a wholly owned subsidiary of Charter Holdings and a co-issuer of the notes described in the preceding paragraph. CHARTER COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems originally managed by Charter Investment, Inc. (namely Charter Communications Properties Holdings, LLC, CCA Group and CharterComm Holdings, LLC), the cable systems obtained through the merger of Marcus Holdings with Charter Holdings and the cable systems we acquired in eight acquisitions in 1999. Historical financial information is presented separately for these acquired entities. Charter Operating, a direct subsidiary of Charter Holdings, owns all of the Charter companies' operating subsidiaries and is the borrower under the Charter 80 84 Operating credit facilities. The Charter Companies also include the issuers of the outstanding publicly held notes of Renaissance. FALCON COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Falcon acquisition and Falcon Cable Communications, which is the borrower under the Falcon credit facilities. FANCH COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Fanch acquisition and CC VI Operating, LLC, which is the borrower under the Fanch credit facilities. AVALON COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Avalon acquisition, including CC Michigan, LLC and CC New England, LLC, which are the borrowers under the Avalon credit facilities. CC V Holdings, LLC (formerly Avalon Cable LLC) and CC V Holdings Finance, Inc. (formerly Avalon Cable Finance Holdings, Inc.) are co-issuers of the outstanding publicly held Avalon notes. BRESNAN COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Bresnan acquisition and CC VIII Operating, LLC, which is the borrower under the Bresnan credit facilities. ACQUISITIONS Our primary criterion in considering acquisition and swapping opportunities is the financial return that we expect to ultimately realize. We consider each acquisition in the context of our overall existing and planned operations, focusing particularly on the impact on our size and scope and the ability to reinforce our clustering strategy, either directly or through future swaps or acquisitions. Other specific factors we consider in acquiring a cable system are: - demographic profile of the market as well as the number of homes passed and customers within the system; - per customer revenues and operating cash flow and opportunities to increase these financial benchmarks; - proximity to our existing cable systems or the potential for developing new clusters of systems; - the technological state of such system; and - the level of competition within the local market. We believe that there are significant advantages in increasing the size and scope of our operations, including: - improved economies of scale in management, marketing, customer service, billing and other administrative functions; - reduced costs for our cable plants and our infrastructure in general; - increased leverage for negotiating programming contracts; and - increased influence on the evolution of important new technologies affecting our business. We believe that as a result of our acquisition strategy and our systems upgrade we will be well positioned to have cable systems with economies of scale sufficient to allow us to execute our strategy to expand the array of products and services that we offer to our customers as we implement our Wired World vision. We will, however, continue to explore acquisitions and swaps of cable systems that would further complement our existing cable systems. 81 85 ACQUISITIONS COMPLETED IN 1999 AND 2000 MERGER WITH MARCUS HOLDINGS. On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable Company, L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion in assumed liabilities. On February 22, 1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests of Marcus Cable. On April 7, 1999, the holding company parent of the Marcus companies, Marcus Holdings, merged into Charter Holdings, which was the surviving entity of the merger. The subsidiaries of Marcus Holdings became subsidiaries of Charter Operating. During the period of obtaining the requisite regulatory approvals for the transaction, the Marcus systems came under common management with our subsidiaries in October 1998 pursuant to the terms of a management agreement. The cable systems we acquired in the merger with Marcus Holdings are located in Wisconsin, Tennessee, North Carolina, Georgia, California, Alabama and Texas, has approximately 1,001,000 customers and is operated as part of our North Central, Southeast, Southern California, Gulf Coast and Metroplex regions. For the year ended December 31, 1999, Marcus had revenues of approximately $511.9 million. RENAISSANCE. In April 1999, one of our subsidiaries purchased Renaissance Media Group LLC for approximately $459 million, consisting of $348 million in cash and $111 million of assumed debt. Renaissance owns cable systems located in Louisiana, Mississippi and Tennessee, has approximately 134,000 customers and is operated as part of our Gulf Coast and Mid-South regions. For the year ended December 31, 1999, Renaissance had revenues of approximately $62.4 million. AMERICAN CABLE. In May 1999, one of our subsidiaries purchased American Cable Entertainment, LLC for approximately $240 million. American Cable owns cable systems located in California serving approximately 69,000 customers and is operated as part of our Southern California region. For the year ended December 31, 1999, American Cable had revenues of approximately $37.2 million. GREATER MEDIA SYSTEMS. In June 1999, one of our subsidiaries purchased certain cable systems of Greater Media Cablevision Inc. for approximately $500 million. The Greater Media systems are located in Massachusetts, have approximately 176,000 customers and are operated as part of our Northeast Region. For the year ended December 31, 1999, the Greater Media systems had revenues of approximately $85.9 million. HELICON. In July 1999, one of our subsidiaries acquired Helicon Partners I, L.P. and affiliates for approximately $550 million, consisting of $410 million in cash, $115 million of assumed debt, and $25 million in the form of preferred limited liability company interest of Charter-Helicon LLC, a direct wholly owned subsidiary of Charter Communications, LLC. Helicon owns cable systems located in Alabama, Georgia, New Hampshire, North Carolina, West Virginia, South Carolina, Tennessee, Pennsylvania, Louisiana and Vermont, and has approximately 171,000 customers. For the year ended December 31, 1999, Helicon had revenues of approximately $85.2 million. VISTA AND CABLE SATELLITE. One of our subsidiaries acquired Vista Broadband Communications, LLC in July 1999 and acquired a cable system of Cable Satellite of South Miami, Inc. in August 1999. These cable systems are located in Georgia and southern Florida and serve a total of approximately 35,000 customers. The aggregate purchase price for these acquisitions was approximately $148 million in cash. For the year ended December 31, 1999, these systems had revenues of approximately $19.0 million. RIFKIN. In September 1999, Charter Operating acquired Rifkin Acquisition Partners L.L.L.P. and InterLink Communications Partners, LLLP for a purchase price of approximately $1.46 billion, 82 86 consisting of $1.2 billion in cash, $133.3 million in equity in Charter Communications Holding Company and $128.0 million in assumed debt. Rifkin owns cable systems primarily in Florida, Georgia, Illinois, Indiana, Tennessee, Virginia and West Virginia, serving approximately 463,000 customers. For the year ended December 31, 1999, Rifkin had revenues of approximately $219.9 million. INTERMEDIA SYSTEMS. In October 1999, Charter Communications, LLC purchased certain cable systems of InterMedia Capital Partners IV, L.P., InterMedia Partners and their affiliates in exchange for approximately $873 million in cash and certain of our cable systems. The InterMedia systems serve approximately 420,000 customers in North Carolina, South Carolina, Georgia and Tennessee. As part of this transaction, we agreed to "swap" some of our non-strategic cable systems serving approximately 142,000 customers in Indiana, Montana, Utah and northern Kentucky. At the closing, we retained a cable system located in Indiana serving approximately 30,000 customers for which we were unable to timely obtain the necessary regulatory approvals of the system transfer. Such approval was subsequently obtained and the Indiana system assets were transferred in March 2000. This transaction, including the transfer of the retained Indiana system, resulted in a net increase of 278,000 customers concentrated in our Southeast and Mid-South regions. For the year ended December 31, 1999, the InterMedia systems had revenues of approximately $179.3 million ($126.2 million net of disposed systems). BRESNAN. In February 2000, Charter Communications Holding Company and one of our subsidiaries purchased Bresnan Communications Company Limited Partnership for a total purchase price of approximately $3.1 billion, consisting of cash, $1.0 billion in membership units in Charter Communications Holding Company and an indirect subsidiary of Charter Communications Holding Company and $964.4 million in assumed debt. The cable systems acquired in the Bresnan acquisition are primarily located in Michigan, Minnesota, Wisconsin and Nebraska and serve approximately 686,000 customers. For the year ended December 31, 1999, these systems and systems acquired by Bresnan since December 31, 1999 had revenues of approximately $290.7 million. In February 2000, Charter Communications Holding Company transferred to us the interests it held in the Bresnan systems. CAPITAL CABLE AND FARMINGTON. In April 2000, one of our subsidiaries purchased a cable system of Falcon Capital Cable Partners, L.P. and another cable system of Farmington Cablevision Company. These cable systems are primarily located in Illinois, Indiana and Missouri. The aggregate purchase price for these acquisitions was approximately $75 million in cash. For the year ended December 31, 1999, these systems had revenues of approximately $13.5 million. RECENT TRANSFERS COMPLETED IN JANUARY 2000 FANCH. In November 1999, Charter Communications Holding Company purchased the partnership interests of Fanch Cablevision of Indiana, L.P., specified assets of Cooney Cable Associates of Ohio, Limited Partnership, Fanch-JV2 Master Limited Partnership, Mark Twain Cablevision Limited Partnership, Fanch-Narragansett CSI Limited Partnership, North Texas Cablevision, Ltd., Post Cablevision of Texas, Limited Partnership and Spring Green Communications, L.P. and the stock of Tioga Cable Company, Inc., Cable Systems, Inc. and, indirectly, Hornell Television Service, Inc. for a total combined purchase price of approximately $2.4 billion in cash. These interests and assets were transferred to us on January 1, 2000. The cable systems acquired in this acquisition are located in Colorado, Indiana, Kansas, Kentucky, Michigan, Mississippi, New Mexico, Oklahoma, Texas and Wisconsin, and serve 83 87 approximately 528,000 customers. For the year ended December 31, 1999, these systems had revenues of approximately $218.2 million. FALCON. In November 1999, Charter Communications Holding Company purchased partnership interests in Falcon Communications, L.P. from Falcon Holding Group, L.P. and TCI Falcon Holdings, LLC, interests in a number of Falcon entities held by Falcon Cable Trust and Falcon Holding Group, Inc., specified interests in Enstar Communications Corporation and Enstar Finance Company, LLC held by Falcon Holding Group, L.P., and specified interests in Adlink held by DHN Inc. These interests were transferred to us on January 1, 2000. The purchase price for the acquisition was approximately $3.5 billion, consisting of cash, $550 million in common membership units in Charter Communications Holding Company issued to certain of the Falcon sellers and $1.7 billion in assumed debt. The Falcon cable systems are located in California and the Pacific Northwest, Missouri, North Carolina, Alabama and Georgia and serve approximately 955,000 customers. For the year ended December 31, 1999, these systems had revenues of approximately $427.7 million. AVALON. In November 1999, Charter Communications Holding Company purchased directly and indirectly all of the equity interests of Avalon Cable of Michigan Holdings, Inc. from Avalon Cable Holdings LLC and Avalon Investors, L.L.C. for approximately $832 million, consisting of $558.2 million in cash and $273.8 million in assumed notes. These interests were transferred to us on January 1, 2000. Avalon operates primarily in Michigan and New England and serves approximately 252,000 customers. For the year ended December 31, 1999, Avalon had revenues of approximately $108.3 million. PENDING KALAMAZOO TRANSACTION In March 2000, Charter Communications, Inc. entered into an agreement providing for the merger of Cablevision of Michigan, Inc., the indirect owner of a cable system in Kalamazoo, Michigan, with and into Charter Communications, Inc. As a result of this merger, Charter Communications, Inc. will become the indirect owner of the Kalamazoo system. The merger consideration of approximately $173 million will be paid in Class A common stock of Charter Communications, Inc. After the merger, Charter Communications, Inc. will contribute 100% of the equity interests of the direct owner of the Kalamazoo system to Charter Communications Holding Company in exchange for membership units. Charter Communications Holding Company will in turn contribute the equity interests to Charter Holdings, which will in turn contribute the equity interests to a subsidiary. The Kalamazoo cable system has approximately 49,000 customers and had revenues of approximately $20.3 million for the year ended December 31, 1999. We anticipate that this transaction will close in the third quarter of 2000. PENDING SWAP TRANSACTION On December 1, 1999, Charter Communications, Inc. entered into a non-binding letter of intent with AT&T Broadband & Internet Services to exchange certain cable systems. The Swap Transaction would involve cable systems owned by AT&T located in municipalities in Alabama, Georgia, Illinois and Missouri serving approximately 705,000 subscribers and certain of our cable systems located in municipalities in California, Connecticut, Massachusetts, Texas and certain other states, serving approximately 631,000 subscribers. As part of the Swap Transaction, we will be required to pay AT&T approximately $108 million in cash. This represents the difference in the agreed values of the systems being exchanged. The Swap Transaction is subject to the negotiation and execution of a 84 88 definitive exchange agreement, regulatory approvals and other conditions typical in transactions of this type. We cannot assure you that the Swap Transaction will be completed. PRODUCTS AND SERVICES We offer our customers a full array of traditional cable television services and programming and we have begun to offer new and advanced high bandwidth services such as high-speed Internet access. We plan to continually enhance and upgrade these services, including adding new programming and other telecommunications services, and will continue to position cable television as an essential service. TRADITIONAL CABLE TELEVISION SERVICES. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, approximately 85% of our customers subscribed to both "basic" and "expanded basic" service and generally receive a line-up of between 33 and 85 channels of television programming, depending on the bandwidth capacity of the system. Customers who pay additional amounts can also subscribe to additional channels, either individually or in packages of several channels, as add-ons to the basic channels. As of December 31, 1999, more than 22% of our customers subscribe to premium channels, with additional customers subscribing to other special add-on packages. We tailor both our basic channel line-up and our additional channel offerings to each system according to demographics, programming preferences, competition, price sensitivity and local regulation. Our traditional cable television service offerings include the following: - BASIC CABLE. All of our customers receive basic cable services, which generally consist of local broadcast television, local community programming, including governmental and public access, and limited satellite programming. For the year ended December 31, 1999, pro forma for the recent transfers, the average monthly fee was $13.54 for our basic service. - EXPANDED BASIC CABLE. This expanded tier includes a group of satellite-delivered or non-broadcast channels, such as Entertainment and Sports Programming Network (ESPN), Cable News Network (CNN) and Lifetime Television, in addition to the basic channel line-up. For the year ended December 31, 1999, pro forma for the recent transfers, the average monthly fee was $14.88 for our expanded basic service. - PREMIUM CHANNELS. These channels provide unedited, commercial-free movies, sports and other special event entertainment programming. Home Box Office, Cinemax and Showtime are typical examples. We offer subscriptions to these channels either individually or in packages. For the year ended December 31, 1999, pro forma for the recent transfers, the average monthly fee was $6.15 per premium subscription. - PAY-PER-VIEW. These channels allow customers to pay to view a single showing of a recently released movie, a one-time special sporting event or music concerts on an unedited, commercial-free basis. We currently charge a fee that ranges from $2.95 to $8.95 for movies. For special events, such as championship boxing matches, we have charged a fee of up to $54.95. We have employed a variety of targeted marketing techniques to attract new customers by focusing on delivering value, choice, convenience and quality. We employ direct mail and telemarketing, using demographic "cluster codes" to target specific messages to target audiences. In many of our systems, we offer discounts to customers who purchase premium services on a limited trial basis in order to encourage a higher level of service subscription. We also have a coordinated strategy for retaining customers that includes televised retention advertising to reinforce the decision to subscribe and to encourage customers to purchase higher service levels. 85 89 NEW PRODUCTS AND SERVICES. A variety of emerging technologies and the rapid growth of Internet usage have presented us with substantial opportunities to provide new or expanded products and services to our customers and to expand our sources of revenue. The desire for such new technologies and the use of the Internet by businesses in particular have triggered a significant increase in our commercial market penetration. As a result, we are in the process of introducing a variety of new or expanded products and services beyond the traditional offerings of analog television programming for the benefit of both our residential and commercial customers. These new products and services include: - digital television and its related enhancements; - high-speed Internet access via cable modems installed in personal computers; - WorldGate television-based Internet access, which allows customers to access the Internet through the use of our two-way capable cable plant without the need for a personal computer; - interactive services, such as Wink, which adds interactivity and electronic commerce opportunities to traditional programming and advertising; and - telephony and data transmission services, which are private network services interconnecting locations for a customer. Cable television's high bandwidth allows cable to be well positioned to deliver a multitude of channels and/or new and advanced products and services. We believe that this high bandwidth will be a key factor in the successful delivery of these products and services. DIGITAL TELEVISION. As part of upgrading our systems, we are installing headend equipment capable of delivering digitally encoded cable transmissions to a two-way digital-capable set-top converter box in the customer's home. This digital connection offers significant advantages. For example, we can compress the digital signal to allow the transmission of up to twelve digital channels in the bandwidth normally used by one analog channel. This will allow us to increase both programming and service offerings, including near video-on-demand for pay-per-view customers. We expect to increase the amount of these services purchased by our customers. Digital services customers may receive a mix of additional television programming, an electronic program guide and up to 40 channels of digital music. The additional programming falls into four categories which are targeted toward specific markets: - additional expanded basic channels, which are marketed in systems primarily serving rural communities; - additional premium channels, which are marketed in systems serving both rural and urban communities; - "multiplexes" of premium channels to which a customer previously subscribed, such as multiple channels of HBO or Showtime, which are varied as to time of broadcast or programming content theme and which are marketed in systems serving both rural and urban communities; and - additional pay-per-view programming, such as more pay-per-view options and/or frequent showings of the most popular films to provide near video-on-demand, which are more heavily marketed in systems primarily serving both rural and urban communities. As part of our pricing strategy for digital services, we have established a retail rate of $4.95 to $8.95 per month for the digital set-top converter and the delivery of "multiplexes" of premium services, additional pay-per-view channels, digital music and an electronic programming guide. Some 86 90 of our systems also offer additional expanded basic tiers of service. These tiers of services retail for $3.95 per month each or $8.95 for all three tiers. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, more than 155,400 of our customers subscribed to the digital service offered in 85 markets. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, approximately 4.7 million of our customers were served by cable systems capable of delivering digital services. By year-end 2000, we anticipate that digital services will pass approximately 7.0 million homes. INTERNET ACCESS. We currently provide Internet access to our customers by two principal means: - via cable modems attached to personal computers, either directly or through an outsourcing contract with an Internet service provider; and - through television access, via a service such as WorldGate. We also provide Internet access in some markets through traditional dial-up telephone modems, using a third party service provider. The principal advantage of cable Internet connections is the high speed of data transfer over a cable system. We currently offer these services to our residential customers over coaxial cable at speeds that can range up to approximately 50 times the speed of a conventional telephone modem. Furthermore, a two-way communication cable system using a hybrid fiber optic/coaxial structure can support the entire connection at cable modem speeds without the need for a separate telephone line. If the cable system only supports one-way signals from the headend to the customer, the customer must use a separate telephone line in order to send signals to the provider, although such customer still receives the benefit of high speed cable access when downloading information, which is the primary reason for using cable as an Internet connection. In addition to Internet access over our traditional coaxial system, we also provide our commercial customers fiber optic cable access at a price that we believe is less than the price offered by the telephone companies. In the past, cable Internet connections have provided customers with widely varying access speeds because each customer accessed the Internet by sending and receiving data through a node. Users connecting simultaneously through a single node share the bandwidth of that node, so that users' connection speeds may diminish as additional users connect through the same node. To induce users to switch to our Internet services, we guarantee our cable modem customers the minimum access speed selected from several speed options we offer. We also provide higher guaranteed access speeds for customers willing to pay an additional cost. In order to meet these guarantees, we are increasing the bandwidth of our systems and "splitting" nodes easily and cost-effectively to reduce the number of customers per node. CABLE MODEM-BASED INTERNET ACCESS. We have deployed cable modem-based Internet access services in 84 markets including Los Angeles, California; St. Louis, Missouri; and Fort Worth, Texas. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we provided Internet access service to approximately 65,600 residential customers and 280 commercial customers. The following table indicates the projected availability of cable modem-based Internet access services in our systems, as of the dates indicated. Only a small percentage of our customers currently subscribe to these services. 87 91
HOMES MADE AVAILABLE FOR ADVANCED DATA SERVICES -------------------------------------- DECEMBER 31, 1999 DECEMBER 31, 2000 ----------------- ----------------- (PRO FORMA) (PROJECTED) HIGH-SPEED INTERNET ACCESS VIA CABLE MODEMS: High Speed Access Corp................................... 1,128,300 3,180,500 EarthLink/Charter Pipeline............................... 708,700 772,700 Excite@Home.............................................. 867,800 917,700 Convergence.com.......................................... 263,200 -- In-House/Other........................................... 445,600 523,700 --------- --------- Total cable modems..................................... 3,413,600 5,394,600 ========= ========= Internet access via WorldGate............................ 428,800 488,800 ========= =========
We have a relationship with High Speed Access Corp. to offer Internet access in some of our smaller systems. High Speed Access also provides Internet access services to our customers under the Charter Pipeline brand name. Although the Internet access service is provided by High Speed Access, the Internet "domain name" of our customer's e-mail address and web site, if any, is "Charter.net," allowing the customer to switch or expand to our other Internet services without a change of e-mail address. High Speed Access provides three different tiers of service to us. The base tier is similar to our arrangements with EarthLink and Excite@Home described below. The turnkey tier bears all capital, operating and marketing costs of providing the service, and seeks to build economies of scale in our smaller systems that we cannot efficiently build ourselves by simultaneously contracting to provide the same services to other small geographically contiguous systems. The third tier allows for a la carte selection of services between the base tier and the turnkey tier. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we have made Internet access available to approximately 1,128,300 of our homes passed, and approximately 15,200 customers have signed up for the service. During 2000, we anticipate making available for service an additional 73 markets to High Speed Access, covering approximately 2,052,200 additional homes passed. We have an agreement with EarthLink Network, Inc., an independent Internet service provider, to provide service marketed and branded as Charter Pipeline(TM), which is a cable modem-based, high-speed Internet access service we offer. EarthLink and MindSpring Enterprises, Inc. merged in February 2000 creating the second-largest Internet service provider (ISP) in the United States. We currently charge a monthly usage fee of between $24.95 and $39.95. Our customers have the option to lease a cable modem for $10 to $15 a month or to purchase a modem for between $200 and $300. As of December 31, 1999, we made EarthLink Internet access available to approximately 708,700 homes passed and had approximately 10,500 customers who subscribed to this service. We have a revenue sharing agreement with Excite@Home, under which Excite@Home provides Internet service to customers in our systems serving Fort Worth, University Park and Highland Park, Texas. The Excite@Home network provides high-speed, cable modem-based Internet access using our cable infrastructure. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we have made Excite@Home available to approximately 867,800 of our homes passed and had approximately 18,200 customers who subscribed to this service. We also have services agreements with Convergence.com under which Convergence.com provides Internet service to customers in systems acquired from Rifkin. The Convergence.com network provides high-speed, cable modem-based Internet access using our cable infrastructure. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we have made available Convergence.com service to approximately 263,200 homes passed and had approximately 7,100 customers. 88 92 We actively market our cable modem service to businesses in each one of our systems where we have the capability to offer such service. Our marketing efforts are often door-to-door, and we have established a separate division whose function is to make businesses aware that this type of Internet access is available through us. We also provide several virtual local area networks for municipal and educational facilities in our Los Angeles cluster including California Institute of Technology located in Pasadena, the City of Pasadena and the City of West Covina. TV-BASED INTERNET ACCESS. We have a non-exclusive agreement with WorldGate to provide its TV-based e-mail and Internet access to our cable customers. WorldGate's technology is only available to cable systems with two-way capability. WorldGate offers easy, low-cost Internet access to customers at connection speeds ranging up to 128 kilobits per second. For a monthly fee, we provide our customers with e-mail and Internet access that does not require the use of a PC, an existing or additional telephone line, or any additional equipment. Instead, the customer accesses the Internet through the set-top box, which the customer already has on his television set, and a wireless keyboard, that is provided with the service and which interfaces with the box. WorldGate works on advanced analog and digital converters and, therefore, can be installed utilizing advanced analog converters already deployed. In contrast, other converter-based, non-PC Internet access products require a digital platform and a digital converter prior to installation. Customers who opt for television-based Internet access are generally first-time Internet users who prefer this more user-friendly interface. Although the WorldGate service bears the WorldGate brand name, the Internet domain names of the customers who use this service is "Charter.net." This allows the customers to switch or expand to our other Internet services without a change of e-mail address. We first offered WorldGate to customers on the upgraded portion of our systems in St. Louis in April 1998. We are also currently offering this service in five other systems. In addition, we plan to introduce it in four additional systems during 2000. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we provided WorldGate Internet service to approximately 7,100 customers. INTERNET PORTAL SERVICES. On October 1, 1999, Charter Communications Holding Company, Vulcan Ventures, an entity controlled by Mr. Allen, and Go2Net, Inc. entered into a joint venture to form Broadband Partners, Inc. Broadband will provide access to the Internet through a "portal" to our customers on the digital service tier. A portal is an Internet web site that serves as a user's initial point of entry to the World Wide Web. By offering selected content, services and links to other web sites, a portal guides and directs users through the World Wide Web. In addition, the portal generates revenues from advertising on its own web pages and by sharing revenues generated by linked or featured web sites. Revenue splits and other economic terms in this arrangement will be at least as favorable to us as terms between Broadband and any other parties. Charter Communications Holding Company has agreed to use Broadband's portal services exclusively for an initial six-year period that will begin when the portal services are launched, except that Charter Communications Holding Company's existing agreements with other Internet high-speed portal services and High Speed Access may run for their current term to the extent that such agreements do not allow for the carriage of content provided by Charter Communications Holding Company or Vulcan Ventures. The joint venture is for an initial 25-year term, subject to successive five-year renewals by mutual consent. Vulcan Ventures will own 55.2%, Charter Communications Holding Company will own 24.9% and Go2Net will own 19.9% of Broadband's equity interests and Vulcan Ventures will have voting control over the Broadband entity. Broadband's board of directors will consist of three directors designated by Vulcan Ventures and one by each of Charter Communications Holding Company and Go2Net. 89 93 Each of Broadband's investors will be obligated to provide their pro rata share of funding for Broadband's operations and capital expenditures, except that Vulcan Ventures will fund our portion of Broadband's expenses for the first four years and will fund Go2Net's portion of Broadband's expenses to the extent Go2Net's portion exceeds budget for the first four years. We believe that our participation in the Broadband joint venture will facilitate the delivery of a broad array of Internet products and services to our customers over the television through the use of an advanced digital set-top box or through the personal computer. The Broadband joint venture has not yet established a timetable for a commercial launch of its portal services. However, we anticipate that alpha and beta testing of this Internet portal service will be completed during 2000. We do not anticipate that our participation in the joint venture will have a material adverse impact on our financial condition or results of operations for the foreseeable future. WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which sells technology to embed interactive features, such as additional information and statistics about a program or the option to order an advertised product, into programming and advertisements. A customer with a Wink-enabled set-top box and a Wink-enabled cable provider sees an icon flash on the screen when additional Wink features are available to enhance a program or advertisement. By pressing the select button on a standard remote control, a viewer of a Wink-enhanced program is able to access additional information regarding such program, including, for example, information on prior episodes or the program's characters. A viewer watching an advertisement would be able to access additional information regarding the advertised product and may also be able to utilize the two-way transmission features to order a product. We have bundled Wink's services with our traditional cable services in both our advanced analog and digital platforms. Wink's services are provided free of charge. A company controlled by Mr. Allen has made an equity investment in Wink. Various programming networks, including CNN, NBC, ESPN, HBO, Showtime, Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing over 1,000 hours of Wink-enhanced programming per week. Under certain revenue-sharing arrangements, we will modify our headend technology to allow Wink-enabled programming to be offered on our systems. We receive fees from Wink each time one of our customers uses Wink to request certain additional information or order an advertised product. TELEPHONE SERVICES. We expect to be able to offer cable telephony services in the near future using our systems' direct, two-way connections to homes and other buildings. We are exploring technologies using Internet protocol telephony, as well as traditional switching technologies that are currently available, to transmit digital voice signals over our systems. AT&T and other telephone companies have already begun to pursue strategic partnering and other programs which make it attractive for us to acquire and develop this alternative Internet protocol technology. For the last two years, we have sold telephony services as a competitive access provider in the state of Wisconsin through one of our subsidiaries, and are currently looking to expand our services as a competitive access provider into other states. JOINT VENTURE WITH RCN CORPORATION. On October 1, 1999, Charter Communications Holding Company and RCN Corporation entered into a binding term sheet containing the principal terms of a non-exclusive joint venture to provide a broad range of telephony services to the customers of Charter Communications Holding Company's subsidiaries in its Los Angeles franchise territory. RCN is engaged in the businesses of bundling residential voice, video and Internet access operations, cable operations and certain long distance telephony operations. RCN is developing advanced fiber optic networks to provide a wide range of telecommunications services, including long distance telephone, video programming and data services, such as high-speed Internet access. 90 94 Charter Communications Holding Company will provide access to our Los Angeles customer base and will provide the capital necessary to develop telephony capability in Los Angeles. In addition, Charter Communications Holding Company will provide the necessary personnel to oversee and manage the telephony services. RCN will provide the necessary personnel and support services to develop and implement telephony services to be provided by Charter Communications Holding Company. We will pay RCN's fees at rates consistent with industry market compensation. We will have all rights to the telephony business and assets and will receive all revenues derived from the telephony business unless the parties expand RCN's role by mutual agreement. We believe that our telephony joint venture, together with Mr. Allen's investment in RCN, may allow us to take advantage of RCN's telephony experience as we deliver telephone services to our customers, although we cannot assure you that we will realize anticipated advantages. The term sheet contains only the principal terms of this joint venture and provides that the parties will enter into definitive agreements, which will contain, among other terms, details of the compensation to be received by RCN. To date, we have only had preliminary discussions with RCN regarding specific operational matters and have not determined a timetable for the commencement of services by the joint venture. We do not anticipate that this joint venture will have a material impact on our financial condition or results of operations in the foreseeable future. OUR SYSTEMS As of December 31, 1999, including the recent transfers of the Fanch, Falcon and Avalon cable systems, acquisitions completed since this date and the Kalamazoo transaction, our cable systems consisted of approximately 182,000 miles of coaxial and approximately 12,600 sheath miles of fiber optic cable passing approximately 10.0 million households and serving approximately 6.2 million customers. Coaxial cable is a type of cable used for broadband data and cable systems. This type of cable has excellent broadband frequency characteristics, noise, immunity and physical durability. The cable is connected from each node to individual homes or buildings. A node is a single connection to a cable system's main high-capacity fiber optic cable that is shared by a number of customers. A sheath mile is the actual length of cable in miles. Fiber optic cable is a communication medium that uses hair-thin glass fibers to transmit signals over long distances with minimum signal loss or distortion. As of December 31, 1999, without giving effect to acquisitions since that date and the recent transfers, approximately 45% of our customers were served by systems with at least 550 megahertz bandwidth capacity, approximately 30% had at least 750 megahertz bandwidth capacity and approximately 30% were served by systems capable of providing two-way interactive communication capability. Such two-way interactive communication capability includes two-way Internet connections, services provided by Wink, and interactive program guides. CORPORATE MANAGEMENT. Pursuant to a services agreement between Charter Communications, Inc. and Charter Investment, Inc., Charter Investment, Inc. provides the necessary personnel and services to manage Charter Communications Holding Company, Charter Holdings and their subsidiaries. These personnel and services are provided to Charter Communications, Inc. on a cost reimbursement basis. Management of Charter Communications, Inc. and Charter Investment, Inc. consists of approximately 310 people led by Charter Communications chief executive officer Jerald L. Kent. They are responsible for coordinating and overseeing our operations, including certain critical functions, such as marketing and engineering, that are conducted by personnel at the regional and local system level. The corporate office also performs certain financial control functions such as accounting, finance and acquisitions, payroll and benefit administration, internal audit, purchasing and programming contract administration on a centralized basis. OPERATING REGIONS. To manage and operate our systems, we have established two divisions that contain a total of eleven operating regions. Each of the two divisions is managed by a Senior Vice 91 95 President who reports directly to Mr. Kent and is responsible for overall supervision of the operating regions within the division. Each region is managed by a team consisting of a Senior Vice President or a Vice President, supported by operational, marketing and engineering personnel. Within each region, certain groups of cable systems are further organized into clusters. We believe that much of our success is attributable to our operating philosophy which emphasizes decentralized management, with decisions being made as close to the customer as possible. The Western Division is comprised of the following regions: Central, North Central, Southern California, Northwest, Michigan and National. The Eastern Division is comprised of the following regions: Southeast, Mid-South, Northeast, Gulf Coast and Mid-Atlantic. The following table provides an overview of customer data for each of our operating regions as of December 31, 1999, pro forma for the recent transfers, the Bresnan acquisition, and the Kalamazoo Transaction, after which our systems will pass approximately 10.0 million homes serving approximately 6.2 million customers. CUSTOMER DATA AS OF DECEMBER 31, 1999
ACQUISITIONS AND CHARTER RECENT KALAMAZOO HOLDINGS TRANSFERS SUBTOTAL TRANSACTION TOTAL --------- ---------------- --------- ----------- --------- WESTERN DIVISION Central....................... 318,464 142,865 461,329 -- 461,329 North Central................. 408,865 391,697 800,562 -- 800,562 Southern California........... 588,906 159,082 747,988 -- 747,988 Northwest..................... -- 370,619 370,619 -- 370,619 Michigan...................... -- 544,327 544,327 48,500 592,827 National...................... 242,537 185,215 427,752 -- 427,752 --------- --------- --------- ------ --------- 1,558,772 1,793,805 3,352,577 48,500 3,401,077 EASTERN DIVISION Southeast..................... 823,671 136,481 960,152 -- 960,152 Mid-South..................... 477,543 65,533 543,076 -- 543,076 Northeast..................... 302,047 26,061 328,108 -- 328,108 Gulf Coast.................... 365,502 66,986 432,488 -- 432,488 Mid-Atlantic.................. 183,803 371,052 554,855 -- 554,855 --------- --------- --------- ------ --------- 2,152,566 666,113 2,818,679 -- 2,818,679 --------- --------- --------- ------ --------- Total......................... 3,711,338 2,459,918 6,171,256 48,500 6,219,756 ========= ========= ========= ====== =========
The following discussion provides a description of our operating regions as of December 31, 1999, giving effect to the recent transfers, acquisitions closed since this date and the Kalamazoo transaction. CENTRAL REGION. The Central region consists of cable systems serving approximately 461,000 customers of which approximately 261,000 customers reside in and around St. Louis County or in adjacent areas in Illinois. The remaining customers, approximately 200,000, reside in small to medium-sized communities in Missouri, Illinois and Indiana. NORTH CENTRAL REGION. The North Central region consists of cable systems serving approximately 801,000 customers located throughout the states of Wisconsin and Minnesota. Approximately 518,000 and 283,000 customers reside in the states of Wisconsin and Minnesota, respectively. Within the state of Wisconsin, the two largest operating clusters are located in and around Madison, serving approximately 231,000 customers, and Fond du Lac, serving approximately 107,000 customers. 92 96 Within the state of Minnesota, the two largest operating clusters are located in and around Rochester, serving approximately 142,000 customers, and St. Cloud, serving approximately 62,000 customers. SOUTHERN CALIFORNIA REGION. The Southern California region consists of cable systems serving approximately 748,000 customers located in the state of California, with approximately 509,000 customers in the Los Angeles metropolitan area. These customers reside primarily in the communities of Pasadena, Alhambra, Glendale, Long Beach and Riverside. We also have approximately 239,000 customers in central California, principally located in the communities of San Luis Obispo, West Sacramento and Turlock. NORTHWEST REGION. The Northwest region was formed in connection with the recent Fanch and Falcon acquisitions. After these acquisitions, the Northwest region consists of cable systems serving approximately 371,000 customers residing in the states of Oregon, Washington, Idaho, Utah and California. The two largest operating clusters in the Northwest region are located in and around Kennewick, Washington, serving approximately 85,000 customers and Medford, Oregon, serving approximately 72,000 customers. MICHIGAN REGION. The Michigan region was formed in connection with the recent Fanch, Avalon, Falcon transfers and the Bresnan acquisition. Pro forma for these transactions and the pending transaction, the Michigan region will consist of cable systems serving approximately 593,000 customers. The largest operating cluster in the Michigan region is located in and around Bay City, Michigan serving approximately 132,000 customers. NATIONAL REGION. The National region consists of cable systems serving approximately 240,000 customers residing in small to medium-sized communities in the states of Nebraska, Texas, New Mexico, North Dakota, Kansas, Colorado and Oklahoma and cable systems serving approximately 188,000 customers in Texas of which approximately 132,000 are served by the Fort Worth, Texas system. These systems are managed from our Fort Worth, Texas regional office. SOUTHEAST REGION. The Southeast region consists of cable systems serving approximately 960,000 customers residing primarily in small to medium-sized communities in North Carolina, South Carolina, Georgia and Florida. There are significant clusters of cable systems in and around the cities and counties of Greenville/Spartanburg, South Carolina; Hickory and Asheville, North Carolina; and Atlanta, Georgia. MID-SOUTH REGION. The Mid-South region consists of cable systems serving approximately 543,000 customers residing in the states of Tennessee and Kentucky. The Mid-South region has a significant cluster of cable systems in and around Kingsport, Tennessee serving approximately 124,000 customers. NORTHEAST REGION. The Northeast region consists of cable systems serving approximately 328,000 customers residing in the states of Connecticut and Massachusetts. These systems serve the communities of Newtown and Willimantic, Connecticut, and areas in and around Pepperell and Worcester, Massachusetts. GULF COAST REGION. The Gulf Coast region was formed in connection with the Fanch and Falcon acquisitions. The Gulf Coast region consists of cable systems serving approximately 432,000 customers residing in the states of Louisiana, Mississippi and Alabama. Within the state of Alabama, the two largest operating clusters are located in and around Birmingham, serving approximately 117,000 customers, and Montgomery, serving approximately 25,000 customers. MID-ATLANTIC REGION. The Mid-Atlantic region consists of cable systems serving approximately 555,000 customers residing in the states of Virginia, West Virginia, Vermont, Ohio, Pennsylvania, New York and Maryland. The Mid-Atlantic region has significant clusters of cable systems in and 93 97 around the cities of Charleston, West Virginia, serving approximately 189,000 customers, and Johnstown, Pennsylvania, serving approximately 77,000 customers. PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to upgrade our existing cable plant over the next three years. For the period from January 1, 2000 to December 31, 2002, we plan to spend approximately $6.0 billion for capital expenditures, approximately $3.5 billion of which will be used to upgrade our systems to bandwidth capacity of 550 megahertz or greater, so that we may offer advanced services. The remaining capital will be spent on plant extensions, new services, converters and system maintenance. The following table describes the current technological state of our systems, including the recent transfers, and the anticipated progress of planned upgrades through 2003, based on the percentage of our customers who will have access to the bandwidth and two-way capability.
LESS THAN 750 MEGAHERTZ TWO-WAY 550 MEGAHERTZ 550 MEGAHERTZ OR GREATER 870 MEGAHERTZ CAPABILITY ------------- ------------- ------------- ------------- ---------- December 31, 1999....... 53% 14% 30% 3% 33% December 31, 2000....... 33% 9% 32% 26% 58% December 31, 2001....... 17% 7% 33% 43% 76% December 31, 2002....... 6% 5% 33% 56% 89% December 31, 2003....... 2% 6% 33% 59% 92%
We have adopted the hybrid fiber coaxial cable (HFC) architecture as the standard for our ongoing systems upgrades. HFC architecture combines the use of fiber optic cable, which can carry hundreds of video, data and voice channels over extended distances, with coaxial cable, which requires a more extensive signal amplification in order to obtain the desired transmission levels for delivering channels. In most systems, we deliver our signals via fiber optic cable to individual nodes serving a maximum of 500 homes or commercial buildings. Currently, our average node size is approximately 380 homes per node. Our HFC architecture consists of six strands of fiber to each node, with two strands activated and four strands reserved for future services. We believe that this network design provides high capacity and superior signal quality, and will enable us to provide the newest forms of telecommunications services to our customers. The primary advantages of HFC architecture over traditional coaxial cable networks include: - increased channel capacity of cable systems; - reduced number of amplifiers, which are devices to compensate for signal loss caused by coaxial cable, needed to deliver signals from the headend to the home, resulting in improved signal quality and reliability; - reduced number of homes that need to be connected to an individual node, improving the capacity of the network to provide high-speed Internet access and reducing the number of households affected by disruptions in the network; and - sufficient dedicated bandwidth for two-way services, which avoids reverse signal interference problems that can otherwise occur when you have two-way communication capability. The HFC architecture will enable us to offer new and enhanced services, including: - additional channels and tiers; - expanded pay-per-view options; - high-speed Internet access; 94 98 - wide area networks, which permit a network of computers to be connected together beyond an area; - point-to-point data services, which can switch data links from one point to another; and - digital advertising insertion, which is the insertion of local, regional and national programming. The upgrades will facilitate our new services in two primary ways: - Greater bandwidth allows us to send more information through our systems. This provides us with the capacity to provide new services in addition to our current services. As a result, we will be able to roll out digital cable programming in addition to existing analog channels offered to customers who do not wish to subscribe to a package of digital services. - Enhanced design configured for two-way communication with the customer allows us to provide cable Internet services without telephone support and other interactive services, such as an interactive program guide, impulse pay-per-view, video-on-demand and Wink, that cannot be offered without upgrading the bandwidth capacity of our systems. This HFC architecture will also position us to offer cable telephony services in the future, using either Internet protocol technology or switch-based technology, another method of linking communications. CUSTOMER SERVICE AND COMMUNITY RELATIONS Providing a high level of service to our customers has been a central driver of our historical success. Our emphasis on system reliability, engineering support and superior customer satisfaction is key to our management philosophy. In support of our commitment to customer satisfaction, we operate a 24-hour customer service hotline in most systems and offer on-time installation and service guarantees. It is our policy that if an installer is late for a scheduled appointment the customer receives free installation, and if a service technician is late for a service call the customer receives a $20 credit. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we maintained seventeen call centers located in our eleven regions, which are responsible for handling call volume for more than 53% of our customers. They are staffed with dedicated personnel who provide service to our customers 24 hours a day, seven days a week. We believe operating regional call centers allows us to provide "localized" service, which also reduces overhead costs and improves customer service. We have invested significantly in both personnel and equipment to ensure that these call centers are professionally managed and employ state-of-the-art technology. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we employed approximately 2,920 customer service representatives. Our customer service representatives receive extensive training to develop customer contact skills and product knowledge critical to successful sales and high rates of customer retention. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we had approximately 5,490 technical employees who are encouraged to enroll in courses and attend regularly scheduled on-site seminars conducted by equipment manufacturers to keep pace with the latest technological developments in the cable television industry. We utilize surveys, focus groups and other research tools as part of our efforts to determine and respond to customer needs. We believe that all of this improves the overall quality of our services and the reliability of our systems, resulting in fewer service calls from customers. We are also committed to fostering strong community relations in the towns and cities our systems serve. We support many local charities and community causes in various ways, including marketing promotions to raise money and supplies for persons in need, and in-kind donations that 95 99 include production services and free air-time on major cable networks. Recent charity affiliations include campaigns for "Toys for Tots," United Way, local theatre, children's museums, local food banks and volunteer fire and ambulance corps. We also participate in the "Cable in the Classroom" program, whereby cable television companies throughout the United States provide schools with free cable television service. In addition, we install and provide free basic cable service to public schools, government buildings and non-profit hospitals in many of the communities in which we operate. We also provide free cable modems and high-speed Internet access to schools and public libraries in our franchise areas. We place a special emphasis on education, and regularly award scholarships to employees who intend to pursue courses of study in the communications field. SALES AND MARKETING PERSONNEL RESOURCES. We have a centralized team responsible for coordinating the marketing efforts of our individual systems. For most of our systems with over 30,000 customers we have a dedicated marketing manager, while smaller systems are handled regionally. We believe our success in marketing comes in large part from new and innovative ideas and from good interaction between our corporate office, which handles programs and administration, and our field offices, which implement the various programs. We are also continually monitoring the regulatory arena, customer perception, competition, pricing and product preferences to increase our responsiveness to our customer base. Our customer service representatives are given the incentive to use their daily contacts with customers as opportunities to sell our new service offerings. MARKETING STRATEGY. Our long-term marketing objective is to increase cash flow through deeper market penetration and growth in revenue per household. To achieve this objective and to position our service as an indispensable consumer service, we are pursuing the following strategies: - increase the number of rooms per household with cable; - introduce new cable products and services; - design product offerings to enable greater opportunity for customer choices; - utilize "tiered" packaging strategies to promote the sale of premium services and niche programming; - offer our customers more value through discounted bundling of products; - increase the number of residential consumers who use our set-top box, which enables them to obtain advanced digital services such as a greater number of television stations and interactive services; - target households based on demographic data; - develop specialized programs to attract former customers, households that have never subscribed and illegal users of the service; and - employ Charter branding of products to promote customer awareness and loyalty. We have innovative marketing programs which utilize market research on selected systems, compare the data to national research and tailor marketing programs for individual markets. We gather detailed customer information through our regional marketing representatives and use the Claritas geodemographic data program and consulting services to create unique packages of services and marketing programs. These marketing efforts and the follow-up analysis provide consumer information down to the city block or suburban subdivision level, which allows us to create very targeted marketing programs. 96 100 We seek to maximize our revenue per customer through the use of "tiered" packaging strategies to market premium services and to develop and promote niche programming services. We regularly use targeted direct mail campaigns to sell these tiers and services to our existing customer base. We are developing an in-depth profile database that goes beyond existing and former customers to include all homes passed. This database information is expected to improve our targeted direct marketing efforts, bringing us closer toward our objective of increasing total customers as well as sales per customer for both new and existing customers. For example, using customer profile data currently available, we are able to identify customers who have children under a specified age and do not currently subscribe to The Disney Channel. We then target our marketing efforts with respect to The Disney Channel to those households. In 1998, we were chosen by Claritas Corporation, sponsor of a national marketing competition across all industries, as the first place winner in their media division, which includes cable systems operations, telecommunications and newspapers, for our national segmenting and targeted marketing program. In 1998, we introduced a new package of premium services. Customers receive a substantial discount on bundled premium services of HBO, Showtime, Cinemax and The Movie Channel. We were able to negotiate favorable terms with premium networks, which allowed minimal impact on margins and provided substantial volume incentives to grow the premium category. The MVP package has increased our premium household penetration, premium revenue and cash flow. We are currently introducing this same premium strategy in the systems we have recently acquired. We expect to continue to invest significant amounts of time, effort and financial resources in the marketing and promotion of new and existing services. To increase customer penetration and increase the level of services used by our customers, we use a coordinated array of marketing techniques, including door-to-door solicitation, telemarketing, media advertising and direct mail solicitation. We believe we have one of the cable television industry's highest success rates in attracting and retaining customers who have never before subscribed to cable television. Historically, these "nevers" are the most difficult customers to attract and retain. PROGRAMMING SUPPLY GENERAL. We believe that offering a wide variety of conveniently scheduled programming is an important factor influencing a customer's decision to subscribe to and retain our cable services. We devote considerable resources to obtaining access to a wide range of programming that we believe will appeal to both existing and potential customers of basic and premium services. We rely on extensive market research, customer demographics and local programming preferences to determine channel offerings in each of our markets. PROGRAMMING SOURCES. We obtain basic and premium programming from a number of suppliers, usually pursuant to a written contract. As of December 31, 1999, we obtained approximately 64% of our programming through contracts entered into directly with a programming supplier. We obtained the rest of our programming through TeleSynergy, Inc., which offers its partners contract benefits in buying programming by virtue of volume discounts available to a larger buying base. Recent consolidation in the cable television industry coupled with our growth through acquisitions has reduced the benefits associated with our participation in TeleSynergy. As a result of our recent acquisitions, we reviewed our programming arrangements and terminated our agreement with TeleSynergy, effective January 31, 2000. Programming tends to be made available to us for a flat fee per customer. However, some channels are available without cost to us. In connection with the launch of a new channel, we may receive a distribution fee to support the channel launch, a portion of which is applied to marketing 97 101 expenses associated with the channel launch. The amounts we receive in distribution fees are not significant. Our programming contracts generally continue for a fixed period of time, usually from three to ten years, and are subject to negotiated renewal. Although longer contract terms are available, we prefer to limit contracts to three years so that we retain flexibility to change programming and include new channels as they become available. Some program suppliers offer marketing support or volume discount pricing structures. Some of our programming agreements with premium service suppliers offer cost incentives under which premium service unit prices decline as certain premium service growth thresholds are met. For home shopping channels, we receive a percentage of the amount spent in home shopping purchases by our customers on channels we carry. In 1998, cash receipts totaled approximately $220,000. In 1999, cash receipts totaled approximately $5.0 million. PROGRAMMING COSTS. Our cable programming costs have increased in recent years and are expected to continue to increase due to factors including: - system acquisitions; - additional programming being provided to customers; - increased cost to produce or purchase cable programming; and - inflationary increases. In every year we have operated, our costs to acquire programming have exceeded customary inflationary and cost-of-living type increases. Sports programming costs have increased significantly over the past several years. In addition, contracts to purchase sports programming sometimes contain built-in cost increases for programming added during the term of the contract which we may or may not have the option to add to our service offerings. Under rate regulation of the Federal Communications Commission, cable operators may increase their rates to customers to cover increased costs for programming, subject to certain limitations. See "Regulation and Legislation." We believe we will, as a general matter, be able to pass increases in our programming costs through to customers, although we cannot assure you that it will be possible. RATES Pursuant to the Federal Communications Commission's rules, we have set rates for cable-related equipment, such as converter boxes and remote control devices and installation services. These rates are based on actual costs plus an 11.25% rate of return. We have unbundled these charges from the charges for the provision of cable service. Rates charged to our customers vary based on the market served and service selected, and are typically adjusted on an annual basis. As of December 31, 1999, including the Fanch, Falcon and Avalon cable systems, the average monthly fee was $13.54 for basic service and $14.88 for expanded basic service. Regulation of the expanded basic service was eliminated by federal law as of March 31, 1999 and such rates are now based on market conditions. A one-time installation fee, which may be waived in part during certain promotional periods, is charged to new customers. We believe our rate practices are in accordance with Federal Communications Commission Guidelines and are consistent with those prevailing in the industry generally. See "Regulation and Legislation." THEFT PROTECTION The unauthorized tapping of cable plant and the unauthorized receipt of programming using cable converters purchased through unauthorized sources are problems which continue to challenge 98 102 the entire cable industry. We have adopted specific measures to combat the unauthorized use of our plant to receive programming. For instance, in several of our regions, we have instituted a "perpetual audit" whereby each technician is required to check at least four other nearby residences during each service call to determine if there are any obvious signs of piracy, namely, a drop line leading from the main cable line into other homes. Addresses where the technician observes drop lines are then checked against our customer billing records. If the address is not found in the billing records, a sales representative calls on the unauthorized user to correct the "billing discrepancy" and persuade the user to become a formal customer. In our experience, approximately 25% of unauthorized users who are solicited in this manner become customers. Billing records are then closely monitored to guard against these new customers reverting to their status as unauthorized users. Unauthorized users who do not convert are promptly disconnected and, in certain instances, flagrant violators are referred for prosecution. In addition, we have prosecuted individuals who have sold cable converters programmed to receive our signals without proper authorization. FRANCHISES As of December 31, 1999, pro forma for the recent transfers, our systems operated pursuant to an aggregate of approximately 3,670 franchises, permits and similar authorizations issued by local and state governmental authorities. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we held approximately 4,215 franchises in the aggregate. Each franchise is awarded by a governmental authority and is usually not transferable unless the granting governmental authority consents. Most franchises are subject to termination proceedings in the event of a material breach. In addition, most franchises require us to pay the granting authority a franchise fee of up to 5.0% of gross revenues generated by cable television services under the franchise (i.e., the maximum amount that may be charged under the Communications Act). Our franchises have terms which range from four years to more than 32 years. Prior to the scheduled expiration of most franchises, we initiate renewal proceedings with the granting authorities. This process usually takes three years but can take a longer period of time and often involves substantial expense. The Communications Act provides for an orderly franchise renewal process in which granting authorities may not unreasonably withhold renewals. If a renewal is withheld and the granting authority takes over operation of the affected cable system or awards it to another party, the granting authority must pay the existing cable operator the "fair market value" of the system. The Communications Act also established comprehensive renewal procedures requiring that an incumbent franchisee's renewal application be evaluated on its own merit and not as part of a comparative process with competing applications. In connection with the franchise renewal process, many governmental authorities require the cable operator make certain commitments, such as technological upgrades to the system, which may require substantial capital expenditures. We cannot assure you, however, that any particular franchise will be renewed or that it can be renewed on commercially favorable terms. Our failure to obtain renewals of our franchises, especially those in major metropolitan areas where we have the most customers, would have a material adverse effect on our business, results of operations and financial condition. 99 103 The following table summarizes our systems' franchises, including the Fanch, Falcon and Avalon cable systems, by year of expiration and approximate number of basic customers as of December 31, 1999.
NUMBER PERCENTAGE PERCENTAGE OF OF TOTAL TOTAL BASIC OF TOTAL YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS(A) CUSTOMERS - - - ---------------------------- ---------- ---------- ------------ ---------- Prior to December 31, 1999.................... 116 3% 124,300 2% 2000 to 2002.................................. 862 24% 1,452,000 27% 2003 to 2005.................................. 847 23% 1,174,500 21% 2006 or after................................. 1,844 50% 2,732,300 50% ----- --- --------- --- Total....................................... 3,669 100% 5,483,100 100% ===== === ========= ===
- - - --------------- (a) Includes approximately 30,000 customers served by an Indiana cable system that we did not transfer at the time of the InterMedia closing but transferred in March 2000. Under the 1996 Telecom Act, state and local authorities are prohibited from limiting, restricting or conditioning the provision of telecommunications services. They may, however, impose "competitively neutral" requirements and manage the public rights-of-way. Granting authorities may not require a cable operator to provide telecommunications services or facilities, other than institutional networks, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits franchise fees to an operator's cable-related revenues and clarifies that they do not apply to revenues that a cable operator derives from providing new telecommunications services. We believe our relations with the franchising authorities under which our systems are operated are generally good. Substantially all of the material franchises relating to our systems which are eligible for renewal have been renewed or extended at or prior to their stated expiration dates. COMPETITION We face competition in the areas of price, service offerings and service reliability. We compete with other providers of television signals and other sources of home entertainment. In addition, as we expand into additional services such as Internet access, interactive services and telephony, we will face competition from other providers of each type of service. See "Risk Factors -- Business -- We operate in a very competitive business environment which can adversely affect our business and operations." To date, we believe that we have not lost a significant number of customers or a significant amount of revenue to our competitors' systems. However, competition from other providers of the technologies we expect to offer in the future may have a negative impact on our business in the future. Through mergers such as the recent merger of Tele-Communications, Inc. and AT&T and the pending merger of America Online, Inc. (AOL) and Time Warner Inc., customers will come to expect a variety of services from a single provider. While these mergers have no direct or immediate impact on our business, it encourages providers of cable and telecommunications services to expand their service offerings. It also encourages consolidation in the cable industry as cable operators recognize the competitive benefits of a large customer base and expanded financial resources. Key competitors today include: BROADCAST TELEVISION. Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an "off-air" antenna. The extent of such competition is dependent upon the quality and quantity of broadcast 100 104 signals available through "off-air" reception compared to the services provided by the local cable system. The recent licensing of digital spectrum by the Federal Communications Commission will provide incumbent television licenses with the ability to deliver high definition television pictures and multiple digital-quality program streams, as well as advanced digital services such as subscription video. DBS. Direct broadcast satellite, known as DBS, has emerged as significant competition to cable systems. The DBS industry has grown rapidly over the last several years, far exceeding the growth rate of the cable television industry, and now serves more than 10 million subscribers nationwide. DBS service allows the subscriber to receive video services directly via satellite using a relatively small dish antenna. Moreover, video compression technology allows DBS providers to offer more than 100 digital channels, thereby surpassing the typical analog cable system. DBS companies historically were prohibited from retransmitting popular local broadcast programming, but a change to the copyright laws in November 1999 eliminated this legal impediment. After an initial six-month grace period, DBS companies will need to secure retransmission consent from the popular broadcast stations they wish to carry, and they will face mandatory carriage obligations of less popular broadcast stations as of January 2002. In response to the legislation, DirecTV, Inc. and EchoStar Communications Corporation already have begun carrying the major network stations in the nation's top television markets. DBS, however, is limited in the local programming it can provide because of the current capacity limitations of satellite technology. It is, therefore, expected that DBS companies will offer local broadcast programming only in the larger U.S. markets in the foreseeable future. The same legislation providing for DBS carriage of local broadcast stations reduced the compulsory copyright fees paid by DBS companies and allows them to continue offering distant network signals to rural customers. In March 2000, both DirecTV and EchoStar announced that they would be capable of providing two-way high-speed Internet access by the end of this year. AOL, the nation's leading provider of Internet services has announced a plan to invest $1.5 billion in Hughes Electronics Corp., DirecTV's parent company, and these companies intend to jointly market AOL's prospective Internet television service to DirecTV's DBS customers. DSL. The deployment of digital subscriber line technology, known as DSL, will allow Internet access to subscribers at data transmission speeds greater than those of modems over conventional telephone lines. Several telephone companies and other companies are introducing DSL service. The Federal Communications Commission recently released an order in which it mandated that incumbent telephone companies grant access to the high frequency portion of the local loop over which they provide voice services. This will enable competitive carriers to provide DSL services over the same telephone lines simultaneously used by incumbent telephone companies to provide basic telephone service. However, in a separate order the Federal Communications Commission declined to mandate that incumbent telephone companies unbundle their internal packet switching functionality or related equipment for the benefit of competitive carriers. This functionality or equipment could otherwise have been used by competitive carriers directly to provide DSL or other high-speed broadband services. We are unable to predict whether the Federal Communications Commission's decisions will be sustained upon administrative or judicial appeal, the likelihood of success of the Internet access offered by our competitors or the impact on our business and operations of these competitive ventures. TRADITIONAL OVERBUILDS. Cable television systems are operated under non-exclusive franchises granted by local authorities. More than one cable system may legally be built in the same area. It is possible that a franchising authority might grant a second franchise to another cable operator and that franchise might contain terms and conditions more favorable than those afforded us. In addition, entities willing to establish an open video system, under which they offer unaffiliated programmers non-discriminatory access to a portion of the system's cable system may be able to avoid local franchising requirements. Well financed businesses from outside the cable industry, such as public 101 105 utilities which already possess fiber optic and other transmission lines in the areas they serve may over time become competitors. There has been a recent increase in the number of cities that have constructed their own cable systems, in a manner similar to city-provided utility services. There has been an increased interest in traditional overbuilds by private companies. Constructing a competing cable system is a capital intensive process which involves a high degree of risk. We believe that in order to be successful, a competitor's overbuild would need to be able to serve the homes and businesses in the overbuilt area on a more cost-effective basis than us. Any such overbuild operation would require either significant access to capital or access to facilities already in place that are capable of delivering cable television programming. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we are aware of overbuild situations in some of our cable systems. Approximately 115,000 basic customers, or approximately 1.9% of our total basic customers, are passed by these overbuilds. Additionally, we have been notified that franchises have been awarded, and present potential overbuild situations, in other of our systems. These potential overbuild areas service an aggregate of approximately 134,000 basic customers or approximately 2.2% of our total basic customers. In response to such overbuilds, these systems have been designated priorities for the upgrade of cable plant and the launch of new and enhanced services. We have upgraded many of these systems to at least 750 megahertz two-way HFC architecture, and anticipate upgrading the other systems to at least 750 megahertz by December 31, 2001. TELEPHONE COMPANIES AND UTILITIES. The competitive environment has been significantly affected by both technological developments and regulatory changes enacted in The Telecommunications Act of 1996, which were designed to enhance competition in the cable television and local telephone markets. Federal cross-ownership restrictions historically limited entry by local telephone companies into the cable television business. The 1996 Telecom Act modified this cross-ownership restriction, making it possible for local exchange carriers who have considerable resources to provide a wide variety of video services competitive with services offered by cable systems. As we expand our offerings to include Internet and other telecommunications services, we will be subject to competition from other telecommunications providers. The telecommunications industry is highly competitive and includes competitors with greater financial and personnel resources, who have brand name recognition and long-standing relationships with regulatory authorities. Moreover, mergers, joint ventures and alliances among franchise, wireless or private cable television operators, local exchange carriers and others may result in providers capable of offering cable television, Internet, and telecommunications services in direct competition with us. Several telephone companies have obtained or are seeking cable television franchises from local governmental authorities and are constructing cable systems. Cross-subsidization by local exchange carriers of video and telephony services poses a strategic advantage over cable operators seeking to compete with local exchange carriers that provide video services. Some local exchange carriers may choose to make broadband services available under the open video regulatory framework of the Federal Communications Commission or through wireless technology. In addition, local exchange carriers provide facilities for the transmission and distribution of voice and data services, including Internet services, in competition with our existing or potential interactive services ventures and businesses, including Internet service, as well as data and other non-video services. We cannot predict the likelihood of success of the broadband services offered by our competitors or the impact on us of such competitive ventures. The entry of telephone companies as direct competitors in the video marketplace, however, may become more widespread and could adversely affect the profitability and valuation of the systems. Additionally, we are subject to competition from utilities which possess fiber optic transmission lines capable of transmitting signals with minimal signal distortion. 102 106 PRIVATE CABLE. Additional competition is posed by satellite master antenna television systems known as "SMATV systems" serving multiple dwelling units, referred to in the cable industry as "MDU's", such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with such MDUs, which may preclude operators of franchise systems from serving residents of such private complexes. Such private cable systems can offer both improved reception of local television stations and many of the same satellite-delivered program services which are offered by cable systems. SMATV systems currently benefit from operating advantages not available to franchised cable systems, including fewer regulatory burdens and no requirement to service low density or economically depressed communities. Exemption from regulation may provide a competitive advantage to certain of our current and potential competitors. The FCC ruled in 1998 that private cable operators can lease video distribution capacity from local telephone companies and distribute cable programming services over public rights-of-way without obtaining a cable franchise. In 1999, both the Fifth and Seventh Circuit Courts of Appeals upheld this FCC policy. WIRELESS DISTRIBUTION. Cable television systems also compete with wireless program distribution services such as multi-channel multipoint distribution systems or "wireless cable," known as MMDS. MMDS uses low-power microwave frequencies to transmit television programming over-the-air to paying customers. Wireless distribution services generally provide many of the programming services provided by cable systems, and digital compression technology is likely to increase significantly the channel capacity of their systems. Both analog and digital MMDS services require unobstructed "line of sight" transmission paths. Analog MMDS has impacted our customer growth in Riverside and Sacramento, California and Missoula, Montana. Digital MMDS is a more significant competitor, presenting potential challenges to us in Los Angeles, California and Atlanta, Georgia. PROPERTIES Our principal physical assets consist of cable television distribution plant and equipment, including signal receiving, encoding and decoding devices, headend reception facilities, distribution systems and customer drop equipment for each of our cable television systems. Our cable television plant and related equipment are generally attached to utility poles under pole rental agreements with local public utilities and telephone companies, and in certain locations are buried in underground ducts or trenches. We own or lease real property for signal reception sites and business offices in many of the communities served by our systems and for our principal executive offices. We own most of our service vehicles. Our subsidiaries own the real property housing a regional data center in Town & Country, Missouri, as well as the regional office for the Northeast Region in Newtown, Connecticut and additional real estate located in Hickory, North Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo, California. Our subsidiaries lease space for our regional data center located in Dallas, Texas and additional locations for business offices throughout our operating regions and generally own the towers on which our equipment is located. Our headend locations are generally located on owned or leased parcels of land, and we generally own the towers on which our equipment is located. We believe that our properties are in good operating condition and are suitable for our business operations. EMPLOYEES Pursuant to a services agreement between Charter Communications, Inc. and Charter Investment, Inc., Charter Investment, Inc. provides the necessary personnel and services to manage Charter Communications Holding Company and its subsidiaries, including us. These personnel and 103 107 services are provided to Charter Communications, Inc. on a cost reimbursement basis. Charter Communications, Inc. currently has only thirteen employees, all of whom are senior management and are also executive officers of Charter Investment, Inc. The management of Charter Communications, Inc. and Charter Investment, Inc. consists of approximately 325 people led by Charter Communications chief executive officer Jerald L. Kent. They are responsible for coordinating and overseeing our operations, including certain critical functions, such as marketing and engineering, that are conducted by personnel at the regional and local system level. The corporate office also performs certain financial control functions such as accounting, finance and acquisitions, payroll and benefit administration, internal audit, purchasing and programming contract administration on a centralized basis. As of February 29, 2000, our subsidiaries had approximately 11,970 full-time equivalent employees of which 375 were represented by the International Brotherhood of Electrical Workers. We believe we have a good relationship with our employees and have never experienced a work stoppage. See "Certain Relationships and Related Transactions." INSURANCE We have insurance to cover risks incurred in the ordinary course of business, including general liability, property coverage, business interruption and workers' compensation insurance in amounts typical of similar operators in the cable industry and with reputable insurance providers. As is typical in the cable industry, we do not insure our underground plant. We believe our insurance coverage is adequate. LEGAL PROCEEDINGS We are involved from time to time in routine legal matters incidental to our business. We believe that the resolution of such matters will not have a material adverse impact on our financial position or results of operations. REGULATION AND LEGISLATION The following summary addresses the key regulatory developments and legislation affecting the cable television industry. The operation of a cable system is extensively regulated by the Federal Communications Commission, some state governments and most local governments. The 1996 Telecom Act has altered the regulatory structure governing the nation's communications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it also reduces the scope of cable rate regulation and encourages additional competition in the video programming industry by allowing local telephone companies to provide video programming in their own telephone service areas. The 1996 Telecom Act requires the Federal Communications Commission to undertake a host of implementing rulemakings. Moreover, Congress and the Federal Communications Commission have frequently revisited the subject of cable regulation. Future legislative and regulatory changes could adversely affect our operations, and there have been calls in Congress and at the Federal Communications Commission to maintain or even tighten cable regulation in the absence of widespread effective competition. CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems were subjected to rate regulation, unless they faced "effective competition" in their local franchise area. Federal law defines "effective competition" on a 104 108 community-specific basis as requiring satisfaction of conditions rarely satisfied in the current marketplace. Although the Federal Communications Commission established the underlying regulatory scheme, local government units, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable service -- the basic service tier, which typically contains local broadcast stations and public, educational, and government access channels. Before a local franchising authority begins basic service rate regulation, it must certify to the Federal Communications Commission that it will follow applicable federal rules. Many local franchising authorities have voluntarily declined to exercise their authority to regulate basic service rates. Local franchising authorities also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, approximately 17% of our local franchising authorities were certified to regulate basic tier rates. The 1992 Cable Act permits communities to certify and regulate rates at any time, so that it is possible that additional localities served by the systems may choose to certify and regulate basic rates in the future. The Federal Communications Commission historically administered rate regulation of cable programming service tiers, which are the expanded basic programming packages that offer services other than basic programming and which typically contains satellite-delivered programming. As of December 31, 1999, pro forma for the recent transfers and the Bresnan acquisition, we had cable programming service tier rate complaints relating to approximately 440,000 customers pending at the Federal Communications Commission. Under the 1996 Telecom Act, however, the Federal Communications Commission's authority to regulate cable programming service tier rates sunset on March 31, 1999. The Federal Communications Commission has taken the position that it will still adjudicate pending cable programming service tier complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date. We do not believe any adjudications regarding these pre-sunset complaints will have a material adverse effect on our business. The elimination of cable programming service tier regulation on a prospective basis affords us substantially greater pricing flexibility. Under the rate regulations of the Federal Communication Commission, most cable systems were required to reduce their basic service tier and cable programming service tier rates in 1993 and 1994, and have since had their rate increases governed by a complicated price cap scheme that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The Federal Communications Commission has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with regulatory lag. Operators also have the opportunity to bypass this "benchmark" regulatory scheme in favor of traditional "cost-of-service" regulation in cases where the latter methodology appears favorable. Cost of service regulation is a traditional form of rate regulation, under which a utility is allowed to recover its costs of providing the regulated service, plus a reasonable profit. The Federal Communications Commission and Congress have provided various forms of rate relief for smaller cable systems owned by smaller operators. Premium cable services offered on a per-channel or per-program basis remain unregulated. However, federal law requires that the basic service tier be offered to all cable subscribers and limits the ability of operators to require purchase of any cable programming service tier if a customer seeks to purchase premium services offered on a per-channel or per-program basis, subject to a technology exception which sunsets in 2002. As noted above, Federal Communications Commission regulation of cable programming service tier rates for all systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March 31, 105 109 1999. As a result, the regulatory regime just discussed is now essentially applicable only to the basic service tier and cable equipment. The 1996 Telecom Act also relaxes existing "uniform rate" requirements by specifying that uniform rate requirements do not apply where the operator faces "effective competition," and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the Federal Communications Commission. CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more favorable environment for us to provide telecommunications services beyond traditional video delivery. It provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. A cable operator is authorized under the 1996 Telecom Act to provide telecommunications services without obtaining a separate local franchise. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way and may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The favorable pole attachment rates afforded cable operators under federal law can be gradually increased by utility companies owning the poles, beginning in 2001, if the operator provides telecommunications service, as well as cable service, over its plant. The Federal Communications Commission clarified that a cable operator's favorable pole rates are not endangered by the provision of Internet access, but a recent decision by the 11th Circuit Court of Appeals disagreed and suggested that Internet traffic is neither cable service nor telecommunications service and might leave cable attachments that carry Internet traffic ineligible for Pole Attachment Act protections. Cable entry into telecommunications will be affected by the regulatory landscape now being developed by the Federal Communications Commission and state regulators. One critical component of the 1996 Telecom Act to facilitate the entry of new telecommunications providers, including cable operators, is the interconnection obligation imposed on all telecommunications carriers. The Supreme Court upheld most of the Federal Communications Commission interconnection regulations. Although these regulations should enable new telecommunications entrants to reach viable interconnection agreements with incumbent carriers, many issues, including which specific network elements the Federal Communications Commission can mandate that incumbent carriers make available to competitors, remain subject to administrative and judicial appeal. If the Federal Communications Commission's current list of unbundled network elements is upheld on appeal, it would make it easier for us to provide telecommunications service. INTERNET SERVICE. Although there is at present no significant federal regulation of cable system delivery of Internet services, and the Federal Communications Commission recently issued several reports finding no immediate need to impose such regulation, this situation may change as cable systems expand their broadband delivery of Internet services. In particular, proposals have been advanced at the Federal Communications Commission and Congress that would require cable operators to provide access to unaffiliated Internet service providers and online service providers. The FCC recently rejected a petition by certain Internet service providers attempting to use existing modes of access that are commercially leased to gain access to cable system delivery. Finally, some states and local franchising authorities are considering the imposition of mandatory Internet access requirements as part of cable franchise renewals or transfers and a few local jurisdictions have adopted these requirements. A federal district court in Portland, Oregon recently upheld the legal ability of local franchising authority to impose such conditions, but an appeal was filed with the Ninth Circuit Court of Appeals, oral argument has been held and the parties are awaiting a decision. Other local authorities have imposed or may impose mandatory Internet access requirements on cable operators. These developments could, if they become widespread, burden the capacity of cable systems and complicate our own plans for providing Internet service. 106 110 TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable cross-ownership ban. Local exchange carriers, including the regional telephone companies, can now compete with cable operators both inside and outside their telephone service areas with certain regulatory safeguards. Because of their resources, local exchange carriers could be formidable competitors to traditional cable operators. Various local exchange carriers already are providing video programming services within their telephone service areas through a variety of distribution methods, including both the deployment of broadband wire facilities and the use of wireless transmission. Under the 1996 Telecom Act, local exchange carriers or any other cable competitor providing video programming to subscribers through broadband wire should be regulated as a traditional cable operator, subject to local franchising and federal regulatory requirements, unless the local exchange carrier or other cable competitor elects to deploy its broadband plant as an open video system. To qualify for favorable open video system status, the competitor must reserve two-thirds of the system's activated channels for unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of the Federal Communications Commission's open video system rules, including its preemption of local franchising. The Federal Communications Commission recently revised its OVS rules to eliminate this general preemption, thereby leaving franchising discretion to state and local authorities. It is unclear what effect this ruling will have on the entities pursuing open video system operation. Although local exchange carriers and cable operators can now expand their offerings across traditional service boundaries, the general prohibition remains on local exchange carrier buyouts of co-located cable systems. Co-located cable systems are cable systems serving an overlapping territory. Cable operator buyouts of co-located local exchange carrier systems, and joint ventures between cable operators and local exchange carriers in the same market are also prohibited. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition, including a carefully circumscribed "rural exemption." The 1996 Telecom Act also provides the Federal Communications Commission with the limited authority to grant waivers of the buyout prohibition. ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, including cable television, notwithstanding the Public Utility Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the Federal Communications Commission for operating authority. Like telephone companies, electric utilities have substantial resources at their disposal, and could be formidable competitors to traditional cable systems. Several such utilities have been granted broad authority by the Federal Communications Commission to engage in activities which could include the provision of video programming. ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership, including broadcast network/cable restrictions, but leaves in place existing Federal Communications Commission regulations prohibiting local cross-ownership between co-located television stations and cable systems. Pursuant to the 1992 Cable Act, the Federal Communications Commission adopted rules precluding a cable system from devoting more than 40% of its activated channel capacity to the carriage of affiliated national video program services. Also pursuant to the 1992 Cable Act, the Federal Communications Commission has adopted rules that preclude any cable operator from serving more than 30% of all U.S. domestic multichannel video subscribers, including cable and direct broadcast satellite subscribers. This provision might require AT&T to divest certain cable ownership. However, this provision has been stayed pending further judicial review. 107 111 MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast signal carriage requirements. Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable customers. These requirements, among other things, allow local commercial television broadcast stations to elect once every three years between "must carry" status or "retransmission consent" status. Less popular stations typically elect must carry, which is the broadcast signal carriage requirement that allows local commercial television broadcast stations to require a cable system to carry the station. More popular stations, such as those affiliated with a national network, typically elect retransmission consent which is the broadcast signal carriage requirement that allows local commercial television broadcast stations to negotiate for payments for granting permission to the cable operator to carry the stations. Must carry requests can dilute the appeal of a cable system's programming offerings because a cable system with limited channel capacity may be required to forego carriage of popular channels in favor of less popular broadcast stations electing must carry. Retransmission consent demands may require substantial payments or other concessions. Either option has a potentially adverse effect on our business. The burden associated with must carry may increase substantially if broadcasters proceed with planned conversion to digital transmission and the Federal Communications Commission determines that cable systems must carry all analog and digital broadcasts in their entirety. This burden would reduce capacity available for more popular video programming and new internet and telecommunication offerings. A rulemaking is now pending at the Federal Communications Commission regarding the imposition of dual digital and analog must carry. ACCESS CHANNELS. Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a portion of their channel capacity, up to 15% in some cases, for commercial leased access by unaffiliated third parties. The Federal Communications Commission has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for commercial leased access use. We believe that requests for commercial leased access carriages have been relatively limited. The Federal Communications Commission recently rejected a request that unaffiliated Internet service providers be found eligible for commercial leased access. Although we do not believe such use is in accord with the governing statute, a contrary ruling, should the ruling be appealed, could lead to substantial leased activity by Internet service providers and disrupt our own plans for Internet service. ACCESS TO PROGRAMMING. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring their cable operators over new competitors and requires such programmers to sell their programming to other multichannel video distributors. This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to cable companies. There also has been interest expressed in further restricting the marketing practices of cable programmers, including subjecting programmers who are not affiliated with cable operators to all of the existing program access requirements, and subjecting terrestrially delivered programming to the program access requirements. Terrestrially delivered programming is programming delivered other than by satellite. These changes should not have a dramatic impact on us, but would limit potential competitive advantages we now enjoy. Pursuant to the Satellite Home Viewer Improvement Act, the Federal Communications Commission has adopted regulations governing retransmission consent negotiations between broadcasters and all multichannel video programming distributors, including cable and DBS. INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997, the Federal Communications Commission established rules that require an incumbent cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove "home run" wiring that was installed by the 108 112 cable operator in a multiple dwelling unit building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers who are willing to pay the building owner a higher fee, where such a fee is permissible. The Federal Communications Commission has also proposed abrogating all exclusive multiple dwelling unit service agreements held by incumbent operators, but allowing such contracts when held by new entrants. In another proceeding, the Federal Communications Commission has preempted restrictions on the deployment of private antenna on rental property within the exclusive use of a tenant, such as balconies and patios. This Federal Communications Commission ruling may limit the extent to which we along with multiple dwelling unit owners may enforce certain aspects of multiple dwelling unit agreements which otherwise prohibit, for example, placement of digital broadcast satellite receiver antennae in multiple dwelling unit areas under the exclusive occupancy of a renter. These developments may make it even more difficult for us to provide service in multiple dwelling unit complexes. OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION. In addition to the Federal Communications Commission regulations noted above, there are other regulations of the Federal Communications Commission covering such areas as: - equal employment opportunity, - subscriber privacy, - programming practices, including, among other things, (1) syndicated program exclusivity, which is a Federal Communications Commission rule which requires a cable system to delete particular programming offered by a distant broadcast signal carried on the system which duplicates the programming for which a local broadcast station has secured exclusive distribution rights, (2) network program nonduplication, (3) local sports blackouts, (4) indecent programming, (5) lottery programming, (6) political programming, (7) sponsorship identification, (8) children's programming advertisements, and (9) closed captioning, - registration of cable systems and facilities licensing, - maintenance of various records and public inspection files, - aeronautical frequency usage, - lockbox availability, - antenna structure notification, - tower marking and lighting, - consumer protection and customer service standards, - technical standards, - consumer electronics equipment compatibility, and 109 113 - emergency alert systems. The Federal Communications Commission recently ruled that cable customers must be allowed to purchase cable converters from third parties and established a multi-year phase-in during which security functions, which would remain in the operator's exclusive control, would be unbundled from basic converter functions, which could then be satisfied by third party vendors. The first phase implementation date is July 1, 2000 and compliance may be technically and operationally difficult in some locations. The Federal Communications Commission has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of Federal Communications Commission licenses needed to operate certain transmission facilities used in connection with cable operations. COPYRIGHT. Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenues to a federal copyright royalty pool, that varies depending on the size of the system, the number of distant broadcast television signals carried, and the location of the cable system, cable operators can obtain blanket permission to retransmit copyrighted material included in broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect our ability to obtain desired broadcast programming. We cannot predict the outcome of this legislative activity. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. Cable operators distribute locally originated programming and advertising that use music controlled by the two principal major music performing rights organizations, the American Society of Composers, Authors and Publishers and Broadcast Music, Inc. The cable industry has had a long series of negotiations and adjudications with both organizations. A prior voluntarily negotiated agreement with Broadcast Music has now expired, and is subject to further proceedings. The governing rate court recently set retroactive and prospective cable industry rates for American Society of Composers music based on the previously negotiated Broadcast Music rate. Although we cannot predict the ultimate outcome of these industry proceedings or the amount of any license fees we may be required to pay for past and future use of association-controlled music, we do not believe such license fees will be significant to our business and operations. STATE AND LOCAL REGULATION. Cable systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in order to cross public rights-of-way. Federal law now prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises. Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for non-compliance and may be terminable if the franchisee failed to comply with material provisions. The specific terms and conditions of franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, service rates, franchising fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states, including Connecticut, subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system's gross cable-related revenues, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories 110 114 of programming. Certain states are considering the imposition of new broadly applied telecommunications taxes. Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the local franchising authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and service or increased franchise fees as a condition of renewal. Similarly, if a local franchising authority's consent is required for the purchase or sale of a cable system or franchise, such local franchising authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, most franchises have been renewed for and consents granted to cable operators that have provided satisfactory services and have complied with the terms of their franchise. Under the 1996 Telecom Act, states and local franchising authorities are prohibited from limiting, restricting, or conditioning the provision of competitive telecommunications services, except for certain "competitively neutral" requirements and as necessary to manage the public rights-of-way. This law should facilitate entry into competitive telecommunications services, although certain jurisdictions still may attempt to impose rigorous entry requirements. In addition, local franchising authorities may not require a cable operator to provide any telecommunications service or facilities, other than institutional networks under certain circumstances, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also provides that franchising fees are limited to an operator's cable-related revenues and do not apply to revenues that a cable operator derives from providing new telecommunications services. 111 115 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Charter Holdings is a holding company with no operations. Charter Capital is a direct wholly owned finance subsidiary of Charter Holdings that exists solely for the purpose of serving as co-obligor of the notes and the March 1999 Charter Holdings notes and has no operations. Neither Charter Holdings nor Charter Capital has any employees. We and our direct and indirect subsidiaries are managed by Charter Communications, Inc. See "Certain Relationships and Related Transactions." The persons listed below are directors of Charter Communications, Inc., Charter Communications Holding Company, Charter Holdings or Charter Capital, as indicated. Each of the directors is elected annually.
DIRECTORS AGE POSITION - - - --------- --- -------- Paul G. Allen............................. 47 Chairman of the Board of Directors of Charter Communications, Inc. and Director of Charter Communications Holding Company Jerald L. Kent............................ 43 Director of Charter Communications, Inc., Charter Communications Holding Company, Charter Holdings and Charter Capital Marc B. Nathanson......................... 54 Director of Charter Communications, Inc. Ronald L. Nelson.......................... 47 Director of Charter Communications, Inc. Nancy B. Peretsman........................ 46 Director of Charter Communications, Inc. William D. Savoy.......................... 35 Director of Charter Communications, Inc., Charter Communications Holding Company and Charter Holdings Howard L. Wood............................ 60 Director of Charter Communications, Inc.
The following sets forth certain biographical information with respect to the directors listed above. PAUL G. ALLEN has been Chairman of the board of directors of Charter Communications, Inc. since July 1999, and Chairman of the board of directors of Charter Investment, Inc. since December 1998. Mr. Allen, a co-founder of Microsoft Corporation, has been a private investor for more than five years, with interests in a wide variety of companies, many of which focus on multimedia digital communications. These companies include Interval Research Corporation, Vulcan Ventures, Inc., Vulcan Programming, Inc., and Vulcan Cable III Inc. He is a director of Microsoft Corporation, USA Networks, Inc. and various other private corporations. JERALD L. KENT has been the President, Chief Executive Officer and a director of Charter Communications, Inc. since July 1999 and of Charter Investment, Inc. since April 1995. He previously held the position of Chief Financial Officer of Charter Investment, Inc. Prior to co-founding Charter Investment, Inc. in 1993, Mr. Kent was Executive Vice President and Chief Financial Officer of Cencom Cable Associates, Inc., where he previously held other executive positions. Earlier he was with Arthur Andersen LLP, where he attained the position of tax manager. Mr. Kent is a member of the board of directors of High Speed Access Corp., Cable Television Laboratories, Inc. and Com21 Inc. Mr. Kent, a certified public accountant, received his undergraduate and M.B.A. degrees from Washington University. MARC B. NATHANSON has been a director of Charter Communications, Inc. since January 2000. Mr. Nathanson was Chairman and Chief Executive Officer of Falcon Holding Group, Inc. and its 112 116 predecessors from 1975 to 1999, and held the same positions with Enstar Communications Corporation from 1988 until November 1999. Prior to 1975, he held executive positions with Teleprompter Corporation, Warner Cable, and Cypress Communications Corporation. He is a director of Digital Entertainment Network, Inc. and of the National Cable Television Association and serves as Chairman of U.S. International Broadcasting Agency. RONALD L. NELSON has been a director of Charter Communications, Inc. since November 1999. Mr. Nelson is a founding member of Dream Works LLC, where he has served in executive management since 1994. Prior to that time, during his 15 years at Paramount Communications Inc., he served in a variety of operating and executive positions. He currently serves as a member of the board of directors of Advanced Tissue Sciences, Inc. Mr. Nelson has a B.S. from the University of California at Berkeley and an M.B.A. from the University of California at Los Angeles. NANCY B. PERETSMAN has been a director of Charter Communications, Inc. since November 1999. Ms. Peretsman has been a Managing Director and Executive Vice President of Allen & Company Incorporated, an investment bank unrelated to Mr. Allen, since 1995. From 1983 to 1995 she was an investment banker at Salomon Brothers Inc., where she was a Managing Director since 1990. She is a director of Oxygen Media, Inc., Priceline.com Incorporated and several privately held companies. She received a B.A. from Princeton University and an M.P.P.M. from Yale University. WILLIAM D. SAVOY has been a director of Charter Communications, Inc. since July 1999 and a director of Charter Investment, Inc. since December 1998. Since 1990, Mr. Savoy has been an officer and a director of many affiliates of Mr. Allen, including Vice President and a director of Vulcan Ventures, Inc., President of Vulcan Northwest, Inc., and President and a director of Vulcan Programming, Inc. and Vulcan Cable III Inc. Mr. Savoy also serves as a director of drugstore.com, inc., Go2Net, Inc., Harbinger Corporation, High Speed Access Corp., Metricom, Inc., Telescan, Inc., Ticketmaster Online -- CitySearch, Inc., USA Networks, Inc., and Value America, Inc. Mr. Savoy holds a B.S. in computer science, accounting and finance from Atlantic Union College. HOWARD L. WOOD has been a director of Charter Communications, Inc. since January 2000. Mr. Wood co-founded Charter Investment, Inc. in 1993 and served in various executive capacities until November 1999, when he became a consultant to Charter Communications, Inc. Prior to 1993, Mr. Wood was Chief Executive Officer of Cencom Cable Associates, Inc., where he also served in various other executive positions. Earlier he was Partner-in-Charge of the St. Louis Tax Division of Arthur Andersen LLP. He is a director of VanLiner Group, Inc., First State Community Bank, Gaylord Entertainment Company and Data Research, Inc. Mr. Wood, a certified public accountant, graduated from Washington University (St. Louis) School of Business. DIRECTOR COMPENSATION The employee directors of Charter Holdings, Charter Capital, Charter Communications Holding Company and Charter Communications, Inc. do not receive any additional compensation for serving as a director, nor are they paid any fees for attendance at any meeting of the board of directors. Each non-employee director of Charter Communications, Inc., other than Mr. Allen, has been issued 40,000 fully vested options in consideration for agreeing to join the board of directors and may receive additional compensation to be determined. Directors may also be reimbursed for the actual reasonable costs incurred in connection with attendance at board meetings. EMPLOYMENT AND OTHER AGREEMENTS Effective as of December 23, 1998, Jerald L. Kent entered into an employment agreement with Mr. Allen for a three-year term with automatic one-year renewals. The employment agreement was 113 117 assigned by Mr. Allen to Charter Investment, Inc. as of December 23, 1998. Charter Investment, Inc. subsequently assigned Mr. Kent's employment agreement to Charter Communications, Inc. and Charter Communications, Inc. has assumed all rights and obligations of Charter Investment, Inc. under the agreement, except with respect to the grant of options, which have already been granted by Charter Communications Holding Company. Under this agreement, Mr. Kent has agreed to serve as President and Chief Executive Officer of Charter Communications, Inc., with responsibility for the nationwide general management, administration and operation of all present and future business of Charter Communications, Inc. and its subsidiaries. During the initial term of the agreement, Mr. Kent receives an annual base salary of $1,250,000, or such higher rate as may from time to time be determined by Charter Communications, Inc.'s board of directors in its discretion. In addition, Mr. Kent is eligible to receive an annual bonus in an aggregate amount not to exceed $625,000, to be determined by the board based on an assessment of the performance of Mr. Kent as well as the achievement of certain financial targets. Under the agreement, Mr. Kent is entitled to participate in any disability insurance, pension, or other benefit plan afforded to employees generally or executives of Charter Communications, Inc. Mr. Kent will be reimbursed by Charter Communications, Inc. for life insurance premiums up to $30,000 per year, and is granted personal use of the corporate airplane. Mr. Kent was also granted a car valued at up to $100,000 and the fees and dues for his membership in a country club of his choice. Also under this agreement and a related agreement with Charter Communications Holding Company, Mr. Kent received options to purchase 7,044,127 Charter Communications Holding Company membership units. The options have a term of ten years and vested 25% on December 23, 1998. The remaining 75% vest 1/36 on the first day of each of the 36 months commencing on the first day of the thirteenth month following December 23, 1998. The terms of these options provide that immediately following the issuance of Charter Communications Holding Company membership units received upon exercise of such options, these units will be automatically exchanged for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. Charter Communications, Inc. will indemnify and hold harmless Mr. Kent to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses in connection with or arising out of the performance by Mr. Kent of his duties. If the agreement expires because Charter Communications, Inc. gives Mr. Kent notice of its intention not to extend the initial term, or if the agreement is terminated by Mr. Kent for good reason or by Charter Communications, Inc. without cause: - Charter Communications, Inc. will pay to Mr. Kent an amount equal to the aggregate base salary due to Mr. Kent for the remaining term and the board of directors will consider additional amounts, if any, to be paid to Mr. Kent; and - any unvested options of Mr. Kent shall immediately vest. EXECUTIVE OFFICERS The following persons are executive officers of each of Charter Communications, Inc., Charter Communications Holding Company and Charter Holdings:
EXECUTIVE OFFICERS AGE POSITION ------------------ --- -------- Jerald L. Kent......................... 43 President and Chief Executive Officer David G. Barford....................... 41 Senior Vice President of Operations -- Western Division Mary Pat Blake......................... 44 Senior Vice President -- Marketing and Programming Eric A. Freesmeier..................... 47 Senior Vice President -- Administration
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EXECUTIVE OFFICERS AGE POSITION ------------------ --- -------- Thomas R. Jokerst...................... 50 Senior Vice President -- Advanced Technology Development Kent D. Kalkwarf....................... 40 Senior Vice President and Chief Financial Officer Ralph G. Kelly......................... 43 Senior Vice President -- Treasurer David L. McCall........................ 44 Senior Vice President of Operations -- Eastern Division John C. Pietri......................... 50 Senior Vice President -- Engineering Michael E. Riddle...................... 41 Senior Vice President and Chief Information Officer Steven A. Schumm....................... 47 Executive Vice President, Assistant to the President Curtis S. Shaw......................... 51 Senior Vice President, General Counsel and Secretary Stephen E. Silva....................... 40 Senior Vice President -- Corporate Development and Technology
Information regarding our executive officers is set forth below. Our executive officers, except for Mr. Riddle, were appointed to their positions following our formation in February 1999, and became employees of Charter Communications, Inc. in November 1999. Prior to that time, they were employees of Charter Investment, Inc. All of our executive officers simultaneously serve in the same capacity with Charter Investment, Inc. JERALD L. KENT, President, Chief Executive Officer and director of Charter Communications, Inc. Mr. Kent has held these positions with Charter Communications, Inc. since July 1999 and with Charter Investment, Inc. since April 1995. He previously held the position of Chief Financial Officer of Charter Investment, Inc. Prior to co-founding Charter Investment, Inc. in 1993, Mr. Kent was Executive Vice President and Chief Financial Officer of Cencom Cable Associates, Inc., where he previously held other executive positions. Earlier he was with Arthur Andersen LLP, where he attained the position of tax manager. Mr. Kent is a member of the board of directors of High Speed Access Corp., Cable Television Laboratories, Inc. and Com21 Inc. Mr. Kent, a certified public accountant, received his undergraduate and M.B.A. degrees from Washington University. DAVID G. BARFORD, Senior Vice President of Operations -- Western Division. Prior to joining Charter Investment, Inc. in 1995, Mr. Barford held various senior marketing and operating roles during nine years at Comcast Cable Communications, Inc. He received a B.A. from California State University, Fullerton, and an M.B.A. from National University. MARY PAT BLAKE, Senior Vice President -- Marketing and Programming. Prior to joining Charter Investment, Inc. in 1995, Ms. Blake was active in the emerging business sector and formed Blake Investments, Inc. in 1993. She has 18 years of experience with senior management responsibilities in marketing, sales, finance, systems, and general management. Ms. Blake received a B.S. from the University of Minnesota and an M.B.A. from the Harvard Business School. ERIC A. FREESMEIER, Senior Vice President -- Administration. From 1986 until joining Charter Investment, Inc. in 1998, Mr. Freesmeier served in various executive management positions at Edison Brothers Stores, Inc. Earlier he held management and executive positions at Montgomery Ward. Mr. Freesmeier holds bachelor's degrees from the University of Iowa and a master's degree from Northwestern University's Kellogg Graduate School of Management. THOMAS R. JOKERST, Senior Vice President -- Advanced Technology Development. Mr. Jokerst joined Charter Investment, Inc. in 1994. Previously he served as a vice president of Cable Television Laboratories and as a regional director of engineering for Continental Cablevision. He is a graduate of Ranken Technical Institute and of Southern Illinois University. KENT D. KALKWARF, Senior Vice President and Chief Financial Officer. Prior to joining Charter Investment, Inc. in 1995, Mr. Kalkwarf was employed for 13 years by Arthur Andersen LLP, where 115 119 he attained the position of senior tax manager. He has extensive experience in cable, real estate, and international tax issues. Mr. Kalkwarf has a B.S. from Illinois Wesleyan University and is a certified public accountant. RALPH G. KELLY, Senior Vice President --Treasurer. Prior to joining Charter Investment, Inc. in 1993, Mr. Kelly was controller and then treasurer of Cencom Cable Associates. He left Charter in 1994, to become chief financial officer of CableMaxx, Inc., and returned in 1996. Mr. Kelly received his bachelor's degree in accounting from the University of Missouri -- Columbia and his M.B.A. from Saint Louis University. DAVID L. MCCALL, Senior Vice President of Operations -- Eastern Division. Prior to joining Charter Investment, Inc. in 1995, Mr. McCall was associated with Crown Cable and its predecessor company, Cencom Cable Associates, Inc., from 1983 to 1994. Mr. McCall has served as a director of the South Carolina Cable Television Association for ten years and is a member of the Southern Cable Association's Tower Club. JOHN C. PIETRI, Senior Vice President -- Engineering. Prior to joining Charter Investment, Inc. in 1998, Mr. Pietri was with Marcus Cable for 9 years, most recently serving as senior vice president and chief technical officer. Earlier he was in operations with West Marc Communications and Minnesota Utility Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh. MICHAEL E. RIDDLE, Senior Vice President and Chief Information Officer. Prior to joining Charter Communications, Inc. in December 1999, Mr. Riddle was director, applied technologies of Cox Communications for 4 years. Prior to that, he held technical and management positions during 17 years at Southwestern Bell and its subsidiaries. Mr. Riddle attended Fort Hays State University. STEVEN A. SCHUMM, Executive Vice President, Assistant to the President. Prior to joining Charter Investment, Inc. in 1998, Mr. Schumm was managing partner of the St. Louis office of Ernst & Young LLP, where he was a partner for 14 of 24 years. He served as one of 10 members of the firm's National Tax Committee. Mr. Schumm earned a B.S. degree from Saint Louis University. CURTIS S. SHAW, Senior Vice President, General Counsel and Secretary. Prior to joining Charter Investment, Inc. in 1997, Mr. Shaw served as corporate counsel to NYNEX since 1988. He has over 26 years of experience as a corporate lawyer, specializing in mergers and acquisitions, joint ventures, public offerings, financings, and federal securities and antitrust law. Mr. Shaw received a B.A. with honors from Trinity College and a J.D. from Columbia University School of Law. STEPHEN E. SILVA, Senior Vice President -- Corporate Development and Technology. From 1983 until joining Charter Investment, Inc. in 1995, Mr. Silva served in various management positions at U.S. Computer Services, Inc. He is a member of the board of directors of High Speed Access Corp. The employee directors of Charter Communications, Inc. do not receive any compensation for serving as a director, nor are they paid any fees for attendance at any meeting of the board of directors. Each non-employee director other than Mr. Allen has been issued 40,000 options in connection with joining or agreeing to join the board of directors and may receive additional compensation to be determined. Directors may also be reimbursed for the actual reasonable costs incurred in connection with attendance at board meetings. EMPLOYMENT AND CONSULTING AGREEMENTS Effective as of December 23, 1998, Jerald L. Kent entered into an employment agreement with Mr. Allen for a three-year term with automatic one-year renewals. The employment agreement was assigned by Mr. Allen to Charter Investment, Inc. as of December 23, 1998. Charter Investment, Inc. subsequently assigned Mr. Kent's employment agreement to Charter Communications, Inc. and Charter Communications, Inc. has assumed all rights and obligations of Charter Investment, Inc. 116 120 under the agreement, except with respect to the grant of options which have already been granted by Charter Communications Holding Company. Under this agreement, Mr. Kent has agreed to serve as President and Chief Executive Officer of Charter Communications, Inc., with responsibility for the nationwide general management, administration and operation of all present and future business of Charter Communications, Inc. and its subsidiaries. During the initial term of the agreement, Mr. Kent receives an annual base salary of $1,250,000, or such higher rate as may from time to time be determined by Charter Communications, Inc.'s board of directors in its discretion. In addition, Mr. Kent is eligible to receive an annual bonus in an aggregate amount not to exceed $625,000, to be determined by the board based on an assessment of the performance of Mr. Kent as well as the achievement of certain financial targets. Under the agreement, Mr. Kent is entitled to participate in any disability insurance, pension, or other benefit plan afforded to employees generally or executives of Charter Communications, Inc. Mr. Kent will be reimbursed by Charter Communications, Inc. for life insurance premiums up to $30,000 per year, and is granted personal use of the corporate airplane. Mr. Kent was also granted a car valued at up to $100,000 and the fees and dues for his membership in a country club of his choice. Also under this agreement and a related agreement with Charter Communications Holding Company, Mr. Kent received options to purchase 7,044,127 Charter Communications Holding Company membership units. The options have a term of ten years and vested 25% on December 23, 1998. The remaining 75% vest 1/36 on the first day of each of the 36 months commencing on the first day of the thirteenth month following December 23, 1998. The terms of these options provide that immediately following the issuance of Charter Communications Holding Company membership units received upon exercise of such options, these units will be automatically exchanged for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. Charter Communications, Inc. will indemnify and hold harmless Mr. Kent to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses in connection with or arising out of the performance by Mr. Kent of his duties. If the agreement expires because Charter Communications, Inc. gives Mr. Kent notice of its intention not to extend the initial term, or if the agreement is terminated by Mr. Kent for good reason or by Charter Communications, Inc. without cause: - Charter Communications, Inc. will pay to Mr. Kent an amount equal to the aggregate base salary due to Mr. Kent for the remaining term and the board of directors will consider additional amounts, if any, to be paid to Mr. Kent; and - any unvested options of Mr. Kent shall immediately vest. Effective as of November 12, 1999, Charter Communications, Inc. entered into a consulting agreement with Howard L. Wood. In connection with this agreement, Mr. Wood received options to purchase 40,000 membership units of Charter Communications Holding Company, which vested immediately. Upon exercise of such options, the membership units received are immediately exchanged for shares of Charter Communications, Inc. Class A common stock on one-for-one basis. The consulting agreement has a one-year term with automatic one-year renewals. Under this agreement, Mr. Wood provides consulting services to Charter Communications, Inc. and will also be responsible for such other duties as the Chief Executive Officer determines. During the term of this agreement, Mr. Wood will receive annual cash compensation initially at a rate of $60,000. In addition, Mr. Wood is entitled to receive health benefits as well as use of an office and a full-time secretary. Charter Communications, Inc. will indemnify and hold harmless Mr. Wood to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by him of his duties. 117 121 Effective as of May 25, 1999, Marc B. Nathanson entered into a letter agreement with Charter Communications, Inc. for a three-year term. Under this agreement, Mr. Nathanson agreed to serve as Vice-Chairman and as a director of Charter Communications, Inc. During the term of this agreement, Mr. Nathanson will receive a benefit equal to $193,197 per year, which amount is being paid by Charter Communications, Inc. to a company controlled by Mr. Nathanson. In addition, Mr. Nathanson is entitled to the rights and benefits provided to other directors of Charter Communications, Inc. Charter Communications, Inc. will indemnify and hold harmless Mr. Nathanson to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by Mr. Nathanson of his duties. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Most executive officer compensation determinations have been made based upon the recommendations of Mr. Kent. Prior to November 1999, these determinations were made by the board of directors of Charter Investment, with option grant determinations being made in conjunction with the board of directors of Charter Communications Holding Company. During this period, the board of Charter Investment included Messrs. Allen, Savoy and Kent, and the board of Charter Communications Holding Company included Messrs. Savoy and Kent. Commencing in November 1999, when Charter Communications, Inc. became the successor principal employer of the executive officers, the board of directors of Charter Communications, Inc. took over the role of the Charter Investment board in the decision-making process. In November 1999, the board of directors of Charter Communications, Inc. was comprised of Messrs. Allen, Savoy, Kent and Nelson, and Ms. Peretsman. Commencing in February 2000, when the Charter Communications, Inc. board of directors appointed a compensation committee comprised of Messrs. Allen, Savoy, Nathanson and Wood, executive officers compensation matters, including option grants, were delegated to the new committee. EXECUTIVE COMPENSATION None of the executive officers listed above has ever received any compensation from Charter Holdings or Charter Capital, nor do such individuals expect to receive compensation from Charter Holdings or Charter Capital at any time in the future. The following table sets forth information regarding the compensation paid to executive officers of Charter Communications, Inc., the manager of Charter Holdings and its subsidiaries, during the fiscal years ended December 31, 1999 and 1998, including the Chief Executive Officer, each of the other four most highly compensated executive officers as of December 31, 1999, and two other highly compensated executive officers who resigned during 1999. Through the beginning of November 1999, such executive officers had received their compensation from Charter Investment, Inc., the former manager of Charter Holdings and its subsidiaries. Effective in November 1999, such officers began receiving their compensation from Charter Communications, Inc. Pursuant to a mutual services agreement between Charter Communications, Inc. and Charter Investment, Inc., each of those entities provides services to each other, including the knowledge and expertise of their respective officers. See "Certain Relationships and Related Transactions." 118 122 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARD --------------------------------------- ------------ YEAR OTHER SECURITIES ENDED ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - - - --------------------------- ------- --------- -------- --------------- ------------ --------------- Jerald L. Kent.................... 1999 1,250,000 --(1) 80,799(2) -- -- President and Chief Executive 1998 790,481 641,353 -- 7,044,127 -- Officer Steven A. Schumm(3)............... 1999 400,000 60,000 -- 80,000 -- Executive Vice President 1998 -- 12,300 -- -- -- David G. Barford.................. 1999 235,000 80,000 -- 200,000 -- Senior Vice President of 1998 220,000 225,000(4) -- -- 8,390,888(5) Operations -- Western Division Curtis S. Shaw.................... 1999 200,000 80,000 -- 200,000 -- Senior Vice President, General 1998 190,000 80,000 -- -- 8,178,967(5) Counsel and Secretary John C. Pietri(6)................. 1999 200,000 70,000 -- 165,000 -- Senior Vice President -- 1998 -- -- -- -- -- Engineering Barry L. Babcock(7)............... 1999 623,000 -- -- 65,000 385,093(8) Former Vice Chairman 1998 575,000 925,000(9) -- -- -- Howard L. Wood(10)................ 1999 311,300 -- -- 145,000 -- Former Vice Chairman 1998 575,000(11) 675,000(12) -- -- --
- - - ------------------------- (1) Mr. Kent is entitled under his employment agreement to receive a bonus for 1999 in an amount up to $625,000. The amount of any 1999 bonus has not yet been determined. (2) Includes $55,719 paid for club membership and dues and $20,351 attributed to personal use of Charter Investment, Inc.'s airplane. (3) Mr. Schumm became affiliated with Charter Investment, Inc. on December 16, 1998. (4) Includes $150,000 received as a one-time bonus. (5) Received in March 1999, in connection with a one-time change of control payment under the terms of a previous equity appreciation rights plan. This payment was triggered by the acquisition of us by Mr. Allen on December 23, 1998, but was income for 1999. (6) Mr. Pietri became affiliated with Charter Investment, Inc. on January 1, 1999. (7) Mr. Babcock resigned as an executive officer, terminated his employment and became a consultant in October 1999. (8) Includes a bonus of $312,500 and accrued vacation of $48,077 paid in connection with termination of Mr. Babcock's employment agreement, plus $24,516 as consulting fees. (9) Includes $500,000 earned as a one-time bonus upon signing of an employment agreement. (10) Mr. Wood resigned as an executive officer, terminated his employment and became a consultant in November 1999. (11) Includes a bonus of $468,750 and accrued vacation of $24,038 paid in connection with termination of Mr. Wood's employment agreement, plus $8,166 in consulting fees. (12) Includes $250,000 earned as a one-time bonus upon signing of an employment agreement. 119 123 1999 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE The following table sets forth for certain executive officers information concerning options exercised during 1999, including the value realized upon exercise, and the number of securities for which options were held at December 31, 1999, including the value of unexercised "in-the-money" options (i.e., the positive spread between the exercise price of outstanding options and the market value of Charter Communications, Inc.'s Class A common stock on December 31, 1999), the options granted during the fiscal year ended December 31, 1999, and the value of unexercised options as of December 31, 1999.
NUMBER OF VALUE OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT SECURITIES AT DECEMBER 31, 1999 DECEMBER 31, 1999(1) ACQUIRED VALUE --------------------------- --------------------------- ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- -------- ----------- ------------- ----------- ------------- Jerald L. Kent.......... -- -- 1,761,031 5,283,096 -- -- David G. Barford........ -- -- -- 200,000 -- -- Curtis S. Shaw.......... -- -- -- 200,000 -- -- John C. Pietri.......... -- -- -- 165,000 -- -- Barry L. Babcock........ -- -- 65,000 -- -- -- Howard L. Wood.......... -- -- 145,000 -- -- --
- - - --------------- (1) No options were in-the-money as of December 31, 1999. 1999 OPTION GRANTS The following table shows individual grants of options made to certain named executive officers during 1999. All such grants were made under the option plan.
NUMBER OF POTENTIAL REALIZABLE VALUE AT MEMBERSHIP % OF TOTAL ASSUMED ANNUAL RATES OF UNITS OPTIONS MEMBERSHIP UNIT PRICE UNDERLYING GRANTED TO APPRECIATION FOR OPTION TERM(1) OPTIONS EMPLOYEES EXERCISE EXPIRATION -------------------------------- NAME GRANTED IN 1999 PRICE DATE 5% 10% - - - ---- ---------- ---------- -------- ---------- -------------- --------------- Jerald L. Kent..................... -- -- -- -- -- -- Steven A. Schumm................... 782,681 5.7% $20.00 2/8/09 $9,844,478 $24,947,839 David G. Barford................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970 Curtis S. Shaw..................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970 John C. Pietri..................... 165,000 1.2% 20.00 2/8/09 2,075,352 5,259,350 Barry L. Babcock................... 65,000 0.5% 20.00 2/8/09 817,563 2,071,865 Howard L. Wood..................... 65,000 1.1% 20.00 2/8/09 817,563 2,071,865 80,000 19.00 11/8/09 955,920 2,422,488
- - - --------------- (1) This column shows the hypothetical gains on the options granted based on assumed annual compound price appreciation of 5% and 10% over the full ten-year term of the options. The assumed rates of appreciation are mandated by the SEC and do not represent our estimate or projection of future prices. OPTION PLAN The Charter Communications Option Plan was adopted in February 1999. This plan provides for the grant of options to purchase up to 25,009,798 membership units in Charter Communications Holding Company. Under the terms of the plan, each membership unit acquired as a result of exercise of options will be exchanged automatically for shares of Class A common stock of Charter Communications, Inc. on a one-for-one basis. The plan provides for grants of options to current and 120 124 prospective to employees and consultants of Charter Communications Holding Company and its affiliates and current and prospective non-employee directors of Charter Communications, Inc. The plan is intended to promote the long-term financial interest of Charter Communications Holding Company and its affiliates by encouraging eligible individuals to acquire an ownership position in Charter Communications Holding Company and its affiliates and providing incentives for performance. The options expire after ten years from the date of grant. Under the plan, the plan administrator has the discretion to accelerate the vesting of any options. As of March 31, 2000, a total of 18,972,081 options are outstanding under the plan. Of the options granted on February 9, 1999, there remain outstanding 8,478,881 options with an exercise price of $20.00. Of the options granted on April 5, 1999, there remain outstanding 395,800 options with an exercise price of $20.73. Of the options granted on November 8, 1999, there remain outstanding 4,530,800 options with an exercise price of $19.00. Of the options granted on February 15, 2000, there remain outstanding 5,566,600 with an exercise price of $19.47. Of the options granted on February 9, 1999, 130,000 options have vested. Of the remaining 8,348,881 options granted on that date, one-fourth vest on April 3, 2000 and the remainder vest 1/45 on each monthly anniversary following April 3, 2000. One-fourth of the options granted on April 5, 1999 vest on the 15-month anniversary from April 5, 1999, with the remainder vesting 1/45 on each monthly anniversary for 45 months following the 15-month anniversary of the date of grant. Of the options granted on November 8, 1999, 240,000 options have vested. Of the remaining 4,290,800 options granted on that date, one-fourth vest on February 8, 2001, with the remainder vesting 1/45 on each monthly anniversary following the 15-month anniversary of the date of grant. Of the options granted on February 15, 2000, one-fourth vest on May 15, 2001 and the remaining vest 1/45 on each 15 month anniversary following February 15, 2000. The options expire after ten years from the date of grant. Any unvested options issued under the plan vest immediately upon a change of control of Charter Communications Holding Company. Options will not vest upon a change of control, however, to the extent that any such acceleration of vesting would result in the disallowance of specified tax deductions that would otherwise be available to Charter Communications Holding Company or any of its affiliates or to the extent that any optionee would be liable for any excise tax under a specified section of the tax code. In the plan, a change of control includes: (1) a sale of more than 49.9% of the outstanding membership units in Charter Communications Holding Company, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company; (2) a merger or consolidation of Charter Communications Holding Company with or into any other corporation or entity, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company; or (3) any other transaction or event, including a sale of the assets of Charter Communications Holding Company, that results in Mr. Allen holding less than 50.1% of the voting power of the surviving entity, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company. If an optionee's employment with or service to Charter Communications Holding Company or its affiliates is terminated other than for cause, the optionee has the right to exercise any vested options within sixty days of the termination of employment. After this sixty-day period, all vested and unvested options held by the optionee are automatically canceled. If an optionee's employment or service is terminated for cause, any unexercised options are automatically canceled. In this case, Mr. Allen, or, at his option, Charter Communications Holding Company will have the right for ninety days after termination to purchase all membership units held by the optionee for a purchase price equal to the exercise price at which the optionee acquired the membership units, or the optionee's purchase price for the membership units if they were not acquired on the exercise of an option. 121 125 In the event of an optionee's death or disability, all vested options may be exercised until the earlier of their expiration and one year after the date of the optionee's death or disability. Any options not so exercised will automatically be canceled. Upon termination for any other reason, all unvested options will immediately be canceled and the optionee will not be entitled to any payment. All vested options will be automatically canceled if not exercised within ninety days after termination. LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS. The limited liability company agreement of Charter Holdings and the certificate of incorporation of Charter Capital limit the liability of their respective directors to the maximum extent permitted by Delaware law. The Delaware General Corporation Law provides that a limited liability company and a corporation may eliminate or limit the personal liability of a director for monetary damages for breach of fiduciary duty as a director, except for liability for: (1) any breach of the director's duty of loyalty to the corporation and its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) unlawful payments of dividends or unlawful stock purchases or redemptions; or (4) any transaction from which the director derived an improper personal benefit. The limited liability company agreement of Charter Holdings and the by-laws of Charter Capital provide that directors and officers shall be indemnified for acts or omissions performed or omitted that are determined, in good faith, to be in our best interest. No such indemnification is available for actions constituting bad faith, willful misconduct or fraud. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Charter Holdings and Charter Capital pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 122 126 PRINCIPAL EQUITY HOLDERS Charter Holdings is a direct, wholly owned subsidiary of Charter Communications Holding Company. Charter Communications, Inc. holds an approximate 39.6% economic interest and 100% of the voting interest in Charter Communications Holding Company. Charter Investment, Inc. and Vulcan Cable III hold approximately a 38.8% and 19.0% economic interest, respectively, in Charter Communications Holding Company. The following table sets forth certain information regarding beneficial ownership of Charter Communications, Inc. common stock and Charter Communications Holding Company common membership units as of April 1, 2000 by: - each of our directors and the directors of Charter Communications, Inc.; - each of our named executive officers and the named executive officers of Charter Communications, Inc.; - all current directors and executive officers of Charter Holdings and Charter Communications, Inc. as a group; and - each person known by us to own beneficially 5% or more of the outstanding shares of Charter Communications, Inc. common stock and shares of common stock issuable upon exchange of Charter Communications Holding Company membership units that are issuable upon exercise of options that are vested or will vest within 60 days or upon exchange of membership units held in a subsidiary of Charter Holdings. With respect to the percentage of voting power of Charter Communications, Inc. set forth in the following table: - each holder of Class A common stock is entitled to one vote per share; and - each holder of Class B common stock is entitled to a number of votes based on the number of outstanding Class B common stock and outstanding membership units exchangeable for Class B common stock. For example, Mr. Allen is entitled to ten votes for each share of Class B common stock held by him or his affiliates and ten votes for each membership unit held by him or his affiliates.
NUMBER OF CLASS A PERCENTAGE OF NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF BENEFICIAL OWNER OWNED(1) OWNED(2) VOTING POWER(3) - - - ------------------- ------------------- ------------------- ------------------ Paul G. Allen(4)(5)(7)............................ 327,039,404 59.9% 93.7% Charter Investment, Inc.(6)....................... 217,585,246 49.5% * Vulcan Cable III Inc.(4)(7)....................... 106,715,234 32.5% * Jerald L. Kent(8)................................. 2,656,549 1.2% * Howard L. Wood(9)................................. 145,000 * * Marc B. Nathanson(10)............................. 9,829,806 4.4% * Ronald L. Nelson(11).............................. 40,000 * * Nancy B. Peretsman(11)............................ 50,000 * * William D. Savoy(12).............................. 515,669 * * Steven A. Schumm(13).............................. 212,415 * * David G. Barford(14).............................. 55,833 * * Curtis S. Shaw(14)................................ 58,333 * * John C. Pietri(15)................................ 49,000 * * Barry L. Babcock(16).............................. 65,000 * *
123 127
NUMBER OF CLASS A PERCENTAGE OF NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF BENEFICIAL OWNER OWNED(1) OWNED(2) VOTING POWER(3) - - - ------------------- ------------------- ------------------- ------------------ All current directors and executive officers as a group (19 persons)(17).......................... 340,631,014 61.9% 94.0% Janus Capital Corporation(18)..................... 15,958,030 7.2 * TCID of Michigan, Inc.(19)........................ 15,117,743 6.4% *
- - - --------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with Rule 13d-3. The named holders of Charter Communications, Inc. Class B common stock and of Charter Communications Holding Company membership units are deemed to be beneficial owners of an equal number of shares of Charter Communications, Inc. Class A common stock because such holdings are either convertible for (in the case of Class B shares) or exchangeable into (in the case of the membership units) shares of Class A common stock on a one-for-one basis. Unless otherwise noted, the named holders have sole investment and voting power with respect to the shares listed as beneficially owned. (2) The calculation of this percentage assumes for each person that: the 50,000 shares of Class B common stock held by Mr. Allen have been converted into shares of Class A common stock; all shares of Class A common stock that such person has the right to acquire upon exchange of Charter Communications Holding Company membership units upon exercise of options that have vested or will vest within 60 days have been acquired; and that none of the other listed persons or entities has received any shares of common stock that are issuable to him or her pursuant to the exercise of options or otherwise. (3) The calculation of this percentage assumes that Mr. Allen's equity interests are retained in the form that maximizes voting power (i.e., the 50,000 shares of Class B common stock held by Mr. Allen have not been converted into shares of Class A common stock; that the membership units of Charter Communications Holding Company owned by Vulcan Cable III have not been exchanged for shares of Class A common stock; and that the membership units of Charter Communications Holding Company owned by Charter Investment, Inc. have not been exchanged for shares of Class A common stock). (4) The address of these persons is 110 110th Street, NE, Suite 550, Bellevue, WA 98004. (5) Mr. Allen is the owner of 100% of the Class B common stock which is convertible into Class A common stock on a one-for-one basis; represents 217,585,246 membership units held by Charter Investment, Inc.; 106,715,233 membership units held by Vulcan Cable III; 2,688,925 shares of Class A common stock held directly by Mr. Allen; and 50,000 shares of Class B common stock held directly by Mr. Allen. (6) The address of this person is Charter Communications, Inc., 12444 Powerscourt Drive, Suite 100, St. Louis, MO 63131. (7) Of this amount, 475,669 shares of Class A common stock are issuable upon exchange for membership units in Charter Communications Holding Company held by Vulcan Cable III that are subject to options granted by Vulcan Cable III to Mr. Savoy that have vested or will vest within 60 days. (8) Represents 2,641,549 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon the exercise of options that have vested or will vest within 60 days, and 15,000 shares of Class A common stock held directly by Mr. Kent. (9) Represents 145,000 shares of Class A common stock issuable upon exchange of membership units that are issuable upon exercise of options that have vested. 124 128 (10) Includes 40,000 shares of Class A common stock issuable upon exchange of membership units that are issuable upon exercise of options that have vested. Also includes 9,789,806 shares of Class A common stock as follows: 3,951,636 shares for which Mr. Nathanson has sole investment and voting power, 5,444,861 shares for which he has shared voting and investment power; and 393,309 shares for which he has sole investment power and shared voting power. The address of this person is c/o Falcon Holding Group, Inc. and Affiliates, 10900 Wilshire Blvd., Los Angeles, CA 90024. (11) Includes 40,000 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon exercise of options that have vested. (12) Represents 40,000 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon exercise of options that have vested and 475,669 shares of Class A common stock that Mr. Savoy would receive upon exercise of options from Vulcan Cable III to purchase such shares that have vested or will vest within 60 days. (13) Includes 208,715 shares of Class A common stock issuable upon the exchange of membership units that would be issued upon exercise of options that have vested or will vest within 60 days and 2,200 shares for which Mr. Schumm has shared investment and voting power. (14) Includes 53,333 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon exercise of options that have vested or will vest within 60 days. (15) Includes 44,000 shares of Class A common stock issuable upon exchange of membership units that are issuable upon exercise of options that have vested or will vest within 60 days. (16) Represents 65,000 shares of Class A common stock issuable upon exchange of membership units that would be issued upon exercise of options that have vested. (17) Represents 50,000 shares of Class B common stock convertible into shares of Class A common stock on a one-for-one basis; 12,638,606 shares of Class A common stock; 324,300,479 shares of Class A common stock issuable upon the exchange of outstanding Charter Communications Holding Company membership units; and 3,641,929 shares of Class A common stock issuable upon exchange of membership units that are issuable upon exercise of options that have vested or will vest within 60 days. (18) As reported in Schedule 13G provided to Charter Communications, Inc. on February 16, 2000. Janus Capital Corporation is a registered investment advisor that provides investment advice to investment companies and other clients. As a result of being an investment advisor, Janus Capital may be deemed to beneficially own shares held by its clients. As indicated in the Schedule 13G, Mr. Thomas Bailey, President, Chairman of the Board and 12.2% shareholder of Janus Capital disclaims beneficial ownership with respect to such shares. The address of these persons is 100 Fillmore St., Denver, Colorado 80206-4923. (19) Represents shares of Class A common stock issuable upon exchange of preferred membership units held in an indirect subsidiary of Charter Holdings. 125 129 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following sets forth certain transactions in which we and our directors, executive officers and affiliates and the directors and executive officers of Charter Communications, Inc., Charter Communications Holding Company, Charter Capital and Charter Investment, Inc., are involved. We believe that each of the transactions described below was on terms no less favorable to us than could have been obtained from independent third parties. TRANSACTIONS WITH MANAGEMENT AND OTHERS MERGER WITH MARCUS On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable, and agreed to acquire the remaining interests in Marcus Cable. The aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion in liabilities assumed. On February 22, 1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests in Marcus Cable. On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of Charter Investment, Inc. for an aggregate purchase price of approximately $2.2 billion, excluding $2.0 billion in debt assumed. On February 9, 1999, Charter Holdings was formed as a wholly owned subsidiary of Charter Investment, Inc. On February 10, 1999, Charter Operating was formed as a wholly owned subsidiary of Charter Holdings. In April 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable systems they owned came under the ownership of Charter Holdings, and, in turn, Charter Operating. On May 25, 1999, Charter Communications Holding Company was formed as a wholly owned subsidiary of Charter Investment, Inc. All of Charter Investment, Inc.'s equity interests in Charter Holdings were transferred to Charter Communications Holding Company. In March 1999, we paid $20 million to Vulcan Northwest, an affiliate of Mr. Allen, for reimbursement of direct costs incurred in connection with Mr. Allen's acquisition of Marcus Cable. Such costs were principally comprised of financial, advisory, legal and accounting fees. On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings. Charter Holdings survived the merger, and the operating subsidiaries of Marcus Holdings became subsidiaries of Charter Holdings. At the time Charter Holdings issued $3.6 billion in principal amount of notes in March 1999, this merger had not yet occurred. Consequently, Marcus Holdings was a party to the indentures governing the March 1999 Charter Holdings notes as a guarantor of Charter Holdings' obligations. Charter Holdings loaned some of the proceeds from the sale of the March 1999 Charter Holdings notes to Marcus Holdings, which amounts were used to complete the cash tender offers for then-outstanding notes of subsidiaries of Marcus Holdings. Marcus Holdings issued a promissory note in favor of Charter Holdings. The promissory note was in the amount of $1.7 billion, with an interest rate of 9.92% and a maturity date of April 1, 2007. Marcus Holdings guaranteed its obligations under the promissory note by entering into a pledge agreement in favor of Charter Holdings pursuant to which Marcus Holdings pledged all of its equity interests in Marcus Cable as collateral for the payment and performance of the promissory note. Charter Holdings pledged this promissory note to the trustee under the indentures for the March 1999 Charter Holdings notes as collateral for the equal and ratable benefit of the holders of the March 1999 Charter Holdings notes. Upon the closing 126 130 of the merger, and in accordance with the terms of the March 1999 Charter Holdings notes and the indentures for the March 1999 Charter Holdings notes: - the guarantee issued by Marcus Holdings was automatically terminated; - the promissory note issued by Marcus Holdings was automatically extinguished, with no interest having accrued or being paid; and - the pledge in favor of Charter Holdings of the equity interests in Marcus Cable as collateral under the promissory note and the pledge in favor of the trustee of the promissory note as collateral for the March 1999 Charter Holdings notes were automatically released. MANAGEMENT AGREEMENTS WITH CHARTER COMMUNICATIONS, INC. PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a series of management agreements with certain of our subsidiaries, Charter Investment, Inc. provided management and consulting services to those subsidiaries. In exchange for these services, Charter Investment, Inc. was entitled to receive management fees of 3% to 5% of the gross revenues of all of our systems plus reimbursement of expenses. However, our previous credit facilities limited such management fees to 3% of gross revenues. The balance of management fees payable under the previous management agreements was accrued. Payment is at the discretion of Charter Investment, Inc. Certain deferred portions of management fees bore interest at the rate of 8% per annum. Following the closing of Charter Operating's current credit facilities, the previous management agreements were replaced by a revised management agreement. The material terms of our previous management agreements are substantially similar to the material terms of the revised management agreement. PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus Cable entered into a management consulting agreement with Charter Investment, Inc. pursuant to which Charter Investment, Inc. agreed to provide certain management and consulting services to Marcus Cable and its subsidiaries, in exchange for a fee equal to 3% of the gross revenues of Marcus Cable's systems plus reimbursement of expenses. Management fees expensed by Marcus Cable during the period from October 1998 to December 31, 1998 were approximately $3.3 million. Upon Charter Holdings' merger with Marcus Holdings and the closing of Charter Operating's current credit facilities, this agreement was terminated and the subsidiaries of Marcus Cable began to receive management and consulting services from Charter Investment, Inc. under the revised management agreement described below. THE REVISED MANAGEMENT AGREEMENT. On February 23, 1999, Charter Investment, Inc. entered into a revised management agreement with Charter Operating, which was amended and restated as of March 17, 1999. Upon the closing of Charter Operating's credit facilities on March 18, 1999, our previous management agreements and the management consulting agreement with Marcus Cable terminated and the revised management agreement became operative. Under the revised management agreement, Charter Investment, Inc. agreed to manage the operations of the cable television systems owned by Charter Operating's subsidiaries, as well as any cable television systems Charter Operating subsequently acquires. The term of the revised management agreement is ten years. The revised management agreement provided that Charter Operating would pay Charter Investment, Inc. a management fee equal to its actual costs to provide these services and a management fee of 3.5% of gross revenues. Gross revenues include all revenues from the operation of Charter Operating's cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Charter Operating's cable systems. Gross revenues do not include interest income or income from investments unrelated to our cable systems. 127 131 Payment of the management fee to Charter Investment, Inc. is permitted under Charter Operating's current credit facilities, but ranks below Charter Operating's payment obligations under its credit facilities. In the event any portion of the management fee due and payable is not paid by Charter Operating, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. As of December 31, 1999, no interest had accrued. Pursuant to the terms of the revised management agreement, Charter Operating agreed to indemnify and hold harmless Charter Investment, Inc. and its shareholders, directors, officers and employees. This indemnity extends to any and all claims or expenses, including reasonable attorneys' fees, incurred by them in connection with any action not constituting gross negligence or willful misconduct taken by them in good faith in the discharge of their duties to Charter Operating. The total management fees, including expenses, earned by Charter Investment, Inc. under all management agreements were as follows:
TOTAL FEES YEAR FEES PAID EARNED - - - ---- --------- ---------- (IN THOUSANDS) Year Ended December 31, 1999................................ $ 48,528 $ 54,330 Year Ended December 31, 1998................................ 17,073 27,500 Year Ended December 31, 1997................................ 14,772 20,290 Year Ended December 31, 1996................................ 11,792 15,443
As of December 31, 1999, approximately $25.4 million remains unpaid under all management agreements. ASSIGNMENT AND AMENDMENT OF REVISED CHARTER OPERATING MANAGEMENT AGREEMENT. On November 12, 1999, Charter Investment, Inc. assigned to Charter Communications, Inc. all of its rights and obligations under the revised Charter Operating management agreement. In connection with the assignment, the revised Charter Operating management agreement was amended to eliminate the 3.5% management fee. Under the amended agreement, Charter Communications, Inc. is entitled to reimbursement from Charter Operating for all of its expenses, costs, losses, liabilities and damages paid or incurred by it in connection with the performance of its services under the amended agreement, with no cap on the amount of reimbursement. MANAGEMENT AGREEMENT WITH CHARTER COMMUNICATIONS, INC. On November 12, 1999, Charter Communications, Inc. entered into a management agreement with Charter Communications Holding Company. Under this agreement, Charter Communications, Inc. manages and operates the cable television systems owned or to be acquired by Charter Communications Holding Company and its subsidiaries, to the extent such cable systems are not subject to management agreements between Charter Communications, Inc. and specific subsidiaries of Charter Communications Holding Company. The terms of this management agreement are substantially similar to the terms of the Charter Operating management agreement. Charter Communications, Inc. is entitled to reimbursement from Charter Communications Holding Company for all expenses, costs, losses, liabilities and damages paid or incurred by Charter Communications, Inc. in connection with the performance of its services, which expenses will include any fees Charter Communications, Inc. is obligated to pay under the mutual services agreement described below. There is no cap on the amount of reimbursement to which Charter Communications, Inc. is entitled. MUTUAL SERVICES AGREEMENT WITH CHARTER INVESTMENT, INC. Charter Communications, Inc. has only thirteen employees, all of whom are also executive officers of Charter Investment, Inc. Effective 128 132 November 12, 1999, Charter Communications, Inc. and Charter Investment, Inc. entered into a mutual services agreement pursuant to which each entity provides services to the other as may be reasonably requested in order to manage Charter Communications Holding Company and to manage and operate the cable systems owned by its subsidiaries, including Charter Holdings. In addition, officers of Charter Investment, Inc. also serve as officers of Charter Communications, Inc. The officers and employees of each entity are available to the other to provide the services described above. All expenses and costs incurred with respect to the services provided are paid by Charter Communications, Inc. Charter Communications, Inc. will indemnify and hold harmless Charter Investment, Inc. and its directors, officers and employees from and against any and all claims that may be made against any of them in connection with the mutual services agreement except due to its or their gross negligence or willful misconduct. The term of the mutual services agreement is ten years, commencing on November 12, 1999, and the agreement may be terminated at any time by either party upon thirty days' written notice to the other. FALCON MANAGEMENT AGREEMENT. On November 12, 1999, Falcon Cable Communications, a parent company of the Falcon operating companies, entered into a management consulting agreement with Charter Communications, Inc. pursuant to which Charter Communications, Inc. agreed to provide certain management and consulting services to Falcon and its subsidiaries. The term of the management agreement is ten years. The management agreement provides that Falcon will pay Charter Communications, Inc. a management fee equal to its actual costs to provide these services but limited to 5% of gross revenues. Gross revenues include all revenues from the operation of Falcon's cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Falcon's cable systems. Gross revenues do not include interest income or income from investments unrelated to cable systems. Payment of the management fee is subject to certain restrictions under the Falcon credit facilities. In the event any portion of the management fee due and payable is not paid by Falcon, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. FANCH MANAGEMENT AGREEMENT. On November 12, 1999, CC VI Operating Company, LLC, the parent company of the Fanch operating companies, entered into a management consulting agreement with Charter Communications, Inc. pursuant to which Charter Communications, Inc. agreed to provide certain management and consulting services to Fanch and its subsidiaries. The term of the management agreement is ten years. The management agreement provides that Fanch will pay Charter Communications, Inc. a management fee equal to its actual costs to provide these services but limited to 5% of gross revenues. Gross revenues include all revenues from the operation of Fanch's cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Fanch's cable systems. Gross revenues do not include interest income or income from investments unrelated to cable systems. Payment of the management fee is subject to certain restrictions under the Fanch credit facilities. In the event any portion of the management fee due and payable is not paid by Fanch, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. AVALON MANAGEMENT ARRANGEMENT. Under the Avalon limited liability company agreements, Charter Communications, Inc. agreed to provide certain management and consulting services to 129 133 CC Michigan, CC New England and their subsidiaries. Under these arrangements, CC Michigan and CC New England will pay Charter Communications, Inc. a management fee equal to their actual costs to provide these services but limited to 2% of gross revenues. Gross revenues include all revenues from the operation of the Avalon cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Avalon's cable systems. Gross revenues do not include interest income or income from investments unrelated to cable systems. Payment of the management fee is permitted under the current credit facilities of CC Michigan and CC New England, but ranks below the senior debt of such companies and shall not be paid except to the extent allowed under such credit facilities. In the event any portion of the management fee due and payable is not paid by CC Michigan or CC New England, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. BRESNAN MANAGEMENT AGREEMENT. On February 14, 2000, CC VIII Operating LLC, parent of the Bresnan cable systems, and several wholly owned subsidiaries, entered into a management consulting agreement with Charter Communications, Inc. pursuant to which Charter Communications, Inc. agreed to provide certain management and consulting services to the Bresnan cable systems. The management agreement provides that Bresnan will pay Charter Communications, Inc. a management fee equal to its actual cost to provide these services without limitation as to the amount. The term of the management agreement is ten years. Payment of the management fee is subject to certain restrictions under the Bresnan credit facilities. In the event that any portion of the management fee due and payable is not paid by Bresnan, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. CONSULTING AGREEMENT On March 10, 1999, Charter Holdings entered into a consulting agreement with Vulcan Northwest and Charter Investment, Inc. Pursuant to the terms of the consulting agreement, Charter Holdings retained Vulcan Northwest and Charter Investment, Inc. to provide advisory, financial and other consulting services with respect to acquisitions of the business, assets or stock of other companies by Charter Holdings or by any of its affiliates. Such services include participation in the evaluation, negotiation and implementation of these acquisitions. The agreement expires on December 31, 2000, and automatically renews for successive one-year terms unless otherwise terminated. All reasonable out-of-pocket expenses incurred by Vulcan Northwest and Charter Investment, Inc. are Charter Holdings' responsibility and must be reimbursed. Charter Holdings must also pay Vulcan Northwest and Charter Investment, Inc. a fee for their services rendered for each acquisition made by Charter Holdings or any of its affiliates. This fee equals 1% of the aggregate value of such acquisition. Neither Vulcan Northwest nor Charter Investment, Inc. received or will receive a fee in connection with the American Cable, Renaissance, Greater Media, Helicon, Vista, Cable Satellite, InterMedia, Rifkin, Avalon, Falcon, Fanch and Bresnan acquisitions. No such fee is or would be payable to either Vulcan Northwest or Charter Investment, Inc. in connection with the Swap Transaction if that transaction is completed. Charter Holdings has also agreed to indemnify and hold harmless Vulcan Northwest and Charter Investment, Inc., and their respective officers, directors, stockholders, agents, employees and affiliates, for all claims, actions, demands and expenses that arise out of this consulting agreement and the services they provide to Charter Holdings. 130 134 Mr. Allen owns 100% of Vulcan Northwest and is the Chairman of the board. William D. Savoy, another of Charter Communications, Inc.'s directors, is the President and a director of Vulcan Northwest. TRANSACTIONS WITH MR. ALLEN On December 21, 1998, Mr. Allen contributed approximately $431 million to Charter Investment, Inc. and received non-voting common stock of Charter Investment, Inc. Such non-voting common stock was converted to voting common stock on December 23, 1998. The $431 million contribution was used to redeem stock of certain shareholders in Charter Investment, Inc. On December 23, 1998, Mr. Allen contributed approximately $1.3 billion to Charter Investment, Inc. and received voting common stock of Charter Investment, Inc. Additionally, Charter Investment, Inc. borrowed approximately $6.2 million in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan was accrued or paid by Charter Investment, Inc. On the same date, Mr. Allen also contributed approximately $223.5 million to Vulcan Cable II, Inc., a company owned by Mr. Allen. Vulcan II was merged with and into Charter Investment, Inc. The $1.3 billion and $223.5 million contributions by Mr. Allen were used by Charter Investment, Inc. to purchase the remaining interest in CCA Group and CharterComm Holdings. On January 5, 1999, Charter Investment, Inc. borrowed approximately $132.2 million in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan was accrued or paid by Charter Investment, Inc. On the same date, Mr. Allen also acquired additional voting common stock of Charter Investment, Inc. from Jerald L. Kent, Howard L. Wood and Barry L. Babcock for an aggregate purchase price of approximately $176.7 million. On January 11, 1999, Charter Investment, Inc. borrowed $25 million in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan was accrued or paid by Charter Investment, Inc. On March 16, 1999, Mr. Allen contributed approximately $124.8 million in cash to Charter Investment, Inc. In connection with this contribution and the contribution of the three bridge loans described above, Mr. Allen received 11,316 shares of common stock of Charter Investment, Inc. All other contributions to Charter Investment, Inc. by Mr. Allen were used in operations of Charter Investment, Inc. and were not contributed to Charter Holdings. On August 10, 1999, Vulcan Cable III Inc. purchased 24.1 million Charter Communications Holding Company membership units for $500 million. On September 22, 1999, Mr. Allen, through Vulcan Cable III Inc., contributed an additional $825 million, consisting of approximately $644.3 million in cash and approximately $180.7 million in equity interests in Rifkin that Vulcan Cable III Inc. had acquired in the Rifkin acquisition in exchange for 39.8 million Charter Communications Holding Company membership units. Charter Communications Holding Company in turn contributed the cash and equity interests to Charter Holdings. As part of the membership interests purchase agreement, Vulcan Ventures Incorporated, Charter Communications, Inc., Charter Investment, Inc. and Charter Communications Holding Company entered into an agreement on September 21, 1999 regarding the right of Vulcan Ventures to use up to eight of our digital cable channels. Specifically, we will provide Vulcan Ventures with exclusive rights for carriage of up to eight digital cable television programming services or channels on each of the digital cable television systems with local control of the digital product now or hereafter owned, operated, controlled or managed by us of 550 megahertz or more. If the system offers digital services but has less than 550 megahertz of capacity, then the programming services will be equitably 131 135 reduced. Upon request of Vulcan Ventures, we will attempt to reach a comprehensive programming agreement pursuant to which we will pay the programmer, if possible, a fee per digital subscriber. If such fee arrangement is not achieved, then we and the programmer shall enter into a standard programming agreement. We believe that this transaction is on terms at least as favorable to us as Mr. Allen would negotiate with other cable operators. In November 1999, in connection with Charter Communications, Inc.'s initial public offering, Mr. Allen, through Vulcan Cable III Inc., purchased $750 million of membership units of Charter Communications Holding Company at a per membership unit price equal to the net initial public offering price. During the second and third quarters of 1999, one of our subsidiaries sold interests in several airplanes to Mr. Allen for approximately $8 million. We believe that the purchase price paid by Mr. Allen for these interests was the fair market price. ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN As described under "-- Business Relationships," Mr. Allen and a number of his affiliates have interests in various entities that provide services or programming to a number of our subsidiaries. Given the diverse nature of Mr. Allen's investment activities and interests, and to avoid the possibility of future disputes as to potential business, Charter Communications Holding Company and Charter Communications, Inc., under the terms of their respective organizational documents, may not, and may not allow their subsidiaries to, engage in any business transaction outside the cable transmission business except for the joint venture with Broadband Partners and incidental businesses engaged in as of the closing of the initial public offering of Charter Communications, Inc. This restriction will remain in effect until all of the shares of Charter Communications, Inc.'s high-vote Class B common stock have been converted into shares of Class A common stock due to Mr. Allen's equity ownership falling below specified threshholds. Should Charter Communications, Inc. or Charter Communications Holding Company wish to pursue, or allow their subsidiaries to pursue, a business transaction outside of this scope, it must first offer Mr. Allen the opportunity to pursue the particular business transaction. If he decides not to do so and consents to Charter Communications, Inc., Charter Communications Holding Company or any of their subsidiaries engaging in the business transaction, it will be able to do so. In any such case, the restated certificate of incorporation and the limited liability company agreement of Charter Communications, Inc. and Charter Communications Holding Company would be amended accordingly to appropriately modify the current restrictions on their ability to engage in any business other than the cable transmission business. The cable transmission business means the business of transmitting video, audio, including telephony, and data over cable television systems owned, operated or managed by Charter Communications, Inc., Charter Communications Holding Company or any of their subsidiaries from time to time. The businesses of RCN Corporation, a company in which Mr. Allen has made a significant investment, are not considered cable transmission businesses under these provisions. See "-- Business Relationships -- RCN Corporation." Under Delaware corporate law, each director of Charter Communications, Inc., including Mr. Allen, is generally required to present to Charter Communications, Inc. any opportunity he or she may have to acquire any cable transmission business or any company whose principal business is the ownership, operation or management of cable transmission businesses so that we may determine whether we wish to pursue such opportunities. However, Mr. Allen and the other directors generally will not have an obligation to present to Charter Communications, Inc. other business opportunities and they may exploit such opportunities for their own account. 132 136 ASSIGNMENTS OF ACQUISITIONS On January 1, 1999, Charter Investment, Inc. entered into a membership purchase agreement with ACEC Holding Company, LLC for the acquisition of American Cable. On February 23, 1999, Charter Investment, Inc. assigned its rights and obligations under this agreement to one of our subsidiaries, Charter Communications Entertainment II, LLC, effective as of March 8, 1999, or such earlier date as mutually agreed to by the parties. The acquisition of American Cable was completed in May 1999. On February 17, 1999, Charter Investment, Inc. entered into an asset purchase agreement with Greater Media, Inc. and Greater Media Cablevision, Inc. for the acquisition of the Greater Media systems. On February 23, 1999, Charter Investment, Inc. assigned its rights and obligations under this agreement to one of our subsidiaries, Charter Communications Entertainment I, LLC. The acquisition of the Greater Media systems was completed in June 1999. On April 26, 1999, Charter Investment, Inc. entered into a purchase and sale agreement with InterLink Communications Partners, LLLP and the other sellers listed on the signature pages of the agreement. On June 30, 1999, Charter Investment, Inc. assigned its rights and obligations under this agreement to Charter Operating. The acquisition contemplated by these agreements was completed in September 1999. On April 26, 1999, Charter Investment, Inc. entered into a purchase and sale agreement with Rifkin Acquisition Partners L.L.L.P and the other sellers listed on the signature pages of the agreement. On June 30, 1999, Charter Investment, Inc. assigned its rights and obligations under this agreement to Charter Operating. The acquisition contemplated by these agreements was completed in September 1999. On April 26, 1999, Charter Investment, Inc. entered into the RAP indemnity agreement with InterLink Communications Partners, LLLP and the other sellers and InterLink partners listed on the signature pages of the agreement. On June 30, 1999, Charter Investment, Inc. assigned its rights and obligations under this agreement to Charter Operating. In May 1999, Charter Investment, Inc. entered into the Falcon purchase agreement. As of June 22, 1999, pursuant to the first amendment to the Falcon purchase agreement, Charter Investment, Inc. assigned its rights under the Falcon purchase agreement to Charter LLC, a subsidiary of Charter Communications Holding Company. In May 1999, Charter Investment, Inc. entered into the Fanch purchase agreement. On September 21, 1999, Charter Investment, Inc. assigned its rights and obligations to purchase stock interests under this agreement to Charter Communications Holding Company and its rights and obligations to purchase partnership interests and assets under this agreement to Charter Communications VI, LLC, an indirect wholly owned subsidiary of Charter Communications Holding Company. In December 1999, Charter Communications Holding Company entered into contribution and sale agreements with three of its indirect subsidiaries. Effective January 1, 2000 Charter Communications Holding Company transferred to us the equity interests it held in the entities that owned the Fanch, Falcon and Avalon cable systems. In June 1999, Charter Communications Holding Company entered into the Bresnan purchase agreement. In February 2000, Charter Communications Holding Company assigned its rights under the Bresnan purchase agreement to purchase certain assets to us and we accepted such assignment and assumed all obligations of Charter Communications Holding Company under the Bresnan purchase agreement. 133 137 INTERCOMPANY LOANS In November 1999, Charter Communications Holding Company loaned $856 million to Charter Operating, maturing March 18, 2009. As of December 31, 1999, the loan bore interest at a rate of 7.82% per year. In January 2000, Charter Communications Holding Company loaned an additional $66 million to Charter Operating, maturing March 18, 2009 with an interest rate of 7.79%. In February 2000, Charter Operating repaid $540 million. Accordingly, $382 million remained outstanding as of February 29, 2000. In November 1999, Charter Communications Holding Company loaned $21 million to CC VI Operating Company, LLC, maturing November 30, 2009. The funds were used by CC VI Operating Company to pay down a portion of amounts outstanding under the Fanch credit facilities. Effective December 31, 1999, Charter Communications Holding Company forgave the amounts outstanding, including accrued and unpaid interest of approximately $314,000, and contributed such amounts to CC VI Holdings, LLC, the parent company of the Fanch companies. In November 1999, Charter Communications Holding Company loaned $173.0 million to Falcon Cable Communications, LLC, maturing December 31, 2008. As of December 31, 1999, the loan bore interest at a rate of 7.57% per year. In January 2000, Charter Communications Holding Company loaned an additional $373 million to Falcon Cable Communications with an interest rate of 7.54%. In February 2000, Falcon Cable Communications repaid all outstanding balances. In November and December 1999, Charter Communications, Inc. loaned $50 million to Charter Operating. As of December 31, 1999, these loans bore interest at rates ranging from 7.865% to 7.9125% and mature March 18, 2009. OTHER AGREEMENTS Mr. Kent has entered into an employment agreement with Charter Communications, Inc. We have summarized this agreement in "Directors and Executive Officers -- Employment and Consulting Agreements." Effective as of December 23, 1998, Howard L. Wood entered into an employment agreement with Charter Investment, Inc. for a one-year term with automatic one-year renewals. Under this agreement, Mr. Wood agreed to serve as an officer of Charter Investment, Inc. During the initial term of the agreement, Mr. Wood was entitled to receive a base salary for the remaining month of the term of $312,500, or such higher rate as determined by the Chief Executive Officer in his discretion. In addition, Mr. Wood was eligible to receive an annual bonus to be determined by the board of directors in its discretion. Mr. Wood received a one-time payment as part of his employment agreement of $250,000. Under the agreement, Mr. Wood was entitled to participate in any disability insurance, pension or other benefit plan afforded to employees generally or executives of Charter Investment, Inc. Charter Investment, Inc. agreed to indemnify and hold harmless Mr. Wood to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by Mr. Wood of his duties. Effective on November 12, 1999, this employment agreement ceased to be effective. Mr. Wood received an amount equal to his base salary for the remaining month of the term plus a bonus of $312,500. In addition, the options then held by Mr. Wood vested in full. Mr. Wood has entered into a consulting agreement with Charter Communications, Inc. We have summarized this agreement in "Directors and Executive Officers -- Employment and Consulting Agreements." A company controlled by Mr. Wood occasionally leases to Charter Communications, Inc. and its subsidiaries and affiliates an airplane for business travel. Charter Communications, Inc. or its subsidiaries or affiliates, as applicable, in turn, pays to such company market rates for such use. 134 138 Mr. Wood reimburses Charter Communications, Inc. for the full annual cost of two individuals qualified to operate the plane and who are otherwise available to Charter in connection with its own flight operations. In addition, Mr. Wood's daughter, a Vice President of Charter Investment, Inc., received a bonus in the form of a three-year promissory note bearing interest at 7% per year. One-third of the original outstanding principal amount of the note is forgiven as long as she remains employed by Charter Investment, Inc. at the end of each of the first three anniversaries of the issue date in February 1999. The outstanding balance on the note as of February 29, 2000 was $150,000. Mr. Nathanson has entered into a letter agreement with Charter Communications, Inc. We have summarized this agreement in "Directors and Officers -- Employment and Consulting Agreements." Effective as of December 23, 1998, Barry L. Babcock entered into an employment agreement with Charter Investment, Inc. for a one-year term with automatic one-year renewals. Under this agreement, Mr. Babcock agreed to serve as Vice Chairman of Charter Investment, Inc. with responsibilities including the government and public relations of Charter Investment, Inc. During the initial term of the agreement, Mr. Babcock was entitled to receive a base salary of $625,000, or such higher rate as may have been determined by the Chief Executive Officer in his discretion. This employment agreement was terminated in October 1999. Pursuant to the termination agreement, Mr. Babcock received an amount equal to his base salary for the remaining month of the term plus a $312,500 bonus. In addition, the options held by Mr. Babcock vested in full. Effective as of November 12, 1999, Charter Communications, Inc. entered into a consulting agreement with Mr. Babcock which expired in March 2000. During the term of this agreement, Mr. Babcock received monthly cash compensation at a rate of $10,000 per month, disability and health benefits and the use of an office and secretarial services, upon request. Charter Communications, Inc. agreed to indemnify and hold harmless Mr. Babcock to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by Mr. Babcock of his duties. INSURANCE Insurance covering our operations and workers' compensation is negotiated by our manager, which was Charter Investment, Inc. prior to November 8, 1999 and thereafter, Charter Communications, Inc. Charter Holdings expensed approximately $13,797,000 for the year ended December 31, 1999, approximately $603,000 for the year ended December 31, 1998, approximately $172,100 for the year ended December 31, 1997, and approximately $108,000 for the year ended December 31, 1996, relating to insurance allocations. OTHER RELATIONSHIPS David L. McCall, Senior Vice President of Operations -- Eastern Division of Charter Communications, Inc., is a partner in a partnership that leases office space to us. The partnership has received approximately $177,500 pursuant to such lease and related agreements for the year ended December 31, 1999. In addition, approximately $646,000 was paid in 1999 to a construction company controlled by Mr. McCall's brother, Marvin A. McCall for construction services. In January 1999, Charter Investment, Inc. issued bonuses to executive officers in the form of three-year promissory notes. One-third of the original outstanding principal amount of each of these notes is forgiven, as long as the employee is still employed by Charter Investment, Inc. or any of its 135 139 affiliates, at the end of each of the first three anniversaries of the issue date. The promissory notes bear interest at 7% per year. Outstanding balances as of February 29, 2000 are as follows:
INDIVIDUAL AMOUNT ---------- -------- David G. Barford.................................. $300,000 Mary Pat Blake.................................... $300,000 Eric A. Freesmeier................................ $300,000 Thomas R. Jokerst................................. $300,000 Kent D. Kalkwarf.................................. $300,000 Ralph G. Kelly.................................... $300,000 David L. McCall................................... $300,000 John C. Pietri.................................... $150,000 Steven A. Schumm.................................. $600,000 Curtis S. Shaw.................................... $300,000 Stephen E. Silva.................................. $200,000
Marc B. Nathanson was the Chairman of the board of directors of Falcon Holding Group, Inc., which was the general partner of Falcon Holding Group, L.P. from whom the Falcon cable systems were acquired. BUSINESS RELATIONSHIPS Mr. Allen or certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interests in various entities which provide a number of our affiliates with services or programming. Among these entities are High Speed Access Corp., WorldGate Communications, Inc., Wink Communications, Inc., ZDTV, L.L.C., USA Networks, Oxygen Media, Inc., Broadband Partners, Inc., Go2Net, Inc. and RCN Corporation. These affiliates include Charter Investment, Inc. and Vulcan Ventures, Inc. Mr. Allen owns 100% of the equity of Vulcan Ventures, and is its Chief Executive Officer. Mr. Savoy is also a Vice President and a director of Vulcan Ventures. The various cable, Internet and telephony companies that Mr. Allen has invested in may mutually benefit one another. The Broadband Partners Internet portal joint venture announced in the fourth quarter of 1999 is an example of a cooperative business relationship among his affiliated companies. We can give no assurance, nor should you expect, that this joint venture will be successful, that we will realize any benefits from this or other relationships with Mr. Allen's affiliated companies or that we will enter into any joint ventures or business relationships in the future with Mr. Allen's affiliated companies. Mr. Allen and his affiliates have made, and in the future likely will make, numerous investments outside of us and our business. We cannot assure you that, in the event that we or any of our subsidiaries enter into transactions in the future with any affiliate of Mr. Allen, such transactions will be on terms as favorable to us as terms we might have obtained from an unrelated third party. Also, conflicts could arise with respect to the allocation of corporate opportunities between us and Mr. Allen and his affiliates. We have not instituted any formal plan or arrangement to address potential conflicts of interest. HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet access over cable modems. In November 1998, Charter Investment, Inc. entered into a systems access and investment agreement with Vulcan Ventures and High Speed Access and a related network services agreement with High Speed Access. Additionally, Vulcan Ventures and High Speed Access entered into a programming content agreement. Charter Investment Inc.'s rights and obligations under these agreements were assigned by Charter Investment, Inc. to Charter Communications Holding Company 136 140 upon closing of Charter Communications, Inc's initial public offering. Under these agreements, High Speed Access will have exclusive access to at least 750,000 of our homes with an installed cable drop from our cable system or which is eligible for a cable drop by virtue of our cable system passing the home. The term of the systems access and investment agreement continues until the earlier of termination of the network services agreement or midnight of the day High Speed Access ceases to provide High Speed Access services to cable subscribers in a geographic area or region. The term of the network services agreement is, as to a particular cable system, five years from the date revenue billing commences for that cable system. Following the five-year initial term, the network services agreement automatically renews on a year-to-year basis unless Charter provides notice of termination prior to the end of the five-term in accordance with the terms of the agreement. Additionally, Charter Communications Holding Company can terminate High Speed Access' exclusivity rights, on a system-by-system basis, if High Speed Access fails to meet performance benchmarks or otherwise breaches the agreements including their commitment to provide content designated by Vulcan Ventures. The programming content agreement is effective until terminated for any breach and will automatically terminate upon the expiration of the systems access and investment agreement. All of Charter Communications Holding Company's operations take place at the subsidiary level and it is as subsidiaries of Charter Communications Holding Company that we derive our rights and obligations with respect to High Speed Access. Under the terms of the network services agreement, we split revenue with High Speed Access based on set percentages of gross revenues in each category of service. The programming content agreement provides each of Vulcan Ventures and High Speed Access with a license to use certain content and materials of the other on a non-exclusive, royalty-free basis. Operations began in the first quarter of 1999. Net receipts from High Speed Access for the year ended December 31, 1999 were approximately $461,000. Concurrently with entering into these agreements, High Speed Access issued 8 million shares of series B convertible preferred stock to Vulcan Ventures at a purchase price of $2.50 per share. Vulcan Ventures also subscribed to purchase 2.5 million shares of series C convertible preferred stock, at a purchase price of $5.00 per share on or before November 25, 2000, and received an option to purchase an additional 2.5 million shares of series C convertible preferred stock at a purchase price of $5.00 per share. In April 1999, Vulcan Ventures purchased the entire 5 million shares of series C convertible preferred stock for $25 million in cash. The shares of series B and series C convertible preferred stock issued to Vulcan Ventures automatically converted at a price of $3.23 per share into 22,224,688 million shares of common stock upon completion of High Speed Access' initial public offering in June 1999. Additionally, High Speed Access granted Vulcan Ventures warrants to purchase up to 5,006,500 shares of common stock at a purchase price of $5.00 per share. These warrants were converted to warrants to purchase up to 7,750,000 shares of common stock at a purchase price of $3.23 per share upon completion of High Speed Access' initial public offering. The warrants were subsequently assigned to Charter Communications Holding Company. The warrants are exercisable at the rate of 1.55 shares of common stock for each home passed in excess of 750,000. On or before July 31, 2001 3.875 million warrants may be earned. These warrants must be exercised on or before July 31, 2002. In addition, 3.875 million warrants may be earned on or before July 31, 2003 and must be exercised on or before July 31, 2004. The warrants may be forfeited in certain circumstances, generally if the number of homes passed in a committed system is reduced. As of December 31, 1999, Charter Communications Holding Company has earned 77,738 warrants under the agreements described above. On April 13, 2000, Charter Communications, Inc. entered into a binding letter of intent with High Speed Access. Charter Communications, Inc., on behalf of itself and its subsidiaries, agreed to commit homes passed by our cable television systems to High Speed Access for which High Speed 137 141 Access will provide residential Tier 2 and above technical support and network operations center support. Such systems will be in locations where we have formally launched or intend to launch cable modem-based Internet access to residential customers. Tier 2 support is support beyond the initial screening of a problem. We have agreed to commit an aggregate of 5,000,000 homes passed, including all homes passed in systems previously committed by us to High Speed Access (other than full turnkey systems), on or prior to the third anniversary of the date of the definitive agreements. With respect to each system launched or intended to be launched, we will pay a per customer fee to High Speed Access according to agreed pricing terms. In addition, we will also compensate High Speed Access for services that exceed certain minimum thresholds. Upon entering into definitive agreements, High Speed Access will issue to Charter Communications, Inc. a warrant to purchase shares of common stock of High Speed Access at a price of $3.23 per share. Portions of such warrant will become vested at the time an authorization to proceed is delivered to High Speed Access with respect to a system, and will be based upon the number of homes passed in such system. With respect to the initial aggregate 5,000,000 homes passed, the warrant will provide that Charter Communications, Inc. will have the right to purchase .775 shares of common stock for every home passed. With respect to any additional homes passed, the warrant will provide that Charter Communications, Inc. will have the right to purchase 1.55 shares of common stock for every home passed. The agreement governing the services to be provided by High Speed Access will have a term of five years. We will have the option to renew the agreement for additional successive 5-year terms on similar terms. On each renewal date, High Speed Access will issue Charter Communications, Inc. an additional warrant for each renewal term. These renewal warrants will grant Charter Communications, Inc., the right to purchase additional shares of common stock at a price of $10.00 per share. The number of shares of common stock subject to a renewal warrant will be determined based upon .50 shares of common stock for every home passed in each system committed to High Speed Access during the initial 5-year term and each 5-year renewal term. Either Charter Communications, Inc. or High Speed Access may terminate the letter of intent if the definitive agreements are not executed by May 13, 2000. The letter of intent and the definitive agreements may be assigned by Charter Communications, Inc. to one or more of its direct or indirect subsidiaries without consent from High Speed Access. Vulcan Ventures owns 37.1% of the outstanding stock of High Speed Access. Jerald L. Kent, our President and Chief Executive Officer and a director of the issuers of the notes and of Charter Communications Holding Company and Charter Communications, Inc. Stephen E. Silva, Senior Vice President -- Corporate Development and Technology of Charter Communications, Inc., and Mr. Savoy, a member of the boards of directors of Charter Holdings, Charter Communications Holding Company and Charter Communications, Inc., are all members of the board of directors of High Speed Access. WORLDGATE. WorldGate is a provider of Internet access through cable television systems. On November 7, 1997, Charter Investment, Inc. signed an affiliation agreement with WorldGate pursuant to which WorldGate's services will be offered to some of our customers. This agreement was assigned by Charter Investment, Inc. to Charter Communications Holding Company upon the closing of Charter Communications, Inc.'s initial public offering. The term of the agreement is five years unless terminated by either party for failure of the other party to perform any of its obligations or undertakings required under the agreement. The agreement automatically renews for additional successive two-year periods upon expiration of the initial five-year term. All of Charter Communications Holding Company's operations take place at the subsidiary level and it is as 138 142 subsidiaries of Charter Communications Holding Company that we derive our rights and obligations with respect to WorldGate. Pursuant to the agreement, we have agreed to use our reasonable best efforts to deploy the WorldGate Internet access service within a portion of our cable television systems and to install the appropriate headend equipment in all of our major markets in those systems. Major markets for purposes of this agreement include those in which we have more than 25,000 customers. We incur the cost for the installation of headend equipment. In addition, we have agreed to use our reasonable best efforts to deploy such service in all non-major markets that are technically capable of providing interactive pay-per-view service, to the extent we determine that it is economically practical. When WorldGate has a telephone return path service available, we will, if economically practical, use all reasonable efforts to install the appropriate headend equipment and deploy the WorldGate service in our remaining markets. Telephone return path service is the usage of telephone lines to connect to the Internet to transmit data or receive data. We have also agreed to market the WorldGate service within our market areas. We pay a monthly subscriber access fee to WorldGate based on the number of subscribers to the WorldGate service. We have the discretion to determine what fees, if any, we will charge our subscribers for access to the WorldGate service. We started offering WorldGate service in 1998. For the year ended December 31, 1999, we paid to WorldGate approximately $1,661,000. For the year ended December 31, 1998, we paid to WorldGate approximately $276,000. We charged our subscribers approximately $263,000 for the year ended December 31, 1999, and approximately $22,000 for the year ended December 31, 1998. On November 24, 1997, Charter Investment, Inc. acquired 70,423 shares of WorldGate's series B preferred stock at a purchase price of $7.10 per share. These shares of WorldGate's series B preferred stock were assigned to Charter Communications Holding Company upon the closing of Charter Communications Inc.'s initial public offering. On February 3, 1999, a subsidiary of Charter Holdings acquired 90,909 shares of series C preferred stock at a purchase price of $11.00 per share. As a result of a stock split and WorldGate's initial public offering, each share of series B preferred stock converted into two-thirds of a share of WorldGate's common stock, and each share of series C preferred stock converted into two-thirds of a share of WorldGate's common stock. WINK. Wink offers an enhanced broadcasting system that adds interactivity and electronic commerce opportunities to traditional programming and advertising. Viewers can, among other things, find news, weather and sports information on-demand and order products through use of a remote control. On October 8, 1997, Charter Investment, Inc. signed a cable affiliation agreement with Wink to deploy this enhanced broadcasting technology in our systems. This agreement was assigned by Charter Investment, Inc. to Charter Communications Holding Company upon the closing of Charter Communications, Inc.'s initial public offering. The term of the agreement is three years. Either party has the right to terminate the agreement for the other party's failure to comply with any of its respective material obligations under the agreement. All of Charter Communications Holding Company's operations take place at the subsidiary level and it is as subsidiaries of Charter Communications Holding Company that we derive our rights and obligations with respect to Wink. Pursuant to the agreement, Wink granted us the non-exclusive license to use their software to deliver the enhanced broadcasting to all of our cable systems. We pay a fixed monthly license fee to Wink. We also supply all server hardware required for deployment of Wink services. In addition, we agreed to promote and market the Wink service to our customers within the area of each system in which such service is being provided. We share in the revenue Wink generates from all fees collected by Wink for transactions generated by our customers. The amount of revenue shared is based on the number of transactions per month. As of December 31, 1999, no revenue or expenses have been recognized as a result of this agreement. On November 30, 1998, Vulcan Ventures acquired 1,162,500 shares of Wink's series C preferred stock for approximately $9.3 million. In connection with such acquisition, Wink issued to Vulcan 139 143 Ventures warrants to purchase shares of common stock. Additionally, Microsoft Corporation, of which Mr. Allen is a director, owns an equity interest in Wink. ZDTV. ZDTV operates a cable television channel which broadcasts shows about technology and the Internet. Pursuant to a carriage agreement which Charter Communications Holding Company intends to enter into with ZDTV, ZDTV has agreed to provide us with programming for broadcast via our cable television systems at no cost. The term of the proposed carriage agreement, with respect to each of our cable systems, is from the date of launch of ZDTV on that cable system until April 30, 2008. The carriage agreement grants us a limited non-exclusive right to receive and to distribute ZDTV to our subscribers in digital or analog format. The carriage agreement does not grant us the right to distribute ZDTV over the Internet. We pay a monthly subscriber fee to ZDTV for the ZDTV programming based on the number of our subscribers subscribing to ZDTV. Additionally, we agreed to use commercially reasonable efforts to publicize the programming schedule of ZDTV in each of our cable systems that offers or will offer ZDTV. Upon reaching a specified threshold number of ZDTV subscribers, then, in the event ZDTV inserts any informercials, advertorials and/or home shopping into in the ZDTV programming, we receive from ZDTV a percentage of net product revenues resulting from our distribution of these services. ZDTV may not offer its services to any other cable operator which serves the same or fewer number of subscribers at a more favorable rate or on more favorable carriage terms. On February 5, 1999, Vulcan Programming acquired an approximate one-third interest in ZDTV. Mr. Allen owns 100% of Vulcan Programming. Mr. Savoy is the president and director of Vulcan Programming. The remaining approximate two-thirds interest in ZDTV is owned by Ziff-Davis Inc. Vulcan Ventures owns approximately 3% of the interests in Ziff-Davis. The total current investment made by Vulcan Programming and Vulcan Ventures is $104 million. On November 19, 1999, Vulcan Ventures announced that it would acquire an additional 64% in ZDTV for $204.8 million bringing its interest in ZDTV to 97%. The remaining 3% of ZDTV would be owned by its management and employees. The purchase was completed on January 21, 2000. USA NETWORKS. USA Networks operates USA Network and The Sci-Fi Channel, which are cable television networks. USA Networks also operates Home Shopping Network, which is a retail sales program available via cable television systems. On May 1, 1994, Charter Investment, Inc. signed an affiliation agreement with USA Networks. This agreement was assigned by Charter Investment, Inc. to Charter Communications Holding Company upon the closing of Charter Communications, Inc.'s initial public offering. Pursuant to this affiliation agreement, USA Networks has agreed to provide their programming for broadcast via our cable television systems. The term of the affiliation agreement is until December 30, 1999. The affiliation agreement grants us the nonexclusive right to cablecast the USA Network programming service. We pay USA Networks a monthly fee for the USA Network programming service based on the number of subscribers in each of our systems and the number and percentage of such subscribers receiving the USA Network programming service. Additionally, we agreed to use best efforts to publicize the schedule of the USA Network programming service in the television listings and program guides which we distribute. We have paid to USA Networks for programming approximately $16,740,000 for the year ended December 31, 1999, approximately $556,000 for the year ended December 31, 1998, approximately $204,000 for the year ended December 31, 1997, and approximately $134,000 for the year ended December 31, 1996. In addition, we received commissions from Home Shopping Network for sales generated by our customers totaling approximately $1,826,000 for the year ended December 31, 1999, approximately $121,000 for the year ended December 31, 1998, approximately $62,000 for the year ended December 31, 1997, and approximately $35,000 for the year ended December 31, 1996. 140 144 Mr. Allen and Mr. Savoy are also directors of USA Networks. As of April 2000, Mr. Allen owned approximately 8.3% and Mr. Savoy owned less than 1% of the capital stock of USA Networks. OXYGEN MEDIA, INC. Oxygen Media provides content aimed at the female audience for distribution over the Internet and cable television systems. Vulcan Ventures invested $50 million in 1999 in Oxygen Media. In addition, Charter Communications Holding Company plans to enter into a carriage agreement with Oxygen Media pursuant to which we will carry Oxygen Media programming content on certain of our cable systems. Nancy B. Peretsman, a director of Charter Communications, Inc., serves on the board of directors of Oxygen Media. Mr. Allen owns an approximate 7% interest in Oxygen. BROADBAND PARTNERS, INC. Charter Communications, Inc. has entered into a joint venture with Vulcan Ventures and Go2Net to provide broadband portal services. See "Business -- Products and Services." Mr. Allen owns approximately 33% of the outstanding equity of Go2Net. Mr. Savoy, a director of Charter Communications, Inc., is also a director of Go2Net. RCN CORPORATION. On October 1, 1999, Vulcan Ventures entered into an agreement to purchase shares of convertible preferred stock of RCN Corporation for an aggregate purchase price of approximately $1.65 billion. If Vulcan Ventures immediately converts the RCN preferred stock it has agreed to purchase into common stock, it will own 27.4% of RCN when combined with the common stock that Vulcan Ventures already owns. None of Charter Communications, Inc., Charter Communications Holding Company, Charter Holdings or their respective stockholders, members or subsidiaries, other than Vulcan Ventures, has any interest in the RCN investment and none of them is expected to have any interest in any subsequent investment in RCN that Vulcan Ventures may make. Charter Communications, Inc.'s certificate of incorporation and Charter Communications Holding Company's limited liability company agreement provide that the businesses of RCN are not deemed to be "cable transmission businesses." 141 145 DESCRIPTION OF CERTAIN INDEBTEDNESS The following description of our indebtedness is qualified in its entirety by reference to the relevant credit facilities, indentures and related documents governing the debt. EXISTING CREDIT FACILITIES CHARTER OPERATING CREDIT FACILITIES. On March 18, 1999, Charter Operating entered into senior secured credit facilities arranged by Chase Securities Inc., NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc. Obligations under the Charter Operating credit facilities are guaranteed by Charter Operating's parent, Charter Holdings, and by Charter Operating's subsidiaries. The obligations under the Charter Operating credit facilities are secured by pledges by Charter Operating of intercompany obligations and the ownership interests of Charter Operating and its subsidiaries, but are not secured by the other assets of Charter Operating or its subsidiaries. The obligations under the Charter Operating credit facilities are also secured by pledges of intercompany obligations and the ownership interests of Charter Holdings in Charter Operating, but are not secured by the other assets of Charter Holdings or Charter Operating. The Charter Operating credit facilities provide for borrowings of up to $4.7 billion consisting of: - an eight and one-half year reducing revolving loan in the amount of $1.25 billion; - an eight and one-half year Tranche A term loan in the amount of $1.0 billion; and - a nine-year Tranche B term loan in the amount of $2.45 billion. The Charter Operating credit facilities provide for the amortization of the principal amount of the Tranche A term loan facility and the reduction of the revolving loan facility beginning on June 30, 2002 with respect to the Tranche A term loan and on March 31, 2004 with respect to the revolving credit facility, with a final maturity date, in each case, of September 18, 2007. The amortization of the principal amount of the Tranche B term loan facility is substantially "back-ended," with more than 90% of the principal balance due in the year of maturity. The final maturity date of the Tranche B term loan facility is March 18, 2008. The Charter Operating credit facilities also provide for an incremental term facility of up to $1.0 billion conditioned upon receipt of additional new commitments from lenders. Up to 50% of the borrowings under it may be repaid on terms substantially similar to that of the Tranche A term loan and the remaining portion on terms substantially similar to that of the Tranche B term loan. In March 2000, $600.0 million of the incremental term facility was drawn down. The maturity date for this term loan is September 18, 2008. The Charter Operating credit facilities also contain provisions requiring mandatory loan prepayments under some circumstances, such as when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of Charter Operating. In the event that any Existing 8.250% Charter Holdings Notes remain outstanding on the date which is six months prior to the scheduled final maturity, the term loans under the Charter Operating credit facility will mature and the revolving credit facility will terminate on such date. The Charter Operating credit facilities provide Charter Operating with two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rate margins for the Charter Operating credit facilities depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of Charter Operating and its subsidiaries, exclusive of outstanding notes and other debt for money borrowed, 142 146 including guarantees by Charter Operating and by Charter Holdings. The interest rate margins for the Charter Operating credit facilities are as follows: - with respect to the revolving loan and the Tranche A term loan, the margin ranges from 1.5% to 2.25% for eurodollar loans and from 0.5% to 1.25% for base rate loans; and - with respect to the Tranche B term loan, the margin ranges from 2.25% to 2.75% for eurodollar loans and from 1.25% to 1.75% for base rate loans. The Charter Operating credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default include a cross-default provision that is triggered by the failure of Charter Operating, Charter Holdings or Charter Operating's subsidiaries to make payment on debt with an outstanding total principal amount exceeding $50 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Charter Operating credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that either: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in Charter Operating; or - a change of control occurs under the indentures governing the March 1999 Charter Holdings notes or the notes. The various negative covenants place limitations on the ability of Charter Holdings, Charter Operating and their subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Charter Operating credit facilities to Charter Holdings to pay interest on the March 1999 Charter Holdings notes are generally permitted. Distributions under the Charter Operating credit facilities to Charter Holdings to pay interest on the original notes and the new notes are generally permitted, provided Charter Operating's cash flow for the four complete quarters preceding the distribution exceeds 1.75 times its cash interest expense, including the amount of such distribution. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Charter Operating credit facilities. As of December 31, 1999, $2.91 billion was outstanding and $1.19 billion was available for borrowing under the Charter Operating credit facilities. CREDIT FACILITY TO BE ARRANGED TO FUND A PORTION OF CAPITAL EXPENDITURES CHARTER HOLDINGS COMMITTED SENIOR BRIDGE LOAN FACILITY. Morgan Stanley Senior Funding, Inc. has committed to provide Charter Holdings and Charter Capital with senior increasing rate bridge loans in an aggregate principal amount of up to $1.0 billion. The commitment to provide the 143 147 bridge loans expires on October 14, 2000. Each bridge loan must be in a principal amount not less than $400.0 million and the bridge loans mature one year from the date of the initial loan. The conditions to closing under the bridge loans include: - execution and delivery of satisfactory documentation of the bridge loans; - absence of various types of material adverse changes, including material adverse changes relative to us as well as adverse changes in the financial and capital markets; - the absence of certain litigation; - our having adequate availability, in Morgan Stanley's judgment, under our existing credit facilities; - satisfactory completion by the bridge lenders of a due diligence review of Charter Holdings and its subsidiaries, including, among other things, their corporate ownership structure; and - receipt of required approvals. Many of these conditions are outside our control. We cannot assure you that the closing conditions will be met. The first loan will initially bear interest at an annual rate equal to the yield corresponding to the bid price on our 10.25% notes less 0.25%, calculated as of the initial date of funding of the first loan. If the first loan is not repaid within 90 days following its initial date of funding, the interest rate will increase by 1.25% at the end of such 90-day period and will increase by an additional 0.50% at the end of each additional 90-day period. The second loan will initially bear interest at an annual rate equal to the greater of: (a) the interest rate on the first loan in effect on the date of funding of the second loan, (b) the yield corresponding to the bid price on our 10.25% notes as of the date of funding of the second loan. If the second loan is not repaid in whole by the last day of each 90-day period following its funding, the interest rate on the loan will increase on the last day of each 90-day period by an amount equal to the increase in interest rate on the first loan on such day. Unless additional default interest is assessed, the interest rate on the bridge loans will be between 9% and 15% annually. Charter Holdings and Charter Capital must use the net cash proceeds of any of the following to pay back the loans in full plus any accrued and unpaid interest: - any direct or indirect public offering or private placement of any debt or equity securities by Charter Holdings and Charter Capital or any subsidiary; - any future bank borrowings other than under any of the existing credit facilities of Charter Holdings and Charter Capital and any subsidiary; and - any future asset sales by Charter Holdings and Charter Capital or any subsidiary. If the bridge loans have not been repaid in full by the maturity date, and provided there is no default under the bridge loans or any material indebtedness, the bridge loans will be automatically converted into nine-year term loans. FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the required percentage of lenders under the senior secured credit facilities of Falcon Cable Communications agreed to amend and restate the Falcon credit agreement, which amendment and restatement was effective as of November 12, 1999, the date that Charter Communications Holding Company closed the Falcon acquisition. The obligations under the Falcon credit facilities are guaranteed by the direct parent of Falcon Cable Communications, Charter Communications VII, LLC, and by the subsidiaries of Falcon Cable Communications. The obligations under the Falcon credit facilities are secured by 144 148 pledges of the ownership interests and intercompany obligations of Falcon Cable Communications and its subsidiaries, but are not secured by other assets of Falcon Cable Communications or its subsidiaries. The Falcon credit facilities have maximum borrowing availability of $1.251 billion consisting of the following: - a revolving facility in the amount of approximately $646.0 million; - a term loan B in the amount of approximately $198.0 million; - a term loan C in the amount of approximately $297.0 million; and - a supplemental revolving facility of $110.0 million. In addition to the foregoing, the Falcon credit facilities provide for supplemental credit facilities when added to the above supplemental revolving facility not in excess of $700.0 million. These supplemental credit facilities are available, subject to the borrower's ability to obtain additional commitments from the lenders. The terms of such additional borrowings are subject to certain restrictions that may be no more materially restrictive than the provisions of the Falcon credit facilities and will be determined at the time of borrowing. The revolving facility and the supplemental revolving facility amortize beginning in 2001 and 2003, respectively, and ending on December 29, 2006 and December 31, 2007, respectively. The term loan B and term loan C facilities amortize beginning in 1999 and ending on June 29, 2007 and December 31, 2007, respectively. The Falcon credit facilities also contain provisions requiring mandatory loan prepayments under certain circumstances, such as when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of Falcon Cable Communications. The Falcon credit facilities provide Falcon Cable Communications with two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rates for these credit facilities, as well as a fee payable on unborrowed amounts available thereunder, depend upon performance measured by a "leverage ratio" which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of Falcon Cable Communications and its subsidiaries, exclusive of the Falcon debentures described below. The interest rate margins for the Falcon credit facilities are as follows: - with respect to the revolving loan facility, the margin ranges from 1.0% to 2.0% for eurodollar loans and from 0.0% to 1.0% for base rate loans; - with respect to Term Loan B, the margin ranges from 1.75% to 2.25% for eurodollar loans and from 0.75% to 1.25% for base rate loans; and - with respect to Term Loan C, the margin ranges from 2.0% to 2.5% for eurodollar loans and from 1.0% to 1.5% for base rate loans. The Falcon credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Falcon credit facilities include a cross-default provision that is triggered by, among other things, the failure to make payment relating to specified outstanding debt of Falcon Cable Communications, its direct and indirect parent companies, CC VII Holdings, LLC and Charter Communications VII, LLC, or specified subsidiary guarantors in a total amount of principal and accrued interest exceeding $10 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on 145 149 a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Falcon credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that either: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in Falcon Cable Communications; or - a change of control occurs under the indentures governing the Falcon debentures or under the terms of other specified debt of Falcon. The various negative covenants place limitations on the ability of Falcon Cable Communications and its subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Falcon credit facilities to pay interest on the Falcon debentures are generally permitted, except during the existence of a default under the Falcon credit facilities. Distributions under the Falcon credit facilities to Charter Holdings to pay interest on the notes and the March 1999 Charter Holdings notes will not be permitted until CC VII Holdings, LLC is merged with and into Charter Holdings, which merger Charter Holdings intends to effect on or about the time of the closing of the Falcon change of control offers. After the merger, distributions to Charter Holdings to pay interest on the notes and the March 1999 Charter Holdings notes will generally be permitted, provided Falcon Cable Communications' cash flow for the most recent fiscal quarter preceding the distribution exceeds 1.75 times its cash interest expense, including the amount of such distribution. Distributions to Charter Holdings will also be permitted if Falcon Cable Communications meets specified financial ratios. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Falcon credit facilities. As of December 31, 1999, $865.5 million was outstanding and $385.5 million was available for borrowing under the Falcon credit facilities. However, debt covenants limited the amount that could be borrowed to $342.0 million at December 31, 1999. FANCH CREDIT FACILITIES. On November 12, 1999, the Fanch acquisition was closed and CC VI Operating Company, LLC, the parent company of the Fanch cable systems, entered into senior secured credit facilities arranged by Chase Securities Inc. and Banc of America Securities LLC. The obligations under the Fanch credit facilities are guaranteed by CC VI Operating's parent, CC VI Holdings, LLC, and by the subsidiaries of CC VI Operating. The obligations under the Fanch credit facilities are secured by pledges of the ownership interests and intercompany obligations of CC VI Operating and its subsidiaries, but are not secured by other assets of CC VI Operating or its subsidiaries. 146 150 The Fanch credit facilities have maximum borrowings of $1.2 billion, consisting of: - a revolving facility in the amount of approximately $350 million; - a term loan A in the amount of approximately $450 million; and - a term loan B in the amount of approximately $400 million. The revolving facility amortizes beginning in 2004 and ending in May 2008. The term loan A and term loan B facilities amortize beginning in 2003 and ending in May 2008 and November 2008, respectively. In addition to the foregoing, the Fanch credit facilities provide for supplemental credit facilities in the maximum amount of $300 million. These supplemental credit facilities may be in the form of an additional term loan or an aggregate increase in the amount of the term loan A or the revolving facility. These supplemental credit facilities are available, subject to the borrower's ability to obtain additional commitments from lenders. The amortization of the additional term loans under the supplemental credit facilities prior to May 2009 is limited to 1% per annum of the aggregate principal amount of such additional term loans. The Fanch credit facilities also contain provisions requiring mandatory loan prepayments under specific circumstances, including when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of CC VI Operating. The Fanch credit facilities provide CC VI Operating with the following two interest rate options, to which a margin is added: a base rate option, generally the prime rate of interest; and an interest rate option rate based on the interbank Eurodollar rate. Interest rates for the Fanch credit facilities, as well as a fee payable on unborrowed amounts available thereunder, depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of CC VI Operating and its subsidiaries. The interest rate margins for the Fanch credit facilities are as follows: - with respect to the revolving loan facility and term loan A, the margin ranges from 1.0% to 2.25% for eurodollar loans and from 0.0% to 1.25% for base rate loans; and - with respect to term loan B, the margin ranges from 2.50% to 3.00% for eurodollar loans and from 1.50% to 2.00% for base rate loans. The Fanch credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Fanch credit facilities include a cross-default provision that is triggered by the failure to make payment on debt of CC VI Operating, CC VI Holdings and the subsidiaries of CC VI Operating in a total amount of $25 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Fanch credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event of any of the following: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in CC VI Operating; - CC VI Operating is no longer a direct or indirect subsidiary of Charter Communications Holding Company; or - A change of control occurs under specified indebtedness of CC VI Holdings, CC VI Operating or CC VI Operating's subsidiaries. 147 151 Various negative covenants place limitations on the ability of CC VI Operating and its subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Fanch credit facilities to Charter Holdings to pay interest on the notes and the March 1999 Charter Holdings notes are generally permitted, provided CC VI Operating's cash flow for the four complete quarters preceding the distribution exceeds 1.75 times its cash interest expense, including the amount of such distribution. Distributions to Charter Holdings will also be permitted if CC VI Operating meets specified financial ratios. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Fanch credit facilities. As of December 31, 1999, approximately $850 million was outstanding and $350 million was available for borrowing under the Fanch credit facilities. AVALON CREDIT FACILITIES. On November 15, 1999 the Avalon acquisition was closed and CC Michigan, LLC and CC New England, LLC (formerly Avalon Cable of Michigan, Inc. and Avalon Cable of New England LLC, respectively) entered into senior secured credit facilities arranged by Bank of Montreal. The obligations under the Avalon credit facilities are guaranteed by the parent of the Avalon borrowers, CC V Holdings, LLC (formerly Avalon Cable LLC) and by the subsidiaries of the Avalon borrowers. The obligations under the Avalon credit facilities are secured by pledges of the ownership interests and intercompany obligations of the Avalon borrowers and their subsidiaries, but are not secured by other assets of the Avalon borrowers or their subsidiaries. The Avalon credit facilities are also secured by a pledge of CC V Holdings' equity interest in the Avalon borrowers and intercompany obligations with respect to the Avalon borrowers. The Avalon credit facilities have maximum borrowings of $300 million, consisting of: - a revolving facility in the amount of approximately $175 million; and - a term loan B in the amount of approximately $125 million. We borrowed $165 million under the Avalon credit facilities to fund a portion of the Avalon purchase price. Amounts available under the revolving facility reduce annually in specified percentages beginning in the fourth year following the closing date of the facility. The term loan B facility amortizes beginning in the fourth year following the closing date. In addition to the foregoing, the Avalon credit facilities provide for supplemental credit facilities in the maximum amount of $75 million. These supplemental credit facilities may be in the form of an additional term loan or an aggregate increase in the amount of the revolving facility. These supplemental credit facilities will be available, subject to the borrowers' ability to obtain additional commitments from lenders. These supplemental credit facilities are available to the Avalon borrowers until December 31, 2003, and, if borrowed, the weighted average life and final maturity will not be less than that of the revolving facility. 148 152 The Avalon credit facilities also contain provisions requiring mandatory loan prepayments under specific circumstances, including when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of the Avalon borrowers. The Avalon credit facilities provide the following two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rates for the Avalon credit facilities, as well as a fee payable on unborrowed amounts available thereunder, will depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of the Avalon borrowers and their subsidiaries. The interest rate margins for the Avalon credit facilities are as follows: - with respect to the revolving loan facility, the margin ranges from 1.0% to 1.875% for eurodollar loans and from 0.0% to 0.875% for base rate loans; and - with respect to term loan B, the margin ranges from 2.50% to 2.75% for eurodollar loans and from 1.50% to 1.750% for base rate loans. The Avalon credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Avalon credit facilities include a cross-default provision that is triggered by the failure to make payment on debt of the Avalon borrowers, CC V Holdings and specified subsidiaries of the Avalon borrowers in a total amount of $20 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Avalon credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in the Avalon borrowers. Various negative covenants place limitations on the ability of the Avalon borrowers and their subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Avalon credit facilities to pay interest on certain indebtedness of CC V Holdings are generally permitted, except during the existence of a default under the Avalon credit facilities. Distributions under the Avalon credit facilities to Charter Holdings to pay interest on the notes and the March 1999 Charter Holdings notes are generally permitted, provided the Avalon borrowers' consolidated cash flow for the four complete quarters preceding the distribution exceeds 2.1 times their combined cash interest expense, including the amount of such distribution. Distributions to Charter Holdings will also be permitted if the Avalon borrowers meet specified financial ratios. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Avalon credit facilities. 149 153 As of December 31, 1999, there was approximately $170 million outstanding and $130 million was available for borrowing under the Avalon credit facilities. BRESNAN CREDIT FACILITIES. In connection with the Bresnan acquisition, our subsidiary, CC VIII Operating, LLC (formerly Bresnan Telecommunications Company) amended and restated its previous senior secured credit facilities and increased the available borrowings under the facilities. At the closing of the Bresnan acquisition, we borrowed approximately $601.2 million to replace the borrowings outstanding under the previous credit facilities and an additional $30.0 million to fund a portion of the Bresnan purchase price. The obligations under the Bresnan credit facilities are guaranteed by the parent company of the Bresnan borrower, CC VIII Holdings, LLC (formerly Bresnan Communications Group LLC), and by the subsidiaries of the Bresnan borrower. The obligations under the Bresnan credit facilities are secured by pledges of the ownership interests and intercompany obligations of the Bresnan borrower and its subsidiaries, but are not secured by other assets of the Bresnan borrower or its subsidiaries. The Bresnan credit facilities are also secured by a pledge of CC VIII Holdings' equity interest in the Bresnan borrower and intercompany obligations with respect to the Bresnan borrower. The Bresnan credit facilities provide for borrowings of up to $900 million, consisting of: - a reducing revolving loan facility in the amount of $200 million; - a term loan A facility in the amount of $403 million; and - a term loan B facility in the amount of $297 million. The Bresnan credit facilities provide for the amortization of the principal amount of the term loan A facility and the reduction of the revolving loan facility beginning March 31, 2002, with a final maturity date of June 30, 2007. The amortization of the term loan B facility is substantially "back-ended", with more than ninety percent of the principal balance due on the final maturity date of February 2, 2008. The Bresnan credit facilities also provide for an incremental facility of up to $200 million, which is conditioned upon receipt of additional commitments from lenders. If the incremental facility becomes available, it may be in the form of revolving loans or term loans, but may not amortize more quickly than the reducing revolving loan facility or the term loan A facility, and may not have a final maturity date earlier than six calendar months after the maturity date of the term loan B facility. The Bresnan credit facilities provide the following two interest rate options, to which a margin is added: a base rate, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rate margins for the Bresnan credit facilities depend upon performance measured by a leverage ratio, which is the ratio of total debt to annualized operating cash flow. The leverage ratio is based on the debt of the Bresnan borrower and its subsidiaries. The interest rate margins for the Bresnan credit facilities are as follows: - with respect to the term loan A facility and the revolving loan facility, the margin ranges from 0.75% to 2.25% for eurodollar loans and from 0.0% to 1.25% for base rate loans; and - with respect to the term loan B facility, the margin ranges from 2.5% to 2.75% for eurodollar loans and from 1.5% to 1.75% for base rate loans. The Bresnan credit facilities contain various representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Bresnan credit facilities include a cross-default provision that is triggered by, among other things, the failure to make payment on the debt of the Bresnan borrower, its subsidiaries and CC VIII Holdings in a total amount in excess of $25 million, the acceleration of debt of this amount prior to its maturity or failure to comply with specified covenants The financial covenants, which are 150 154 generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. Certain negative covenants place limitations on the ability of the Bresnan borrower and its restricted subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. The Bresnan credit facilities contain a change in control provision making it an event of default permitting acceleration of the debt in the event of any of the following: - Mr. Allen, including his estate, heirs and related entities, fails to maintain, directly or indirectly, at least 51% voting interest in the Bresnan borrower, or ceases to own of record or beneficially, directly or indirectly, at least 25% of the equity interests of the Bresnan borrower; - a change of control or similar defined term shall occur in any agreement governing debt of CC VIII Holding or the Bresnan borrower, and such debt is at least in the amount of $25 million; - Charter Communications Holding Company shall cease to own, directly or indirectly, at least 51% of the equity interests in the borrower; or - the Bresnan borrower shall cease to be a direct wholly owned subsidiary of CC VIII Holdings. Distributions under the Bresnan credit facilities to pay interest on certain indebtedness of CC VIII Holdings are generally permitted, except during the existence of a default. Distributions under the Bresnan credit facilities to Charter Holdings to pay interest on the notes and the March 1999 notes are generally permitted provided the Bresnan borrower's consolidated cash flow for the four complete quarters preceding the distribution exceeds 1.75 times the consolidated interest expense of the Bresnan borrower, including the amount of such distribution. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Bresnan credit facilities. As of February 29, 2000, there was $647.9 million outstanding and $252.1 million was available for borrowing under the Bresnan credit facilities. EXISTING PUBLIC DEBT THE MARCH 1999 CHARTER HOLDINGS NOTES. The March 1999 Charter Holdings notes were issued under three separate indentures, each dated as of March 17, 1999, among Charter Holdings and Charter Capital, as the issuers, and Harris Trust and Savings Bank, as trustee. Charter Holdings and Charter Capital recently exchanged these notes for new March 1999 Charter Holdings notes with substantially similar terms, except that the new March 1999 Charter Holdings notes are registered under the Securities Act and, therefore, do not bear legends restricting their transfer. The March 1999 Charter Holdings notes are general unsecured obligations of the issuers. The March 1999 8.250% Charter Holdings notes mature on April 1, 2007 and as of December 31, 1999, there was $600.0 million in total principal amount outstanding. The March 1999 8.625% Charter 151 155 Holdings notes mature on April 1, 2009 and as of December 31, 1999, there was $1.5 billion in total principal amount outstanding. The March 1999 9.920% Charter Holdings notes mature on April 1, 2011 and as of December 31, 1999, the total accreted value was $977.8 million. Cash interest on the March 1999 9.920% Charter Holdings notes will not accrue prior to April 1, 2004. The March 1999 Charter Holdings notes are senior debts of Charter Holdings and Charter Capital. They rank equally with the current and future unsecured and unsubordinated debt of Charter Holdings, including the original notes and the new notes. The issuers will not have the right to redeem the March 1999 8.250% Charter Holdings notes prior to their maturity date on April 1, 2007. Before April 1, 2002, the issuers may redeem up to 35% of each of the March 1999 8.625% Charter Holdings notes and the March 1999 9.920% Charter Holdings notes, in each case, at a premium with the proceeds of certain offerings of equity securities. In addition, on or after April 1, 2004, the issuers may redeem some or all of the March 1999 8.625% Charter Holdings notes and the March 1999 9.920% Charter Holdings notes at any time, in each case, at a premium. The optional redemption price declines to 100% of the principal amount of March 1999 Charter Holdings notes redeemed, plus accrued and unpaid interest, if any, for redemption on or after April 1, 2007. In the event of a specified change of control event, the issuers must offer to repurchase any then outstanding March 1999 Charter Holdings notes at 101% of their principal amount or accreted value, as applicable, plus accrued and unpaid interest, if any. The indentures governing the March 1999 Charter Holdings notes contain substantially identical events of default, affirmative covenants and negative covenants as those contained in the indentures governing the original notes and the new notes. RENAISSANCE NOTES. The 10% senior discount notes due 2008 were issued by Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation, with Renaissance Media Group LLC as guarantor and the United States Trust Company of New York as trustee. Renaissance Media Group LLC, which is the direct or indirect parent company of these issuers, is now a subsidiary of Charter Operating. The Renaissance 10% notes and the Renaissance guarantee are unsecured, unsubordinated debt of the issuers and the guarantor, respectively. In October 1998, the issuers exchanged $163.175 million of the original issued and outstanding Renaissance 10% notes for an equivalent value of new Renaissance 10% notes. The form and terms of the new Renaissance 10% notes are the same in all material respects as the form and terms of the original Renaissance 10% notes except that the issuance of the new 10% Renaissance notes was registered under the Securities Act. There will not be any payment of interest in respect of the Renaissance 10% notes prior to October 15, 2003. Interest on the Renaissance 10% notes shall be paid semi-annually in cash at a rate of 10% per annum beginning on October 15, 2003. The Renaissance 10% notes are redeemable at the option of the issuer, in whole or in part, at any time on or after April 15, 2003, initially at 105% of their principal amount at maturity, plus accrued interest, declining to 100% of the principal amount at maturity, plus accrued interest, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the issuers may redeem up to 35% of the original total principal amount at maturity of the Renaissance 10% notes with the proceeds of one or more sales of equity interests at 110% of their accreted value on the redemption date, provided that after any such redemption at least $106 million total principal amount at maturity of Renaissance 10% notes remains outstanding. Our acquisition of Renaissance triggered change of control provisions of the Renaissance 10% notes that required us to offer to purchase the Renaissance 10% notes at a purchase price equal to 101% of their accreted value on the date of the purchase, plus accrued interest, if any. In May 1999, we made an offer to repurchase the Renaissance 10% notes, and holders of Renaissance 10% notes 152 156 representing 30% of the total principal amount outstanding at maturity tendered their Renaissance 10% notes for repurchase. The indenture governing the Renaissance 10% notes contains certain covenants that restrict the ability of the issuers and their restricted subsidiaries to: - incur additional debt; - create liens; - engage in sale-leaseback transactions; - pay dividends or make other distributions in respect of their equity interests; - redeem capital stock; - make investments or certain other restricted payments; - sell assets; - issue or sell capital stock of restricted subsidiaries; - enter into transactions with stockholders or affiliates; and - effect a consolidation or merger. The Renaissance 10% notes contain events of default that include a cross-default provision triggered by the failure of Renaissance Media Group LLC or any of its specified subsidiaries to make payment on debt at maturity with a total principal amount of $10 million or more or the acceleration of debt of this amount prior to maturity. As of December 31, 1999, there was outstanding $114.4 million total principal amount at maturity of Renaissance 10% notes, with an accreted value of $83.0 million. THE FALCON DEBENTURES. The Falcon debentures, consisting of 8.375% series A senior debentures due 2010 and 9.285% Series A senior discount debentures due 2010, were issued by CC VII Holdings, LLC, formerly known as Falcon Communications, L.P., and Falcon Funding Corporation on April 3, 1998. On August 5, 1998, the issuers commenced an exchange offer whereby the outstanding $375 million Falcon 8.375% debentures and $435.3 million Falcon 9.285% debentures were exchanged for an equivalent value of series B senior debentures and series B senior discount debentures. The form and terms of the new Falcon debentures are the same as the form and terms of the corresponding original Falcon debentures, except that the issuance of the new Falcon debentures was registered under the Securities Act and, therefore, the new Falcon debentures do not bear legends restricting their transfer. In the event of specified change of control events, the holders of the Falcon debentures have the right to require the issuers to purchase their Falcon debentures at a price equal to 101% of their principal amount or accreted value, as applicable, plus accrued and unpaid interest, if any, to the date of purchase. The Falcon acquisition gave rise to this right. On December 10, 1999, we made offers to repurchase the Falcon debentures and holders of all of the Falcon 8.375% and 9.285% debentures tendered their debentures for repurchase. Pursuant to the change of control offers and purchases in the "open market," all of the 8.375% series debentures were repurchased for $388.0 million, including unpaid and accrued interest and all of the 9.285% senior discount debentures were repurchased for $328.1 million in February 2000. As of December 31, 1999, there was $375 million total principal amount outstanding on the Falcon 8.375% debentures, and the accreted value of the Falcon 9.285% debentures was $319.1 million. 153 157 THE AVALON 11.875% NOTES. On December 10, 1998, CC V Holdings, LLC, formerly known as Avalon Cable LLC, and CC V Holdings Finance, Inc. (formerly Avalon Cable Holdings Finance, Inc.) jointly issued $196 million total principal amount at maturity of 11.875% senior discount notes due 2008. On July 22, 1999, the issuers exchanged $196 million of the original issued and outstanding Avalon 11.875 % notes for an equivalent amount of new Avalon 11.875% notes. The form and terms of the new Avalon 11.875% notes are substantially identical to the original Avalon 11.875% notes except that they are registered under the Securities Act and, therefore, are not subject to the same transfer restrictions. The Avalon 11.875% notes are guaranteed by certain subsidiaries of CC V Holdings. There will be no current payments of cash interest on the Avalon 11.875% notes before December 1, 2003. The Avalon 11.875% notes accrete in value at a rate of 11.875% per annum, compounded semi-annually, to an aggregate principal amount of $196 million on December 1, 2003. After December 1, 2003, cash interest on the Avalon 11.875% notes: - will accrue at the rate of 11.875% per year on the principal amount at maturity; and - will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing June 1, 2004. On December 1, 2003, the issuers will be required to redeem an amount equal to $369.79 per $1,000 in principal amount at maturity of each Avalon 11.875% note, on a pro rata basis, at a redemption price of 100% of the principal amount then outstanding at maturity of the Avalon 11.875% notes so redeemed. On or after December 1, 2003, the issuers may redeem the Avalon 11.875% notes, in whole or in part, at a specified premium. The optional redemption price declines to 100% of the principal amount of the Avalon 11.875% notes redeemed, plus accrued and unpaid interest, if any, for redemptions on or after December 1, 2006. Before December 1, 2001, the issuers may redeem up to 35% of the total principal amount at maturity of the Avalon 11.875% notes with the proceeds of one or more equity offerings and/or equity investments. In the event of specified change of control events, holders of the Avalon 11.875% notes have the right to sell their Avalon 11.875% notes to the issuers at 101% of: - the accreted value of the Avalon 11.875% notes in the case of repurchases of Avalon 11.875% notes prior to December 1, 2003; or - the total principal amount of the Avalon 11.875% notes in the case of repurchases of Avalon 11.875% notes on or after December 1, 2003, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. Our acquisition of Avalon triggered this right. On December 3, 1999, we commenced a change of control repurchase offer with respect to the Avalon 11.875% notes. In January 2000, we completed change of control offers in which we repurchased $16.3 million aggregate principal amount of the 11.875% notes at a purchase price of 101% of accreted value as of January 28, 2000. The aggregate repurchase price of $10.5 million was funded with proceeds of the sale of the original notes. Among other restrictions, the indenture governing the Avalon 11.875% notes limits the ability of the issuers and their specified subsidiaries to: - incur additional debt; - pay dividends or make specified other restricted payments; - enter into transactions with affiliates; - make certain investments; 154 158 - sell assets or subsidiary stock; - engage in sale-leaseback transactions; - create liens; - create or permit to exist restrictions dividends or other payments from restricted subsidiaries; - redeem equity interests; - merge, consolidate or sell all or substantially all of their combined assets; and - with respect to restricted subsidiaries, issue capital stock. The Avalon 11.875% notes contain events of default that include a cross-default provision triggered by the failure of CC V Operating, CC V Holdings Finance, Inc. or any specified subsidiary to make payment on debt with a total principal amount of $5 million or more or the acceleration of debt of this amount prior to maturity. As of December 31, 1999, the total accreted value of the outstanding Avalon 11.875% notes was $124.8 million. As of February 29, 2000, subsequent to the expiration of the Avalon change of control offer for the Avalon 11.875% notes, the total accreted value of the outstanding Avalon 11.875% notes was $116.4 million. THE AVALON 9.375% NOTES. On December 10, 1998, CC New England, LLC, formerly known as Avalon Cable of New England LLC, and CC V Finance Inc., formerly known as Avalon Cable Finance, Inc., jointly issued $150 million total principal amount of 9.375% senior subordinated notes due December 1, 2008. On July 22, 1999, the issuers exchanged $150 million of the Avalon 9.375% notes for an equivalent amount of new Avalon 9.375% notes. The form and terms of the new Avalon 9.375% notes are substantially the same as the form and terms of the original Avalon 9.375% notes except that the new Avalon 9.375% notes are registered under the Securities Act and do not bear a legend restricting the transfer thereof. Upon the occurrence of specified change of control events or the sale of certain assets, holders of the Avalon 9.375% notes will have the opportunity to sell their Avalon 9.375% notes to the issuers at 101% of their face amount, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. Our acquisition of Avalon triggered this right. On December 3, 1999, we commenced the Avalon change of control offer with respect to the Avalon 9.375% notes. In January 2000, we completed the change of control offer in which we repurchased $134.0 million aggregate principal amount of the Avalon 9.375% notes for 101% of their principal amount, plus accrued and unpaid interest thereon through January 28, 2000. The aggregate repurchase price was $137.4 million and was funded with proceeds of the sale of the original notes. In addition to the above change of control repurchase, we repurchased the remaining Avalon 9.375% notes (including accrued and unpaid interest) in the "open market" for $16.3 million, also using cash received the proceeds of the sale of the original notes. As of December 31, 1999, there was $150 million total principal outstanding on the Avalon 9.375% notes. BRESNAN NOTES. On February 2, 1999, Bresnan Communications Group LLC and Bresnan Capital Corporation jointly issued $170 million total principal amount of 8% series A senior notes due 2009 and $275 million total principal amount at maturity of 9.25% series A senior discount notes due 2009. In September 1999, the issuers of the Bresnan notes completed an exchange offer in which the Bresnan 8% notes and the Bresnan 9.25% notes representing 100% of the principal amount of all Bresnan notes outstanding were exchanged for new Bresnan notes. The form and terms of the new Bresnan notes were the same in all material respects as the form and terms of the original Bresnan notes except that the new Bresnan notes were registered under the Securities Act and did not bear a legend restricting their transfer. 155 159 Upon the occurrence of specified change of control events, each holder of Bresnan notes had the right to require the issuers to purchase all or any part of such holder's notes at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the purchase date, in the case of the Bresnan 8% notes, and 101% of the accreted value thereof in the case of the Bresnan 9.25% notes. The Bresnan acquisition triggered this right. On February 15, 2000 we commenced a change of control repurchase offer with respect to the Bresnan notes. In March 2000, we repurchased all of the outstanding principal amounts of the Bresnan notes plus accrued and unpaid interest or accreted value, as applicable, for a total of $369.7 million. As of December 31, 1999, there was $170 million total principal outstanding on the Bresnan 8% notes and the accreted value of the outstanding Bresnan 9.25% notes was $190.1 million. INTERCOMPANY LOANS For a description of certain intercompany loans made by Charter Communications, Inc. and Charter Communications Holding Company to certain of their subsidiaries, see "Certain Relationships and Related Transactions -- Transactions with Management and Others -- Intercompany Loans." 156 160 DESCRIPTION OF NOTES You can find the definitions of certain terms used in this description under the subheading "Certain Definitions." The original notes were issued, and the new notes will be issued, under three separate indentures, each dated as of January 12, 2000, among the issuers and Harris Trust and Savings Bank, as trustee. The terms of the notes include those stated in the indentures and those made part of the indentures by reference to the Trust Indenture Act of 1939, as amended. The form and terms of the new notes are the same in all material respects to the form and terms of the original notes, except that the new notes will have been registered under the Securities Act of 1933 and, therefore, will not bear legends restricting the transfer thereof. The original notes have not been registered under the Securities Act of 1933 and are subject to certain transfer restrictions. The following description is a summary of the material provisions of the indentures. It does not restate the indentures in their entirety. We urge you to read the indentures because they, and not this description, define your rights as holders of the new notes. Copies of the indentures are available as set forth under "Business -- Additional Information." BRIEF DESCRIPTION OF THE NOTES The notes: - are general unsecured obligations of the issuers; - are effectively subordinated in right of payment to all existing and future secured Indebtedness of the issuers to the extent of the value of the assets securing such Indebtedness and to all liabilities, including trade payables, of Charter Holdings' Subsidiaries, other than Charter Capital; - are equal in right of payment to all existing and future unsubordinated, unsecured Indebtedness of the issuers; and - are senior in right of payment to any future subordinated Indebtedness of the issuers. At December 31, 1999, on a pro forma basis giving effect to the offering of the notes, acquisitions closed since that date, the recent transfers to us of the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction, the outstanding Indebtedness of Charter Holdings and its Subsidiaries would have totaled approximately $11.2 billion, $6.4 billion of which would have been Indebtedness of our Subsidiaries and effectively senior to the notes. The notes will rank equally with the senior notes and senior discount notes of the issuers which were issued in March 1999. As of the date of the indentures, all the Subsidiaries of Charter Holdings will be "Restricted Subsidiaries." However, under the circumstances described below under "-- Certain Covenants -- Investments," we will be permitted to designate certain of our Subsidiaries as "Unrestricted Subsidiaries." Unrestricted Subsidiaries will generally not be subject to the restrictive covenants in the indentures. PRINCIPAL, MATURITY AND INTEREST OF NOTES 10.00% NOTES The 10.00% notes are limited in aggregate principal amount to $675 million, and will be issued in denominations of $1,000 and integral multiples of $1,000. The 10.00% notes will mature on April 1, 2009. 157 161 Interest on the 10.00% notes will accrue at the rate of 10.00% per annum and will be payable semi-annually in arrears on April 1 and October 1, commencing on April 1, 2000. The issuers will make each interest payment to the holders of record of the 10.00% notes on the immediately preceding March 15 and September 15. Interest on the 10.00% notes will accrue from the date of issuance of the original notes or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 10.25% NOTES The 10.25% notes are limited in aggregate principal amount to $325 million, and will be issued in denominations of $1,000 and integral multiples of $1,000. The 10.25% notes will mature on January 15, 2010. Interest on the 10.25% notes will accrue at the rate of 10.25% per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 2000. The issuers will make each interest payment to the holders of record of the 10.25% notes on the immediately preceding January 1 and July 1. Interest on the 10.25% notes will accrue from the date of issuance of the original notes or, if interest has already been paid, from the date it was most recently paid. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 11.75% NOTES The 11.75% notes are limited in aggregate principal amount at maturity to $532 million and originally were issued at an issue price of $564.48 per $1,000 principal amount at maturity, representing a yield to maturity of 11.75%, calculated on a semi-annual bond equivalent basis, calculated from January 12, 2000. The issuers will issue 11.75% notes, in denominations of $1,000 principal amount at maturity and integral multiples of $1,000 principal amount at maturity. The 11.75% notes will mature on January 15, 2010. Cash interest on the 11.75% notes will not accrue prior to January 15, 2005. Thereafter, cash interest on the 11.75% notes will accrue at a rate of 11.75% per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 2005. The issuers will make each interest payment to the holders of record of the 11.75% notes on the immediately preceding January 1 and July 1. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The 11.75% notes will accrete at a rate of 11.75% per year to an aggregate amount of $532 million as of January 15, 2005. For United States federal income tax purposes, holders of the 11.75% notes will be required to include amounts in gross income in advance of the receipt of the cash payments to which the income is attributable. See "Certain United States Federal Tax Considerations." OPTIONAL REDEMPTION 10.00% NOTES The 10.00% notes will not be redeemable at the issuers' option prior to maturity. 10.25% NOTES At any time prior to January 15, 2003, the issuers may, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the 10.25% notes on a pro rata basis or nearly as pro 158 162 rata as practicable, at a redemption price of 110.25% of the principal amount thereof, plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more Equity Offerings; provided that (1) at least 65% of the aggregate principal amount of 10.25% notes remains outstanding immediately after the occurrence of such redemption excluding 10.25% notes held by Charter Holdings and its Subsidiaries; and (2) the redemption must occur within 60 days of the date of the closing of such Equity Offering. Except pursuant to the preceding paragraph, the 10.25% notes will not be redeemable at the issuers' option prior to January 15, 2005. On or after January 15, 2005, the issuers may redeem all or a part of the 10.25% notes upon not less than 30 nor more than 60 days notice, at the redemption prices, expressed as percentages of principal amount, set forth below plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on January 15 of the years indicated below:
YEAR PERCENTAGE - - - ---- ---------- 2005........................................................ 105.125% 2006........................................................ 103.417% 2007........................................................ 101.708% 2008 and thereafter......................................... 100.000%
11.75% NOTES At any time prior to January 15, 2003, the issuers may, on any one or more occasions, redeem up to 35% of the aggregate principal amount at maturity of the 11.75% notes on a pro rata basis or nearly as pro rata as practicable, at a redemption price of 111.75% of the Accreted Value thereof, with the net cash proceeds of one or more Equity Offerings; provided that (1) at least 65% of the aggregate principal amount at maturity of 11.75% notes remains outstanding immediately after the occurrence of such redemption, excluding 11.75% notes held by Charter Holdings and its Subsidiaries; and (2) the redemption must occur within 60 days of the date of the closing of such Equity Offering. Except pursuant to the preceding paragraph, the 11.75% notes will not be redeemable at the issuers' option prior to January 15, 2005. On or after January 15, 2005, the issuers may redeem all or a part of the 11.75% notes upon not less than 30 nor more than 60 days notice, at the redemption prices, expressed as percentages of principal amount, set forth below plus accrued and unpaid interest thereon, if any, to the applicable 159 163 redemption date, if redeemed during the twelve-month period beginning on January 15 of the years indicated below:
YEAR PERCENTAGE - - - ---- ---------- 2005........................................................ 105.875% 2006........................................................ 103.917% 2007........................................................ 101.958% 2008 and thereafter......................................... 100.000%
REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL If a Change of Control occurs, each holder of new notes will have the right to require the issuers to repurchase all or any part, equal to $1,000 or an integral multiple thereof, of that holder's new notes pursuant to a "Change of Control Offer." In the Change of Control Offer, the issuers will offer a "Change of Control Payment" in cash equal to (x) with respect to the 10.00% notes and the 10.25% notes, 101% of the aggregate principal amount thereof repurchased plus accrued and unpaid interest thereon, if any, to the date of purchase and (y) with respect to the 11.75% notes, 101% of the Accreted Value plus, for any Change of Control offer occurring after the Full Accretion Date, accrued and unpaid interest, if any, on the date of purchase. Within ten days following any Change of Control, the issuers will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase notes on a certain date, the "Change of Control Payment Date", specified in such notice, pursuant to the procedures required by the indentures and described in such notice. The issuers will comply with the requirements of Rule 14e-1 under the Securities Exchange Act of 1934 or any successor rules, and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control. On the Change of Control Payment Date, the issuers will, to the extent lawful: (1) accept for payment all notes or portions thereof properly tendered pursuant to the Change of Control Offer; (2) deposit with the paying agent an amount equal to the Change of Control payment in respect of all notes or portions thereof so tendered; and (3) deliver or cause to be delivered to the trustee the notes so accepted together with an officers' certificate stating the aggregate principal amount of notes or portions thereof being purchased by the issuers. The paying agent will promptly mail to each holder of notes so tendered the Change of Control payment for such notes, and the trustee will promptly authenticate and mail, or cause to be transferred by book entry, to each holder a new note equal in principal amount or principal amount at maturity, as applicable, to any unpurchased portion of the notes surrendered, if any; provided that each such new note will be in a principal amount or principal amount at maturity, as applicable, of $1,000 or an integral multiple thereof. The provisions described above that require the issuers to make a Change of Control offer following a Change of Control will be applicable regardless of whether or not any other provisions of 160 164 the indentures are applicable. Except as described above with respect to a Change of Control, the indentures do not contain provisions that permit the holders of the notes to require that the issuers repurchase or redeem the notes in the event of a takeover, recapitalization or similar transaction. The issuers will not be required to make a Change of Control offer upon a Change of Control if a third party makes the Change of Control offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indentures applicable to a Change of Control offer made by the issuers and purchases all notes validly tendered and not withdrawn under such Change of Control offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of Charter Holdings and its Subsidiaries, taken as a whole, or of a Parent and its Subsidiaries, taken as a whole. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require the issuers to repurchase such notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of Charter Holdings and its Subsidiaries, taken as a whole, or of a Parent and its Subsidiaries, taken as a whole, to another Person or group may be uncertain. ASSET SALES Charter Holdings will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless: (1) Charter Holdings or a Restricted Subsidiary of Charter Holdings receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets or Equity Interests issued or sold or otherwise disposed of; (2) such fair market value is determined by Charter Holdings' board of directors and evidenced by a resolution of such board of directors set forth in an officers' certificate delivered to the trustee; and (3) at least 75% of the consideration therefor received by Charter Holdings or such Restricted Subsidiary is in the form of cash, Cash Equivalents or readily marketable securities. For purposes of this provision, each of the following shall be deemed to be cash: (a) any liabilities, as shown on Charter Holdings' or such Restricted Subsidiary's most recent balance sheet, other than contingent liabilities and liabilities that are by their terms subordinated to the notes, that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases Charter Holdings or such Restricted Subsidiary from further liability; (b) any securities, notes or other obligations received by Charter Holdings or any such Restricted Subsidiary from such transferee that are converted by Charter Holdings or such Restricted Subsidiary into cash, Cash Equivalents or readily marketable securities within 60 days after receipt thereof, to the extent of the cash, Cash Equivalents or readily marketable securities received in that conversion; and (c) Productive Assets. Within 365 days after the receipt of any Net Proceeds from an Asset Sale, Charter Holdings or a Restricted Subsidiary of Charter Holdings may apply such Net Proceeds at its option: (1) to repay debt under the Credit Facilities or any other Indebtedness of the Restricted Subsidiaries, other than Indebtedness represented by a guarantee of a Restricted Subsidiary of Charter Holdings; or 161 165 (2) to invest in Productive Assets; provided that any Net Proceeds which Charter Holdings or a Restricted Subsidiary of Charter Holdings has committed to invest in Productive Assets within 365 days of the applicable Asset Sale may be invested in Productive Assets within two years of such Asset Sale. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the preceding paragraph will constitute Excess Proceeds. When the aggregate amount of Excess Proceeds exceeds $25 million, the issuers will make an Asset Sale Offer to all holders of notes and all holders of other Indebtedness that is of equal priority with the notes containing provisions requiring offers to purchase or redeem with the proceeds of sales of assets to purchase the maximum principal amount of notes and such other Indebtedness of equal priority that may be purchased out of the Excess Proceeds, which amount includes the entire amount of the Net Proceeds. The offer price in any Asset Sale Offer will be payable in cash and equal to: (x) with respect to the 10.00% notes and the 10.25% notes, 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase; and (y) with respect to the 11.75% notes, 100% of the Accreted Value thereof plus, after the Full Accretion Date, accrued and unpaid interest, if any, to the date of purchase. If any Excess Proceeds remain after consummation of an Asset Sale Offer, Charter Holdings may use such Excess Proceeds for any purpose not otherwise prohibited by the indentures. If the aggregate principal amount of notes and such other Indebtedness of equal priority tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the applicable trustee shall select the Notes and such other Indebtedness of equal priority to be purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. SELECTION AND NOTICE If less than all of the notes are to be redeemed at any time, the trustee will select notes for redemption as follows: (1) if the notes are listed, in compliance with the requirements of the principal national securities exchange on which the notes are listed; or (2) if the notes are not so listed, on a pro rata basis, by lot or by such method as the trustee shall deem fair and appropriate. No notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to that note shall state the portion of the principal amount thereof to be redeemed. A new note in principal amount equal to the unredeemed portion of the original note will be issued in the name of the holder thereof upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on, or the Accreted Value ceases to increase on, as the case may be, notes or portions of them called for redemption. 162 166 CERTAIN COVENANTS Set forth in this section are summaries of certain covenants contained in the indentures. The covenants summarized are the following: - Limitations on restricted payments by Charter Holdings and its Restricted Subsidiaries. Restricted payments include - dividends and other distributions on equity interests, - purchases, redemptions on other acquisitions of equity interests, and - purchases, redemptions, defeasance or other acquisitions of subordinated debt. - Limitations on restricted investments by Charter Holdings or its Restricted Subsidiaries. Restricted investments include investments other than - investments in Restricted Subsidiaries, cash equivalents, - non-cash consideration from an asset sale made in compliance with the indenture, - investments with the net cash proceeds of the issuance and sale of equity interests, - investments in productive assets not to exceed in the $150 million, - other investments not exceeding $50 million in any person, - investments in customers and suppliers which either generate accounts receivable or are accepted in settlement of bona fide disputes, and - the investment in Marcus Cable Holdings, LLC. This covenant also limits Charter Holdings from allowing any Restricted Subsidiary from becoming an Unrestricted Subsidiary. - Limitations on the occurrence of Indebtedness and issuance of preferred stock generally unless the leverage ratio is not greater than 8.75 to 1.0 on a pro forma basis. This does not prohibit the incurrence of permitted debt which includes: - borrowings up to $3.5 billion under the credit facilities, - existing indebtedness, - capital lease obligations, mortgage financings or purchase money obligations in an aggregate amount of up to $25 million at any one time outstanding for the purchase, construction or improvement of productive assets, - permitted refinancing indebtedness, - intercompany indebtedness, - hedging obligations, - up to $300 million of additional indebtedness, - additional indebtedness not exceeding 200% of the net cash proceeds from the sale of equity interests to the extent not used to make restricted payments or permitted investments, and - the accretion or amortization of original issue discount and the write up of indebtedness in accordance with purchase accounting. - Prohibitions against the creation of liens except permitted liens. 163 167 - Prohibitions against restrictions on the ability of any Restricted Subsidiary to pay dividends or make other distributions on its capital stock to Charter Holdings or any Restricted Subsidiary, make loans or advances to Charter Holdings or its Restricted Subsidiaries or transfer properties or assets to Charter Holdings or any of its Restricted Subsidiaries. This covenant, however, does not prohibit restrictions under - existing indebtedness, - the notes and the indentures, - applicable law, - the terms of indebtedness or capital stock of a person acquired by Charter Holdings or any of its Restricted Subsidiaries, - customary non-assignment provisions in leases, - purchase money obligations, - agreements for the sale or other disposition of a Restricted Subsidiary restricting distributions pending its sale, - permitted refinancing indebtedness, - liens securing indebtedness permitted under the indentures, - joint venture agreements, - under ordinary course contracts with customers that restrict cash, other deposits or net worth, - indebtedness permitted under the indentures, and - restrictions that are not materially more restrictive than customary provisions in comparable financings which management determines will not materially impair Charter Holdings' ability to make payments required under the notes. - Prohibitions against mergers, consolidations or the sale of all or substantially all of an issuer's assets unless - the issuer is the surviving corporation or the person formed by the merger or consolidation or acquiring the assets is organized under the law of the United States, any state or the District of Columbia, - such person assumes all obligations under the notes and the indentures, - no default or event of default exists, and - Charter Holdings or the person formed by the merger or consolidation or acquiring all or substantially all the assets could incur at least $1.00 of additional indebtedness under the leverage ratio or have a leverage ratio after giving effect to the transaction no greater than the leverage ratio of the issuer immediately prior to the transaction. - Prohibitions against transactions with affiliates, unless Charter Holdings delivers to the trustee: - for transactions exceeding $15.0 million a resolution approved by a majority of the board of directors certifying that the transaction complies with the covenant; and - for transactions exceeding $50.0 million a fairness opinion of an accounting, appraisal or investment banking firm of national standing. 164 168 Certain transactions are not subject to the covenant including: - existing employment agreements and new employment agreements entered into in the ordinary course of business and consistent with past practice; and - management fees under agreements existing as of March 17, 1999 or after March 17, 1999 if the percentage fees are not higher than those under agreements existing on March 17, 1999. - Limitations on sale and leaseback transactions exceeding three years. - Limitations on issuances of guarantees of indebtedness. - Prohibitions against consent payments to holders of notes unless paid to all consenting holders. During any period of time that (a) either the 10.00% notes, the 10.25% notes or the 11.75% notes have Investment Grade Ratings from both Rating Agencies, and (b) no Default or Event of Default has occurred and is continuing under the applicable indenture, Charter Holdings and its Restricted Subsidiaries will not be subject to the provisions of the indenture described under - "-- Incurrence of Indebtedness and Issuance of preferred stock," - "-- Restricted Payments," - "-- Asset Sales," - "-- Sale and Leaseback Transactions," - "-- Dividend and Other Payment Restrictions Affecting Subsidiaries," - "-- Transactions with Affiliates," - "-- Investments" and - clause (4) of the first paragraph of "-- Merger, Consolidation and Sale of Assets." If Charter Holdings and its Restricted Subsidiaries are not subject to these covenants for any period of time as a result of the previous sentence and, subsequently, one, or both, of the Rating Agencies withdraws its ratings or downgrades the ratings assigned to the applicable notes below the required Investment Grade Ratings or a Default or Event of Default occurs and is continuing, then Charter Holdings and its Restricted Subsidiaries will thereafter again be subject to these covenants. Compliance with the covenant with respect to Restricted Payments made after the time of such withdrawal, downgrade, Default or Event of Default will be calculated as if such covenant had been in effect during the entire period of time from the Issue Date. The new notes will not have Investment Grade Ratings from the Rating Agencies when they are issued. Consequently, the covenants listed above remain applicable to Charter Holdings and its Restricted Subsidiaries. RESTRICTED PAYMENTS Charter Holdings will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (1) declare or pay any dividend or make any other payment or distribution on account of Charter Holdings' or any of its Restricted Subsidiaries' Equity Interests, including, without 165 169 limitation, any payment in connection with any merger or consolidation involving Charter Holdings or any of its Restricted Subsidiaries, or to the direct or indirect holders of Charter Holdings' or any of its Restricted Subsidiaries' Equity Interests in their capacity as such, other than dividends or distributions payable in Equity Interests, other than Disqualified Stock, of Charter Holdings or, in the case of Charter Holdings and its Restricted Subsidiaries, to Charter Holdings or a Restricted Subsidiary of Charter Holdings; (2) purchase, redeem or otherwise acquire or retire for value, including, without limitation, in connection with any merger or consolidation involving Charter Holdings, any Equity Interests of Charter Holdings or any direct or indirect parent of Charter Holdings or any Restricted Subsidiary of Charter Holdings, other than, in the case of Charter Holdings and its Restricted Subsidiaries, any such Equity Interests owned by Charter Holdings or any Restricted Subsidiary of Charter Holdings; or (3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value, any Indebtedness that is subordinated to the notes, other than the notes, except a payment of interest or principal at the Stated Maturity thereof. All such payments and other actions set forth in clauses (1) through (3) above are collectively referred to as "Restricted Payments," unless, at the time of and after giving effect to such Restricted Payment: (1) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (2) Charter Holdings would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Leverage Ratio test set forth in the first paragraph of the covenant described below under the caption "-- Incurrence of Indebtedness and Issuance of preferred stock"; and (3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by Charter Holdings and each of its Restricted Subsidiaries after the date of the indenture, excluding Restricted Payments permitted by clauses (2), (3), (4), (5), (6), (7) and (8) of the next succeeding paragraph, shall not exceed, at the date of determination, the sum of: (a) an amount equal to 100% of the Consolidated EBITDA of Charter Holdings since the date of the indenture to the end of Charter Holdings' most recently ended full fiscal quarter for which internal financial statements are available, taken as a single accounting period, less the product of 1.2 times the combined Consolidated Interest Expense of Charter Holdings since the date of the indenture to the end of Charter Holdings' most recently ended full fiscal quarter for which internal financial statements are available, taken as a single accounting period, plus (b) an amount equal to 100% of Capital Stock Sale Proceeds less any such Capital Stock Sale Proceeds used in connection with (i) an Investment made pursuant to clause (6) of the definition of "Permitted Investments" or (ii) the incurrence of Indebtedness pursuant to clause (10) of the covenant described under the caption "-- Incurrence of Indebtedness and Issuance of preferred stock," plus (c) $100 million. 166 170 So long as no Default has occurred and is continuing or would be caused thereby, the preceding provisions will not prohibit: (1) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the indentures; (2) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness of Charter Holdings in exchange for, or out of the net proceeds of, the substantially concurrent sale, other than to a Subsidiary of Charter Holdings, of Equity Interests of Charter Holdings, other than Disqualified Stock; provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition shall be excluded from clause (3)(b) of the preceding paragraph; (3) the defeasance, redemption, repurchase or other acquisition of subordinated Indebtedness of Charter Holdings or any of its Restricted Subsidiaries with the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness; (4) regardless of whether a Default then exists, the payment of any dividend or distribution to the extent necessary to permit direct or indirect beneficial owners of shares of Capital Stock of Charter Holdings to pay federal, state or local income tax liabilities that would arise solely from income of Charter Holdings or any of its Restricted Subsidiaries, as the case may be, for the relevant taxable period and attributable to them solely as a result of Charter Holdings, and any intermediate entity through which the holder owns such shares or any of its Restricted Subsidiaries being a limited liability company, partnership or similar entity for federal income tax purposes; (5) regardless of whether a Default then exists, the payment of any dividend by a Restricted Subsidiary of Charter Holdings to the holders of its common Equity Interests on a pro rata basis; (6) the payment of any dividend on the Helicon Preferred Stock or the redemption, repurchase, retirement or other acquisition of the Helicon Preferred Stock in an amount not in excess of its aggregate liquidation value; (7) the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of Charter Holdings held by any member of Charter Holdings' management pursuant to any management equity subscription agreement or stock option agreement in effect as of the date of the indenture; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $10 million in any fiscal year of Charter Holdings; and (8) payment of fees in connection with any acquisition, merger or similar transaction in an amount that does not exceed an amount equal to 1.25% of the transaction value of such acquisition, merger or similar transaction. The amount of all Restricted Payments, other than cash, shall be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by Charter Holdings or any of its Restricted Subsidiaries pursuant to the Restricted Payment. The fair market value of any assets or securities that are required to be valued by this covenant shall be determined by the board of directors of Charter Holdings whose resolution with respect thereto shall be delivered to the trustee. Such board of directors' determination must be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing if the fair market value exceeds $100 million. Not later than the date of making any Restricted Payment, Charter Holdings shall deliver to the trustee an officers' certificate stating that such Restricted Payment is permitted and setting forth the 167 171 basis upon which the calculations required by this "Restricted Payments" covenant were computed, together with a copy of any fairness opinion or appraisal required by the indentures. INVESTMENTS Charter Holdings will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (1) make any Restricted Investment; or (2) allow any Restricted Subsidiary of Charter Holdings to become an Unrestricted Subsidiary, unless, in each case: (a) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; and (b) Charter Holdings would, at the time of, and after giving effect to, such Restricted Investment or such designation of a Restricted Subsidiary as an unrestricted Subsidiary, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Leverage Ratio test set forth in the first paragraph of the covenant described below under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock." An Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary if such redesignation would not cause a Default. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK (a) Charter Holdings will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness, including Acquired Debt, and Charter Holdings will not issue any Disqualified Stock and will not permit any of its Restricted Subsidiaries to issue any shares of preferred stock unless the Leverage Ratio would have been not greater than 8.75 to 1.0 determined on a pro forma basis, including a pro forma application of the net proceeds therefrom, as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of the most recently ended fiscal quarter. So long as no Default shall have occurred and be continuing or would be caused thereby, the first paragraph of this covenant will not prohibit the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (1) the incurrence by Charter Holdings and its Restricted Subsidiaries of Indebtedness under Credit Facilities; provided that the aggregate principal amount of all Indebtedness of Charter Holdings and its Restricted Subsidiaries outstanding under all Credit Facilities, after giving effect to such incurrence, does not exceed an amount equal to $3.5 billion less the aggregate amount of all Net Proceeds of Asset Sales applied by Charter Holdings or any of its Subsidiaries in the case of an Asset Sale since the date of the indenture to repay Indebtedness under a Credit Facility pursuant to the covenant described above under the caption "-- Asset Sales"; (2) the incurrence by Charter Holdings and its Restricted Subsidiaries of Existing Indebtedness, other than the Credit Facilities; (3) the incurrence on the January 12, 2000 by Charter Holdings and its Restricted Subsidiaries of Indebtedness represented by the notes; 168 172 (4) the incurrence by Charter Holdings or any of its Restricted Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case, incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvement, including, without limitation, the cost of design, development, construction, acquisition, transportation, installation, improvement, and migration, of Productive Assets of Charter Holdings or any of its Restricted Subsidiaries in an aggregate principal amount not to exceed $75 million at any time outstanding; (5) the incurrence by Charter Holdings or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace, in whole or in part, Indebtedness, other than intercompany Indebtedness, that was permitted by the indentures to be incurred under the first paragraph of this covenant or clauses (2) or (3) of this paragraph; (6) the incurrence by Charter Holdings or any of its Restricted Subsidiaries of intercompany Indebtedness between or among Charter Holdings and any of its Wholly Owned Restricted Subsidiaries; provided that this clause does not permit Indebtedness between Charter Holdings or any of its Restricted Subsidiaries, as creditor or debtor, as the case may be, unless otherwise permitted by the indentures; provided, further, that: (a) if Charter Holdings is the obligor on such Indebtedness, such Indebtedness must be expressly subordinated to the prior payment in full in cash of all obligations with respect to the notes; and (b) (i) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than Charter Holdings or a Wholly Owned Restricted Subsidiary thereof and (ii) any sale or other transfer of any such Indebtedness to a Person that is not either Charter Holdings or a Wholly Owned Restricted Subsidiary thereof, shall be deemed, in each case, to constitute an incurrence of such Indebtedness by Charter Holdings or any of its Restricted Subsidiaries that was not permitted by this clause (6); (7) the incurrence by Charter Holdings or any of its Restricted Subsidiaries of Hedging Obligations that are incurred for the purpose of fixing or hedging interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of the indentures to be outstanding; (8) the guarantee by Charter Holdings of Indebtedness of a Restricted Subsidiary of Charter Holdings that was permitted to be incurred by another provision of this covenant; (9) the incurrence by Charter Holdings or any of its Restricted Subsidiaries of additional Indebtedness in an aggregate principal amount at any time outstanding, not to exceed $300 million; (10) the incurrence by Charter Holdings or any of its Restricted Subsidiaries of additional Indebtedness in an aggregate principal amount at any time outstanding not to exceed 200% of the net cash proceeds received by Charter Holdings from the sale of its Equity Interests, other than Disqualified Stock, after the date of the indentures to the extent such net cash proceeds have not been applied to make Restricted Payments or to effect other transactions pursuant to the covenant described above under the subheading "-- Restricted Payments" or to make Permitted Investments pursuant to clause (6) of the definition thereof; and (11) the accretion or amortization of original issue discount and the write up of Indebtedness in accordance with purchase accounting. For purposes of determining compliance with this "Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, in the event that an item of proposed Indebtedness 169 173 (a) meets the criteria of more than one of the categories of Permitted Debt described in clauses (1) through (11) above, or (b) is entitled to be incurred pursuant to the first paragraph of this covenant, Charter Holdings will be permitted to classify and from time to time to reclassify such item of Indebtedness on the date of its incurrence in any manner that complies with this covenant. For avoidance of doubt, Indebtedness incurred pursuant to a single agreement, instrument, program, facility or line of credit may be classified as Indebtedness arising in part under one of the clauses listed above, and in part under any one or more of the clauses listed above, to the extent that such Indebtedness satisfies the criteria for such clauses. (b) Notwithstanding the foregoing, in no event shall any Restricted Subsidiary of Charter Holdings consummate a Subordinated Debt Financing or a preferred stock Financing. A "Subordinated Debt Financing" or a "preferred stock Financing", as the case may be, with respect to any Restricted Subsidiary of Charter Holdings shall mean a public offering or private placement, whether pursuant to Rule 144A under the Securities Act or otherwise, of Subordinated Notes or preferred stock, whether or not such preferred stock constitutes Disqualified Stock, as the case may be, of such Restricted Subsidiary to one or more purchasers, other than to one or more Affiliates of Charter Holdings. "Subordinated Notes" with respect to any Restricted Subsidiary of Charter Holdings shall mean Indebtedness of such Restricted Subsidiary that is contractually subordinated in right of payment to any other Indebtedness of such Restricted Subsidiary, including, without limitation, Indebtedness under the Credit Facilities. The foregoing limitation shall not apply to (i) any Indebtedness or preferred stock of any Person existing at the time such Person is merged with or into or became a Subsidiary of Charter Holdings; provided that such Indebtedness or preferred stock was not incurred or issued in connection with, or in contemplation of, such Person merging with or into, or becoming a Subsidiary of, Charter Holdings, and (ii) any Indebtedness or preferred stock of a Restricted Subsidiary issued in connection with, and as part of the consideration for, an acquisition, whether by stock purchase, asset sale, merger or otherwise, in each case involving such Restricted Subsidiary, which Indebtedness or preferred stock is issued to the seller or sellers of such stock or assets; provided that such Restricted Subsidiary is not obligated to register such Indebtedness or preferred stock under the Securities Act or obligated to provide information pursuant to Rule 144A under the Securities Act. LIENS Charter Holdings will not, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or trade payables on any asset now owned or hereafter acquired, except Permitted Liens. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES Charter Holdings will not, directly or indirectly, create or permit to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary of Charter Holdings to: (1) pay dividends or make any other distributions on its Capital Stock to Charter Holdings or any of its Restricted Subsidiaries, or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to Charter Holdings or any of its Restricted Subsidiaries; (2) make loans or advances to Charter Holdings or any of its Restricted Subsidiaries; or 170 174 (3) transfer any of its properties or assets to Charter Holdings or any of its Restricted Subsidiaries. However, the preceding restrictions will not apply to encumbrances or restrictions existing under or by reason of: (1) Existing Indebtedness as in effect on the date of the indentures, including, without limitation, the Credit Facilities, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof; provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive, taken as a whole, with respect to such dividend and other payment restrictions than those contained in such Existing Indebtedness, as in effect on the date of the indentures; (2) the indentures and the notes; (3) applicable law; (4) any instrument governing Indebtedness or Capital Stock of a Person acquired by Charter Holdings or any of its Restricted Subsidiaries as in effect at the time of such acquisition, except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired; provided that, in the case of Indebtedness, such Indebtedness was permitted by the terms of the indentures to be incurred; (5) customary non-assignment provisions in leases entered into in the ordinary course of business and consistent with past practices; (6) purchase money obligations for property acquired in the ordinary course of business that impose restrictions on the property so acquired of the nature described in clause (3) of the preceding paragraph; (7) any agreement for the sale or other disposition of a Restricted Subsidiary of Charter Holdings that restricts distributions by such Restricted Subsidiary pending its sale or other disposition; (8) Permitted Refinancing Indebtedness; provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced; (9) Liens securing Indebtedness otherwise permitted to be incurred pursuant to the provisions of the covenant described above under the caption "-- Liens" that limit the right of Charter Holdings or any of its Restricted Subsidiaries to dispose of the assets subject to such Lien; (10) provisions with respect to the disposition or distribution of assets or property in joint venture agreements and other similar agreements entered into in the ordinary course of business; (11) restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business; (12) restrictions contained in the terms of Indebtedness permitted to be incurred under the covenant described under the caption "-- Incurrence of Indebtedness and Issuance of preferred stock"; provided that such restrictions are no more restrictive than the terms contained in the Credit Facilities as in effect on January 12, 2000; and 171 175 (13) restrictions that are not materially more restrictive than customary provisions in comparable financings and the management of Charter Holdings determines that such restrictions will not materially impair Charter Holdings' ability to make payments as required under the notes. MERGER, CONSOLIDATION, OR SALE OF ASSETS Neither of the issuers may, directly or indirectly: (1) consolidate or merge with or into another Person, whether or not such Issuer is the surviving corporation; or (2) sell, assign, transfer, convey or otherwise dispose of all or substantially all of its properties or assets, in one or more related transactions, to another Person; unless: (A) either: (1) such issuer is the surviving corporation; or (2) the Person formed by or surviving any such consolidation or merger, if other than such Issuer, or to which such sale, assignment, transfer, conveyance or other disposition shall have been made is a Person organized or existing under the laws of the United States, any state thereof or the District of Columbia, provided that if the Person formed by or surviving any such consolidation or merger with either Issuer is a limited liability company or other Person other than a corporation, a corporate co-issuer shall also be an obligor with respect to the notes; (B) the Person formed by or surviving any such consolidation or merger, if other than Charter Holdings, or the Person to which such sale, assignment, transfer, conveyance or other disposition shall have been made assumes all the obligations of Charter Holdings under the notes and the indentures pursuant to agreements reasonably satisfactory to the trustee; (C) immediately after such transaction no Default or Event of Default exists; and (D) Charter Holdings or the Person formed by or surviving any such consolidation or merger, if other than Charter Holdings, will, on the date of such transaction after giving pro forma effect thereto and any related financing transactions as if the same had occurred at the beginning of the applicable four-quarter period, either (1) be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Leverage Ratio test set forth in the first paragraph of the covenant described above under the caption "-- Incurrence of Indebtedness and Issuance of preferred stock" or (2) have a Leverage Ratio immediately after giving effect to such consolidation or merger no greater than the Leverage Ratio immediately prior to such consolidation or merger. In addition, Charter Holdings may not, directly or indirectly, lease all or substantially all of its properties or assets, in one or more related transactions, to any other Person. This "Merger, Consolidation, or Sale of Assets" covenant will not apply to a sale, assignment, transfer, conveyance or other disposition of assets between or among Charter Holdings and any of its Wholly Owned Subsidiaries. 172 176 TRANSACTIONS WITH AFFILIATES Charter Holdings will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless: (1) such Affiliate Transaction is on terms that are no less favorable to Charter Holdings or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by Charter Holdings or such Restricted Subsidiary with an unrelated Person; and (2) Charter Holdings delivers to the trustee: (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $15 million, a resolution of the board of directors of Charter Holdings set forth in an officers' certificate certifying that such Affiliate Transaction complies with this covenant and that such Affiliate Transaction has been approved by a majority of the members of the board of directors; and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $50 million, an opinion as to the fairness to the holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. The following items shall not be deemed to be Affiliate Transactions and, therefore, will not be subject to the provisions of the prior paragraph: (1) any existing employment agreement entered into by Charter Holdings or any of its Subsidiaries and any employment agreement entered into by Charter Holdings or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of Charter Holdings or such Restricted Subsidiary; (2) transactions between or among Charter Holdings and/or its Restricted Subsidiaries; (3) payment of reasonable directors fees to Persons who are not otherwise Affiliates of Charter Holdings, and customary indemnification and insurance arrangements in favor of directors, regardless of affiliation with Charter Holdings or any of its Restricted Subsidiaries; (4) payment of management fees pursuant to management agreements either (A) existing on January 12, 2000 or (B) entered into after January 12, 2000, to the extent that such management agreements provide for percentage fees no higher than the percentage fees existing under the management agreements existing on January 12, 2000; (5) Restricted Payments that are permitted by the provisions of the covenant described above under the caption "-- Restricted Payments" and Restricted Investments that are permitted by the provisions of the indentures described above under the caption "Restricted Payments -- Investments"; and (6) Permitted Investments. 173 177 SALE AND LEASEBACK TRANSACTIONS Charter Holdings will not, and will not permit any of its Restricted Subsidiaries to, enter into any sale and leaseback transaction; provided that Charter Holdings may enter into a sale and leaseback transaction if: (1) Charter Holdings could have (a) incurred Indebtedness in an amount equal to the Attributable Debt relating to such sale and leaseback transaction under the Leverage Ratio test in the first paragraph of the covenant described above under the caption "-- Incurrence of Additional Indebtedness and Issuance of preferred stock" and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant described above under the caption "-- Liens"; and (2) the transfer of assets in that sale and leaseback transaction is permitted by, and Charter Holdings applies the proceeds of such transaction in compliance with, the covenant described above under the caption "-- Asset Sales." The foregoing restrictions do not apply to a sale and leaseback transaction if the lease is for a period, including renewal rights, of not in excess of three years. LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS Charter Holdings will not permit any of its Restricted Subsidiaries, directly or indirectly, to Guarantee or pledge any assets to secure the payment of any other Indebtedness of Charter Holdings, except in respect of the Credit Facilities (the "Guaranteed Indebtedness") unless (1) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for the Guarantee (a "Subsidiary Guarantee") of the payment of the notes by such Restricted Subsidiary, and (2) until one year after all the notes have been paid in full in cash, such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against Charter Holdings or any other Restricted Subsidiary of Charter Holdings as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall not be applicable to any Guarantee or any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is subordinated to the notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the notes. PAYMENTS FOR CONSENT Charter Holdings will not, and will not permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any holder of notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indentures or the notes unless such consideration is offered to be paid and is paid to all holders of the notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. 174 178 REPORTS Whether or not required by the Securities and Exchange Commission, so long as any notes are outstanding, Charter Holdings will furnish to the holders of notes, within the time periods specified in the Securities and Exchange Commission's rules and regulations: (1) all quarterly and annual financial information that would be required to be contained in a filing with the Securities and Exchange Commission on Forms 10-Q and 10-K if Charter Holdings were required to file such forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and, with respect to the annual information only, a report on the annual financial statements by Charter Holdings' independent public accountants; and (2) all current reports that would be required to be filed with the Securities and Exchange Commission on Form 8-K if Charter Holdings were required to file such reports. If Charter Holdings has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph shall include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in Management's Discussion and Analysis of Financial Condition and Results of Operations, of the financial condition and results of operations of Charter Holdings and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of Charter Holdings. In addition, whether or not required by the Securities and Exchange Commission, Charter Holdings will file a copy of all of the information and reports referred to in clauses (1) and (2) above with the Securities and Exchange Commission for public availability within the time periods specified in the Securities and Exchange Commission's rules and regulations, unless the Securities and Exchange Commission will not accept such a filing, and make such information available to securities analysts and prospective investors upon request. EVENTS OF DEFAULT AND REMEDIES Each of the following is an Event of Default with respect to the notes of each series: (1) default for 30 days in the payment when due of interest on the notes; (2) default in payment when due of the principal of or premium, if any, on the notes; (3) failure by Charter Holdings or any of its Restricted Subsidiaries to comply with the provisions described under the captions "-- Change of Control" or "-- Merger, Consolidation, or Sale of Assets"; (4) failure by Charter Holdings or any of its Restricted Subsidiaries for 30 days after written notice thereof has been given to Charter Holdings by the trustee or to Charter Holdings and the trustee by holders of at least 25% of the aggregate principal amount of the notes outstanding to comply with any of their other covenants or agreements in the indentures; (5) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by Charter Holdings or any of its Restricted Subsidiaries, or the payment of which is guaranteed by Charter Holdings or any of its Restricted Subsidiaries, whether such Indebtedness or guarantee now exists, or is created after the date of the indentures, if that default: (a) is caused by a failure to pay at final stated maturity the principal amount on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default (a "Payment Default"); or 175 179 (b) results in the acceleration of such Indebtedness prior to its express maturity, and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $100 million or more; (6) failure by Charter Holdings or any of its Restricted Subsidiaries to pay final judgments which are non-appealable aggregating in excess of $100 million, net of applicable insurance which has not been denied in writing by the insurer, which judgments are not paid, discharged or stayed for a period of 60 days; and (7) Charter Holdings or any of its Significant Subsidiaries pursuant to or within the meaning of bankruptcy law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a custodian of it or for all or substantially all of its property, or (d) makes a general assignment for the benefit of its creditors; or (8) a court of competent jurisdiction enters an order or decree under any bankruptcy law that: (a) is for relief against Charter Holdings or any of its Significant Subsidiaries in an involuntary case; (b) appoints a custodian of Charter Holdings or any of its Significant Subsidiaries or for all or substantially all of the property of Charter Holdings or any of its Significant Subsidiaries; or (c) orders the liquidation of Charter Holdings or any of its Significant Subsidiaries; and the order or decree remains unstayed and in effect for 60 consecutive days. In the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to Charter Holdings, all outstanding notes will become due and payable immediately without further action or notice. If any other Event of Default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding notes of each series may declare their respective notes to be due and payable immediately. Holders of the notes may not enforce the indentures or the notes except as provided in the indentures. Subject to certain limitations, holders of a majority in principal amount of the then outstanding notes of each series may direct the trustee in its exercise of any trust or power. The trustee may withhold from holders of the notes notice of any continuing Default or Event of Default, except a Default or Event of Default relating to the payment of principal or interest, if it determines that withholding notice is in their interest. The holders of a majority in aggregate principal amount of the notes of each series then outstanding by notice to the trustee may on behalf of the holders of all of the notes waive any existing Default or Event of Default and its consequences under the indentures except a continuing Default or Event of Default in the payment of interest on, or the principal of, the notes. Charter Holdings will be required to deliver to the trustee annually a statement regarding compliance with the indentures. Upon becoming aware of any Default or Event of Default, Charter Holdings will be required to deliver to the trustee a statement specifying such Default or Event of Default. 176 180 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, MEMBERS AND STOCKHOLDERS No director, officer, employee, incorporator, member or stockholder of Charter Holdings, as such, shall have any liability for any obligations of Charter Holdings under the notes or the indentures, or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of notes by accepting a note waives and releases all such liability. The waiver and release will be part of the consideration for issuance of the notes. The waiver may not be effective to waive liabilities under the federal securities laws. LEGAL DEFEASANCE AND COVENANT DEFEASANCE Charter Holdings may, at its option and at any time, elect to have all of its obligations discharged with respect to the outstanding notes ("Legal Defeasance") except for: (1) the rights of holders of outstanding Notes to receive payments in respect of the Accreted Value or principal of, premium, if any, and interest on such Notes when such payments are due from the trust referred to below; (2) Charter Holdings' obligations with respect to the notes concerning issuing temporary notes, registration of notes, mutilated, destroyed, lost or stolen notes and the maintenance of an office or agency for payment and money for security payments held in trust; (3) the rights, powers, trusts, duties and immunities of the trustee, and Charter Holdings' obligations in connection therewith; and (4) the Legal Defeasance provisions of the indentures. In addition, Charter Holdings may, at its option and at any time, elect to have the obligations of Charter Holdings released with respect to certain covenants that are described in the indentures ("Covenant Defeasance") and thereafter any omission to comply with those covenants shall not constitute a Default or Event of Default with respect to the notes. In the event Covenant Defeasance occurs, certain events, not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events, described under "Events of Default" will no longer constitute an Event of Default with respect to the notes. In order to exercise either Legal Defeasance or Covenant Defeasance: (1) Charter Holdings must irrevocably deposit with the trustee, in trust, for the benefit of the holders of the notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest on the outstanding notes on the stated maturity or on the applicable redemption date, as the case may be, and Charter Holdings must specify whether the notes are being defeased to maturity or to a particular redemption date; (2) in the case of Legal Defeasance, Charter Holdings shall have delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that (a) Charter Holdings has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of the indentures, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on 177 181 the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (3) in the case of Covenant Defeasance, Charter Holdings shall have delivered to the trustee an opinion of counsel reasonably acceptable to the trustee confirming that the holders of the outstanding notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (4) no Default or Event of Default shall have occurred and be continuing either: (a) on the date of such deposit, other than a Default or Event of Default resulting from the borrowing of funds to be applied to such deposit; or (b) insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (5) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument, other than the indentures, to which Charter Holdings or any of its Restricted Subsidiaries is a party or by which Charter Holdings or any of its Restricted Subsidiaries is bound; (6) Charter Holdings must have delivered to the trustee an opinion of counsel to the effect that after the 91st day, assuming no intervening bankruptcy, that no holder is an insider of Charter Holdings following the deposit and that such deposit would not be deemed by a court of competent jurisdiction a transfer for the benefit of either issuer in its capacity as such, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (7) Charter Holdings must deliver to the trustee an officers' certificate stating that the deposit was not made by Charter Holdings with the intent of preferring the holders of notes over the other creditors of Charter Holdings with the intent of defeating, hindering, delaying or defrauding creditors of Charter Holdings or others; and (8) Charter Holdings must deliver to the trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent relating to the Legal Defeasance or the Covenant Defeasance have been complied with. Notwithstanding the foregoing, the opinion of counsel required by clause (2) above with respect to a Legal Defeasance need not be delivered if all notes not theretofore delivered to the trustee for cancellation (a) have become due and payable or (b) will become due and payable on the maturity date within one year under arrangements satisfactory to the trustee for the giving of notice of redemption by the trustee in the name, and at the expense, of the issuers. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided below, the indentures or the notes of each series may be amended or supplemented with the consent of the holders of at least a majority in aggregate principal amount, in the case of the 10.00% notes and the 10.25% notes, and aggregate principal amount at maturity, in the case of the 11.75% notes, of the then outstanding notes of each series. This includes consents obtained in connection with a purchase of notes, a tender offer for notes, or an exchange offer for notes. Any existing Default or compliance with any provision of the indentures or the notes may be 178 182 waived with the consent of the holders of a majority in aggregate principal amount, in the case of the 10.00% notes and the 10.25% notes, and aggregate principal amount at maturity, in the case of the 11.75% notes, of the then outstanding notes of each series. This includes consents obtained in connection with a purchase of notes, a tender offer for notes, or an exchange offer for notes. Without the consent of each holder affected, an amendment or waiver may not, with respect to any notes held by a non-consenting holder: (1) reduce the principal amount of notes whose holders must consent to an amendment, supplement or waiver; (2) reduce the principal of or change the fixed maturity of any note or alter the payment provisions with respect to the redemption of the notes, other than provisions relating to the covenants described above under the caption "-- Repurchase at the Option of Holders"; (3) reduce the rate of or extend the time for payment of interest on any note; (4) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the notes, except a rescission of acceleration of the notes by the holders of at least a majority in aggregate principal amount of the notes and a waiver of the payment default that resulted from such acceleration; (5) make any note payable in money other than that stated in the notes; (6) make any change in the provisions of the indentures relating to waivers of past Defaults or the rights of holders of notes to receive payments of Accreted Value or principal of, or premium, if any, or interest on the notes; (7) waive a redemption payment with respect to any note, other than a payment required by one of the covenants described above under the caption "-- Repurchase at the Option of Holders"; (8) make any change in the preceding amendment and waiver provisions. Notwithstanding the preceding, without the consent of any holder of notes, the issuers and the trustee may amend or supplement the indentures or the notes: (1) to cure any ambiguity, defect or inconsistency; (2) to provide for uncertificated notes in addition to or in place of certificated notes; (3) to provide for the assumption of either issuer's obligations to holders of notes in the case of a merger or consolidation or sale of all or substantially all of such issuer's assets; (4) to make any change that would provide any additional rights or benefits to the holders of notes or that does not adversely affect the legal rights under the indentures of any such holder; or (5) to comply with requirements of the Securities and Exchange Commission in order to effect or maintain the qualification of the indentures under the Trust Indenture Act or otherwise as necessary to comply with applicable law. GOVERNING LAW The indentures and the notes will be governed by the laws of the State of New York. CONCERNING THE TRUSTEE If the trustee becomes a creditor of Charter Holdings, the indentures limit its right to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such 179 183 claim as security or otherwise. The trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Securities and Exchange Commission for permission to continue or resign. The holders of a majority in principal amount of the then outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the trustee, subject to certain exceptions. The indentures provide that in case an Event of Default shall occur and be continuing, the trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indentures at the request of any holder of notes, unless such holder shall have offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense. ADDITIONAL INFORMATION Anyone who receives this prospectus may obtain a copy of the indentures without charge by writing to Charter Communications Holdings, LLC, 12444 Powerscourt Drive, Suite 100, St. Louis, Missouri 63131, Attention: Corporate Secretary. BOOK-ENTRY, DELIVERY AND FORM The notes will initially be issued in the form of global securities held in book-entry form. The notes will be deposited with the trustee as custodian for the Depository Trust Company, and the Depository Trust Company or its nominee will initially be the sole registered holder of the notes for all purposes under the indentures. Unless it is exchanged in whole or in part for debt securities in definitive form as described below, a global security may not be transferred. However, transfers of the whole security between the Depository Trust Company and its nominee or their respective successors are permitted. Upon the issuance of a global security, the Depository Trust Company or its nominee will credit on its internal system the principal amount at maturity of the individual beneficial interest represented by the global security acquired by the persons in sale of the original notes. Ownership of beneficial interests in a global security will be limited to persons that have accounts with the Depository Trust Company or persons that hold interests through participants. Ownership of beneficial interests will be shown on, and the transfer of that the Depository Trust Company or its nominee relating to interests of participants and the records of participants relating to interests of persons other than participants. The laws of some jurisdictions require that some purchasers of securities take physical delivery of the securities in definitive form. These limits and laws may impair the ability to transfer beneficial interests in a global security. Principal and interest payments on global securities registered in the name of the Depository Trust Company's nominee will be made in immediate available funds to the Depository Trust Company's nominee as the registered owner of the global securities. The issuers and the trustee will treat the Depository Trust Company's nominee as the owner of the global securities for all other purposes as well. Accordingly, the issuers, the trustee, any paying agent and the initial purchasers will have no direct responsibility or liability for any aspect of the records relating to payments made on account of beneficial interests in the global securities or for maintaining, supervising or reviewing any records relating to these beneficial interests. It is the Depository Trust Company's current practice, upon receipt of any payment of principal or interest, to credit direct participants' accounts on the payment date according to their respective holdings of beneficial interests in the global securities. These payments will be the responsibility of the direct and indirect participants and not of the Depository Trust Company, the issuers, the trustee or the initial purchasers. 180 184 So long as the Depository Trust Company or its nominee is the registered owner or holder of the global security, the Depository Trust Company or its nominee, as the case may be, will be considered the sole owner or holder of the notes represented by the global security for the purposes of: (1) receiving payment on the notes; (2) receiving notices; and (3) for all other purposes under the indentures and the notes. Beneficial interests in the notes will be evidenced only by, and transfers of the notes will be effected only through, records maintained by the Depository Trust Company and its participants. Except as described above, owners of beneficial interests in a global security will not be entitled to receive physical delivery of certificated notes in definitive form and will not be considered the holders of the global security for any purposes under the indentures. Accordingly, each person owning a beneficial interest in a global security must rely on the procedures of the Depository Trust Company. And, if that person is not a participant, the person must rely on the procedures of the participant through which that person owns its interest, to exercise any rights of a holder under the indentures. Under existing industry practices, if the issuers request any action of holders or an owner of a beneficial interest in a global security desires to take any action under the indentures, the Depository Trust Company would authorize the participants holding the relevant beneficial interest to take that action. The participants then would authorize beneficial owners owning through the participants to take the action or would otherwise act upon the instructions of beneficial owners owning through them. The Depository Trust Company has advised the issuers that it will take any action permitted to be taken by a holder of notes only at the direction of one or more participants to whose account with the Depository Trust Company interests in the global security are credited. Further, the Depository Trust Company will take action only as to the portion of the aggregate principal amount at maturity of the notes as to which the participant or participants has or have given the direction. Although the Depository Trust Company has agreed to the procedures described above in order to facilitate transfers of interests in global securities among participants of the Depository Trust Company, it is under no obligation to perform these procedures, and the procedures may be discontinued at any time. None of the issuers, the trustee, any agent of the issuers or the initial purchasers will have any responsibility for the performance by the Depository Trust Company or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. The Depository Trust Company has provided the following information to us. The Depository Trust Company is a: (1) limited-purpose trust company organized under the New York Banking Law; (2) a banking organization within the meaning of the New York Banking Law; (3) a member of the United States Federal Reserve System; (4) a clearing corporation within the meaning of the New York Uniform Commercial Code; and (5) a clearing agency registered under the provisions of Section 17A of the Securities Exchange Act. 181 185 CERTIFICATED NOTES Notes represented by a global security are exchangeable for certificated notes only if: (1) the Depository Trust Company notifies the issuers that it is unwilling or unable to continue as depository or if the Depository Trust Company ceases to be a registered clearing agency, and a successor depository is not appointed by the issuers within 90 days; (2) the issuers determine not to require all of the notes to be represented by a global security and notifies the trustee of its decision; or (3) an Event of Default or an event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default relating to the notes represented by the global security has occurred and is continuing. Any global security that is exchangeable for certificated notes in accordance with the preceding sentence will be transferred to, and registered and exchanged for, certificated notes in authorized denominations and registered in the names as the Depository Trust Company or its nominee may direct. However, a global security is only exchangeable for a global security of like denomination to be registered in the name of the Depository Trust Company or its nominee. If a global security becomes exchangeable for certificated notes: (1) certificated notes will be issued only in fully registered form in denominations of $1,000 or integral multiples of $1,000; (2) payment of principal, premium, if any, and interest on the certificated notes will be payable, and the transfer of the certificated notes will be registrable, at the office or agency of the issuers maintained for these purposes; and (3) no service charge will be made for any issuance of the certificated notes, although the issuers may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection with the issuance. CERTAIN DEFINITIONS This section sets forth certain defined terms used in the indentures. Reference is made to the indentures for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. 182 186 "ACCRETED VALUE" is defined to mean, for any Specific Date, the amount calculated pursuant to (1), (2), (3) or (4) for each $1,000 of principal amount at maturity of the 11.75% notes: (1) if the Specified Date occurs on one or more of the following dates (each a "Semi-Annual Accrual Date") the Accreted Value will equal the amount set forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE - - - ------------ -------------- Issue Date............................................... $ 564.48 January 15, 2000......................................... 565.02 July 15, 2000............................................ 598.21 January 15, 2001......................................... 633.36 July 15, 2001............................................ 670.57 January 15, 2002......................................... 709.96 July 15, 2002............................................ 751.67 January 15, 2003......................................... 795.84 July 15, 2003............................................ 842.59 January 15, 2004......................................... 892.09 July 15, 2004............................................ 944.51 January 15, 2005......................................... $1,000.00
(2) if the Specified Date occurs before the first Semi-Annual Accrual Date, the Accreted Value will equal the sum of (a) $564.48 and (b) an amount equal to the product of (x) the Accreted Value for the first Semi-Annual Accrual Date less $564.48 multiplied by (y) a fraction, the numerator of which is the number of days from the Issue Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is the number of days elapsed from the Issue Date to the first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day months; (3) if the Specified Date occurs between two Semi-Annual Accrual Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the Semi-Annual Accrual Date immediately preceding such Specified Date and (b) an amount equal to the product of (1) the Accreted Value for the immediately following Semi-Annual Accrual Date less the Accreted Value for the immediately preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator of which is the number of days from the immediately preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is 180; or 183 187 (4) if the Specified Date occurs after the last Semi-Annual Accrual Date, the Accreted Value will equal $1,000. "ACQUIRED DEBT" means, with respect to any specified Person: (1) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, whether or not such Indebtedness is incurred in connection with, or in contemplation of, such other Person merging with or into, or becoming a Subsidiary of, such specified Person; and (2) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control", as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a Person shall be deemed to be control. For purposes of this definition, the terms "controlling," "controlled by" and "under common control with" shall have correlative meanings. "ASSET ACQUISITION" means (a) an Investment by Charter Holdings or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary of Charter Holdings or any of its Restricted Subsidiaries or shall be merged with or into Charter Holdings or any of its Restricted Subsidiaries, or (b) the acquisition by Charter Holdings or any of its Restricted Subsidiaries of the assets of any Person which constitute all or substantially all of the assets of such Person, any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "ASSET SALE" means: (1) the sale, lease, conveyance or other disposition of any assets or rights, other than sales of inventory in the ordinary course of business consistent with past practices; provided that the sale, conveyance or other disposition of all or substantially all of the assets of Charter Holdings and its Subsidiaries, taken as a whole, will be governed by the provisions of the indentures described above under the caption "-- Change of Control" and/or the provisions described above under the caption "-- Merger, Consolidation or Sale of Assets" and not by the provisions of the Asset Sale covenant; and (2) the issuance of Equity Interests by any of Charter Holdings' Restricted Subsidiaries or the sale of Equity Interests in any of Charter Holdings' Restricted Subsidiaries. Notwithstanding the preceding, the following items shall not be deemed to be Asset Sales: (1) any single transaction or series of related transactions that: (a) involves assets having a fair market value of less than $100 million; or (b) results in net proceeds to Charter Holdings and its Restricted Subsidiaries of less than $100 million; (2) a transfer of assets between or among Charter Holdings and its Restricted Subsidiaries; 184 188 (3) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary of Charter Holdings to Charter Holdings or to another Wholly Owned Restricted Subsidiary of Charter Holdings; (4) a Restricted Payment that is permitted by the covenant described above under the caption "-- Certain Covenants -- Restricted Payments" and a Restricted Investment that is permitted by the covenant described above under the caption "-- Certain Covenants -- Investments"; and (5) the incurrence of Permitted Liens and the disposition of assets related to such Permitted Liens by the secured party pursuant to a foreclosure. "ASSET SALE OFFER" means a situation in which the issuers commence an offer to all holders to purchase notes pursuant to Section 4.11 of the indentures. "ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means, at the time of determination, the present value of the obligation of the lessee for net rental payments during the remaining term of the lease included in such sale and leaseback transaction including any period for which such lease has been extended or may, at the option of the lessee, be extended. Such present value shall be calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with GAAP. "BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the beneficial ownership of any particular "person," as such term is used in Section 13(d)(3) of the Exchange Act, such "person" shall be deemed to have beneficial ownership of all securities that such "person" has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. "CABLE RELATED BUSINESS" means the business of owning cable television systems and businesses ancillary, complementary and related thereto. "CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with GAAP. "CAPITAL STOCK" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents, however designated, of corporate stock; (3) in the case of a partnership or limited liability company, partnership or membership interests, whether general or limited; and (4) any other interest, other than any debt obligation, or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "CAPITAL STOCK SALE PROCEEDS" means the aggregate net cash proceeds, including the fair market value of the non-cash proceeds, as determined by an independent appraisal firm, received by Charter Holdings since the date of the indentures (x) as a contribution to the common equity capital or from the issue or sale of Equity Interests of Charter Holdings, other than Disqualified Stock or (y) from the issue or sale of convertible or exchangeable Disqualified Stock or convertible or exchangeable debt securities of Charter Holdings that have been converted into or exchanged 185 189 for such Equity Interests other than Equity Interests, or Disqualified Stock or debt securities, sold to a Subsidiary of Charter Holdings. "CASH EQUIVALENTS" means: (1) United States dollars; (2) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof, provided that the full faith and credit of the United States is pledged in support thereof, having maturities of not more than twelve months from the date of acquisition; (3) certificates of deposit and eurodollar time deposits with maturities of twelve months or less from the date of acquisition, bankers' acceptances with maturities not exceeding six months and overnight bank deposits, in each case, with any domestic commercial bank having combined capital and surplus in excess of $500 million and a Thompson Bank Watch Rating at the time of acquisition of "B" or better; (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (2) and (3) above entered into with any financial institution meeting the qualifications specified in clause (3) above; (5) commercial paper having a rating of at least "P-1" from Moody's or at least "A-1" from S&P and in each case maturing within twelve months after the date of acquisition; (6) corporate debt obligations maturing within twelve months after the date of acquisition thereof, rated at the time of acquisition at least "Aaa" or "P-1" by Moody's or "AAA" or "A-1" by S&P; (7) auction-rate preferred stocks of any corporation maturing not later than 45 days after the date of acquisition thereof, rated at the time of acquisition at least "Aaa" by Moody's or "AAA" by S&P; (8) securities issued by any state, commonwealth or territory of the United States, or by any political subdivision or taxing authority thereof, maturing not later than six months after the date of acquisition thereof, rated at the time of acquisition at least "A" by Moody's or S&P; and (9) money market or mutual funds at least 90% of the assets of which constitute Cash Equivalents of the kinds described in clauses (1) through (8) of this definition. "CHANGE OF CONTROL" means the occurrence of any of the following: (1) the sale, transfer, conveyance or other disposition, other than by way of merger or consolidation, in one or a series of related transactions, of all or substantially all of the assets of Charter Holdings and its Subsidiaries, taken as a whole, or of a Parent and its Subsidiaries, taken as a whole, to any "person," as such term is used in Section 13(d)(3) of the Exchange Act, other than Paul G. Allen or a Related Party; (2) the adoption of a plan relating to the liquidation or dissolution of Charter Holdings or a Parent; (3) the consummation of any transaction, including, without limitation, any merger or consolidation, the result of which is that any "person," as defined above, other than Paul G. Allen and Related Parties, becomes the Beneficial Owner, directly or indirectly, of more than 35% of the Voting Stock of Charter Holdings or a Parent, measured by voting power rather than the number of shares, unless Paul G. Allen or a Related Party Beneficially Owns, directly or indirectly, a greater percentage of Voting Stock of Charter Holdings or such Parent, as the case may be, measured by voting power rather than the number of shares, than such person; 186 190 (4) after the date of the indentures, the first day on which a majority of the members of the board of directors of Charter Holdings or a Parent are not Continuing Directors; or (5) Charter Holdings or a Parent consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, Charter Holdings or a Parent, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of Charter Holdings or such Parent is converted into or exchanged for cash, securities or other property, other than any such transaction where the Voting Stock of Charter Holdings or such Parent outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock, other than Disqualified Stock, of the surviving or transferee Person constituting a majority of the outstanding shares of such Voting Stock of such surviving or transferee Person immediately after giving effect to such issuance. "CONSOLIDATED EBITDA" means with respect to any Person, for any period, the net income of such Person and its Restricted Subsidiaries for such period plus, to the extent such amount was deducted in calculating such net income: (1) Consolidated Interest Expense; (2) income taxes; (3) depreciation expense; (4) amortization expense; (5) all other non-cash items, extraordinary items, nonrecurring and unusual items and the cumulative effects of changes in accounting principles reducing such net income, less all non-cash items, extraordinary items, nonrecurring and unusual items and cumulative effects of changes in accounting principles increasing such net income, all as determined on a consolidated basis for such Person and its Restricted Subsidiaries in conformity with GAAP; (6) amounts actually paid during such period pursuant to a deferred compensation plan; and (7) for purposes of the covenant described under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of Preferred Stock" only, Management Fees; provided that Consolidated EBITDA shall not include: (x) the net income, or net loss, of any Person that is not a Restricted Subsidiary ("Other Person"), except (i) with respect to net income, to the extent of the amount of dividends or other distributions actually paid to such Person or any of its Restricted Subsidiaries by such Other Person during such period and (ii) with respect to net losses, to the extent of the amount of investments made by such Person or any Restricted Subsidiary of such Person in such Other Person during such period; (y) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (3) of the covenant described under the subheading "-- Certain Covenants -- Restricted Payments," and in such case, except to the extent includable pursuant to clause (x) above, the net income, or net loss, of any Other Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with such Person or any Restricted Subsidiaries or all or substantially all of the property and assets of such Other Person are acquired by such Person or any of its Restricted Subsidiaries; and 187 191 (z) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary, other than any agreement or instrument evidencing Indebtedness or preferred stock outstanding on the date of the indentures or incurred or issued thereafter in compliance with the covenant described under the caption "-- Certain Covenants -- Incurrence of Indebtedness and Issuance of preferred stock," provided that (a) the terms of any such agreement restricting the declaration and payment of dividends or similar distributions apply only in the event of a default with respect to a financial covenant or a covenant relating to payment, beyond any applicable period of grace, contained in such agreement or instrument, (b) such terms are determined by such Person to be customary in comparable financings and (c) such restrictions are determined by the Charter Holdings not to materially affect the issuers' ability to make principal or interest payments on the notes when due. "CONSOLIDATED INDEBTEDNESS" means, with respect to any Person as of any date of determination, the sum, without duplication, of: (1) the total amount of outstanding Indebtedness of such Person and its Restricted Subsidiaries, plus (2) the total amount of Indebtedness of any other Person, that has been Guaranteed by the referent Person or one or more of its Restricted Subsidiaries, plus (3) the aggregate liquidation value of all Disqualified Stock of such Person and all preferred stock of Restricted Subsidiaries of such Person, in each case, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any period, without duplication, the sum of: (1) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, including, without limitation, amortization or original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments, if any, pursuant to Hedging Obligations; and (2) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (3) any interest expense on Indebtedness of another Person that is guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries, whether or not such Guarantee or Lien is called upon; excluding, however, any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Consolidated EBITDA pursuant to clause (z) of the definition thereof, but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Consolidated EBITDA pursuant to clause (z) of the definition thereof, in each case, on a consolidated basis and in accordance with GAAP. 188 192 "CONTINUING DIRECTORS" means, as of any date of determination, any member of the board of directors of Charter Holdings who: (1) was a member of such board of directors on the date of the indentures; or (2) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board of directors at the time of such nomination or election or whose election or appointment was previously so approved. "CREDIT FACILITIES" means, with respect to Charter Holdings and/or its Restricted Subsidiaries, one or more debt facilities or commercial paper facilities, in each case with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing, including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables, or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. "DEFAULT" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "DISPOSITION" means, with respect to any Person, any merger, consolidation or other business combination involving such Person, whether or not such Person is the Surviving Person, or the sale, assignment, or transfer, lease conveyance or other disposition of all or substantially all of such Person's assets or Capital Stock. "DISQUALIFIED STOCK" means any Capital Stock that, by its terms, or by the terms of any security into which it is convertible, or for which it is exchangeable, in each case at the option of the holder thereof, or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the notes mature. Notwithstanding the preceding sentence, any Capital Stock that would constitute Disqualified Stock solely because the holders thereof have the right to require Charter Holdings to repurchase such Capital Stock upon the occurrence of a change of control or an asset sale shall not constitute Disqualified Stock if the terms of such Capital Stock provide that Charter Holdings may not repurchase or redeem any such Capital Stock pursuant to such provisions unless such repurchase or redemption complies with the covenant described above under the caption "-- Certain Covenants -- Restricted Payments." "EQUITY INTERESTS" means Capital Stock and all warrants, options or other rights to acquire Capital Stock, but excluding any debt security that is convertible into, or exchangeable for, Capital Stock. "EQUITY OFFERING" means any private or underwritten public offering of Qualified Capital Stock of Charter Holdings of which the gross proceeds to Charter Holdings are at least $25 million. "EXISTING INDEBTEDNESS" means Indebtedness of Charter Holdings and its Restricted Subsidiaries in existence on the date of the indentures, until such amounts are repaid. "FULL ACCRETION DATE" means January 15, 2005, the first date on which the Accreted Value of the 11.75% notes has accreted to an amount equal to the principal amount at maturity of the 11.75% notes. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on January 12, 2000. 189 193 "GUARANTEE" or "GUARANTEE" means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness, measured as the lesser of the aggregate outstanding amount of the Indebtedness so guaranteed and the face amount of the guarantee. "HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of such Person under: (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements; (2) interest rate option agreements, foreign currency exchange agreements, foreign currency swap agreements; and (3) other agreements or arrangements designed to protect such Person against fluctuations in interest and currency exchange rates. "HELICON PREFERRED STOCK" means the preferred limited liability company interest of Charter-Helicon LLC with an aggregate liquidation value of $25 million. "INDEBTEDNESS" means, with respect to any specified Person, any indebtedness of such Person, whether or not contingent: (1) in respect of borrowed money; (2) evidenced by bonds, notes, debentures or similar instruments or letters of credit, or reimbursement agreements in respect thereof; (3) in respect of banker's acceptances; (4) representing Capital Lease Obligations; (5) in respect of the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; or (6) representing the notional amount of any Hedging Obligations, if and to the extent any of the preceding items, other than letters of credit and Hedging Obligations, would appear as a liability upon a balance sheet of the specified Person prepared in accordance with GAAP. In addition, the term "Indebtedness" includes all Indebtedness of others secured by a Lien on any asset of the specified Person, whether or not such Indebtedness is assumed by the specified Person, and, to the extent not otherwise included, the guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be: (1) the accreted value thereof, in the case of any Indebtedness issued with original issue discount; and (2) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness. "INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3 (or the equivalent) by Moody's and BBB- (or the equivalent) by S&P. "INVESTMENTS" means, with respect to any Person, all investments by such Person in other Persons, including Affiliates, in the forms of direct or indirect loans, including guarantees of Indebtedness or other obligations, advances or capital contributions, excluding commission, travel and similar advances to officers and employees made in the ordinary course of business, and purchases or 190 194 other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "LEVERAGE RATIO" means, as of any date, the ratio of: (1) the Consolidated Indebtedness of Charter Holdings on such date to (2) the aggregate amount of Consolidated EBITDA for Charter Holdings for the most recently ended fiscal quarter for which internal financial statements are available multiplied by four (the "Reference Period"). In addition to the foregoing, for purposes of this definition, "Consolidated EBITDA" shall be calculated on a pro forma basis after giving effect to (1) the issuance of the notes; (2) the incurrence of the Indebtedness or the issuance of the Disqualified Stock or other preferred stock of a Restricted Subsidiary, and the application of the proceeds therefrom, giving rise to the need to make such calculation and any incurrence or issuance, and the application of the proceeds therefrom, or repayment of other Indebtedness or Disqualified Stock or other preferred stock of a Restricted Subsidiary, other than the incurrence or repayment of Indebtedness for ordinary working capital purposes, at any time subsequent to the beginning of the Reference Period and on or prior to the date of determination, as if such incurrence, and the application of the proceeds thereof, or the repayment, as the case may be, occurred on the first day of the Reference Period; (3) any Dispositions or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Restricted Subsidiaries, including any person that becomes a Restricted Subsidiary as a result of such Asset Acquisition, incurring, assuming or otherwise becoming liable for or issuing Indebtedness, Disqualified Stock or preferred stock, made on or subsequent to the first day of the Reference Period and on or prior to the date of determination, as if such Disposition or Asset Acquisition, including the incurrence, assumption or liability for any such Indebtedness, Disqualified Stock or preferred stock and also including any Consolidated EBITDA associated with such Asset Acquisition, including any cost savings adjustments in compliance with Regulation S-X promulgated by the Securities and Exchange Commission, had occurred on the first day of the Reference Period. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code, or equivalent statutes, of any jurisdiction. "MANAGEMENT FEES" means the fees payable to Charter Communications, Inc. pursuant to the management agreements between Charter Communications, Inc. and Charter Communications Operating, LLC and between Charter Communications, Inc. and Restricted Subsidiaries of Charter Holdings, including any Person that becomes a Restricted Subsidiary of Charter Holdings in connection with the acquisition of Bresnan Communications Company Limited Partnership, as such agreements exist on the January 12, 2000, or on the date of such acquisition in the case of the aforementioned Bresnan acquisition, including any amendment or replacement thereof, provided that any such amendment or replacement is not more disadvantageous to the holders of the notes in any material respect from such management agreements existing on the January 12, 2000. 191 195 "MARCH 1999 NOTES ISSUE DATE" means March 17, 1999. "MOODY'S" means Moody's Investors Service, Inc. or any successor to the rating agency business thereof. "NET PROCEEDS" means the aggregate cash proceeds received by Charter Holdings or any of its Restricted Subsidiaries in respect of any Asset Sale, including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale, net of the direct costs relating to such Asset Sale, including, without limitation, legal, accounting and investment banking fees, and sales commissions, and any relocation expenses incurred as a result thereof or taxes paid or payable as a result thereof, including amounts distributable in respect of owners', partners' or members' tax liabilities resulting from such sale, in each case after taking into account any available tax credits or deductions and any tax sharing arrangements and amounts required to be applied to the repayment of Indebtedness. "NON-RECOURSE DEBT" means Indebtedness: (1) as to which neither Charter Holdings nor any of its Restricted Subsidiaries (a) provides credit support of any kind, including any undertaking, agreement or instrument that would constitute Indebtedness, (b) is directly or indirectly liable as a guarantor or otherwise, or (c) constitutes the lender; (2) no default with respect to which, including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary, would permit upon notice, lapse of time or both any holder of any other Indebtedness, other than the notes, of Charter Holdings or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (3) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of Charter Holdings or any of its Restricted Subsidiaries. "PARENT" means Charter Communications, Inc. and/or Charter Communications Holding Company, LLC, as applicable, and any successor Person or any Person succeeding to the direct or indirect ownership of Charter Holdings. "PERMITTED INVESTMENTS" means: (1) any Investment by Charter Holdings in a Restricted Subsidiary of Charter Holdings or any Investment by a Restricted Subsidiary of Charter Holdings in Charter Holdings; (2) any Investment in Cash Equivalents; (3) any Investment by Charter Holdings or any Restricted Subsidiary of Charter Holdings in a Person, if as a result of such Investment: (a) such Person becomes a Restricted Subsidiary of Charter Holdings; or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, Charter Holdings or a Restricted Subsidiary of Charter Holdings; (4) any Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "-- Repurchase at the Option of Holders -- Asset Sales"; 192 196 (5) any Investment made out of the net cash proceeds of the issue and sale since the Existing Notes Issue Date, other than to a Subsidiary of Charter Holdings, of Equity Interests, other than Disqualified Stock, of Charter Holdings to the extent that (a) such net cash proceeds have not been applied to make a Restricted Payment or to effect other transactions pursuant to the covenant described above under the caption "--Restricted Payments," or (b) such net cash proceeds have not been used to incur Indebtedness pursuant to clause (10) of the covenant described above under the caption "--Incurrence of Indebtedness and Issuance of preferred stock"; (6) Investments in Productive Assets having an aggregate fair market value, measured on the date each such Investment was made and without giving effect to subsequent changes in value, when taken together with all other Investments made pursuant to this clause (6) since the March 1999 Charter Holdings notes issue date, not to exceed $150 million; provided that either Charter Holdings or any of its Restricted Subsidiaries, after giving effect to such Investments, will own at least 20% of the Voting Stock of such Person; (7) other Investments in any Person having an aggregate fair market value, measured on the date each such Investment was made and without giving effect to subsequent changes in value, when taken together with all other Investments made pursuant to this clause (7) since the March 1999 Charter Holdings notes issue date, not to exceed $50 million; and (8) Investments in customers and suppliers in the ordinary course of business which either (A) generate accounts receivable, or (B) are accepted in settlement of bona fide disputes. "PERMITTED LIENS" means: (1) Liens on the assets of Charter Holdings securing Indebtedness and other Obligations under clause (1) of the covenant "--Incurrence of Indebtedness and Issuance of preferred stock"; (2) Liens in favor of Charter Holdings; (3) Liens on property of a Person existing at the time such Person is merged with or into or consolidated with Charter Holdings; provided that such Liens were in existence prior to the contemplation of such merger or consolidation and do not extend to any assets other than those of the Person merged into or consolidated with Charter Holdings; (4) Liens on property existing at the time of acquisition thereof by Charter Holdings; provided that such Liens were in existence prior to the contemplation of such acquisition; (5) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (6) purchase money mortgages or other purchase money liens, including without limitation any Capitalized Lease Obligations, incurred by Charter Holdings upon any fixed or capital assets acquired after the Issue Date or purchase money mortgages, including without limitation Capitalized Lease Obligations, on any such assets, whether or not assumed, existing at the time of acquisition of such assets, whether or not assumed, so long as (a) such mortgage or lien does not extend to or cover any of the assets of Charter Holdings, except the asset so developed, constructed, or acquired, and directly related assets 193 197 such as enhancements and modifications thereto, substitutions, replacements, proceeds, including insurance proceeds, products, rents and profits thereof, and (b) such mortgage or lien secures the obligation to pay the purchase price of such asset, interest thereon and other charges, costs and expenses, including, without limitation, the cost of design, development, construction, acquisition, transportation, installation, improvement, and migration, and incurred in connection therewith, or the obligation under such Capitalized Lease Obligation, only; (7) Liens existing on the date of the indentures, other than in connection with the Credit Facilities; (8) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (9) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (10) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (11) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligation, bankers' acceptance, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business, exclusive of obligations for the payment of borrowed money; (12) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of Charter Holdings or any of its Restricted Subsidiaries; (13) Liens of franchisors or other regulatory bodies arising in the ordinary course of business; (14) Liens arising from filing Uniform Commercial Code financing statements regarding leases or other Uniform Commercial Code financing statements for precautionary purposes relating to arrangements not constituting Indebtedness; (15) Liens arising from the rendering of a final judgment or order against Charter Holdings or any of its Restricted Subsidiaries that does not give rise to an Event of Default; (16) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (17) Liens encumbering customary initial deposits and margin deposits, and other Liens that are within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Hedging Obligations and forward contracts, options, future contracts, future options or similar agreements or arrangements designed solely to protect Charter Holdings or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; 194 198 (18) Liens consisting of any interest or title of licensor in the property subject to a license; (19) Liens on the Capital Stock of Unrestricted Subsidiaries; (20) Liens arising from sales or other transfers of accounts receivable which are past due or otherwise doubtful of collection in the ordinary course of business; (21) Liens incurred in the ordinary course of business of Charter Holdings, with respect to obligations which in the aggregate do not exceed $50 million at any one time outstanding; (22) Liens in favor of the trustee arising under the provisions in the indentures under the subheading "-- Compensation and Indemnity"; and (23) Liens in favor of the trustee for its benefit and the benefit of holders of the Notes, as their respective interests appear. "PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Charter Holdings or any of its Restricted Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund other Indebtedness of Charter Holdings or any of its Restricted Subsidiaries, other than intercompany Indebtedness; provided that unless permitted otherwise by the indentures, no Indebtedness of Charter Holdings or any of its Restricted Subsidiaries may be issued in exchange for, or the net proceeds of are used to extend, refinance, renew, replace, defease or refund Indebtedness of Charter Holdings or any of its Restricted Subsidiaries; provided, further, that: (1) the principal amount, or accreted value, if applicable, of such Permitted Refinancing Indebtedness does not exceed the principal amount of, or accreted value, if applicable, plus accrued interest and premium, if any, on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded, plus the amount of reasonable expenses incurred in connection therewith; (2) such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; (3) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated in right of payment to the notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the notes on terms at least as favorable to the holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (4) such Indebtedness is incurred either by Charter Holdings or by any of its Restricted Subsidiaries who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "PERSON" means any individual, corporation, partnership, joint venture, association, limited liability company, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. "PRODUCTIVE ASSETS" means assets, including assets of a referent Person owned directly or indirectly through ownership of Capital Stock, of a kind used or useful in the Cable Related Business. "QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified Stock. "RATING AGENCIES" means Moody's and S&P. 195 199 "RELATED PARTY" means: (1) the spouse or an immediate family member, estate or heir of Paul G. Allen; or (2) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of Paul G. Allen and/or such other Persons referred to in the immediately preceding clause (1). "RESTRICTED INVESTMENT" means an Investment other than a Permitted Investment. "RESTRICTED PAYMENTS" are set forth above under the caption "Certain Covenants- Restricted Payments." "RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "S&P" means Standard & Poor's Ratings Service, a division of the McGraw-Hill Companies, Inc. or any successor to the rating agency business thereof. "SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of Charter Holdings which is a "Significant Subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act. "STATED MATURITY" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the documentation governing such Indebtedness on the January 12, 2000, or, if none, the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "SUBSIDIARY" means, with respect to any Person: (1) any corporation, association or other business entity of which at least 50% of the total voting power of shares of Capital Stock entitled without regard to the occurrence of any contingency, to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof, and, in the case of any such entity of which 50% of the total voting power of shares of Capital Stock is so owned or controlled by such Person or one or more of the other Subsidiaries of such Person, such Person and its Subsidiaries also has the right to control the management of such entity pursuant to contract or otherwise; and (2) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person, or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person, or any combination thereof. "UNRESTRICTED SUBSIDIARY" means any Subsidiary of Charter Holdings that is designated by the board of directors of Charter Holdings as an Unrestricted Subsidiary pursuant to a board resolution, but only to the extent that such Subsidiary: (1) has no Indebtedness other than Non-Recourse Debt; (2) is not party to any agreement, contract, arrangement or understanding with Charter Holdings or any Restricted Subsidiary of Charter Holdings unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to Charter Holdings or any Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of Charter Holdings unless such terms constitute Investments permitted by the covenant described above under the caption "-- Certain Covenants -- Investments"; 196 200 (3) is a Person with respect to which neither Charter Holdings nor any of its Restricted Subsidiaries has any direct or indirect obligation (a) to subscribe for additional Equity Interests or (b) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (4) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of Charter Holdings or any of its Restricted Subsidiaries; and (5) has at least one director on its board of directors that is not a director or executive officer of Charter Holdings or any of its Restricted Subsidiaries or has at least one executive officer that is not a director or executive officer of Charter Holdings or any of its Restricted Subsidiaries. Any designation of a Subsidiary of Charter Holdings as an Unrestricted Subsidiary shall be evidenced to the trustee by filing with the trustee a certified copy of the board resolution giving effect to such designation and an officers' certificate certifying that such designation complied with the preceding conditions and was permitted by the covenant described above under the caption "Certain Covenants -- Investments." If, at any time, any Unrestricted Subsidiary would fail to meet the preceding requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the indentures and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of Charter Holdings as of such date and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of preferred stock", Charter Holdings shall be in default of such covenant. The board of directors of Charter Holdings may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of Charter Holdings of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if: (1) such Indebtedness is permitted under the covenant described under the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of preferred stock," calculated on a pro forma basis as if such designation had occurred at the beginning of the four-quarter reference period; and (2) no Default or Event of Default would be in existence following such designation. "VOTING STOCK" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the board of directors of such Person. "WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years, calculated to the nearest one-twelfth, that will elapse between such date and the making of such payment; by (2) the then outstanding principal amount of such Indebtedness. "WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which, other than directors' qualifying shares, shall at the time be owned by such Person and/or by one or more Wholly Owned Restricted Subsidiaries of such Person. 197 201 MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following sets forth the opinion of Paul, Hastings, Janofsky & Walker LLP, our legal counsel, as to the material United States federal income tax consequences of (1) the exchange offer relevant to U.S. holders, and (2) the ownership and disposition of the new notes relevant to U.S. holders and, in certain circumstances, non-U.S. holders. The following deals only with notes held as capital assets within the meaning of section 1221 of the Internal Revenue Code of 1986, as amended. The following does not address special situations, such as those of broker-dealers, tax-exempt organizations, individual retirement accounts and other tax deferred accounts, financial institutions, insurance companies, or persons holding notes as part of a hedging or conversion transaction, a straddle or a constructive sale. Furthermore, the following is based upon the provisions of the Internal Revenue Code and regulations, rulings and judicial decisions promulgated under the Internal Revenue Code and judicial decisions as of the date hereof. Such authorities may be repealed, revoked, or modified, possibly with retroactive effect, so as to result in United States federal income tax consequences different from those discussed below. In addition, except as otherwise indicated, the following does not consider the effect of any applicable foreign, state, local or other tax laws or estate or gift tax considerations. We have not sought, and will not seek, any rulings from the IRS with respect to the positions discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of the exchange offer and ownership or disposition of the original notes or new notes, or that any such position would not be sustained. As used herein, a "United States person" is (1) a citizen or resident of the U.S., (2) a corporation, partnership or other entity created or organized in or under the laws of the U.S. or any political subdivision thereof, (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source, (4) a trust if (A) a United States court is able to exercise primary supervision over the administration of the trust, and (B) one or more United States persons have the authority to control all substantial decisions of the trust, (5) a certain type of trust in existence on August 20, 1996, which was treated as a United States person under the Internal Revenue Code in effect immediately prior to such date and which has made a valid election to be treated as a United States person under the Internal Revenue Code, and (6) any person otherwise subject to U.S. federal income tax on a net income basis in respect of its worldwide taxable income. A U.S. holder is a beneficial owner of a note who is a United States person. A non-U.S. holder is a beneficial owner of a note that is not a U.S. holder. THE EXCHANGE OFFER Pursuant to the exchange offer, holders are entitled to exchange the original notes for new notes that will be substantially identical in all material respects to the original notes, except that the new 198 202 notes will be registered with the Securities and Exchange Commission and therefore will not be subject to transfer restrictions. The exchange pursuant to the exchange offer as described above will not result in a taxable event. Accordingly, (1) no gain or loss will be realized by a U.S. holder upon receipt of a new note, (2) the holding period of the new note will include the holding period of the original note exchanged therefor and (3) the adjusted tax basis of the new notes will be the same as the adjusted tax basis of the original notes exchanged at the time of such exchange. UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS PAYMENTS OF INTEREST ON THE 10.00% NOTES AND THE 10.25% NOTES Interest on a 10.00% note or a 10.25% note, as the case may be, will be taxable to a U.S. Holder as ordinary income from domestic sources at the time it is paid or accrued in accordance with the U.S. Holder's regular method of accounting for tax purposes. ORIGINAL ISSUE DISCOUNT ON THE 11.75% NOTES The 11.75% notes will be issued with original issue discount. Such notes will be issued with original issue discount because they will be issued at an issue price which is substantially less than their stated principal amount at maturity, and because interest on such notes will not be payable until July 15, 2005. Each U.S. Holder will be required to include in income in each year, in advance of receipt of cash payments on such Senior Discount Notes to which such income is attributable, original issue discount income as described below. The amount of original issue discount with respect to the 11.75% notes will be equal to the excess of (1) note's "stated redemption price at maturity" over (2) its "issue price." The issue price of the 11.75% notes will be equal to the price to the public, at which a substantial amount of such notes is initially sold for money excluding any sales to a bond house, broker or similar person or organization acting in the capacity of an underwriter, placement agent or wholesaler. The stated redemption price at maturity of such a note is the total of all payments provided by the 11.75% note, including stated interest payments. A U.S. holder of such a note is required to include in gross income for U.S. federal income tax purposes an amount equal to the sum of the "daily portions" of such original issue discount for all days during the taxable year on which the holder holds such note. The daily portions of original issue discount required to be included in such holder's gross income in a taxable year will be determined on a constant yield basis. A pro rata portion of the original issue discount on such note which is attributable to the "accrual period" in which such day is included will be allocated to each day during the taxable year in which the holder holds the 11.75% notes. Accrual periods with respect to such a note may be of any length and may vary in length over the term of the 11.75% notes as long as (1) no accrual period is longer than one year, and (2) each scheduled payment of interest or principal on such note occurs on either the first or final day of an accrual period. 199 203 The amount of original issue discount attributable to each accrual period will be equal to the product of (1) the "adjusted issue price" at the beginning of such accrual period, and (2) the "yield to maturity" of the instrument, stated in a manner appropriately taking into account the length of the accrual period. The yield to maturity is the discount rate that, when used in computing the present value of all payments to be made under the 11.75% notes, produces an amount equal to the issue price of such notes. The adjusted issue price of such a note at the beginning of an accrual period is generally defined as the issue price of such note plus the aggregate amount of original issue discount that accrued in all prior accrual periods, less any cash payments made on the 11.75% notes. Accordingly, a U.S. holder of such a note will be required to include original issue discount in gross income for United States federal income tax purposes in advance of the receipt of cash attributable to such income. The amount of original issue discount allocable to an initial short accrual period may be computed using any reasonable method if all other accrual periods, other than a final short accrual period, are of equal length. The amount of original issue discount allocable to the final accrual period at maturity of a 11.75% note is the difference between (A) the amount payable at the maturity of such note, and (B) such note's adjusted issue price as of the beginning of the final accrual period. Payments on the 11.75% notes, including principal and stated interest payments, are not separately included in a U.S. holder's income. Such payments are treated first as payments of accrued original issue discount to the extent of such accrued original issue discount and the excess as payments of principal, which reduce the U.S. holder's adjusted tax basis in such notes. EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON ORIGINAL ISSUE DISCOUNT In the event of a change of control, we will be required to offer to redeem all of the notes, at redemption prices specified elsewhere in this prospectus. If we receive net proceeds from one or more equity offerings, we may, at our option, use all or a portion of such net proceeds to redeem in the aggregate up to 35% of the aggregate principal amount at maturity of the 10.25% notes and up to 35% of the aggregate principal amount at maturity of the 11.75% notes at redemption prices specified elsewhere herein, provided that at least 65% of the aggregate principal amount at maturity of the 10.25% notes and the 11.75% notes, respectively, remains outstanding after each such redemption. Computation of the yield and maturity of the notes is not affected by such redemption rights and obligations if, based on all the facts and circumstances as of January 12, 2000, the stated payment schedule of the notes, that does not reflect the change of control event or equity offering event, is significantly more likely than not to occur. We have determined that, based on all of the facts and circumstances as of the issue date, it is significantly more likely than not that the notes will be paid according to their stated schedule. We may redeem the 10.25% notes and the 11.75% notes, in whole or in part, at any time on or after February 1, 2005, at redemption prices specified elsewhere herein plus accrued and unpaid stated interest, if any, on the notes so redeemed but excluding the date of redemption. The United States Treasury Regulations contain rules for determining the "maturity date" and the stated redemption price at maturity of an instrument that may be redeemed prior to its stated maturity date at the option of the issuer. Under United States Treasury Regulations, solely for the purposes of the accrual of original issue discount, it is assumed that an issuer will exercise any option to redeem a debt instrument if such exercise would lower the yield to maturity of the debt instrument. We will not be presumed to redeem the notes prior to their stated maturity under these rules because the exercise of such options would not lower the yield to maturity of the notes. 200 204 U.S. Holders may wish to consult their own tax advisors regarding the treatment of such contingencies. APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS Because the 11.75% notes constitute "applicable high yield discount obligations", referred to as "AHYDOs", the portion of each 11.75% note that is allocable to beneficial owners of Charter Holdings that are C corporations, such as Charter Communications, Inc., will be treated as an AHYDO for U.S. federal income tax purposes. The 11.75% notes constitute AHYDOs because they have a yield to maturity that is at least five percentage points above the applicable federal rate at the time of issuance of the 11.75% notes and the 11.75% notes are issued with "significant original issue discount." An 11.75% note is treated as having significant original issue discount because the aggregate amount that will be includable in gross income with respect to such 11.75% note for periods before the close of any accrual period ending after the date that is five years after the date of issue exceeds the sum of (1) the aggregate amount of interest to be paid in cash under the 11.75% note before the close of such accrual period and (2) the product of the initial issue price of such 11.75% note and its yield to maturity. Because the 11.75% notes constitute AHYDOs, to the extent that the 11.75% notes are allocable to beneficial owners of Charter Holdings that are C corporations, such as Charter Communications, Inc., (1) the "disqualified portion" of the original issue discount that accrues on the 11.75% notes allocable to beneficial owners of Charter Holdings that are C corporations, such as Charter Communications, Inc., may be treated as a dividend generally eligible for the dividends received deduction in the case of corporate U.S. Holders, (2) beneficial owners of Charter Holdings that are C corporations, such as Charter Communications, Inc., will not be entitled to deduct their distributive share of the disqualified portion of original issue discount that accrues on the 11.75% notes, and (3) beneficial owners of Charter Holdings that are C corporations, such as Charter Communications, Inc., will be allowed to deduct the remainder of their distributive share of original issue discount only when Charter Holdings pays amounts attributable to such original issue discount in cash. The disqualified portion of original issue discount is equal to the lesser of the amount of original issue discount or the portion of the "total return" with respect to the 11.75% notes in excess of the applicable federal rate plus six percentage points. The total return is the excess of all payments to be made with respect to a 11.75% note over its issue price. SALE, EXCHANGE OR RETIREMENT OF THE NOTES Upon the sale, exchange, retirement or other taxable disposition of a note, the holder will recognize gain or loss in an amount equal to the difference between (1) the amount of cash and the fair market value of other property received in the exchange and (2) the holder's adjusted tax basis in such note. Amounts attributable to accrued but unpaid interest on the 10.00% notes and the 10.25% notes will be treated as ordinary interest income. A holder's adjusted tax basis in a note will equal the purchase price paid by such holder for the note increased by the amount of any market discount, and in the case of a 11.75% note by any original issue discount previously included in income by such holder with respect to such note and decreased by the amount of any amortizable bond premium 201 205 applied to reduce interest on the notes and, in the case of a 11.75% note, by any payments received thereon. Gain or loss realized on the sale, exchange, retirement or other taxable disposition of a note will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange, retirement, or other taxable disposition, the note has been held for more than 12 months. The maximum rate of tax on long-term capital gains with respect to notes held by an individual is 20%. The deductibility of capital losses is subject to certain limitations. MARKET DISCOUNT A holder receives a "market discount" when he/she (1) purchases a 10.00% note or a 10.25% note for an amount below the issue price, or (2) purchases a 11.75% note for an amount below the adjusted issue price on the date of purchase, as determined in accordance with the original issue discount rules above. Under the market discount rules, a U.S. holder will be required to treat any partial principal payment on, or any gain on the sale, exchange, retirement or other disposition of, a note as ordinary income to the extent of the market discount which has not previously been included in income and is treated as having accrued on such note at the time of such payment or disposition. In addition, the U.S. holder may be required to defer, until the maturity of the note or its earlier disposition in a taxable transaction, the deduction of a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such notes. Any market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the note, unless the U.S. holder elects to accrue such discount on a constant interest rate method. A U.S. holder may elect to include market discount in income currently as it accrues, on either a ratable or constant interest rate method. If this election is made, the holder's basis in the note will be increased to reflect the amount of income recognized and the rules described above regarding deferral of interest deductions will not apply. This election to include market discount in income currently, once made, applies to all market discount obligations acquired on or after the first taxable year to which the election applies and may not be revoked without the consent of the Internal Revenue Service. AMORTIZABLE BOND PREMIUM; ACQUISITION PREMIUM A U.S. holder that (1) purchases a 10.00% note or a 10.25% note for an amount in excess of the principal amount, or (2) purchases a 11.75% note for an amount in excess of the stated redemption price will be considered to have purchased such note with "amortizable bond premium." A U.S. holder generally may elect to amortize the premium over the remaining term of the note on a constant yield method as applied with respect to each accrual period of the note, and allocated ratably to each day within an accrual period in a manner substantially similar to the method of calculating daily portions of original issue discount, as described above. However, because the notes may be optionally redeemed for an amount that is in excess of their principal amount, special rules apply that could result in a deferral of the amortization of bond premium until later in the term of the note. The amount amortized in any year will be treated as a reduction of the U.S. holder's interest income, including original issue discount income, from the note. Bond premium on a note held by a U.S. holder that does not make such an election will decrease the gain or increase the loss otherwise recognized upon disposition of the note. The election to amortize premium on a constant yield method, once made, applies to all 202 206 debt obligations held or subsequently acquired by the electing U.S. holder on or after the first day of the first taxable year to which the election applies and may not be revoked without the consent of the Internal Revenue Service. A U.S. Holder that purchases a 11.75% note for an amount that is greater than the adjusted issue price of the 11.75% note on the date of purchase, as determined in accordance with the original issue discount rules, above, will be considered to have purchased such 11.75% note at an "acquisition premium." A holder of a 11.75% note that is purchased at an acquisition premium may reduce the amount of the original issue discount otherwise includible in income with respect to the 11.75% note by the "acquisition premium fraction." The acquisition premium fraction is that fraction the numerator of which is the excess of the holder's adjusted tax basis in the 11.75% note immediately after its acquisition over the adjusted issue price of the 11.75% note and the denominator of which is the excess of the sum of all amounts payable on the 11.75% note after the purchase date over the adjusted issue price of the 11.75% note. Alternatively, a holder of a 11.75% note that is purchased at an acquisition premium may elect to compute the original issue discount accrual on the 11.75% note by treating the purchase as a purchase of the 11.75% note at original issuance, treating the purchase price as the issue price, and applying the original issue discount rules thereto using a constant yield method. UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS The payment to a non-U.S. holder of interest on a note, will not be subject to U.S. federal withholding tax pursuant to the "portfolio interest exception," provided that (1) the non-U.S. holder does not actually or constructively own 10% or more of the capital or profits interest in the issuers and is not a controlled foreign corporation that is related to the issuers within the meaning of the Code and (2) either (A) the beneficial owner of the notes certifies to the issuers or their agent, under penalties of perjury, that it is not a U.S. holder and provides its name and address on U.S. Treasury Form W-8, or a suitable substitute form, or (B) a securities clearing organization, bank or other financial institution that holds the notes on behalf of such non-U.S. holder in the ordinary course of its trade or business certifies under penalties of perjury that such Form W-8, or suitable substitute form, has been received from the beneficial owner by it or by a financial institution between it and the beneficial owner and furnishes the payor with a copy thereof. Recently adopted Treasury Regulations that will be effective January 1, 2001, provide alternative methods for satisfying the certification requirement described in (2) above. These regulations will generally require, in the case of notes held by a foreign partnership, that the certificate described in (2) above be provided by the partners rather than by the foreign partnership, and that the partnership provide certain information including a U.S. tax identification number. For purposes of the United States federal withholding tax, payment of interest includes the amount of any payment that is attributable to original issue discount that accrued while such non-U.S. holder held the note. If a non-U.S. holder cannot satisfy the requirements of the portfolio interest exception described above, payments of interest, including the amount of any payment that is attributable to original issue discount that accrued while such non-U.S. holder held the note, made to such non-U.S. holder will 203 207 be subject to a 30% withholding tax, unless the beneficial owner of the note provides us or our paying agent, as the case may be, with a properly executed (1) Internal Revenue Service Form 1001, or successor form, claiming an exemption from or reduction in the rate of withholding under the benefit of a tax treaty or (2) Internal Revenue Service Form 4224, or successor form, stating that interest paid on the note is not subject to withholding tax because it is effectively connected with the beneficial owner's conduct of a trade or business in the United States. If a non-U.S. holder of a note is engaged in a trade or business in the United States and interest on the note is effectively connected with the conduct of such trade or business, such non-U.S. holder, will be subject to U.S. federal income tax on such interest, including original issue discount, in the same manner as if it were a U.S. holder. In addition, if such non-U.S. holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits, subject to adjustment, for that taxable year unless it qualifies for a lower rate under an applicable income tax treaty. Any capital gain realized on the sale, redemption, retirement or other taxable disposition of a note by a person other than a U.S. holder generally will not be subject to U.S. federal income tax provided (1) such gain is not effectively connected with the conduct by such holder of a trade or business in the United States, (2) in the case of gains derived by an individual, such individual is not present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met and (3) the non-U.S. holder is not subject to tax pursuant to the provisions of U.S. federal income tax law applicable to certain expatriates. FEDERAL ESTATE TAX Subject to applicable estate tax treaty provisions, notes held by an individual who is not a citizen or resident of the United States for federal estate tax purposes at the time of his or her death will not be subject to U.S. federal estate tax if the interest on the notes qualifies for the portfolio interest exemption from U.S. federal income tax under the rules described above. INFORMATION REPORTING AND BACKUP WITHHOLDING Backup withholding and information reporting requirements may apply to certain payments of principal, premium, if any, and interest, and accruals of original issue discount, on a note, and to the proceeds of the sale or redemption of a note before maturity. We, our agent, a broker, the trustee or the paying agent, as the case may be, will be required to withhold from any payment that is subject to backup withholding a tax equal to 31% of such payment if a U.S. holder fails to furnish his taxpayer identification number, certify that such number is correct, certify that such holder is not subject to backup withholding or otherwise comply with the applicable backup withholding rules. Certain U.S. holders, including all corporations, are not subject to backup withholding and information reporting requirements. Non-U.S. holders other than corporations may be subject to backup withholding and information reporting requirements. However, backup withholding and information reporting requirements do not apply to payments of portfolio interest, including original issue discount, made by us or a paying agent to non-U.S. holders if the appropriate certification is received, provided that the payor does not have actual knowledge that the holder is a U.S. holder. If any payments of principal and interest are made 204 208 to the beneficial owner of a note by or through the foreign office of a foreign custodian, foreign nominee or other foreign agent of such beneficial owner, or if the foreign office of a foreign "broker", as defined in the applicable Treasury Regulations, pays the proceeds of the sale, redemption or other disposition of note or a coupon to the seller thereof, backup withholding and information reporting requirements will not apply. Information reporting requirements, but not backup withholding, will apply, however, to a payment by a foreign office of a broker that is a United States person or is a foreign person that derives 50% of more of its gross income for certain period from the conduct of a trade or business in the United States, or that is a "controlled foreign corporation", that is, a foreign corporation controlled by certain U.S. shareholders, with respect to the United States unless the broker has documentary evidence in its records that the holder is a non-U.S. holder and certain other conditions are met or the holder otherwise establishes an exemption. Payment by a U.S. office of a broker is subject to both backup withholding at a rate of 31% and information reporting unless the holder certifies under penalties of perjury that it is a non-U.S. holder or otherwise establishes an exemption. In October 1997, Treasury regulations were issued which alter the foregoing rules in certain respects and which generally will apply to any payments in respect of a note or proceeds from the sale of a note that are made after December 31, 2000. Among other things, such regulations expand the number of foreign intermediaries that are potentially subject to information reporting and address certain documentary evidence requirements relating to exemption from the backup withholding requirements. Holders of the notes should consult their tax advisers concerning the possible application of such regulations to any payments made on or with respect to the notes. Any amounts withheld under the backup withholding rules from a payment to a holder of the notes will be allowed as a refund or a credit against such holder's United States federal income tax liability, provided that the required information is furnished to the IRS. We must report annually to the IRS and to each non-U.S. holder any interest that is subject to withholding, or that is exempt from United States withholding tax pursuant to a tax treaty, or interest that is exempt from United States federal withholding tax under the portfolio interest exception. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the non-U.S. holder resides. PLAN OF DISTRIBUTION A broker-dealer that is the holder of original notes that were acquired for the account of such broker-dealer as a result of market-making or other trading activities, other than original notes acquired directly from us or any of our affiliates may exchange such original notes for new notes pursuant to the exchange offer. This is true so long as each broker-dealer that receives new notes for its own account in exchange for original notes, where such original notes were acquired by such broker-dealer as a result of market-making or other trading activities acknowledges that it will deliver a prospectus in connection with any resale of such new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for original notes where such original notes were acquired as a result of market-making activities or other trading activities. We have agreed that for a period of 180 days after consummation of the exchange offer or such time as any broker-dealer no longer owns any registrable securities, we will make this prospectus, as it may be amended or supplemented from time to time, available to any broker-dealer for use in connection with any such resale. All dealers effecting transactions in the new notes will be required to deliver a prospectus. We will not receive any proceeds from any sale of new notes by broker-dealers or any other holder of new notes. New notes received by broker-dealers for their own account in the exchange 205 209 offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such new notes. Any broker-dealer that resells new notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of new notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after consummation of the exchange offer or until such time as any broker-dealer no longer owns any registrable securities, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer and to our performance of, or compliance with, the registration rights agreements (other than commissions or concessions of any brokers or dealers) and will indemnify the holders of the notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The legality of the notes offered in this prospectus and other matters will be passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New York. EXPERTS The consolidated financial statements of Charter Communications Holdings, LLC and subsidiaries, the combined financial statements of CCA Group, the consolidated financial statements of CharterComm Holdings, L.P. and subsidiaries, the combined financial statements of Greater Media Cablevision Systems, the financial statements of Sonic Communications Cable Television Systems and Long Beach Acquisition Corp., the combined financial statements of Helicon Partners I, L.P. and affiliates for the seven months ended July 30, 1999, the consolidated financial statements of Marcus Cable Holdings, LLC and subsidiaries for the three months ended March 31, 1999 and the consolidated financial statements of CC V Holdings, LLC and subsidiaries, included in this prospectus, to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included in this prospectus in reliance upon the authority of said firm as experts in giving said reports. The combined financial statements of TCI Falcon Systems as of September 30, 1998 and December 31, 1997 and for the nine-month period ended September 30, 1998, and for each of the years in the two-year period ended December 31, 1997, the consolidated financial statements of Bresnan Communications Group LLC as of December 31, 1998 and 1999, and for each of the years in the three-year period ended December 31, 1999, the consolidated financial statements of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, and the combined financial statements of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998, have been included herein in reliance upon the reports 206 210 of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Renaissance Media Group LLC, the combined financial statements of the Picayune, MS, LaFourche, LA, St. Tammany, LA, St. Landry, LA, Pointe Coupee, LA, and Jackson, TN cable television systems, the financial statements of Indiana Cable Associates, Ltd. as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998, the consolidated financial statements of R/N South Florida Cable Management Limited Partnership as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998, the combined financial statements of Fanch Cable Systems Sold to Charter Communications, Inc. and the consolidated financial statements of Falcon Communications, L.P. appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. The audited combined financial statements of InterMedia Cable Systems (comprised of components of InterMedia Partners and InterMedia Capital Partners IV, L.P.), the audited financial statements of Rifkin Cable Income Partners L.P., the audited consolidated financial statements of Rifkin Acquisition Partners, L.L.L.P., the audited financial statements of Indiana Cable Associates, Ltd. as of September 13, 1999 and for the period from January 1, 1999 to September 13, 1999, the audited consolidated financial statements of R/N South Florida Cable Management Limited Partnership as of September 13, 1999 and for the period from January 1, 1999 to September 13, 1999 the audited consolidated financial statements of Avalon Cable of Michigan Holdings, Inc. and subsidiaries, the audited consolidated financial statements of Cable Michigan Inc. and subsidiaries, the audited consolidated financial statements of Avalon Cable LLC and subsidiaries, the audited financial statements of Amrac Clear View, a Limited Partnership as of May 28, 1998 and for the period from January 1, 1998 through May 28, 1998, the audited combined financial statements of The Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus Cable Television, Inc., included in this registration statement, have been audited by PricewaterhouseCoopers LLP, independent accountants. The entities and periods covered by these audits are indicated in their reports. The financial statements have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Amrac Clear View, a Limited Partnership as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, included in this prospectus, have been so included in reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C., independent accountants, given on the authority of said firm as experts in auditing and accounting. 207 211 - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- $1,532,000,000 OFFER TO PURCHASE 10.00% SENIOR NOTES DUE 2009, 10.25% SENIOR NOTES DUE 2010, AND 11.75% SENIOR DISCOUNT NOTES DUE 2010, FOR ANY AND ALL OUTSTANDING 10.00% SENIOR NOTES DUE 2009, 10.25% SENIOR NOTES DUE 2010, AND 11.75% SENIOR DISCOUNT NOTES DUE 2010, RESPECTIVELY, OF CHARTER COMMUNICATIONS HOLDINGS, LLC AND CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO ISSUE ONLY THE NEW NOTES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE. - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 212 INDEX TO FINANCIAL STATEMENTS
PAGE ----- CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-8 Consolidated Balance Sheets as of December 31, 1999 and 1998.................................................... F-9 Consolidated Statements of Operations for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998......................... F-10 Consolidated Statements of Changes in Member's Equity for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998....... F-11 Consolidated Statements of Cash Flows for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998......................... F-12 Notes to Consolidated Financial Statements................ F-13 Report of Independent Public Accountants.................. F-33 Consolidated Statements of Operations for the Period from January 1, 1998, through December 23, 1998 and for the Year ended December 31, 1997............................ F-34 Consolidated Statements of Changes in Shareholder's Investment for the Period from January 1, 1998, through December 23, 1998 and for the Year ended December 31, 1997.................................................... F-35 Consolidated Statements of Cash Flows for the Period from January 1, 1998, through December 23, 1998 and for the Year ended December 31, 1997............................ F-36 Notes to Consolidated Financial Statements................ F-37 CCA GROUP: Report of Independent Public Accountants.................. F-44 Combined Balance Sheet as of December 31, 1997............ F-45 Combined Statements of Operations for the Period from January 1, 1998, through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-46 Combined Statements of Shareholders' Deficit for the Period from January 1, 1998, through December 23, 1998 and for the Years Ended December 31, 1997 and 1996...... F-47 Combined Statements of Cash Flows for the Period from January 1, 1998, through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-48 Notes to Combined Financial Statements.................... F-49 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-63 Consolidated Balance Sheet as of December 31, 1997........ F-64 Consolidated Statements of Operations for the Period from January 1, 1998, through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-65 Consolidated Statements of Partners' Capital for the Period from January 1, 1998, through December 23, 1998 and for the Years Ended December 31, 1997 and 1996...... F-66 Consolidated Statements of Cash Flows for the Period from January 1, 1998, through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-67 Notes to Consolidated Financial Statements................ F-68
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PAGE ----- MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-81 Consolidated Statement of Operations for the Three Months Ended March 31, 1999.................................... F-82 Consolidated Statement of Members' Deficit for the Three Months Ended March 31, 1999............................. F-83 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1999.................................... F-84 Notes to Consolidated Financial Statements................ F-85 Independent Auditors' Report.............................. F-91 Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................... F-92 Consolidated Statements of Operations for Each of the Years in the Three-Year Period Ended December 31, 1998.................................................... F-93 Consolidated Statements of Members' Equity/Partners' Capital for Each of the Years in the Three-Year Period Ended December 31, 1998................................. F-94 Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1998.................................................... F-95 Notes to Consolidated Financial Statements................ F-96 RENAISSANCE MEDIA GROUP LLC: Report of Independent Auditors............................ F-107 Consolidated Balance Sheet as of April 30, 1999........... F-108 Consolidated Statement of Operations for the Four Months Ended April 30, 1999.................................... F-109 Consolidated Statement of Changes in Members' Equity for the Four Months Ended April 30, 1999.................... F-110 Consolidated Statement of Cash Flows for the Four Months Ended April 30, 1999.................................... F-111 Notes to Consolidated Financial Statements................ F-112 Report of Independent Auditors............................ F-120 Consolidated Balance Sheet as of December 31, 1998........ F-121 Consolidated Statement of Operations for the Year Ended December 31, 1998....................................... F-122 Consolidated Statement of Changes in Members' Equity for the Year Ended December 31, 1998........................ F-123 Consolidated Statement of Cash Flows for the Year Ended December 31, 1998....................................... F-124 Notes to Consolidated Financial Statements for the Year Ended December 31, 1998................................. F-125 PICAYUNE, MS, LAFOURCHE, LA, ST. TAMMANY, LA, ST. LANDRY, LA, POINTE COUPEE, LA AND JACKSON, TN CABLE TELEVISION SYSTEMS: Report of Independent Auditors............................ F-135 Combined Balance Sheet as of April 8, 1998................ F-136 Combined Statement of Operations for the Period from January 1, 1998 through April 8, 1998................... F-137 Combined Statement of Changes in Net Assets for the Period from January 1, 1998 through April 8, 1998.............. F-138 Combined Statement of Cash Flows for the Period from January 1, 1998 through April 8, 1998................... F-139 Notes to Combined Financial Statements.................... F-140 Report of Independent Auditors............................ F-147 Combined Balance Sheets as of December 31, 1996 and 1997.................................................... F-148 Combined Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997........................ F-149 Combined Statements of Changes in Net Assets for the Years Ended December 31, 1996 and 1997........................ F-150 Combined Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997........................ F-151 Notes to Combined Financial Statements.................... F-152
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PAGE ----- GREATER MEDIA CABLEVISION SYSTEMS: Report of Independent Public Accountants.................. F-159 Combined Statement of Income for the Nine Months Ended June 30, 1999........................................... F-160 Combined Statement of Changes in Net Assets for the Nine Months Ended June 30, 1999.............................. F-161 Combined Statement of Cash Flows for the Nine Months Ended June 30, 1999........................................... F-162 Notes to Combined Financial Statements.................... F-163 Report of Independent Public Accountants.................. F-167 Combined Balance Sheets as of September 30, 1998 and 1997.................................................... F-168 Combined Statements of Income for the Years Ended September 30, 1996, 1997 and 1998....................... F-169 Combined Statements of Changes in Net Assets for the Years Ended September 30, 1996, 1997 and 1998................. F-170 Combined Statements of Cash Flows for the Years Ended September 30, 1996, 1997 and 1998....................... F-171 Notes to Combined Financial Statements.................... F-172 HELICON PARTNERS I, L.P. AND AFFILIATES: Report of Independent Public Accountants.................. F-178 Combined Statement of Operations for the Seven Months Ended July 30, 1999..................................... F-179 Combined Statement of Changes in Partners' Deficit for the Seven Months Ended July 30, 1999........................ F-180 Combined Statement of Cash Flows for the Seven Months Ended July 30, 1999..................................... F-181 Notes to Combined Financial Statements.................... F-182 Independent Auditors' Report.............................. F-187 Combined Balance Sheets as of December 31, 1997 and 1998.................................................... F-188 Combined Statements of Operations for Each of the Years in the Three-Year Period Ended December 31, 1998........... F-189 Combined Statements of Changes in Partners' Deficit for Each of the Years in the Three-Year Period Ended December 31, 1998....................................... F-190 Combined Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1998........... F-191 Notes to Combined Financial Statements.................... F-192 RIFKIN CABLE INCOME PARTNERS L.P.: Report of Independent Accountants......................... F-204 Balance Sheet as of September 13, 1999.................... F-205 Statement of Operations for the period January 1, 1999 to September 13, 1999...................................... F-206 Statement of Equity for the period January 1, 1999 to September 13, 1999...................................... F-207 Statement of Cash Flows for the period January 1, 1999 to September 13, 1999...................................... F-208 Notes to Financial Statements............................. F-209 Report of Independent Accountants......................... F-213 Balance Sheet at December 31, 1997 and 1998............... F-214 Statement of Operations for Each of the Three Years in the Period Ended December 31, 1998.......................... F-215 Statement of Partners' Equity (Deficit) for Each of the Three Years in the Period Ended December 31, 1998....... F-216 Statement of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998.......................... F-217 Notes to Financial Statements............................. F-218
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PAGE ----- RIFKIN ACQUISITION PARTNERS, L.L.L.P.: Report of Independent Accountants......................... F-222 Consolidated Balance Sheet as of September 13, 1999....... F-223 Consolidated Statement of Operations for the period January 1, 1999 through September 13, 1999.............. F-224 Consolidated Statement of Partners' Capital for the period January 1, 1999 through September 13, 1999.............. F-225 Consolidated Statement of Cash Flows for the period January 1, 1999 through September 13, 1999.............. F-226 Notes to Consolidated Financial Statements................ F-227 Report of Independent Accountants......................... F-236 Consolidated Balance Sheet at December 31, 1998 and 1997.................................................... F-237 Consolidated Statement of Operations for Each of the Three Years in the Period Ended December 31, 1998............. F-238 Consolidated Statement of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998............. F-239 Consolidated Statement of Partners' Capital (Deficit) for Each of the Three Years in the Period Ended December 31, 1998.................................................... F-240 Notes to Consolidated Financial Statements................ F-241 INDIANA CABLE ASSOCIATES, LTD.: Report of Independent Accountants......................... F-255 Balance Sheet as of September 13, 1999.................... F-256 Statement of Operations for the period January 1, 1999 to September 13, 1999...................................... F-257 Statement of Equity for the period January 1, 1999 to September 13, 1999...................................... F-258 Statement of Cash Flows for the period January 1, 1999 to September 13, 1999...................................... F-259 Notes to Financial Statements............................. F-260 Report of Independent Auditors............................ F-264 Balance Sheet as of December 31, 1997 and 1998............ F-265 Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998..................................... F-266 Statement of Partners' Deficit for the Years Ended December 31, 1996, 1997 and 1998........................ F-267 Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998..................................... F-268 Notes to Financial Statements............................. F-269 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP: Report of Independent Accountants......................... F-273 Consolidated Balance Sheet as of September 13, 1999....... F-274 Consolidated Statement of Operations for the period January 1, 1999 to September 13, 1999................... F-275 Consolidated Statement of Equity for the period January 1, 1999 to September 13, 1999.............................. F-276 Consolidated Statement of Cash Flows for the period January 1, 1999 to September 13, 1999................... F-277 Notes to Consolidated Financial Statements................ F-278 Report of Independent Auditors............................ F-282 Consolidated Balance Sheet as of December 31, 1997 and 1998.................................................... F-283 Consolidated Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998........................ F-284 Consolidated Statement of Partners' Equity (Deficit) for the Years Ended December 31, 1996, 1997 and 1998........ F-285 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998........................ F-286 Notes to Consolidated Financial Statements................ F-287
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PAGE ----- INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.): Report of Independent Accountants......................... F-291 Combined Balance Sheets as of September 30, 1999 and December 31, 1998....................................... F-292 Combined Statements of Operations for the Nine Months Ended September 30, 1999 and for the Years ended December 31, 1998 and 1997.............................. F-293 Combined Statements of Changes in Equity for the Nine Months Ended September 30, 1999 and for the Years ended December 31, 1998 and 1997.............................. F-294 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1999 and for the Years ended December 31, 1998 and 1997.............................. F-295 Notes to Combined Financial Statements.................... F-296 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS: Report of Independent Public Accountants.................. F-307 Statement of Operations and Changes in Net Assets for the Period from April 1, 1998, through May 20, 1998......... F-308 Statement of Cash Flows for the Period from April 1, 1998, through May 20, 1998.................................... F-309 Notes to Financial Statements............................. F-310 LONG BEACH ACQUISITION CORP.: Report of Independent Public Accountants.................. F-313 Statement of Operations for the Period from April 1, 1997, through May 23, 1997.................................... F-314 Statement of Stockholder's Equity for the Period from April 1, 1997, through May 23, 1997..................... F-315 Statement of Cash Flows for the Period from April 1, 1997, through May 23, 1997.................................... F-316 Notes to Financial Statements............................. F-317 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.: Report of Independent Auditors............................ F-321 Report of Independent Auditors............................ F-322 Report of Independent Auditors............................ F-323 Report of Independent Auditors............................ F-324 Combined Balance Sheets as of November 11, 1999 and December 31, 1998....................................... F-325 Combined Statements of Operations for the Period from January 1, 1999 to November 11, 1999 and for the Years Ended December 31, 1998 and 1997........................ F-326 Combined Statements of Net Assets for the Period from January 1, 1999 to November 11, 1999 and for the Years Ended December 31, 1998 and 1997........................ F-327 Combined Statements of Cash Flows for the Period from January 1, 1999 to November 11, 1999 and for the Years Ended December 31, 1998 and 1997........................ F-328 Notes to Combined Financial Statements.................... F-329 FALCON COMMUNICATIONS, L.P.: Report of Independent Auditors............................ F-334 Consolidated Balance Sheets as of December 31, 1998 and November 12, 1999....................................... F-335 Consolidated Statements of Operations for each of the two years in the period ended December 31, 1998 and for the Period from January 1, 1999 to November 12, 1999........ F-336 Consolidated Statements of Partners' Equity (Deficit) for the each of the two years in the period ended December 31, 1998 and for the Period from January 1, 1999 to November 12, 1999....................................... F-337 Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 1998 and for the Period from January 1, 1999 to November 12, 1999........ F-338 Notes to Consolidated Financial Statements................ F-340
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PAGE ----- TCI FALCON SYSTEMS: Independent Auditors' Report.............................. F-360 Combined Balance Sheets at September 30, 1998 and December 31, 1997................................................ F-361 Combined Statements of Operations and Parent's Investment for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996.................................................... F-362 Combined Statements of Cash Flows for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996.................. F-363 Notes to Combined Financial Statements for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996.................. F-364 CC V HOLDINGS, LLC AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-371 Consolidated Balance Sheet as of December 31, 1999........ F-372 Consolidated Statements of Operations for the Period from November 15, 1999, through December 31, 1999, and for the Period from January 1, 1999, through November 14, 1999.................................................... F-373 Consolidated Statement of Changes in Shareholders' Equity for the Period from January 1, 1999, through November 14, 1999................................................ F-374 Consolidated Statements of Cash Flows for the Period from November 15, 1999, through December 31, 1999, and for the Period from January 1, 1999, through November 14, 1999.................................................... F-375 Notes to Consolidated Financial Statements................ F-376 AVALON CABLE LLC AND SUBSIDIARIES: Report of Independent Accountants......................... F-388 Consolidated Balance Sheet as of December 31, 1998 and 1997.................................................... F-389 Consolidated Statement of Operations for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-390 Consolidated Statement of Changes in Members' Interest from September 4, 1997 (inception) through December 31, 1998.................................................... F-391 Consolidated Statement of Cash Flows for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-392 Notes to Consolidated Financial Statements................ F-393 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES: Report of Independent Accountants......................... F-407 Consolidated Balance Sheet as of December 31, 1998 and 1997.................................................... F-408 Consolidated Statements of Operations for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-409 Consolidated Statement of Changes in Shareholders' Equity for the period from September 4, 1997 (inception) through December 31, 1998............................... F-410 Consolidated Statement of Cash Flows for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-411 Notes to Consolidated Financial Statements................ F-412 CABLE MICHIGAN, INC. AND SUBSIDIARIES: Report of Independent Accountants......................... F-425 Consolidated Balance Sheets as of December 31, 1997 and November 5, 1998........................................ F-426 Consolidated Statements of Operations for the years ended December 31, 1996 and 1997 and for the period from January 1, 1998 to November 5, 1998..................... F-427 Consolidated Statements of Changes in Shareholders' Deficit for the years ended December 31, 1996 and 1997 and for the period from January 1, 1998 to November 5, 1998.................................................... F-428 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997 and for the period from January 1, 1998 to November 5, 1998..................... F-429 Notes to Consolidated Financial Statements................ F-430
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PAGE ----- AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP: Report of Independent Accountants......................... F-444 Balance Sheet as of May 28, 1998.......................... F-445 Statement of Operations for the period from January 1, 1998 through May 28, 1998............................... F-446 Statement of Changes in Partners' Equity (Deficit) for the period from January 1, 1998 through May 28, 1998........ F-447 Statement of Cash Flows for the period from January 1, 1998 through May 28, 1998............................... F-448 Notes to Financial Statements............................. F-449 Independent Auditors' Report.............................. F-453 Balance Sheets at December 31, 1996 and 1997.............. F-454 Statements of Net Earnings for the years ended December 31, 1995, 1996 and 1997................................. F-455 Statements of Changes in Partners' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997........ F-456 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997..................................... F-457 Notes to Financial Statements............................. F-458 PEGASUS CABLE TELEVISION, INC.: Report of Independent Accountants......................... F-461 Combined Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998....................................... F-462 Combined Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998..................................... F-463 Combined Statements of Changes in Stockholder's Deficit for the three years ended December 31, 1997 and for the six months ended June 30, 1998.......................... F-464 Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998..................................... F-465 Notes to Combined Financial Statements.................... F-466 BRESNAN COMMUNICATIONS GROUP LLC: Independent Auditors' Report.............................. F-472 Consolidated Balance Sheets as of December 31, 1998 and 1999.................................................... F-473 Consolidated Statements of Operations and Members' Equity (Deficit) for the Years Ended December 31, 1997, 1998 and 1999................................................ F-474 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999........................ F-475 Notes to Consolidated Financial Statements................ F-476
F-7 219 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Holdings, LLC: We have audited the accompanying consolidated balance sheets of Charter Communications Holdings, LLC and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in member's equity and cash flows for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Charter Communications Holdings, LLC and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 16, 2000 F-8 220 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
DECEMBER 31, ------------------------- 1999 1998 ----------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 84,305 $ 9,573 Accounts receivable, net of allowance for doubtful accounts of $8,604 and $1,728, respectively............ 68,522 15,108 Receivables from manager of cable systems -- related parties................................................ 14,500 -- Prepaid expenses and other................................ 15,082 2,519 ----------- ---------- Total current assets................................... 182,409 27,200 ----------- ---------- INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment............................. 2,525,854 716,242 Franchises................................................ 9,162,331 3,590,054 ----------- ---------- 11,688,185 4,306,296 ----------- ---------- OTHER ASSETS................................................ 134,603 2,031 ----------- ---------- $12,005,197 $4,335,527 =========== ========== LIABILITIES AND MEMBER'S EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...................... $ -- $ 10,450 Accounts payable and accrued expenses..................... 553,174 127,586 Payables to manager of cable systems -- related parties... 6,713 4,334 ----------- ---------- Total current liabilities.............................. 559,887 142,370 ----------- ---------- LONG-TERM DEBT, less current maturities..................... 6,065,612 1,991,756 ----------- ---------- LOANS PAYABLE -- RELATED PARTIES............................ 906,000 -- ----------- ---------- DEFERRED MANAGEMENT FEES -- RELATED PARTIES................. 19,831 15,561 ----------- ---------- OTHER LONG-TERM LIABILITIES................................. 109,605 38,461 ----------- ---------- MEMBER'S EQUITY Member's equity (217,585,246 and 100 units issued and outstanding at December 31, 1999 and 1998, respectively).......................................... 4,342,046 2,147,379 Accumulated other comprehensive income.................... 2,216 -- ----------- ---------- Total member's equity.................................. 4,344,262 2,147,379 ----------- ---------- $12,005,197 $4,335,527 =========== ==========
The accompanying notes are an integral part of these consolidated statements. F-9 221 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- REVENUES.................................................... $1,325,830 $13,713 ---------- ------- OPERATING EXPENSES: Operating, general and administrative..................... 683,646 7,134 Depreciation and amortization............................. 675,786 8,318 Option compensation expense............................... 79,979 845 Corporate expense charges -- related parties.............. 48,158 473 ---------- ------- 1,487,569 16,770 ---------- ------- Loss from operations................................... (161,739) (3,057) ---------- ------- OTHER INCOME (EXPENSE): Interest expense.......................................... (434,995) (2,353) Interest income........................................... 18,821 133 Other, net................................................ (217) -- ---------- ------- (416,391) (2,220) ---------- ------- Loss before extraordinary item......................... (578,130) (5,277) EXTRAORDINARY ITEM -- Loss from early extinguishment of debt...................................................... (7,794) -- ---------- ------- Net loss............................................... $ (585,924) $(5,277) ========== =======
The accompanying notes are an integral part of these consolidated statements. F-10 222 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY (DOLLARS IN THOUSANDS)
ACCUMULATED OTHER TOTAL MEMBER'S COMPREHENSIVE MEMBER'S EQUITY INCOME EQUITY ---------- ------------- ---------- BALANCE, December 24, 1998.......................... $2,151,811 $ -- $2,151,811 Option compensation expense....................... 845 -- 845 Net loss.......................................... (5,277) -- (5,277) ---------- ------ ---------- BALANCE, December 31, 1998.......................... 2,147,379 -- 2,147,379 Capital contributions............................. 2,710,682 -- 2,710,682 Distributions to Charter Investment and Charter... (10,070) -- (10,070) Option compensation expense....................... 79,979 -- 79,979 Net loss.......................................... (585,924) -- (585,924) Unrealized gain on marketable securities available for sale....................................... -- 2,216 2,216 ---------- ------ ---------- BALANCE, December 31, 1999.......................... $4,342,046 $2,216 $4,344,262 ========== ====== ==========
The accompanying notes are an integral part of these consolidated statements. F-11 223 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (585,924) $ (5,277) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization.......................... 675,786 8,318 Option compensation expense............................ 79,979 845 Noncash interest expense............................... 93,073 -- Loss from early extinguishment of debt................. 7,794 -- Changes in assets and liabilities, net of effects from acquisitions- Accounts receivable.................................... (24,478) (8,753) Prepaid expenses and other............................. (3,672) (211) Accounts payable and accrued expenses.................. 136,016 10,227 Receivables from and payables to manager of cable systems, including deferred management fees.......... 4,891 473 Other operating activities................................ (1,245) 2,022 ----------- --------- Net cash provided by operating activities............ 382,220 7,644 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (709,731) (13,672) Payments for acquisitions, net of cash acquired........... (3,560,241) -- Loan to Marcus Cable Holdings............................. (1,680,142) -- Other investing activities................................ (12,583) -- ----------- --------- Net cash used in investing activities................ (5,962,697) (13,672) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt, including proceeds from Charter Holdings Notes................................. 9,237,188 14,200 Repayments of long-term debt.............................. (5,515,125) -- Borrowings from related parties........................... 906,000 -- Payments for debt issuance costs.......................... (107,562) -- Capital contributions..................................... 1,144,290 -- Distributions to Charter Investment and Charter........... (10,070) -- Other financing activities................................ 488 -- ----------- --------- Net cash provided by financing activities............ 5,655,209 14,200 ----------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 74,732 8,172 CASH AND CASH EQUIVALENTS, beginning of period.............. 9,573 1,401 ----------- --------- CASH AND CASH EQUIVALENTS, end of period.................... $ 84,305 $ 9,573 =========== ========= CASH PAID FOR INTEREST...................................... $ 307,255 $ 5,538 =========== ========= NONCASH TRANSACTIONS: Transfer of operating subsidiaries to the Company......... $ 1,252,370 $ -- Transfer of equity interests to the Company............... 314,022 --
The accompanying notes are an integral part of these consolidated statements. F-12 224 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION: GENERAL Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited liability company, owns and operates cable systems serving approximately 6.1 million (unaudited) customers, including cable systems acquired and transferred to the Company (see Note 17). Charter Holdings offers a full range of traditional cable television services and has begun to offer digital cable television services, interactive video programming and high-speed Internet access. Charter Holdings is a subsidiary of Charter Communications Holding Company, LLC (Charter Holdco), which is a subsidiary of Charter Communications, Inc. (Charter). In November 1999, Charter completed an initial public offering of the sale for 195.5 million shares of Class A common stock. Proceeds from the offering were used by Charter to purchase membership units in Charter Holdco, which used the funds received from Charter for the acquisition of additional cable television systems. ORGANIZATION AND BASIS OF PRESENTATION Charter Holdings was formed in February 1999 as a wholly owned subsidiary of Charter Investment, Inc. (Charter Investment). Charter Investment, through its wholly owned subsidiary, Charter Communications Properties Holdings, LLC (CCPH), commenced operations with the acquisition of a cable system on September 30, 1995. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter Investment for an aggregate purchase price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction, Charter Investment acquired, for fair value from unrelated third parties, all of the interests it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.), all cable operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment previously managed and owned minority interests in these companies. These acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of CharterComm Holdings and CCA Group are included in the consolidated financial statements from the date of acquisition. In February 1999, Charter Investment transferred all of its cable operating subsidiaries to Charter Communications Operating, LLC (Charter Operating), a wholly owned subsidiary of Charter Holdings. This transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. As a result of the change in ownership of CCPH, CharterComm Holdings and CCA Group, Charter Holdings has applied push-down accounting in the preparation of its consolidated financial statements. Accordingly, on December 23, 1998, Charter Holdings increased its member's equity by $2.2 billion to reflect the amounts paid by Mr. Allen and Charter Investment. The purchase price was allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $3.6 billion. On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen, (collectively, the "Mr. Allen Companies") purchased substantially all of the outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable) for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of the remaining partnership interest retained voting control of Marcus Cable. In February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and F-13 225 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership interests in Marcus Cable, including voting control. On April 7, 1999, Marcus Holdings was merged into Charter Holdings and Marcus Cable was transferred to Charter Holdings. For financial reporting purposes, the merger was accounted for as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen obtained voting control of Marcus Cable. Accordingly, the results of operations of Marcus Cable have been included in the consolidated financial statements from April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in the consolidated financial statements using historical carrying values reflected in the accounts of the Mr. Allen Companies. Total member's equity increased by $1.3 billion as a result of the Marcus Cable acquisition. Previously, on April 23, 1998, the Mr. Allen Companies recorded the assets acquired and liabilities assumed of Marcus Cable based on their relative fair values. The consolidated financial statements of Charter Holdings include the accounts of Charter Operating and CCPH, the accounts of CharterComm Holdings and CCA Group and their subsidiaries since December 23, 1998 (date acquired by Charter Investment), and the accounts of Marcus Cable since March 31, 1999, and are collectively referred to as the "Company" herein. All subsidiaries are, directly or indirectly, wholly owned by Charter Holdings. All material intercompany transactions and balances have been eliminated. Pursuant to a membership interests purchase agreement, as amended, Vulcan Cable III Inc. (Vulcan), a company controlled by Mr. Allen, contributed $500 million in cash in August 1999 to Charter Holdco, contributed an additional $180.7 million in certain equity interests acquired in connection with Charter Holdings' acquisition of Rifkin Acquisitions Partners, L.L.L.P. and InterLink Communications Partners, LLLP (collectively, "Rifkin") in September 1999, and contributed $644.3 million in cash in September 1999 to Charter Holdco. All funds and equity interests were contributed by Charter Holdco to Charter Holdings to finance certain acquisitions. In addition, certain Rifkin sellers received $133.3 million of the purchase price in the form of preferred equity in Charter Holdco. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost that approximates market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installations. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, while equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years
F-14 226 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Accumulated amortization related to franchises was $598.4 million and $5.3 million, as of December 31, 1999 and 1998, respectively. Amortization expense related to franchises for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, was $467.9 million and $5.3 million, respectively. DEFERRED FINANCING COSTS Costs related to borrowings are deferred and amortized to interest expense using the effective interest method over the terms of the related borrowings. As of December 31, 1999, other assets include $114.8 million of deferred financing costs, net of accumulated amortization of $10.2 million. IMPAIRMENT OF ASSETS If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted net cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 31, 1999 and 1998, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Local governmental authorities impose franchise fees on the Company ranging up to a federally mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly basis from the Company's customers and are periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses. CHANNEL LAUNCH PAYMENTS The Company receives upfront payments from certain programmers to launch and promote new cable television channels. A portion of these payments represents reimbursement of advertising costs paid by the Company to promote the new channels. These reimbursements have been immaterial. The remaining portion is being amortized as an offset to programming expense over the respective terms of the program agreements, which range from one to 20 years. For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, the Company amortized and recorded as a reduction of F-15 227 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED programming costs $3.4 million and $12, respectively. As of December 31, 1999, the unamortized portion of payments received totaled $13.4 million and is included in other long-term liabilities. DIRECT RESPONSE ADVERTISING The Company expenses the production costs of advertising as incurred, except for direct response advertising, which is deferred and amortized over its expected period of future benefits. Direct response advertising consists primarily of direct mailings and radio, newspaper and cross-channel television advertisements that include a phone number for use in ordering the Company's products and services. The deferred advertising costs are amortized to advertising expense over the periods during which the future benefits are expected to be received. These periods range from two to four years depending on the type of service the customer subscribes to and represents the period the customer is expected to remain connected to the cable system. As of December 31, 1999, $700 of deferred advertising costs is included in other assets. Advertising expense was $29.7 million for the year ended December 31, 1999, including amortization of deferred advertising costs totaling $87. INVESTMENTS AND OTHER COMPREHENSIVE INCOME Investments in equity securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company owns common stock of WorldGate Communications, Inc. (WorldGate) that is classified as "available for sale" and reported at market value with unrealized gains and losses recorded as accumulated other comprehensive income. Based on quoted market prices, the investment was valued at $3.2 million as of December 31, 1999 and is included in other assets. Comprehensive loss for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, is $583.7 million and $5.3 million, respectively. INTEREST RATE HEDGE AGREEMENTS The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designated for hedging purposes and are not held or issued for speculative purposes. INCOME TAXES Income taxes are the responsibility of the individual member and are not provided for in the accompanying consolidated financial statements. In addition, certain subsidiaries are corporations subject to income taxes but have no operations and, therefore, no material income tax liabilities or assets. F-16 228 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED SEGMENTS In 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. Segments have been identified based upon management responsibility. The individual segments have been aggregated into one segment, cable services. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITIONS: During 1999, the Company acquired cable systems in eight separate transactions for an aggregate purchase price of $3.6 billion, net of cash acquired, excluding debt assumed of $354.0 million and equity issued of $314.0 million. In connection with the Rifkin acquisition, Charter Holdco issued equity interests totaling $133.3 million to certain sellers. In addition, Vulcan purchased $180.7 million of equity interests Rifkin and then contributed the equity interests to Charter Holdings. The purchase prices were allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $3.9 billion. The allocation of the purchase prices for these acquisitions are based, in part, on preliminary information, which is subject to adjustment upon obtaining complete valuation information. Management believes that finalization of the purchase prices and allocations will not have a material impact on the consolidated results of operations or financial position of the Company. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. Unaudited pro forma operating results as though the acquisitions discussed above, including the Paul Allen Transaction and the acquisition of Marcus Holdings, and the March 1999 refinancing discussed herein, had occurred on January 1, 1998, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- (UNAUDITED) Revenues.................................................... $1,843,986 $1,657,353 Loss from operations........................................ (218,189) (204,189) Loss before extraordinary item.............................. (771,780) (776,710)
The unaudited pro forma financial information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. F-17 229 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows:
PERIOD FROM DECEMBER 24, FOR THE YEAR 1998, THROUGH ENDED DECEMBER DECEMBER 31, 31, 1999 1998 ------------ ------------- Balance, beginning of period................................ $ 1,728 $1,702 Acquisitions of cable systems............................... 4,414 -- Charged to expense.......................................... 19,384 26 Uncollected balances written off, net of recoveries......... (16,922) -- -------- ------ Balance, end of period...................................... $ 8,604 $1,728 ======== ======
5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31:
1999 1998 ---------- -------- Cable distribution systems.................................. $2,591,527 $661,749 Land, buildings and leasehold improvements.................. 74,812 26,670 Vehicles and equipment...................................... 144,521 30,590 ---------- -------- 2,810,860 719,009 Less -- Accumulated depreciation............................ (285,006) (2,767) ---------- -------- $2,525,854 $716,242 ========== ========
For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, depreciation expense was $207.9 million and $2.8 million, respectively. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31:
1999 1998 -------- -------- Accounts payable............................................ $ 94,450 $ 7,439 Liability for pending transfer of cable system.............. 88,200 -- Accrued interest............................................ 68,004 30,809 Capital expenditures........................................ 66,713 15,560 Programming costs........................................... 41,966 11,856 Accrued general and administrative.......................... 38,753 6,688 Franchise fees.............................................. 34,689 12,534 Accrued income taxes........................................ 4,381 15,205 Other accrued liabilities................................... 116,018 27,495 -------- -------- $553,174 $127,586 ======== ========
The liability for pending transfer of cable system represents the fair value of a cable system to be transferred upon obtaining necessary regulatory approvals in connection with the transaction with InterMedia Capital Partners IV L. P., InterMedia Partners and their affiliates. F-18 230 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Such approvals were subsequently obtained and the system assets were transferred subsequent to December 31, 1999. 7. LONG-TERM DEBT: Long-term debt consists of the following at December 31:
1999 1998 ---------- ---------- Charter Holdings: Credit Agreements (including CCPH, CCA Group and CharterComm Holdings).................................. $ -- $1,726,500 14.000% Senior Secured Discount Debentures................ -- 109,152 11.250% Senior Notes...................................... -- 125,000 8.250% Senior Notes....................................... 600,000 -- 8.625% Senior Notes....................................... 1,500,000 -- 9.920% Senior Discount Notes.............................. 1,475,000 -- Charter Operating Credit Facilities......................... 2,906,000 -- Renaissance: 10.000% Senior Discount Notes............................. 114,413 -- Rifkin: 11.125% Senior Subordinated Notes......................... 900 -- ---------- ---------- 6,596,313 1,960,652 Current maturities........................................ -- (10,450) Unamortized net (discount) premium........................ (530,701) 41,554 ---------- ---------- $6,065,612 $1,991,756 ========== ==========
In March 1999, the Company extinguished substantially all existing long-term debt, excluding borrowings of the Company under its credit agreements, and refinanced substantially all existing credit agreements at various subsidiaries with a new credit agreement entered into by Charter Operating (the "Charter Operating Credit Facilities"). The excess of the amount paid over the carrying value, net of deferred financing costs, of the Company's long-term debt of $7.8 million was recorded as an extraordinary item-loss from early extinguishment of debt in the accompanying consolidated statements of operations. CHARTER HOLDINGS NOTES In March 1999, the Company issued $600.0 million 8.250% Senior Notes due 2007 (the "8.250% Senior Notes") for net proceeds of $598.4 million, $1.5 billion 8.625% Senior Notes due 2009 (the "8.625% Senior Notes") for net proceeds of $1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes due 2011 (the "9.920% Senior Discount Notes") for net proceeds of $905.5 million, (collectively with the 8.250% Senior Notes and the 8.625% Senior Notes, referred to as the "Charter Holdings Notes"). The 8.250% Senior Notes are not redeemable prior to maturity. Interest is payable semiannually in arrears on April 1 and October 1, beginning October 1, 1999 until maturity. The 8.625% Senior Notes are redeemable at the option of the Company at amounts decreasing from 104.313% to 100% of par value beginning on April 1, 2004, plus accrued and unpaid interest, to the date of redemption. At any time prior to April 1, 2002, the Company may redeem up to 35% of the aggregate principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of the principal amount under certain conditions. Interest is payable semi- annually in arrears on April 1 and October 1, beginning October 1, 1999, until maturity. F-19 231 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The 9.920% Senior Discount Notes are redeemable at the option of the Company at amounts decreasing from 104.960% to 100% of accreted value beginning April 1, 2004. At any time prior to April 1, 2002, the Company may redeem up to 35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a redemption price of 109.920% of the accreted value under certain conditions. No interest will be payable until April 1, 2004. Thereafter, cash interest is payable semi-annually in arrears on April 1 and October 1 beginning April 1, 2004, until maturity. The discount on the 9.920% Senior Discount Notes is being accreted using the effective interest method. The unamortized discount was $497.2 million at December 31, 1999. The Charter Holdings Notes rank equally with current and future unsecured and unsubordinated indebtedness (including accounts payables of the Company). The Company is required to make an offer to repurchase all of the Charter Holdings Notes, at a price equal to 101% of the aggregate principal or 101% of the accreted value, together with accrued and unpaid interest, upon a change of control of the Company, as defined. RENAISSANCE NOTES In connection with the acquisition of Renaissance Media Group LLC (Renaissance) during the second quarter of 1999, the Company assumed $163.2 million principal amount at maturity of senior discount notes due April 2008 (the "Renaissance Notes"). As a result of the change in control of Renaissance, the Company was required to make an offer to repurchase the Renaissance Notes at 101% of their accreted value. In May 1999, the Company made an offer to repurchase the Renaissance Notes pursuant to this requirement, and the holders of the Renaissance Notes tendered an amount representing 30% of the total outstanding principal amount at maturity for repurchase. These notes were repurchased using a portion of the proceeds from the Charter Holdings Notes. As of December 31, 1999, $114.4 million aggregate principal amount at maturity of Renaissance Notes with a carrying value of $86.5 million remain outstanding. Interest on the Renaissance Notes shall be paid semi-annually at a rate of 10% per annum beginning on October 15, 2003. The Renaissance Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003, initially at 105% of their principal amount at maturity, plus accrued and unpaid interest, declining to 100% of the principal amount at maturity, plus accrued and unpaid interest, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the Company may redeem up to 35% of the original principal amount at maturity with the proceeds of one or more sales of membership units at 110% of their accreted value, plus accrued and unpaid interest on the redemption date, provided that after any such redemption, at least $106 million aggregate principal amount at maturity remains outstanding. RIFKIN NOTES The Company acquired Rifkin in September 1999 and assumed Rifkin's 11.125% Senior Subordinated Notes due 2006 together with a $3.0 million promissory note payable to Monroe Rifkin, (the "Rifkin Notes"). Interest on the Rifkin Notes is payable semi-annually on January 15 and July 15 of each year. In September 1999, the Company commenced an offer to repurchase any and all of the outstanding Rifkin Notes, for cash at a premium over the principal amounts. In conjunction with this tender offer, the Company sought and obtained the consent of a majority in principal amount of the note holders of the outstanding Rifkin Notes to proposed amendments to the indenture governing the Rifkin Notes, which eliminated substantially all of the restrictive covenants. In October 1999, the Company repurchased a portion of the Rifkin Notes with a total F-20 232 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED outstanding principal amount of $124.1 million for a total of $140.6 million, including a consent fee to the holders who delivered timely consents amending the indenture, and repurchased the promissory note issued to Monroe Rifkin for $3.4 million. These notes were paid using borrowings from the Charter Operating Credit Facilities. At December 31, 1999, $900 aggregate principal of Rifkin Notes remain outstanding. HELICON NOTES The Company acquired Helicon I, L.P. and affiliates (collectively, "Helicon") in July 1999 and assumed Helicon's 11% Senior Secured Notes due 2003 (the "Helicon Notes"). On November 1, 1999, the Company redeemed all of the Helicon Notes at a purchase price equal to 103% of their principal amount, plus accrued and unpaid interest, for $124.8 million using borrowings from the Charter Operating Credit Facilities. CHARTER OPERATING CREDIT FACILITIES The Charter Operating Credit Facilities provide for two term facilities, one with a principal amount of $1.0 billion that matures September 2007 (Term A), and the other with the principal amount of $1.85 billion that matures March 2008 (Term B). The Charter Operating Credit Facilities also provides for a $1.25 billion revolving credit facility with a maturity date of September 2007 and at the option of the lenders, supplemental credit facilities, in the amount of $500.0 million available until March 18, 2002. Amounts under the Charter Operating Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75%. The variable interest rates ranged from 8.22% to 9.25% at December 31, 1999. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. As of December 31, 1999, the unused availability was $1.2 billion. In March 2000, the credit agreement was amended to increase the amount of the supplemental credit facility to $1.0 billion. In connection with this amendment, $600.0 million of the supplemental credit facility (the "Incremental Term Loan") was drawn down. The Incremental Term Loan maturity date is September 18, 2008. The indentures governing the debt agreements require the Company and/or its subsidiaries to comply with various financial and other covenants, including the maintenance of certain operating and financial ratios. These debt instruments also contain substantial limitations on, or prohibitions of distributions, additional indebtedness, liens, asset sales and certain other items. As a result of limitations and prohibitions of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to Charter Holdings, the parent company. F-21 233 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Based upon outstanding indebtedness at December 31, 1999, the amortization of term loans, scheduled reductions in available borrowings of the revolving credit facility, and the maturity dates for all senior and subordinated notes, aggregate future principal payments on the total borrowings under all debt agreements at December 31, 1999, are as follows:
YEAR AMOUNT - - - ---- ---------- 2000...................................................... $ -- 2001...................................................... -- 2002...................................................... 88,875 2003...................................................... 156,000 2004...................................................... 168,500 Thereafter................................................ 6,182,938 ---------- $6,596,313 ==========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1999, is as follows:
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE ---------- ---------- ---------- DEBT 8.250% Senior Notes................................ $ 598,557 $ -- $ 558,000 8.625% Senior Notes................................ 1,495,787 -- 1,395,000 9.920% Senior Discount Notes....................... 977,807 -- 881,313 Charter Operating Credit Facilities................ 2,906,000 -- 2,906,000 Loans payable to related parties................... 906,000 -- 906,000 Renaissance: 10.000% Senior Discount Notes.................... 86,507 -- 79,517 Rifkin: 11.125% Senior Subordinated Notes................ 954 -- 990
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE ---------- ---------- ---------- INTEREST RATE HEDGE AGREEMENTS Swaps.............................................. $ 15,554 $3,315,000 $ (17,951) Collars............................................ 1,361 240,000 (199)
F-22 234 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A summary of debt and the related interest rate hedge agreements at December 31, 1998, is as follows:
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE ---------- ---------- ---------- DEBT Credit Agreements (including CCPH, CCA Group and CharterComm Holdings)............................ $1,726,500 $ -- $1,726,500 14.000% Senior Secured Discount Debentures......... 138,102 -- 138,102 11.250% Senior Notes............................... 137,604 -- 137,604 INTEREST RATE HEDGE AGREEMENTS Swaps.............................................. $ 23,216 $1,105,000 $ 23,216 Caps............................................... -- 15,000 -- Collars............................................ 4,174 310,000 4,174
As the long-term debt under the credit facilities bears interest at current market rates, their carrying amount approximates market value at December 31, 1999 and 1998. The fair values of the notes are based on quoted market prices. The weighted average interest pay rate for the Company's interest rate swap agreements was 8.35% and 7.66% at December 31, 1999 and 1998, respectively. During 1999, the cap interest rate agreements expired and were not renewed. At December 31, 1998, the weighted average interest rate for the cap interest agreements was 8.55%. The weighted average interest rate for the Company's interest rate collar agreements were 9.13% and 7.74%, for the cap and floor components, respectively, at December 31, 1999, and 8.61% and 7.31%, respectively, at December 31, 1998. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would (receive) or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's credit facilities, thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's consolidated financial position or results of operations. F-23 235 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 9. REVENUES: Revenues consist of the following:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Basic....................................................... $ 927,726 $ 9,347 Premium..................................................... 117,396 1,415 Pay-per-view................................................ 26,627 260 Digital video............................................... 7,664 10 Advertising sales........................................... 67,918 493 Cable modem................................................. 9,991 55 Other....................................................... 168,508 2,133 ---------- ------- $1,325,830 $13,713 ========== =======
10. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating, general and administrative expenses consist of the following:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Programming................................................. $304,103 $ 3,137 General and administrative.................................. 222,283 2,377 Service..................................................... 89,969 847 Advertising................................................. 29,683 344 Marketing................................................... 22,504 225 Other....................................................... 15,104 204 -------- -------- $683,646 $ 7,134 ======== ========
11. RELATED PARTY TRANSACTIONS: Charter Investment and Charter provide management services to the Company including centralized customer billing services, data processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Certain costs for services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are allocated based on the number of basic customers. Such costs totaled $16.1 million and $128 for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively. All other costs incurred by Charter Investment and Charter on behalf of the Company are recorded as expenses in the accompanying consolidated financial statements and are included in corporate expense charges-related parties. Management believes that costs incurred by Charter Investment and Charter on the Company's behalf and included in the accompanying financial statements are not materially different than costs the Company would have incurred as a stand-alone entity. F-24 236 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The Company pays certain costs on behalf of Charter Investment and Charter. These costs are reimbursed by Charter Investment and Charter and are recorded as receivables from manager of cable systems-related parties in the accompanying consolidated financial statements. Charter Investment utilizes a combination of excess insurance coverage and self-insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. Medical coverage provides for $1.0 million aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $1.0 million aggregate stop loss protection and a loss limitation of $250 per person per year. The Company is charged a management fee as stipulated in the management agreements between Charter Investment, Charter and the Company. As of December 31, 1999 and 1998, management fees currently payable of $5.6 million and $473, respectively, are included in payables to manager of cable television systems-related parties. To the extent management fees charged to the Company are greater (less) than the corporate expenses incurred by Charter Investment and Charter, the Company will record distributions to (capital contributions from) Charter Investment and Charter. For the year ended December 31, 1999, the Company recorded distributions of $10.1 million. For the period from December 24, 1998, through December 31, 1998, the management fee charged to the Company approximated the corporate expenses incurred by Charter Investment and Charter on behalf of the Company. The Charter Operating Credit Facilities and notes outstanding prohibit payments of management fees in excess of 3.5% of revenues until repayment of the outstanding indebtedness. Any amount in excess of 3.5% of revenues owed to Charter Investment or Charter based on the management agreement is recorded as deferred management fees-related parties. Charter, Mr. Allen and certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interests in various entities that provide services or programming to the Company, including High Speed Access Corp. (High Speed Access), WorldGate, Wink Communications, Inc. (Wink), ZDTV, LLC (ZDTV), USA Networks, Inc. (USA Networks) and Oxygen Media Inc. (Oxygen Media). In addition, certain officers of the Company or directors of Charter also serve as directors of High Speed Access and USA Networks. The Company and its affiliates do not hold controlling interests in any of these companies. Certain of the Company's cable customers receive cable modem-based Internet access through High Speed Access and TV-based Internet access through WorldGate. For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, revenues attributable to these services were less than 1% of total revenues. The Company receives or will receive programming and certain interactive features embedded into the programming for broadcast via its cable systems from Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee for the programming service generally based on the number of subscribers receiving the service. Such fees for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were approximately 1% of total operating costs. In addition, the Company receives commissions from USA Networks for home shopping sales generated by its customers. Such revenues for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were less than 1% of total revenues. In the second quarter of 1999, Charter Holdings loaned $50 million to Charter Holdco. The promissory note bears interest at 7.5% compounded annually. For the year ended December 31, F-25 237 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 1999, Charter Holdings recognized $1.2 million of interest income pertaining to this promissory note. This note was repaid in November 1999. In connection with the issuance of the Charter Holdings Notes in March 1999, the Company extinguished substantially all existing long-term debt including debt at Marcus Cable. Prior to the merger with Marcus Cable in March 1999, the Company loaned Marcus Cable $1.7 billion. In April 1999, the loan was repaid. During November 1999, the Company received $906 million from Charter and Charter Holdco that was used to pay down the Charter Operating Credit Facilities. The Company recorded the funds as loans payable-related parties. The loans will be repaid with additional long-term borrowings made in connection with the Bresnan acquisition (See Note 17) and accordingly, the loans have been classified as long-term. The loans carry interest rates from 7.82% to 7.91%. Interest expense on the loans totaled $11.6 million for the year ended December 31, 1999. 12. OPTION PLAN: In accordance with an employment agreement between Charter Investment and the President and Chief Executive Officer of Charter and a related option agreement with the President and Chief Executive Officer, an option to purchase 7,044,127 Charter HoldCo membership interests, was issued to the President and Chief Executive Officer. The option vests over a four year period from the date of grant and expires ten years from the date of grant. In February 1999, Charter Holdings adopted an option plan providing for the grant of options. The plan was assumed by Charter Holdco. The option plan provides for grants of options to employees, officers and directors of Charter Holdco and its affiliates and consultants who provide services to Charter Holdco. Options granted vest over five years from the grant date, commencing 15 months after the date of grant. Options not exercised accumulate and are exercisable, in whole or in part, in any subsequent period, but not later than ten years from the date of grant. Membership units received upon exercise of the options are automatically exchanged for shares of Class A common stock of Charter on a one-for-one basis. F-26 238 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A summary of the activity for the Company's option plan for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998 is as follows:
1999 1998 ----------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ----------- -------- ---------- -------- Options outstanding, beginning of period.................................. 7,044,127 $20.00 -- $ -- Granted: December 23, 1998....................... -- -- 7,044,127 20.00 February 9, 1999........................ 9,111,681 20.00 -- -- April 5, 1999........................... 473,000 20.73 -- -- November 8, 1999........................ 4,741,400 19.00 -- -- Cancelled................................. (612,600) 19.95 -- -- ----------- ------ ---------- ------ Options outstanding, end of period........ 20,757,608 $19.79 7,044,127 $20.00 =========== ====== ========== ====== Weighted Average Remaining Contractual Life.................................... 9.2 years 10.0 years =========== ========== Options Exercisable, end of period........ 2,091,032 $19.90 1,761,032 $20.00 =========== ====== ========== ====== Weighted average fair value of options granted................................. $ 12.59 $ 12.50 =========== ==========
In February 2000, the Company granted 5.7 million options at $19.47 per share. The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for the option plans. Option compensation expense of $80.0 million and $845 for the year ended December 31, 1999, and for the period from December 24, 1998, to December 31, 1998, respectively, has been recorded in the consolidated financial statements since the exercise prices were less than the estimated fair values of the underlying membership interests on the date of grant. Estimated fair values were determined by the Company using the valuation inherent in the Paul Allen Transaction and valuations of public companies in the cable television industry adjusted for factors specific to the Company. Compensation expense is being recorded over the vesting period of each grant that varies from four to five years. As of December 31, 1999, deferred compensation remaining to be recognized in future periods totaled $79.4 million. No option compensation expense was recorded for the options granted on November 8, 1999, since the exercise price is equal to the estimated fair value of the underlying membership interests on the date of grant. Since the membership units are exchangeable into Class A common stock of Charter on a one-for-one basis, the estimated fair value was equal to the initial offering price of Class A common stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires pro forma disclosure of the impact on earnings as if the compensation costs for these plans had been determined consistent with the fair value F-27 239 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED methodology of this statement. The Company's net loss would have been increased to the following unaudited pro forma amounts under SFAS 123:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Net loss: As reported............................................... $(585,924) $(5,277) Pro forma (unaudited)..................................... (610,258) (5,495)
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants during the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively: risk-free interest rates of 5.5% and 4.8%; expected volatility of 43.8% and 43.7%; and expected lives of 10 years. The valuations assume no dividends are paid. 13. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were $10.3 million and $70, respectively. As of December 31, 1999, future minimum lease payments are as follows: 2000........................................................ $6,132 2001........................................................ 4,614 2002........................................................ 2,511 2003........................................................ 1,921 2004........................................................ 1,441 Thereafter.................................................. 5,379
The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, was $13.3 million and $137, respectively. LITIGATION The Company is a party to lawsuits and claims that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits and claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and F-28 240 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. During 1999, the amounts refunded by the Company have been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. As of December 31, 1999, approximately 18% of the Company's local franchising authorities are certified to regulate basic tier rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the consolidated financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Company does not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Company's consolidated financial position or results of operations. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. 14. EMPLOYEE BENEFIT PLANS: The Company's employees may participate in 401(k) plans (the "401(k) Plans"). Employees that qualify for participation can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company matches 50% of the first 5% of participant contributions. The Company made contributions to the 401(k) Plans totaling $2.9 million and $20 for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively. F-29 241 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 15. ACCOUNTING STANDARD NOT YET IMPLEMENTED: The Company is required to adopt Statement of Financial Accounting Standards Board No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133 on the consolidated financial statements nor has the Company determined the timing of the adoption of SFAS No. 133. However, SFAS No. 133 could increase the volatility in earnings (losses). 16. PARENT COMPANY ONLY FINANCIAL STATEMENTS: As the result of limitations on and prohibition of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to Charter Holdings, the parent company. The following parent company only financial statements of Charter Holdings account for the investment in Charter Operating under the equity method of accounting. The financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto. CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------------ 1999 1998 ---------- ---------- ASSETS Cash and cash equivalents................................... $ 9,762 $ -- Investment in Charter Operating............................. 7,387,183 2,147,379 Other assets................................................ 69,793 -- ---------- ---------- $7,466,738 $2,147,379 ========== ========== LIABILITIES AND MEMBER'S EQUITY Current liabilities......................................... $ 47,365 $ -- Payables to manager of cable systems -- related parties..... 2,960 -- Long-term debt.............................................. 3,072,151 -- Member's equity............................................. 4,344,262 2,147,379 ---------- ---------- $7,466,738 $2,147,379 ========== ==========
F-30 242 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Interest expense............................................ $(221,925) $ -- Interest income............................................. 11,833 -- Equity in loss of Charter Operating......................... (375,832) (5,277) --------- ------- Net loss.................................................. $(585,924) $(5,277) ========= =======
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (585,924) $(5,277) Noncash interest expense.................................. 78,473 -- Equity in losses of Charter Operating..................... 375,832 5,277 Changes in assets and liabilities......................... 48,825 -- ----------- ------- Net cash used in operating activities.................. (82,794) -- ----------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Charter Operating........................... (1,730,466) -- Loans to Marcus Cable Holdings, LLC....................... (1,680,142) Repayment of debt on behalf of Charter Operating.......... (663,259) Distributions received from Charter Operating............. 96,748 -- ----------- ------- Net cash used in investing activities.................. (3,977,119) -- ----------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from debt offering........................... 2,999,385 -- Payments for debt issuance costs.......................... (74,000) -- Capital contributions..................................... 1,144,290 -- ----------- ------- Net cash used in financing activities.................. 4,069,675 -- ----------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 9,762 -- CASH AND CASH EQUIVALENTS, beginning of period.............. -- -- ----------- ------- CASH AND CASH EQUIVALENTS, end of period.................... $ 9,762 $ -- =========== =======
F-31 243 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 17. SUBSEQUENT EVENTS: On January 1, 2000, Charter Holdco and Charter Holdings effected a number of transactions in which cable systems acquired by Charter Holdco in November 1999 were contributed to Charter Holdings (the "Transferred Systems"). The Company intends to account for the contribution of the Transferred Systems to Charter Holdings as a reorganization of entities under common control in a manner similar to pooling of interests effective January 1, 2000. Charter Holdings will revise its financial statements as of and for the year ended December 31, 1999, to reflect the reorganization. The accounts of the Transferred Systems will be included in Charter Holdings' financial statements from the date the Transferred Systems were acquired by Charter Holdco. This revision will occur in connection with the filing of Charter Holdings' Quarterly Report on Form 10-Q for the quarter ending March 31, 2000. On January 6, 2000, Charter Holdings issued notes with a principal amount of $1.5 billion (January 2000 Charter Holdings Notes). The January 2000 Charter Holdings Notes are comprised of $675.0 million 10.00% Senior Notes due 2009, $325.0 million 10.25% Senior Notes due 2010, and $532.0 million 11.75% Senior Discount Notes due 2010. The net proceeds were approximately $1.3 billion, after giving effect to discounts, commissions and expenses. The proceeds from the January 2000 Charter Holdings Notes were used to finance the repurchases of debt assumed in the above transfers and the Bresnan acquisition (as defined below). On February 14, 2000, Charter Holdco and Charter Holdings completed the acquisition of Bresnan Communications Company Limited Partnership (Bresnan). Prior to the acquisition, Charter Holdco assigned a portion of its rights to purchase Bresnan to Charter Holdings. Charter Holdco and Charter Holdings purchased 52% of Bresnan from certain sellers for cash and certain sellers contributed 18% of Bresnan to Charter Holdco for 14.8 million Class C common membership units of Charter Holdco, an approximate 2.6% equity interest in Charter Holdco. Charter Holdco then transferred its ownership interest to Charter Holdings. Thereafter, Charter Holdings and certain sellers contributed all of the outstanding interests in Bresnan to CC VIII, LLC (CC VIII), a subsidiary of Charter Holdings and Bresnan was dissolved. In exchange for the contribution of their interests in Bresnan, the sellers received approximately 24.2 million Class A preferred membership units in CC VIII representing 30% of the equity of CC VIII and are entitled to a 2% annual return on their preferred membership units. The purchase price for Bresnan was approximately $3.1 billion subject to adjustment and was comprised of $1.1 billion in cash, $384.6 million and $629.5 million in equity in Charter Holdco and CC VIII, respectively, and approximately $1.0 billion in assumed debt. All the membership units received by the sellers are exchangeable on a one-for-one basis for Class A common stock of Charter. The Bresnan cable systems acquired are located in Michigan, Minnesota, Wisconsin and Nebraska, and serve approximately 686,000 (unaudited) customers. Subsequent to the completion of the Bresnan acquisition, Charter repurchased all of the outstanding Bresnan 9.25% Senior Discount Notes Due 2009 with an accreted value of $192.1 million and Bresnan 8.00% Senior Notes Due 2009 with a principal amount of $170.0 million for a total of $369.7 million. The notes were repurchased using a portion of the proceeds of the January 2000 Charter Holdings Notes. F-32 244 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Holdings, LLC: We have audited the accompanying consolidated statements of operations, changes in shareholder's investment and cash flows of Charter Communications Holdings, LLC and subsidiaries for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the operations and the cash flows of Charter Communications Holdings, LLC and subsidiaries for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-33 245 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, 1998, THROUGH DECEMBER YEAR ENDED 23, DECEMBER 31, 1998 1997 ------------- ------------ REVENUES.................................................... $ 49,731 $18,867 -------- ------- OPERATING EXPENSES: Operating, general and administrative..................... 25,952 11,767 Depreciation and amortization............................. 16,864 6,103 Corporate expense allocation -- related party............. 6,176 566 -------- ------- 48,992 18,436 -------- ------- Income from operations................................. 739 431 -------- ------- OTHER INCOME (EXPENSE): Interest expense.......................................... (17,277) (5,120) Interest income........................................... 44 41 Other, net................................................ (728) 25 -------- ------- (17,961) (5,054) -------- ------- Net loss............................................... $(17,222) $(4,623) ======== =======
The accompanying notes are an integral part of these consolidated statements. F-34 246 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S INVESTMENT (DOLLARS IN THOUSANDS)
COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ------- ----------- -------- BALANCE, December 31, 1996........................ $-- $ 5,900 $ (3,252) $ 2,648 Net loss........................................ -- -- (4,623) (4,623) -- ------- -------- -------- BALANCE, December 31, 1997........................ -- 5,900 (7,875) (1,975) Capital contributions........................... -- 10,800 -- 10,800 Net loss........................................ -- -- (17,222) (17,222) -- ------- -------- -------- BALANCE, December 23, 1998........................ $-- $16,700 $(25,097) $ (8,397) == ======= ======== ========
The accompanying notes are an integral part of these consolidated statements. F-35 247 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 23, DECEMBER 31, 1998 1997 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (17,222) $ (4,623) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization........................ 16,864 6,103 Noncash interest expense............................. 267 123 Loss on sale of cable system......................... -- 1,363 (Gain) loss on disposal of property, plant and equipment........................................... (14) 130 Changes in assets and liabilities, net of effects from acquisition -- Receivables............................................ 10 (227) Prepaid expenses and other............................. (125) 18 Accounts payable and accrued expenses.................. 16,927 894 Payables to manager of cable systems-related party..... 5,288 (153) Other operating activities............................. 569 -- --------- -------- Net cash provided by operating activities......... 22,564 3,628 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (15,364) (7,880) Payment for acquisition, net of cash acquired............. (167,484) -- Proceeds from sale of cable system........................ -- 12,528 Other investing activities................................ (486) -- --------- -------- Net cash (used in) provided by investing activities...................................... (183,334) 4,648 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 217,500 5,100 Repayments of long-term debt.............................. (60,200) (13,375) Capital contributions..................................... 7,000 -- Payments for debt issuance costs.......................... (3,487) (12) --------- -------- Net cash provided by (used in) financing activities...................................... 160,813 (8,287) --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 43 (11) CASH AND CASH EQUIVALENTS, beginning of period.............. 626 637 --------- -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 669 $ 626 ========= ======== CASH PAID FOR INTEREST...................................... $ 7,679 $ 3,303 ========= ========
The accompanying notes are an integral part of these consolidated statements. F-36 248 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION: Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited liability company, was formed in February 1999 as a wholly owned subsidiary of Charter Investment, Inc. (Charter Investment). Charter Investment, through its wholly owned cable television operating subsidiary, Charter Communications Properties Holdings, LLC (CCPH), commenced operations with the acquisition of a cable television system on September 30, 1995. Effective December 23, 1998, as a part of a series of transactions, through which Paul G. Allen acquired Charter Investment, Mr. Allen acquired CCPH for an aggregate purchase price of $211 million, excluding $214 million in debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction, CCPH was converted from a corporation to a limited liability company. Also, in conjunction with the Paul Allen Transaction, Charter Investment for fair value acquired from unrelated third parties all of the interest it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings, Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.), all cable television operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment previously managed and owned minority interests in these companies. These acquisitions were accounted for using the purchase method of accounting, and accordingly results of operations of CharterComm Holdings and CCA Group are included in the financial statements of Charter Holdings from the date of acquisition. In February 1999, Charter Investment transferred all of its cable television operating subsidiaries to a wholly owned subsidiary of Charter Holdings, Charter Communications Operating, LLC (Charter Operating). Charter Holdings is a wholly owned subsidiary of Charter Communications Holding Company, LLC (Charter Holdco). The transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. The accompanying consolidated financial statements include the accounts of CCPH and CCP, its wholly owned cable operating subsidiary, representing the consolidated financial statements of Charter Holdings and subsidiaries (collectively, the "Company") for all periods presented. The accounts of CharterComm Holdings and CCA Group are not included since these companies were not owned and controlled by Charter Investment prior to December 23, 1998. As a result of the change in ownership of CCPH, CharterComm Holdings and CCA Group, Charter Holdings has applied push-down accounting in the preparation of the consolidated financial statements effective December 23, 1998. Accordingly, the consolidated financial statements of Charter Holdings for periods ended on or before December 23, 1998, are presented on a different cost basis than the consolidated financial statements for the periods after December 23, 1998 (not presented herein), and are not comparable. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost that approximates market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable transmission and distribution facilities, and the F-37 249 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED cost of new customer installations. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, while equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years
For the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, depreciation expense was $6.2 million and $3.9 million, respectively. FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. OTHER ASSETS Debt issuance costs are being amortized to interest expense using the effective interest method over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. IMPAIRMENT OF ASSETS If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted net cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 23, 1998, and December 31, 1997, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Company ranging up to a federally mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly basis from the Company's customers and are periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses. F-38 250 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED INTEREST RATE HEDGE AGREEMENTS The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designated for hedging purposes and are not held or issued for speculative purposes. INCOME TAXES The Company filed a consolidated income tax return with Charter Investment. Income taxes are allocated to the Company in accordance with the tax-sharing agreement between the Company and Charter Investment. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITION: In 1998, the Company acquired a cable system for an aggregate purchase price, net of cash acquired, of $228.4 million, comprised of $167.5 million in cash and $60.9 million in a note payable to the seller. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $207.6 million and is included in franchises. The above acquisition was accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. The purchase price was allocated to tangible and intangible assets based on estimated fair values at the acquisition date. F-39 251 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Unaudited pro forma operating results as though the acquisition discussed above, excluding the Paul Allen Transaction, had occurred on January 1, 1997, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows:
PERIOD FROM JANUARY 1, 1998, THROUGH DECEMBER YEAR ENDED 23, DECEMBER 31, 1998 1997 ------------- ------------ (UNAUDITED) Revenues.................................................... $ 67,007 $ 63,909 Loss from operations........................................ (7,097) (7,382) Net loss.................................................... $(24,058) $(26,099)
The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had the transaction been completed as of the assumed date or which may be obtained in the future. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows:
PERIOD FROM JANUARY 1, 1998, THROUGH FOR THE DECEMBER YEAR ENDED 23, DECEMBER 31, 1998 1997 ------------- ------------ Balance, beginning of period................................ $ 52 $ 87 Acquisition of system....................................... 96 -- Charged to expense.......................................... 1,122 325 Uncollected balances written off, net of recoveries......... (778) (360) -- -- ------ ----- Balance, end of period...................................... $ 492 $ 52 ====== =====
5. SALE OF FT. HOOD SYSTEM: In February 1997, the Company sold the net assets of the Ft. Hood system, which served customers in Texas, for an aggregate sales price of approximately $12.5 million. The sale of the Ft. Hood system resulted in a loss of approximately $1.4 million, which is included in operating, general and administrative costs in the accompanying consolidated statement of operations for the year ended December 31, 1997. 6. INCOME TAXES: Deferred tax assets and liabilities are recognized for the estimated future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred income tax expense or benefit is the result of changes in the liability or asset recorded for deferred taxes. A valuation allowance must be established for any portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized. F-40 252 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED No current provision (benefit) for income taxes was recorded. The effective income tax rate is less than the federal rate of 35% primarily due to providing a valuation allowance on deferred income tax assets. 7. RELATED-PARTY TRANSACTIONS: Charter Investment provides management services to the Company including centralized customer billing services, data processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Certain costs for services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are determined based on the number of basic customers. Such costs totaled $437 and $220, respectively, for the period from January 1, 1998, through December 23, 1998, and the year ended December 31, 1997. All other costs incurred by Charter Investment on behalf of the Company are expensed in the accompanying consolidated financial statements and are included in corporate expense allocations -- related party. The cost of these services is allocated based on the number of basic customers. Management considers these allocations to be reasonable for the operations of the Company. Charter Investment utilizes a combination of excess insurance coverage and self-insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries, at the present value of the actuarially computed present and future liabilities for such benefits. Medical coverage provides for $2.4 million aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. The Company is charged a management fee based on percentages of revenues as stipulated in the management agreement between Charter Investment and the Company. For the period from January 1, 1998, through December 23, 1998, and the year ended December 31, 1997, the management fee charged to the Company approximated the corporate expenses incurred by Charter Investment on behalf of the Company. 8. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, were $278 and $130, respectively. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, was $421 and $271, respectively. LITIGATION The Company is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. F-41 253 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject to judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. As of December 31, 1998, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Company does not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Company's consolidated financial position or results of operations. A number of states subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. The Company is subject to state regulation in Connecticut. 9. EMPLOYEE BENEFIT PLAN: 401(K) PLAN The Company's employees may participate in the Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 15% of their salary, on or before tax basis, subject to a maximum contribution limit as determined by the F-42 254 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Internal Revenue Service. The Company contributes an amount equal to 50% of the first 5% of contributions by each employee. The Company contributed $74 and $29 for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, respectively. APPRECIATION RIGHTS PLAN Certain employees of Charter participated in the 1995 Charter Communications, Inc. Appreciation Rights Plan (the "Plan"). The Plan permitted Charter Investment to grant 1,500,000 units to certain key employees, of which 1,251,500 were outstanding at December 31, 1997. Units received by an employee vest at a rate of 20% per year, unless otherwise provided in the participant's Appreciation Rights Unit Agreement. The appreciation rights entitled the participants to receive payment, upon termination or change in control of Charter Investment, of the excess of the unit value over the base value (defined as the appreciation value) for each vested unit. The unit value was based on adjusted equity, as defined in the Plan. Deferred compensation expense was based on the appreciation value since the grant date and was being amortized over the vesting period. As a result of the acquisition of Charter Investment by Mr. Allen, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter Investment in 1999. The cost of this plan was allocated to the Company based on the number of basic customers. The company considers this allocation to be reasonable for the operations of the Company. For the period January 1, 1998, through December 23, 1998, the Company expensed $3,800, included in corporate expense allocation-related parties, and increased shareholder's investment for the cost of this plan. 10. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged items in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No. 133, has delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company has not yet quantified the impact of adopting SFAS No. 133 on the consolidated financial statements nor has determined the timing of the adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (losses). F-43 255 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CCA Group: We have audited the accompanying combined balance sheet of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc. (collectively CCA Group) and subsidiaries as of December 31, 1997, and the related combined statements of operations, shareholders' deficit and cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of CCA Group and subsidiaries as of December 31, 1997, and the combined results of their operations and their cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-44 256 CCA GROUP COMBINED BALANCE SHEET -- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 4,501 Accounts receivable, net of allowance for doubtful accounts of $926....................................... 9,407 Prepaid expenses and other................................ 1,988 Deferred income tax asset................................. 5,915 ---------- Total current assets.............................. 21,811 ---------- RECEIVABLE FROM RELATED PARTY, including accrued interest... 13,090 ---------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 352,860 Franchises, net of accumulated amortization of $132,871... 806,451 ---------- 1,159,311 ---------- OTHER ASSETS................................................ 13,731 ---------- $1,207,943 ========== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 25,625 Accounts payable and accrued expenses..................... 48,554 Payables to manager of cable television systems -- related party.................................................. 1,975 ---------- Total current liabilities......................... 76,154 ---------- DEFERRED REVENUE............................................ 1,882 ---------- DEFERRED INCOME TAXES....................................... 117,278 ---------- LONG-TERM DEBT, less current maturities..................... 758,795 ---------- DEFERRED MANAGEMENT FEES.................................... 4,291 ---------- NOTES PAYABLE, including accrued interest................... 348,202 ---------- SHAREHOLDERS' DEFICIT: Common stock.............................................. 1 Additional paid-in capital................................ 128,499 Accumulated deficit....................................... (227,159) ---------- Total shareholders' deficit....................... (98,659) ---------- $1,207,943 ==========
The accompanying notes are an integral part of these combined statements. F-45 257 CCA GROUP COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, --------------------- 1998 1997 1996 ------------- ---- ---- REVENUES............................................. $ 324,432 $ 289,697 $233,392 --------- --------- -------- EXPENSES: Operating costs.................................... 135,705 122,917 102,977 General and administrative......................... 28,440 26,400 18,687 Depreciation and amortization...................... 136,689 116,080 96,547 Management fees -- related parties................. 17,392 11,414 8,634 --------- --------- -------- 318,226 276,811 226,845 --------- --------- -------- Income from operations.......................... 6,206 12,886 6,547 --------- --------- -------- OTHER INCOME (EXPENSE): Interest income.................................... 4,962 2,043 1,883 Interest expense................................... (113,824) (108,122) (88,999) Other, net......................................... (294) 171 (2,504) --------- --------- -------- (109,156) (105,908) (89,620) --------- --------- -------- Net loss........................................ $(102,950) $ (93,022) $(83,073) ========= ========= ========
The accompanying notes are an integral part of these combined statements. F-46 258 CCA GROUP COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- ----- BALANCE, December 31, 1995................. $ 1 $ 99,999 $ (51,064) $ 48,936 Net loss................................. -- -- (83,073) (83,073) --- -------- --------- --------- BALANCE, December 31, 1996................. 1 99,999 (134,137) (34,137) Capital contributions.................... -- 28,500 -- 28,500 Net loss................................. -- -- (93,022) (93,022) --- -------- --------- --------- BALANCE, December 31, 1997................. 1 128,499 (227,159) (98,659) Capital contributions.................... -- 5,684 -- 5,684 Net loss................................. -- -- (102,950) (102,950) --- -------- --------- --------- BALANCE, December 23, 1998................. $ 1 $134,183 $(330,109) $(195,925) === ======== ========= =========
The accompanying notes are an integral part of these combined statements. F-47 259 CCA GROUP COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, --------------------- 1998 1997 1996 ------------- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................... $(102,950) $(93,022) $ (83,073) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization................... 136,689 116,080 96,547 Amortization of debt issuance costs and non cash interest cost................................. 44,701 49,107 39,927 (Gain) loss on sale of property, plant and equipment..................................... 511 (156) 1,257 Changes in assets and liabilities, net of effects from acquisitions -- Accounts receivable, net...................... 4,779 222 (1,393) Prepaid expenses and other.................... 243 (175) 216 Accounts payable and accrued expenses......... 3,849 8,797 3,855 Payables to manager of cable television systems, including deferred management fees....................................... 3,485 784 448 Deferred revenue.............................. 1,336 559 (236) Other operating activities.................... 5,583 (3,207) 1,372 --------- -------- --------- Net cash provided by operating activities..... 98,226 78,989 58,920 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment......... (95,060) (82,551) (56,073) Payments for acquisitions, net of cash acquired.... -- (147,187) (122,017) Other investing activities......................... (2,898) (1,296) 54 --------- -------- --------- Net cash used in investing activities........... (97,958) (231,034) (178,036) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt....................... 300,400 162,000 127,000 Repayments of long-term debt....................... (64,120) (39,580) (13,100) Payments of debt issuance costs.................... (8,442) (3,360) (3,126) Repayments under notes payable..................... (230,994) -- -- Capital contributions.............................. -- 28,500 -- --------- -------- --------- Net cash provided by (used in) financing activities.................................... (3,156) 147,560 110,774 --------- -------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS............ (2,888) (4,485) (8,342) CASH AND CASH EQUIVALENTS, beginning of period....... 4,501 8,986 17,328 --------- -------- --------- CASH AND CASH EQUIVALENTS, end of period............. $ 1,613 $ 4,501 $ 8,986 ========= ======== ========= CASH PAID FOR INTEREST............................... $ 179,781 $ 49,687 $ 51,434 ========= ======== =========
The accompanying notes are an integral part of these combined statements. F-48 260 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION CCA Group consists of CCA Holdings Corp. (CCA Holdings), CCT Holdings Corp. (CCT Holdings) and Charter Communications Long Beach, Inc. (CC-LB), all Delaware corporations (collectively referred to as "CCA Group" or the "Company") and their subsidiaries. The combined financial statements of each of these companies have been combined by virtue of their common ownership and management. All material intercompany transactions and balances have been eliminated. CCA Holdings commenced operations in January 1995 in connection with consummation of the Crown Transaction (as defined below). The accompanying financial statements include the accounts of CCA Holdings; its wholly-owned subsidiary, CCA Acquisition Corp. (CAC); CAC's wholly-owned subsidiary, Cencom Cable Entertainment, Inc. (CCE); and Charter Communications Entertainment I, L.P. (CCE-I), which is controlled by CAC through its general partnership interest. Through December 23, 1998, CCA Holdings was approximately 85% owned by Kelso Investment Associates V, L.P., an investment fund, together with an affiliate (collectively referred to as "Kelso" herein) and certain other individuals and approximately 15% by Charter Communications, Inc. (Charter), manager of CCE-I's cable television systems. CCT Holdings was formed on January 6, 1995. CCT Holdings commenced operations in September 1995 in connection with consummation of the Gaylord Transaction (as defined below). The accompanying financial statements include the accounts of CCT Holdings and Charter Communications Entertainment II, L.P. (CCE-II), which is controlled by CCT Holdings through its general partnership interest. Through December 23, 1998, CCT Holdings was owned approximately 85% by Kelso and certain other individuals and approximately 15% by Charter, manager of CCE-II's cable television systems. In January 1995, CAC completed the acquisition of certain cable television systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards, Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC and CCT Holdings entered into an Asset Exchange Agreement whereby CAC exchanged a 1% undivided interest in all of its assets for a 1.22% undivided interest in certain assets to be acquired by CCT Holdings from an affiliate of Gaylord Entertainment Company, Inc. (Gaylord). Effective September 30, 1995, CCT Holdings acquired certain cable television systems from Gaylord (the "Gaylord Transaction"). Upon execution of the Asset Purchase Agreement, CAC and CCT Holdings entered into a series of agreements to contribute the assets acquired under the Crown Transaction to CCE-I and certain assets acquired in the Gaylord acquisition to CCE-II. Collectively, CCA Holdings and CCT Holdings own 100% of CCE-I and CCE-II. CC-LB was acquired by Kelso and Charter in May 1997. The accompanying financial statements include the accounts of CC-LB and its wholly owned subsidiary, Long Beach Acquisition Corp. (LBAC) from the date of acquisition. Through December 23, 1998, CC-LB was owned approximately 85% by Kelso and certain other individuals and approximately 15% by Charter, manager of LBAC's cable television systems. Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through a series of transactions. In conjunction with Mr. Allen's acquisition, Charter acquired 100% of the outstanding stock of CCA Holdings, CCT Holdings and CC-LB on December 23, 1998. F-49 261 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In 1998, CCE-I provided cable television service to customers in Connecticut, Illinois, Massachusetts, Missouri and New Hampshire, CCE-II provided cable television service to customers in California and LBAC provided cable television service to customers in Long Beach, California, and certain surrounding areas. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that approximates market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a residence are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, and equipment replacement costs and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years
In 1997, the Company shortened the estimated useful lives of certain property, plant and equipment for depreciation purposes. As a result, additional depreciation of $8,123 was recorded during 1997. FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable television systems represent management's estimate of fair value and are amortized using the straight-line method over 15 years. OTHER ASSETS Debt issuance costs are amortized to interest expense over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. INCOME TAXES Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes." F-50 262 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITIONS: In 1997, CC-LB acquired the stock of LBAC for an aggregate purchase price, net of cash acquired, of $147,200. In connection with the completion of this acquisition, LBAC recorded $55,900 of deferred income tax liabilities resulting from differences between the financial reporting and tax basis of certain assets acquired. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $190,200 and is included in franchises. In 1996, the Company acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $122,000. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the dates of acquisition was $100,200 and is included in franchises. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of the acquisitions. Unaudited pro forma operating results for the 1997 acquisitions as though the acquisitions had been made on January 1, 1997, with pro forma adjustments to give effect to amortization of franchises, interest expense and certain other adjustments as follows:
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) ------------- Revenues.................................................... $303,797 Income from operations...................................... 14,108 Net loss.................................................... (94,853)
The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 3. RECEIVABLE FROM RELATED PARTY: In connection with the transfer of certain assets acquired in the Gaylord Transaction to Charter Communications Properties, Inc. (CCP), Charter Communications Properties Holding Corp. (CCP Holdings), the parent of CCP and a wholly owned subsidiary of Charter, entered into a $9,447 promissory note with CCT Holdings. The promissory note bears interest at the rates paid by CCT Holdings on the Gaylord Seller Note. Principal and interest are due on September 29, 2005. Interest income has been accrued based on an average rate of interest over the life of the Gaylord Seller Note, which approximates 15.4% and totaled $1,899 for the period from January 1, 1998, through December 23, 1998, and $1,806 and $1,547 for the years ended December 31, 1997 and 1996, respectively. As of December 31, 1997, interest receivable totaled $3,643. F-51 263 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1997: Cable distribution systems.................................. $ 426,241 Land, buildings and leasehold improvements.................. 15,443 Vehicles and equipment...................................... 24,375 --------- 466,059 Less -- Accumulated depreciation............................ (113,199) --------- $ 352,860 =========
Depreciation expense for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, was $72,914, $59,599 and $39,575, respectively. 5. OTHER ASSETS: Other assets consists of the following at December 31, 1997: Debt issuance costs......................................... $13,416 Note receivable............................................. 2,100 Other....................................................... 1,342 ------- 16,858 Less -- Accumulated amortization............................ (3,127) ------- $13,731 =======
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1997: Accrued interest............................................ $ 8,389 Franchise fees.............................................. 6,434 Programming expenses........................................ 5,855 Accounts payable............................................ 4,734 Public education and governmental costs..................... 4,059 Salaries and related benefits............................... 3,977 Capital expenditures........................................ 3,629 Other....................................................... 11,477 ------- $48,554 =======
F-52 264 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1997: CCE-I: Term loans................................................ $274,120 Fund loans................................................ 85,000 Revolving credit facility................................. 103,800 -------- 462,920 -------- CCE-II: Term loans................................................ 105,000 Revolving credit facility................................. 123,500 -------- 228,500 -------- LBAC: Term loans................................................ 85,000 Revolving credit facility................................. 8,000 -------- 93,000 -------- Total debt........................................ 784,420 Less -- Current maturities.................................. (25,625) -------- Total long-term debt.............................. $758,795 ========
CCE-I CREDIT AGREEMENT CCE-I maintains a credit agreement (the "CCE-I Credit Agreement"), which provides for a $280,000 term loan that matures on September 30, 2006, an $85,000 fund loan that matures on March 31, 2007, and a $175,000 revolving credit facility with a maturity date of September 30, 2006. Amounts under the CCE-I Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.75%. The variable interest rate ranged from 6.88% to 8.06% at December 23, 1998, and from 7.63% to 8.50% and 7.63% to 8.38% at December 31, 1997 and 1996, respectively. Commencing June 30, 2002, and at the end of each calendar quarter thereafter, available borrowings under the revolving credit facility and the term loan shall be reduced on an annual basis by 12.0% in 2002 and 15.0% in 2003. Commencing June 30, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the fund loan shall be reduced on an annual basis by 0.75% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.375% and 0.5% per annum is payable on the unborrowed balance of the revolving credit facility. COMBINED CREDIT AGREEMENT CCE-II and LBAC maintain a credit agreement (the "Combined Credit Agreement") which provides for two term loan facilities, one with the principal amount of $100,000 that matures on March 31, 2005, and the other with the principal amount of $90,000 that matures on March 31, 2006. The Combined Credit Agreement also provides for a $185,000 revolving credit facility, with a maturity date of March 31, 2005. Amounts under the Combined Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.5%. The variable interest rate ranged from 6.56% to 7.59% at December 23, 1998, and from 7.50% to 8.38% at December 31, 1997, respectively. F-53 265 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Commencing March 31, 2001, and at the end of each quarter thereafter, available borrowings under the revolving credit facility and one term loan shall be reduced on an annual basis by 5.0% in 2001, 15.0% in 2002 and 18.0% in 2003. Commencing in December 31, 1999, and at the end of each quarter thereafter, available borrowings under the other term loan shall be reduced on annual basis by 0.5% in 1999, 0.8% in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.25% and 0.375% per annum, based upon the intercompany indebtedness of the Company, is payable on the unborrowed balance of the revolving credit facility. CCE CREDIT AGREEMENT In October 1998, Charter Communications Entertainment, L.P. (CCE L.P.), a 98% direct and indirect owner of CCE-I and CCE-II and indirectly owned subsidiary of the Company, entered into a credit agreement (the "CCE L.P. Credit Agreement") which provides for a term loan facility with the principal amount of $130,000 that matures on September 30, 2007. Amounts under the CCE L.P. Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The variable interest rate at December 23, 1998, was 8.62%. Commencing June 30, 2002, and the end of each calendar quarter thereafter, the available borrowings for the term loan shall be reduced on an annual basis by 0.75% in 2002 and 1.0% in 2003. CCE-II HOLDINGS CREDIT AGREEMENT CCE-II Holdings, LLC (CCE-II Holdings), a wholly owned subsidiary of CCE L.P. and the parent of CCE-II, entered into a credit agreement (the "CCE-II Holdings Credit Agreement") in November 1998, which provides for a term loan facility with the principal amount of $95,000 that matures on September 30, 2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The variable rate at December 23, 1998, was 8.56%. Commencing June 30, 2002, and at the end of each quarter thereafter, available borrowings under the revolving credit facility and one term loan shall be reduced on an annual basis by 0.5% in 2002 and 1.0% in 2003. The credit agreements require the Company to comply with various financial and nonfinancial covenants, including the maintenance of annualized operating cash flow to fixed charge ratio, as defined, not to exceed 1.0 to 1.0. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens asset sales and certain other items. 8. NOTES PAYABLE: Notes payable consists of the following at December 31, 1997: HC Crown Note............................................... $ 82,000 Accrued interest on HC Crown Note........................... 36,919 Gaylord Seller Note......................................... 165,688 Accrued interest on Gaylord Seller Note..................... 63,595 -------- Total............................................. $348,202 ========
In connection with the Crown Transaction, the Company entered into an $82,000 senior subordinated loan agreement with a subsidiary of Hallmark, HC Crown Corp., and pursuant to F-54 266 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) such loan agreement issued a senior subordinated note (the "HC Crown Note"). The HC Crown Note was an unsecured obligation. The HC Crown Note was limited in aggregate principal amount to $82,000 and has a stated maturity date of December 31, 1999 (the "Stated Maturity Date"). Interest has been accrued at 13% per annum, compounded semiannually, payable upon maturity. In October 1998, the Crown Note and accrued interest was paid in full. In connection with the Gaylord Transaction, CCT Holdings entered into a $165,700 subordinated loan agreement with Gaylord (the "Gaylord Seller Note"). Interest expense has been accrued based on an average rate of interest over the life of the Gaylord Seller Note, which approximated 15.4%. In connection with the Gaylord Transaction, CCT Holdings, CCE L.P. and Gaylord entered into a contingent payment agreement (the "Contingent Agreement"). The Contingent Agreement indicates CCE L.P. will pay Gaylord 15% of any amount distributed to CCT Holdings in excess of the total of the Gaylord Seller Note, Crown Seller Note and $450,000. In conjunction with the Paul G. Allen acquisition of Charter and the Company, Gaylord was paid an additional $132,000 pursuant to the Contingent Agreement and the Gaylord Seller Note was paid in full. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1997, is as follows:
1997 -------------------------------- CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- DEBT Debt under credit agreements............................ $784,420 $ -- $784,420 HC Crown Note (including accrued interest).............. 118,919 -- 118,587 Gaylord Seller Note (including accrued interest)........ 229,283 -- 214,074 INTEREST RATE HEDGE AGREEMENTS Swaps................................................... -- 405,000 (1,214) Caps.................................................... -- 120,000 -- Collars................................................. -- 190,000 (437)
As the long-term debt under the credit agreements bear interest at current market rates, their carrying amount approximates fair market value at December 31, 1997. Fair value of the HC Crown Note is based upon trading activity at December 31, 1997. Fair value of the Gaylord Seller Note is based on current redemption value. The weighted average interest pay rate for the Company's interest rate swap agreements was 7.82% at December 31, 1997. The weighted average interest rate for the Company's interest rate cap agreements was 8.49% at December 31, 1997. The weighted average interest rates for the Company's interest rate collar agreements were 9.04% and 7.57% for the cap and floor components, respectively, at December 31, 1997. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. F-55 267 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would receive or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's Senior Credit Facility thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the results of operations or the financial position of the Company. 10. COMMON STOCK: The Company's common stock consist of the following at December 31, 1997: CCA Holdings: Common stock -- Class A, voting, $.01 par value, 100,000 shares authorized; 75,515 shares issued and outstanding............................................ $ 1 Common stock -- Class B, voting, $.01 par value, 20,000 shares authorized; 4,300 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 5,000 shares authorized; 185 shares issued and outstanding... -- --- 1 --- CCT Holdings: Common stock -- Class A, voting, $.01 par value, 20,000 shares authorized; 16,726 shares issued and outstanding............................................ -- Common stock -- Class B, voting, $.01 par value, 4,000 shares authorized; 3,000 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 1,000 shares authorized; 275 shares issued and outstanding... -- --- CC-LB: Common stock -- Class A, voting, $.01 par value, 31,000 shares authorized, 27,850 shares issued and outstanding............................................ -- Common stock -- Class B, voting, $.01 par value, 2,000 shares authorized, 1,500 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 2,000 shares authorized, 650 shares issued and outstanding... -- --- Total common stock................................ $ 1 ===
CCA HOLDINGS The Class A Voting Common Stock (CCA Class A Common Stock) and Class C Nonvoting Common Stock (CCA Class C Common Stock) have certain preferential rights upon liquidation of CCA Holdings. In the event of liquidation, dissolution or "winding up" of CCA Holdings, holders of CCA Class A and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CCA Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C shareholders shall ratably receive the remaining proceeds. F-56 268 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) If upon liquidation, dissolution or "winding up" the assets of CCA Holdings are insufficient to permit payment to Class A and Class C shareholders for their full preferential amounts, all assets of CCA Holdings shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amounts, the proceeds are to be distributed on a pro rata basis to Class B shareholders. Upon the occurrence of any Conversion Event (as defined within the Amended and Restated Certificate of Incorporation) Class C shareholders may convert any or all of their outstanding shares into the same number of Class A shares. Furthermore, CCA Holdings may automatically convert outstanding Class C shares into the same number of Class A shares. CCA Holdings is restricted from making cash dividends on its common stock until the balance outstanding under the HC Crown Note is repaid. Charter and Kelso entered into a Stockholders' Agreement providing for certain restrictions on the transfer, sale or purchase of CCA Holdings' common stock. CCT HOLDINGS The Class A Voting Common Stock (CCT Class A Common Stock) and Class C Nonvoting Common Stock (CCT Class C Common Stock) have certain preferential rights upon liquidation of CCT Holdings. In the event of liquidation, dissolution or "winding up" of CCT Holdings, holders of CCT Class A Common Stock and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CCT Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C shareholders shall ratably receive the remaining proceeds. If upon liquidation, dissolution or "winding up" the assets of CCT Holdings are insufficient to permit payment to Class A Common Stock and Class C shareholders for their full preferential amount, all assets of the Company shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amount, the proceeds are to be distributed on a pro rata basis to Class B shareholders. Upon the occurrence of any Conversion Event (as defined within the Amended and Restated Certificate of Incorporation), Class C shareholders may convert any or all of their outstanding shares into the same number of Class A shares. Furthermore, CCT Holdings may automatically convert outstanding Class C shares into the same number of Class A shares. CCT Holdings is restricted from making cash dividends on its common stock until the balance outstanding under the note payable to seller is repaid. Charter and Kelso entered into a Stockholders' Agreement providing for certain restrictions on the transfer, sale or purchase of CCT Holdings' common stock. CC-LB The Class A Voting Common Stock (CC-LB Class A Common Stock) and Class C Nonvoting Common Stock (CC-LB Class C Common Stock) have certain preferential rights upon liquidation of CC-LB. In the event of liquidation, dissolution or "winding up" of CC-LB, holders of CC-LB Class A Common Stock and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CC-LB Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A, Class B and Class C shareholders shall ratably receive the remaining proceeds. F-57 269 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) If upon liquidation, dissolution or "winding up" the assets of CC-LB are insufficient to permit payment to Class A and Class C shareholders for their full preferential amount, all assets of the Company shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amount, the proceeds are to be distributed on a pro rata basis to Class B shareholders. CC-LB Class C Common Stock may be converted into CC-LB Class A Common Stock upon the transfer of CC-LB Class C Common Stock to a person not affiliated with the seller. Furthermore, CC-LB may automatically convert outstanding Class C shares into the same number of Class A shares. 11. RELATED PARTY TRANSACTIONS: Charter provides management services to the Company under the terms of a contract which provides for annual base fees equal to $9,277 and $9,485 for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, respectively, plus an additional fee equal to 30% of the excess, if any, of operating cash flow (as defined in the management agreement) over the projected operating cash flow. Payment of the additional fee is deferred due to restrictions provided within the Company's credit agreements. Deferred management fees bear interest at 8.0% per annum. The additional fees for the periods from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996, totaled $2,160, $1,990 and $1,255, respectively. In addition, the Company receives financial advisory services from an affiliate of Kelso, under terms of a contract which provides for fees equal to $1,064 and $1,113 per annum as of January 1, 1998, through December 23, 1998, and December 31, 1997, respectively. Management and financial advisory service fees currently payable of $2,281 are included in payables to manager of cable television systems -- related party at December 31, 1997. The Company pays certain acquisition advisory fees to an affiliate of Kelso and Charter, which typically equal approximately 1% of the total purchase price paid for cable television systems acquired. Total acquisition fees paid to the affiliate of Kelso for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to the affiliate of Kelso in 1997 and 1996 were $-0- and $1,400, respectively. Total acquisition fees paid to Charter for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $-0- and $1,400, respectively. The Company and all entities managed by Charter collectively utilize a combination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Medical coverage provides for $2,435 aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. Charges are determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. The Company is allocated its share of the charges monthly based upon its total number of employees, historical claims and medical cost trend rates. Management considers this allocation to be reasonable for the operations of the Company. For the period from January 1, 1998, through December 23, 1998, the Company expensed $1,950 relating to insurance allocations. During 1997 and 1996, the Company expensed $1,689 and $2,065, respectively, relating to insurance allocations. Beginning in 1996, the Company and other entities managed by Charter employed the services of Charter's National Data Center (the "National Data Center"). The National Data Center performs certain customer billing services and provides computer network, hardware and F-58 270 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) software support to the Company and other affiliated entities. The cost of these services is allocated based on the number of customers. Management considers this allocation to be reasonable for the operations of the Company. For the period from January 1, 1998, through December 23, 1998, the Company expensed $843 relating to these services. During 1997 and 1996, the Company expensed $723 and $466 relating to these services, respectively. CCE-I maintains a regional office. The regional office performs certain operational services on behalf of CCE-I and other affiliated entities. The cost of these services is allocated to CCE-I and affiliated entities based on their number of customers. Management considers this allocation to be reasonable for the operations of CCE-I. From the period January 1, 1998, through December 23, 1998, the Company expensed $1,926 relating to these services. During 1997 and 1996, CCE-I expensed $861 and $799, respectively, relating to these services. 12. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, was $2,222. Rent expense incurred under these leases during 1997 and 1996 was $1,956 and $1,704, respectively. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expensed incurred for pole attachments for the period from January 1, 1998, through December 23, 1998, was $2,430. Rent expense incurred for pole attachments during 1997 and 1996 was $2,601 and $2,330, respectively. LITIGATION The Company is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. 13. REGULATION IN THE CABLE TELEVISION INDUSTRY: The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the F-59 271 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) maximum permitted rates. As of December 23, 1998, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. The Company is subject to state regulation in Connecticut. 14. INCOME TAXES: Deferred tax assets and liabilities are recognized for the estimated future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred income tax expense or benefit is the result of changes in the liability or asset recorded for deferred taxes. A valuation allowance must be established for any portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized. For the period from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996, no current provision (benefit) for income taxes was recorded. The effective income tax rate is less than the federal rate of 35% primarily due to providing a valuation allowance on deferred income tax assets. F-60 272 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes are comprised of the following at December 31, 1997: Deferred income tax assets: Accounts receivable....................................... $ 252 Other assets.............................................. 7,607 Accrued expenses.......................................... 4,740 Deferred revenue.......................................... 624 Deferred management fees.................................. 1,654 Tax loss carryforwards.................................... 80,681 Tax credit carryforward................................... 1,360 Valuation allowance....................................... (40,795) --------- Total deferred income tax assets.................. 56,123 --------- Deferred income tax liabilities: Property, plant and equipment............................. (38,555) Franchise costs........................................... (117,524) Other..................................................... (11,407) --------- Total deferred income tax liabilities............. (167,486) --------- Net deferred income tax liability................. $(111,363) =========
At December 31, 1997, the Company had net operating loss (NOL) carryforwards for regular income tax purposes aggregating $204,400, which expire in various years from 1999 through 2012. Utilization of the NOLs carryforwards is subject to certain limitations. 15. EMPLOYEE BENEFIT PLANS: The Company's employees may participate in the Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company contributes an amount equal to 50% of the first 5% of contributions by each employee. For the period from January 1, 1998, through December 23, 1998, the Company contributed $585 to the 401(k) plan. During 1997 and 1996, the Company contributed approximately $499 and $435 to the 401(k) Plan, respectively. Certain employees of the Company are participants in the 1996 Charter Communications/ Kelso Group Appreciation Rights Plan (the "Plan"). The Plan covers certain key employees and consultants within the group of companies and partnerships controlled by affiliates of Kelso and managed by Charter. The Plan permits the granting of up to 1,000,000 units, of which 705,000 were outstanding at December 31, 1997. Unless otherwise provided in a particular instance, units vest at a rate of 20% per annum. The Plan entitles participants to receive payment of the appreciated unit value for vested units, upon the occurrence of certain events specified in the Plan (i.e. change in control, employee termination) The units do not represent a right to an equity interest to any entities within the CCA Group. Compensation expense is based on the appreciated unit value and is amortized over the vesting period. As a result of the acquisition of Charter and the Company, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter in 1999. For the period from January 1, 1998, through December 23, 1998, the Company recorded $5,684 of expense, included in management fees, and a contribution from Charter related to the Appreciation Rights Plan. F-61 273 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 16. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). 17. SUBSEQUENT EVENT: Subsequent to December 23, 1998, CCA Holdings, CCT Holdings and CC-LB converted to limited liability companies and are now known as CCA Holdings LLC, CCT Holdings LLC and Charter Communications Long Beach, LLC, respectively. F-62 274 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CharterComm Holdings, L.P.: We have audited the accompanying consolidated balance sheet of CharterComm Holdings, L.P. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, partners' capital and cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CharterComm Holdings, L.P. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-63 275 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 2,742 Accounts receivable, net of allowance for doubtful accounts of $330....................................... 3,158 Prepaid expenses and other................................ 342 -------- Total current assets.............................. 6,242 -------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 235,808 Franchises, net of accumulated amortization of $119,968... 480,201 -------- 716,009 -------- OTHER ASSETS................................................ 16,176 -------- $738,427 ========
LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 5,375 Accounts payable and accrued expenses..................... 30,507 Payables to manager of cable television systems -- related party.................................................. 1,120 -------- Total current liabilities......................... 37,002 -------- DEFERRED REVENUE............................................ 1,719 -------- LONG-TERM DEBT, less current maturities..................... 666,662 -------- DEFERRED MANAGEMENT FEES.................................... 7,805 -------- DEFERRED INCOME TAXES....................................... 5,111 -------- REDEEMABLE PREFERRED LIMITED UNITS -- 577.81 units, issued and outstanding.................................... 20,128 -------- PARTNERS' CAPITAL: General Partner........................................... -- Common Limited Partners -- 220.24 units issued and outstanding............................................ -- -------- Total partners' capital........................... -- -------- $738,427 ========
The accompanying notes are an integral part of these consolidated statements. F-64 276 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, 1998, YEAR ENDED THROUGH DECEMBER 31 DECEMBER 23, -------------------- 1998 1997 1996 ------------ ---- ---- REVENUES.............................................. $196,801 $175,591 $120,280 -------- -------- -------- OPERATING EXPENSES: Operating costs..................................... 83,745 75,728 50,970 General and administrative.......................... 14,586 12,607 9,327 Depreciation and amortization....................... 86,741 76,535 53,133 Management fees -- related party.................... 14,780 8,779 6,014 -------- -------- -------- 199,852 173,649 119,444 -------- -------- -------- Income (loss) from operations.................... (3,051) 1,942 836 -------- -------- -------- OTHER INCOME (EXPENSE): Interest income..................................... 211 182 233 Interest expense.................................... (66,121) (61,498) (41,021) Other, net.......................................... (1,895) 17 (468) -------- -------- -------- (67,805) (61,299) (41,256) -------- -------- -------- Loss before extraordinary item................... (70,856) (59,357) (40,420) EXTRAORDINARY ITEM -- Loss on early retirement of debt................................................ (6,264) -- -- -------- -------- -------- Net loss......................................... (77,120) (59,357) (40,420) REDEMPTION PREFERENCE ALLOCATION: Special Limited Partner units....................... -- -- (829) Redeemable Preferred Limited units.................. -- -- (4,081) NET LOSS ALLOCATED TO REDEEMABLE PREFERRED LIMITED UNITS............................................... 20,128 2,553 4,063 -------- -------- -------- Net loss applicable to partners' capital accounts....................................... $(56,992) $(56,804) $(41,267) ======== ======== ======== NET LOSS ALLOCATION TO PARTNERS' CAPITAL ACCOUNTS: General Partner..................................... $(56,992) $(21,708) $(38,391) Common Limited Partners............................. -- (35,096) (2,876) -------- -------- -------- $(56,992) $(56,804) $(41,267) ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-65 277 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DOLLARS IN THOUSANDS)
COMMON GENERAL LIMITED PARTNER PARTNERS TOTAL ------- -------- ----- BALANCE, December 31, 1995.............................. $ 29,396 $ 2,202 $ 31,598 Capital contributions................................. 30,703 2,300 33,003 Allocation of net loss................................ (38,391) (2,876) (41,267) -------- -------- -------- BALANCE, December 31, 1996.............................. 21,708 1,626 23,334 Capital contributions................................. -- 33,470 33,470 Allocation of net loss................................ (21,708) (35,096) (56,804) -------- -------- -------- BALANCE, December 31, 1997.............................. -- -- -- Capital contributions................................. 4,920 -- 4,920 Allocation of net loss................................ (56,992) -- (56,992) -------- -------- -------- BALANCE, December 23, 1998.............................. $(52,072) $ -- $(52,072) ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-66 278 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 31, DECEMBER 23, ----------------------- 1998 1997 1996 ------------ ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.............................................. $ (77,120) $ (59,357) $ (40,420) Adjustments to reconcile net loss to net cash provided by operating activities -- Extraordinary item -- Loss on early retirement of debt............................................. 6,264 -- -- Depreciation and amortization...................... 86,741 76,535 53,133 Amortization of debt issuance costs, debt discount and interest rate cap agreements................. 14,563 14,212 9,564 Loss on disposal of property, plant and equipment........................................ 1,714 203 367 Changes in assets and liabilities, net of effects from acquisition -- Accounts receivable, net......................... 2,000 369 (303) Prepaid expenses and other....................... (203) 943 245 Accounts payable and accrued expenses............ (1,970) 3,988 9,911 Payables to manager of cable television systems, including deferred management fees............ 9,456 3,207 3,479 Deferred revenue................................. 770 (82) 452 Other operating activities....................... 5,378 -- -- --------- --------- --------- Net cash provided by operating activities........ 47,593 40,018 36,428 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............ (85,044) (72,178) (48,324) Payments for acquisitions, net of cash acquired....... (5,900) (159,563) (145,366) Other investing activities............................ 5,280 1,577 (2,089) --------- --------- --------- Net cash used in investing activities.............. (85,664) (230,164) (195,779) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.......................... 547,400 231,250 260,576 Repayments of long-term debt.......................... (505,300) (67,930) (34,401) Partners' capital contributions....................... -- 29,800 -- Payment of debt issuance costs........................ (3,651) (3,593) (11,732) Payment of Special Limited Partnership units.......... -- -- (43,243) Repayments of note payable -- related party........... -- -- (15,000) Payments for interest rate cap agreements............. -- -- (35) --------- --------- --------- Net cash provided by financing activities.......... 38,449 189,527 156,165 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 378 (619) (3,186) CASH AND CASH EQUIVALENTS, beginning of period.......... 2,742 3,361 6,547 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period................ $ 3,120 $ 2,742 $ 3,361 ========= ========= ========= CASH PAID FOR INTEREST.................................. $ 61,559 $ 42,538 $ 28,860 ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. F-67 279 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION CharterComm Holdings, L.P. (CharterComm Holdings) was formed in March 1996 with the contributions of Charter Communications Southeast Holdings, L.P. (Southeast Holdings), Charter Communications, L.P. (CC-I) and Charter Communications II, L.P. (CC-II). This contribution was accounted for as a reorganization under common control and, accordingly, the consolidated financial statements and notes have been restated to include the results and financial position of Southeast Holdings, CC-I and CC-II. Through December 23, 1998, CharterComm Holdings was owned 75.3% by affiliates of Charterhouse Group International, Inc., a privately owned investment firm (collectively referred to herein as "Charterhouse"), indirectly owned 5.7% by Charter Communications, Inc. (Charter), manager of the Partnership's (as defined below) cable television systems, and owned 19.0% primarily by other institutional investors. Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through a series of transactions. In conjunction with Mr. Allen's acquisition, Charter acquired 100% of the outstanding partnership interests in CharterComm Holdings on December 23, 1998. The accompanying consolidated financial statements include the accounts of CharterComm Holdings and its subsidiaries collectively referred to as the "Partnership" herein. All significant intercompany balances and transactions have been eliminated in consolidation. In 1998, the Partnership through its subsidiaries provided cable television service to customers in Alabama, Georgia, Kentucky, Louisiana, North Carolina, South Carolina and Tennessee. CASH EQUIVALENTS The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that approximates market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, and equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years
F-68 280 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1997, the Partnership shortened the estimated useful lives of certain property, plant and equipment for depreciation purposes. As a result, an additional $4,775 of depreciation was recorded during 1997. FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable television systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. In addition, approximately $100,000 of franchise rights are being amortized over a period of 3 to 11 years. OTHER ASSETS Debt issuance costs are being amortized to interest expense over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. IMPAIRMENT OF ASSETS If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable television system. As of December 31, 1997, no installation revenue has been deferred, as direct selling costs exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Partnership ranging up to a federally mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected from the Partnership's customers and are periodically remitted to local franchises. Franchise fees collected and paid are reported as revenue. INTEREST RATE HEDGE AGREEMENTS The Partnership manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. F-69 281 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Partnership's interest rate swap agreements require the Partnership to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Partnership to reduce the impact of rising interest rates on floating rate debt. The Partnership's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. OTHER INCOME (EXPENSE) Other, net includes gain and loss on disposition of property, plant and equipment, and other miscellaneous items, all of which are not directly related to the Partnership's primary line of business. In 1996, the Partnership recorded $367 of nonoperating losses for its portion of insurance deductibles pertaining to damage caused by hurricanes to certain cable television systems. INCOME TAXES Income taxes are the responsibility of the partners and are not provided for in the accompanying financial statements except for Peachtree Cable TV, Inc. (Peachtree), an indirect wholly owned subsidiary, which is a C corporation and for which taxes are presented in accordance with SFAS No. 109. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITIONS: In 1998, the Partnership acquired cable television systems in one transaction for a purchase price net of cash acquired, of $5,900. The excess cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $5,000 and is included in franchises. In 1997, the Partnership acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $159,600. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $126,400 and is included in franchises. In 1996, the Partnership acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $145,400. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $118,200 and is included in franchises. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. F-70 282 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited pro forma operating results for the 1997 acquisitions as though the acquisitions had been made on January 1, 1997, with pro forma adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows.
YEAR ENDED DECEMBER 31, 1997 ------------ (UNAUDITED) Revenues.................................................... $182,770 Income from operations...................................... 2,608 Net loss.................................................... (61,389)
The unaudited pro forma information does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 3. DISTRIBUTIONS AND ALLOCATIONS: For financial reporting purposes, redemption preference allocations, profits and losses are allocated to partners in accordance with the liquidation provision of the applicable partnership agreement. As stated in the Partnership Agreement, the Partnership may make distributions to the partners out of all available funds at such times and in such amounts as the General Partner may determine in its sole discretion. 4. REDEEMABLE PREFERRED LIMITED UNITS: As of December 31, 1995, certain Redeemable Preferred Limited Partner units of CC-I and CC-II were outstanding. During 1996, the Partnership issued certain Redeemable Preferred Limited Partner units of CharterComm Holdings. The Preferred Limited Partners' preference return has been reflected as an addition to the Redeemable Preferred Limited Partner units, and the decrease has been allocated to the General Partner and Common Limited Partner consistent with the liquidation and distribution provisions in the partnership agreements. At December 23, 1998, the balance related to the CharterComm Holdings Preferred Limited Partner units was as follows: Contribution, March 1996.................................... $ 20,052 1996 redemption preference allocation..................... 2,629 Allocation of net loss.................................... -- -------- Balance, December 31, 1996.................................. 22,681 1997 redemption preference allocation..................... -- Allocation of net loss.................................... (2,553) -------- Balance, December 31, 1997.................................. 20,128 1998 redemption preference allocation..................... -- Allocation of net loss.................................... (20,128) -------- Balance, December 23, 1998.................................. $ -- ========
F-71 283 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1998 and 1997 redemption preference allocations of $4,617 and $4,020, respectively, have not been reflected in the Preferred Limited Partners' capital accounts since the General Partner and Common Limited Partners' capital accounts have been reduced to $-0-. 5. SPECIAL LIMITED PARTNER UNITS (CC-I): Prior to March 28, 1996, certain Special Limited Partner units of CC-I were outstanding. CC-I's profits were allocated to the Special Limited Partners until allocated profits equaled the unrecovered preference amount (preference amounts range from 6% to 17.5% of the unrecovered initial cost of the partnership units and unrecovered preference amounts per annum). When there was no profit to allocate, the preference return was reflected as a decrease in Partners' Capital. In accordance with a purchase agreement and through the use of a capital contribution from Charter Communications Southeast, L.P. (Southeast), a wholly owned subsidiary of Southeast Holdings, resulting from the proceeds of the Notes (see Note 9), CC-I paid the Special Limited Partners $43,243 as full consideration for their partnership interests on March 28, 1996. 6. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1997: Cable distribution systems.................................. $274,837 Land, buildings and leasehold improvements.................. 5,439 Vehicles and equipment...................................... 14,669 -------- 294,945 Less -- Accumulated depreciation............................ (59,137) -------- $235,808 ========
Depreciation expense for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, was $44,307, $33,634 and $16,997, respectively. 7. OTHER ASSETS: Other assets consist of the following at December 31, 1997: Debt issuance costs......................................... $18,385 Other assets................................................ 3,549 ------- 21,934 Less -- Accumulated amortization............................ (5,758) ------- $16,176 =======
As a result of the payment and termination of the CC-I Credit Agreement and CC-II Credit Agreement (see Note 9), debt issuance costs of $6,264 were written off as an extraordinary loss on early retirement of debt for the period from January 1, 1998, through December 23, 1998. F-72 284 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1997: Accrued interest............................................ $ 9,804 Franchise fees.............................................. 3,524 Programming costs........................................... 3,391 Accounts payable............................................ 2,479 Capital expenditures........................................ 2,099 Salaries and related benefits............................... 2,079 Other....................................................... 7,131 ------- $30,507 =======
9. LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1997: Senior Secured Discount Debentures.......................... $146,820 11 1/4% Senior Notes........................................ 125,000 Credit Agreements: CC-I...................................................... 112,200 CC-II..................................................... 339,500 -------- 723,520 Less: Current maturities........................................ (5,375) Unamortized discount...................................... (51,483) -------- $666,662 ========
SENIOR SECURED DISCOUNT DEBENTURES On March 28, 1996, Southeast Holdings and CharterComm Holdings Capital Corporation (Holdings Capital), a wholly owned subsidiary of Southeast Holdings (collectively the "Debentures Issuers"), issued $146,820 of Senior Secured Discount Debentures (the "Debentures") for proceeds of $75,000. Proceeds from the Debentures were used to pay fees and expenses related to the issuance of the Debentures and the balance of $72,400 was a capital contribution to Southeast. The Debentures are secured by all of Southeast Holdings' ownership interest in Southeast and rank pari passu in right and priority of payment to all other existing and future indebtedness of the Debentures Issuers. The Debentures are effectively subordinated to the claims of creditors of Southeast Holdings' subsidiaries, including the Combined Credit Agreement (as defined herein). The Debentures are redeemable at the Debentures Issuers' option at amounts decreasing from 107% to 100% of principal, plus accrued and unpaid interest to the redemption date, beginning on March 15, 2001. The Debentures Issuers are required to make an offer to purchase all of the Debentures, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the Debentures Indenture. No interest is payable on the Debentures prior to March 15, 2001. Thereafter, interest on the Debentures is payable semiannually in arrears beginning September 15, 2001, until maturity on March 15, 2007. The discount on the Debentures is being accreted using the effective interest method at an interest rate of 14% from the date of issuance to March 15, 2001. F-73 285 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11 1/4% SENIOR NOTES Southeast and CharterComm Capital Corporation (Southeast Capital), a wholly owned subsidiary of Southeast (collectively the "Notes Issuers"), issued $125,000 aggregate principal amount of 11 1/4% Senior Notes (the "Notes"). The Notes are senior unsecured obligations of the Notes Issuers and rank pari passu in right and priority of payment to all other existing and future indebtedness of the Notes Issuers. The Notes are effectively subordinated to the claims of creditors of Southeast's subsidiaries, including the lenders under the Combined Credit Agreement. The Notes are redeemable at the Notes Issuers' option at amounts decreasing from 105.625% to 100% of principal, plus accrued and unpaid interest to the date of redemption, beginning on March 15, 2001. The Notes Issuers are required to make an offer to purchase all of the Notes, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the Notes Indenture. Interest is payable semiannually on March 15 and September 15 until maturity on March 15, 2006. Southeast and Southeast Holdings are holding companies with no significant assets other than their direct and indirect investments in CC-I and CC-II. Southeast Capital and Holdings Capital were formed solely for the purpose of serving as co-issuers and have no operations. Accordingly, the Notes Issuers and Debentures Issuers must rely upon distributions from CC-I and CC-II to generate funds necessary to meet their obligations, including the payment of principal and interest on the Notes and Debentures. COMBINED CREDIT AGREEMENT In June 1998, CC-I and CC-II (the "Borrowers") replaced their existing credit agreements and entered into a combined credit agreement (the "Combined Credit Agreement"), which provides for two term loan facilities, one with the principal amount of $200,000 that matures on June 30, 2007, and the other with the principal amount of $150,000 that matures on December 31, 2007. The Combined Credit Agreement also provides for a $290,000 revolving credit facility, with a maturity date of June 30, 2007. Amounts under the Combined Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.0%. The variable interest rates ranged from 6.69% to 7.31% at December 23, 1998. Commencing March 31, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the revolving credit facility and the $200,000 term loan shall be reduced on an annual basis by 11.0% in 2002 and 14.6% in 2003. Commencing March 31, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the $150,000 term loan shall be reduced on an annual basis by 1.0% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of the revolving credit facility. The Debentures, Notes and Combined Credit Agreement require the Partnership to comply with various financial and nonfinancial covenants including the maintenance of a ratio of debt to annualized operating cash flow, as defined, not to exceed 5.25 to 1 at December 23, 1998. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens, asset sales and certain other items. CC-I CREDIT AGREEMENT CC-I maintained a credit agreement (the "CC-I Credit Agreement") with a consortium of banks for borrowings up to $127,200, consisting of a revolving line of credit of $63,600 and a F-74 286 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) term loan of $63,600. Interest accrued, at CC-I's option, at rates based upon the Base Rate, as defined in the CC-I Credit Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the applicable margin based upon CC-I's leverage ratio at the time of the borrowings. The variable interest rates ranged from 7.75% to 8.00% and 7.44% to 7.50% at December 31, 1997 and 1996, respectively. In June 1998, the CC-I Credit Agreement was repaid and terminated in conjunction with the establishment of the Combined Credit Agreement. CC-II CREDIT AGREEMENT CC-II maintained a credit agreement (the "CC-II Credit Agreement") with a consortium of banks for borrowings up to $390,000, consisting of a revolving credit facility of $215,000, and two term loans totaling $175,000. Interest accrued, at CC-II's option, at rates based upon the Base Rate, as defined in the CC-II Credit Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the applicable margin based upon CC-II's leverage ratio at the time of the borrowings. The variable interest rates ranged from 7.63% to 8.25% and 7.25% to 8.125% at December 31, 1997 and 1996, respectively. In June 1998, the CC-II Credit Agreement was repaid and terminated in conjunction with the establishment of the Combined Credit Agreement. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1997, is as follows:
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- DEBT Senior Secured Discount Debentures.............. $ 95,337 $ -- $115,254 11 1/4% Senior Notes............................ 125,000 -- 136,875 CC-I Credit Agreement........................... 112,200 -- 112,200 CC-II Credit Agreement.......................... 339,500 -- 339,500 INTEREST RATE HEDGE AGREEMENTS CC-I: Swaps......................................... -- 100,000 (797) CC-II: Swaps......................................... -- 170,000 (1,030) Caps.......................................... -- 70,000 -- Collars....................................... -- 55,000 (166)
As the CC-I and CC-II Credit Agreements bear interest at current market rates, their carrying amounts approximate fair market values at December 31, 1997. The fair value of the Notes and the Debentures is based on current redemption value. The weighted average interest pay rate for CC-I interest rate swap agreements was 8.07% at December 31, 1997. The weighted average interest pay rate for CC-II interest rate swap agreements was 8.03% at December 31, 1997. The weighted average interest rate for CC-II interest cap agreements was F-75 287 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8.48% at December 31, 1997. The weighted average interest rates for CC-II interest rate collar agreements were 9.01% and 7.61% for the cap and floor components, respectively, at December 31, 1997. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Partnership's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Partnership would receive or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Partnership's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Partnership's credit facilities thereby reducing the exposure to credit loss. The Partnership has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the results of operations or the financial position of the Partnership. 11. INCOME TAXES: The book value of the Partnership's net assets (excluding Peachtree) exceeds its tax reporting basis by $2,919 as of December 31, 1997. As of December 31, 1997, temporary differences and carryforwards that gave rise to deferred income tax assets and liabilities for Peachtree are as follows: Deferred income tax assets: Accounts receivable....................................... $ 4 Accrued expenses.......................................... 29 Deferred management fees.................................. 111 Deferred revenue.......................................... 24 Tax loss carryforwards.................................... 294 Tax credit carryforwards.................................. 361 ------- Total deferred income tax assets.................. 823 ------- Deferred income tax liabilities: Property, plant and equipment............................. (1,372) Franchises and other assets............................... (4,562) ------- Total deferred income tax liabilities............. (5,934) ------- Net deferred income tax liability................. $(5,111) =======
12. RELATED PARTY TRANSACTIONS: Charter provides management services to the Partnership under the terms of contracts which provide for fees equal to 5% of the Partnership's gross service revenues. The debt agreements prohibit payment of a portion of such management fees (40% for both CC-I and F-76 288 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CC-II) until repayment in full of the outstanding indebtedness. The remaining 60% of management fees, are paid quarterly through December 31, 1998. Thereafter, the entire fee may be deferred if a multiple of EBITDA, as defined, does not exceed outstanding indebtedness of CC-I and CC-II. In addition, payments due on the Notes and Debentures shall be paid before any deferred management fees are paid. Expenses recognized under the contracts for the period from January 1, 1998, through December 23, 1998, were $9,860. Expenses recognized under the contracts during 1997 and 1996 were $8,779 and $6,014, respectively. Management fees currently payable of $1,432 are included in payables to manager of cable television systems -- related party at December 31, 1997. The Partnership and all entities managed by Charter collectively utilize a combination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Medical coverage provides for $2,435 aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. Charges are determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. The Partnership is allocated its share of the charges monthly based upon its total number of employees, historical claims and medical cost trend rates. Management considers this allocation to be reasonable for the operations of the Partnership. For the period from January 1, 1998, through December 23, 1998, the Partnership expensed $1,831 relating to insurance allocations. During 1997 and 1996, the Partnership expensed $1,524 and $1,136, respectively, relating to insurance allocations. The Partnership employs the services of Charter's National Data Center (the "National Data Center"). The National Data Center performs certain customer billing services and provides computer network, hardware and software support for the Partnership and other entities managed by Charter. The cost of these services is allocated based on the number of basic customers. Management considers this allocation to be reasonable for the operations of the Partnership. For the period from January 1, 1998, through December 23, 1998, the Partnership expensed $685 relating to these services. During 1997 and 1996, the Partnership expensed $606 and $345, respectively, relating to these services. CC-I, CC-II and other entities managed by Charter maintain regional offices. The regional offices perform certain operational services. The cost of these services is allocated based on number of basic customers. Management considers this allocation to be reasonable for the operations of the Partnership. For the period from January 1, 1998, through December 23, 1998, the Partnership expensed $3,009 relating to these services. During 1997 and 1996, the Partnership expensed $1,992 and $1,294, respectively, relating to these services. The Partnership pays certain acquisition advisory fees to Charter and Charterhouse for cable television systems acquired. Total acquisition fees paid to Charter for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $982 and $1,738, respectively. Total acquisition fees paid to Charterhouse for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to Charterhouse in 1997 and 1996 were $982 and $1,738, respectively. During 1997, the ownership of CharterComm Holdings changed as a result of CharterComm Holdings receiving a $25,000 cash contribution from an institutional investor, a $3,000 cash contribution from Charterhouse and a $2,000 cash contribution from Charter, as well as the transfer of assets and liabilities of a cable television system through a series of transactions initiated by Charter and Charterhouse. Costs of $200 were incurred in connection with the cash F-77 289 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) contributions. These contributions were contributed to Southeast Holdings which, in turn, contributed them to Southeast. 13. COMMITMENTS AND CONTINGENCIES: LEASES The Partnership leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, was $642. Rent expense incurred under leases during 1997 and 1996 was $615 and $522, respectively. The Partnership also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Partnership anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the period from January 1, 1998, through December 23, 1998, was $3,261. Rent expense incurred for pole attachments during 1997 and 1996 was $2,930 and $2,092, respectively. LITIGATION The Partnership is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Partnership's consolidated financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. As of December 23, 1998, the amount returned by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by F-78 290 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. 14. EMPLOYEE BENEFIT PLANS: The Partnership's employees may participate in Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Partnership contributes an amount equal to 50% of the first 5% of contributions by each employee. For the period from January 1, 1998, through December 23, 1998, the Partnership contributed $305. During 1997 and 1996, the Partnership contributed $262 and $149, respectively. Certain Partnership employees participate in the 1996 Charter Communications/ Charterhouse Group Appreciation Rights Plan (the "Appreciation Rights Plan"). The Appreciation Rights Plan covers certain key employees and consultants within the group of companies and partnerships controlled by Charterhouse and managed by Charter. The Plan permits the granting of up to 1,000,000 units, of which 925,000 were outstanding at December 31, 1997. Unless otherwise provided in a particular instance, units vest at a rate of 20% per annum. The Plan entitles participants to receive payment of the appreciated unit value for vested units, upon the occurrence of certain events specified in the Plan (i.e. change in control, employee termination). The units do not represent a right to an equity interest in CharterComm Holdings. Compensation expense is based on the appreciated unit value and is amortized over the vesting period. As a result of the acquisition of Charter and the Partnership, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter in 1999. For the period from January 1, 1998, through December 23, 1998, the Partnership recorded $4,920 of expense, included in management fees, and a contribution from Charter related to the Appreciation Rights Plan. F-79 291 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Partnership has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). 16. SUBSEQUENT EVENT: Subsequent to December 31, 1998, CharterComm Holdings, L.P. and all of its subsidiaries converted to limited liability companies and are now known as CharterComm Holdings LLC and subsidiaries. F-80 292 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Marcus Cable Holdings, LLC: We have audited the accompanying consolidated statements of operations, members' deficit and cash flows of Marcus Cable Holdings, LLC and subsidiaries for the three months ended March 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations of Marcus Cable Holdings, LLC and subsidiaries and their cash flows for the three months ended March 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, March 6, 2000 F-81 293 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999 ------------ REVENUES.................................................... $ 125,180 --------- OPERATING EXPENSES: Operating costs........................................... 45,309 General and administrative................................ 23,675 Depreciation and amortization............................. 51,688 Management fees -- related party.......................... 4,381 --------- 125,053 --------- Income from operations................................. 127 --------- OTHER INCOME (EXPENSE): Interest Income........................................... 104 Interest expense.......................................... (27,067) Other, net................................................ (158) --------- (27,121) --------- Loss before extraordinary item.............................. (26,994) EXTRAORDINARY ITEM -- Loss from early extinguishment of debt........................................................ (107,978) --------- Net loss.................................................... $(134,972) =========
The accompanying notes are an integral part of this consolidated statement. F-82 294 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF MEMBERS' DEFICIT (DOLLARS IN THOUSANDS)
MARCUS CABLE PROPERTIES, VULCAN MEMBERS' L.L.C CABLE, INC DEFICIT ------------ ---------- --------- BALANCE, December 31, 1998........................... $(21,355) $ 125,639 $ 104,284 Net loss -- January 1, 1999 to March 31, 1999........ (5,129) (129,843) (134,972) -------- --------- --------- BALANCE, March 31, 1999.............................. $(26,484) $ (4,204) $ (30,688) ======== ========= =========
The accompanying notes are an integral part of this consolidated statement. F-83 295 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (134,972) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization.......................... 51,688 Amortization of non-cash interest expense.............. 868 Accretion of notes payable............................. 14,522 Extraordinary item -- loss from early extinguishment of long-term debt........................................ 107,978 Changes in assets and liabilities, net of effects from dispositions of cable television systems- Accounts receivable.................................. 2,650 Prepaid expenses and other........................... 2,882 Accounts payable and accrued expenses................ (13,170) Other operating activities........................... 9,022 ----------- Net cash provided by operating activities......... 41,468 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (57,057) ----------- Net cash used in investing activities............. (57,057) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 24,246 Repayments of long-term debt.............................. (1,680,142) Loan from Charter Holdings................................ 1,680,142 ----------- Net cash provided by financing activities......... 24,246 ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,657 CASH AND CASH EQUIVALENTS, beginning of period.............. 813 ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ 9,470 =========== CASH PAID FOR INTEREST...................................... $ 12,807 ===========
The accompanying notes are an integral part of this consolidated statement. F-84 296 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION Marcus Cable Holdings, LLC (Marcus Holdings), a Delaware limited liability company, was formed in February 1999 as parent of Marcus Cable Company, L.L.C. (MCCLLC), formerly Marcus Cable Company, L.P. (MCCLP). MCCLP was formed as a Delaware limited partnership and was converted to a Delaware limited liability company on June 9, 1998. Marcus Holdings and its subsidiaries (collectively, the "Company") derive their primary source of revenues by providing various levels of cable television programming and services to residential and business customers. The Company's operations are conducted through Charter Cable Operating Company, LLC, formerly Marcus Cable Operating Company, L.L.C., a wholly owned subsidiary of the Company. The Company operates cable television systems primarily in Texas, Wisconsin, Indiana, California and Alabama. The accompanying consolidated financial statements include the accounts of MCCLLC and its subsidiary limited liability companies and corporations, representing the financial statements of the Company for the period presented. All significant intercompany accounts and transactions have been eliminated in consolidation. On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively referred to as "Vulcan") acquired all of the outstanding limited partnership interest and substantially all of the general partner interest in MCCLP for cash payments of $1,392,000 (the "Vulcan Acquisition"). Under the terms of the purchase agreement, the owner of the remaining 0.6% general partner interest in the Company (the "Minority Interest"), which represents 100% of the voting control of the Company, could cause Vulcan to purchase the 0.6% general partner interest under certain conditions, or Vulcan could cause the Minority Interest to sell its interest to Vulcan under certain conditions at a fair value of not less than $8,000. On March 31, 1999, Vulcan acquired voting control of the Company by its acquisition of the Minority Interest for cash consideration. Effective December 23, 1998, through a series of transactions, Mr. Allen acquired approximately 94% of Charter Communications, Inc. (Charter) (renamed Charter Investment, Inc.). Beginning in October 1998, Charter began to manage the operations of the Company. In March 1999, Charter transferred all of its cable television operating subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter Holdings) in connection with the issuance of Senior Notes and Senior Discount Notes totaling $3.6 billion. These operating subsidiaries were then transferred to Charter Communications Operating, LLC (Charter Operating). On April 7, 1999, the cable television operating subsidiaries of the Company were transferred to Charter Operating subsequent to the purchase by Mr. Allen of the Minority Interest. As a result of the Vulcan Acquisition, the Company recognized severance and stay-on bonus compensation of $16,034 for the year ended December 31, 1998. As of December 31, 1998, 35 employees and officers of the Company had been terminated and $13,634 had been paid under severance and bonus arrangements. By March 31, 1999, 50 additional employees were terminated and the remaining balance of $2,400 was paid in April 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. F-85 297 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for maintenance and repairs are charged to expense as incurred and equipment replacements and betterments are capitalized. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-10 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3- 5 years
Depreciation expense for the three months ended March 31, 1999 was $33,696. FRANCHISES Costs incurred in obtaining and renewing cable television franchises are deferred and amortized over the estimated lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable television systems represent management's estimate of fair value and are amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Amortization expense for the three months ended March 31, 1999 was $17,992. OTHER ASSETS Debt issuance costs are amortized to interest expense over the term of the related debt. IMPAIRMENT OF ASSETS If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable television system. As of March 31, 1999, no installation revenue has been deferred as direct selling costs exceeded installation revenue. F-86 298 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED INCOME TAXES Income taxes are the responsibility of the individual members and are not provided for in the accompanying financial statements. The Company's subsidiary corporations are subject to federal income tax but have had no operations since inception and therefore, no taxable income. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. MEMBERS' EQUITY (DEFICIT) Upon completion of the Vulcan Acquisition, Vulcan owned 99.4% of MCCLP through direct ownership of all LP Units and through 80% ownership of Marcus Cable Properties, Inc. ("MCPI"), the general partner of Marcus Cable Properties, L.P. ("MCPLP"), the general partner of MCCLP. The Minority Interest owned the voting common stock, or the remaining 20% of MCPI. On June 9, 1998, MCCLP was converted into a Delaware limited liability company with two members: Vulcan Cable, Inc., with 96.2% ownership, and Marcus Cable Properties, L.L.C. ("MCPLLC") (formerly MCPLP), with 3.8% ownership. Vulcan Cable, Inc. owns approximately 25.6% and MCPI owns approximately 74.4% of MCPLLC, with Vulcan's interest in MCPI unchanged. As there was no change in ownership interests, the historical partners' capital balances at June 9, 1998 were transferred to and became the initial equity of MCCLLC, and thus the accompanying statement of members' equity has been presented as if the conversion of MCCLP into MCCLLC occurred on April 23, 1998, the date of the Vulcan Acquisition (see Note 1). As of March 31, 1999, MCCLLC has 100 issued and outstanding membership units. Income and losses of MCCLLC are allocated to the members in accordance with their ownership interests. Members are not personally liable for obligations of MCCLLC. 4. RELATED PARTY TRANSACTIONS The Company and Charter entered into a management agreement on October 6, 1998 whereby Charter began to manage the day-to-day operations of the Company. In consideration for the management consulting services provided by Charter, Marcus paid Charter an annual fee equal to 3% of the gross revenues of the cable system operations plus reimbursement for out of pocket costs and expenses incurred by Charter in performing services under the management agreement. For the three months ended March 31, 1999, management fees under this agreement were $4,381. In connection with the transfer of the Company's operating subsidiaries to Charter Operating, the annual fee paid by Marcus to Charter increased to 3.5%. 5. EMPLOYEE BENEFIT PLAN The Company sponsored a 401(k) plan for its employees whereby employees that qualified for participation under the plan could contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company matched participant contributions up to a maximum of 2% of a participant's salary. As a result of the Vulcan Acquisition, participants became fully vested in Company matching contributions. F-87 299 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED In connection with Vulcan's acquisition of Charter, the Marcus Plan's assets were frozen as of December 23, 1998 and employees became fully vested in company matching contributions after the Vulcan Acquisition. Effective January 1, 1999, the Company's employees with two months of service are eligible to participate in the Charter Communications, Inc. 401(k) Plan (the "Charter Plan"). Employees that qualify for participation in the Charter Plan can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company contributes an amount equal to 50% of the first 5% of contributions by each employee. For the three months ended March 31, 1999, the Company made contributions to the Charter Plan of $237. 6. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the three months ended March 31, 1999 were $584. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense for pole attachments for the three months ended March 31, 1999 was $955. LITIGATION In Alabama, Indiana, Maryland, Texas and Wisconsin, customers have filed putative class action lawsuits on behalf of all of the Company's customers residing in those states who are or were customers, and who have been charged a processing fee for delinquent payment of their cable bill. The plaintiffs challenge the legality of the processing fee and seek declaratory judgment, injunctive relief and unspecified damages. The Company is in the process of finalizing a global settlement of these cases, which settlement must be approved by a court. Unless a global settlement is consummated and approved, the Company intends to vigorously defend the actions. At this stage, the Company is not able to project the final costs of settlement, the expenses of defending the actions or the potential outcome of the actions, including the impact on the consolidated financial position or results of operations. The Company is also party to lawsuits, which are generally incidental to its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in F-88 300 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. As of December 31, 1998, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. 7. LONG-TERM DEBT In March 1999, concurrent with the issuance of Senior Notes and Senior Discount Notes (see Note 1), Charter and the Company extinguished all long-term debt, excluding borrowings of Charter and the Company under their respective credit agreements, and refinanced all existing credit agreements at various subsidiaries of Charter and the Company with a new credit agreement entered into by Charter Operating. The excess of the amount paid over the carrying value of the Company's long-term debt, net of unamortized debt issuance costs, was recorded as Extraordinary item -- loss on early extinguishment of debt in the accompanying consolidated statement of operations. 8. ACCOUNTING STANDARD NOT IMPLEMENTED In June 1998, the Financial Accounting Standards Boards adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Financial Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that F-89 301 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility of earnings (loss). F-90 302 INDEPENDENT AUDITORS' REPORT The Members Marcus Cable Holdings, LLC: We have audited the accompanying consolidated balance sheets of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, members' equity/partners' capital and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Dallas, Texas February 19, 1999 (except for the fourth and seventh paragraphs of Note 1 which are as of August 25, 1999 and April 7, 1999, respectively) F-91 303 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------------ 1998 1997 ---- ---- ASSETS - - - ------ Current assets: Cash and cash equivalents................................. $ 813 $ 1,607 Accounts receivable, net of allowance of $1,800 in 1998 and $1,904 in 1997..................................... 16,055 23,935 Prepaid expenses and other................................ 6,094 2,105 ---------- ---------- Total current assets.............................. 22,962 27,647 Investment in cable television systems: Property, plant and equipment............................. 741,021 706,626 Franchises................................................ 783,742 945,125 Noncompetition agreements................................. 4,425 6,770 Other assets................................................ 52,928 64,300 ---------- ---------- $1,605,078 $1,750,468 ========== ========== LIABILITIES AND MEMBERS' EQUITY/PARTNERS' CAPITAL - - - ------------------------------------------------- Current liabilities: Current maturities of long-term debt...................... $ 77,500 $ 67,499 Accrued liabilities....................................... 66,985 68,754 ---------- ---------- Total current liabilities......................... 144,485 136,253 Long-term debt.............................................. 1,354,919 1,531,927 Other long-term liabilities................................. 1,390 2,261 Members' equity/partners' capital........................... 104,284 80,027 ---------- ---------- $1,605,078 $1,750,468 ========== ==========
See accompanying notes to consolidated financial statements. F-92 304 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Revenues: Cable services................................... $ 499,265 $ 473,701 $ 432,172 Management fees -- related party................. 555 5,614 2,335 --------- --------- --------- Total revenues........................... 499,820 479,315 434,507 --------- --------- --------- Operating expenses: Selling, service and system management........... 193,725 176,515 157,197 General and administrative................................ 77,913 72,351 73,017 Transaction and severance costs.................. 135,379 -- -- Management fees -- related party................. 3,341 -- -- Depreciation and amortization.................... 215,789 188,471 166,429 --------- --------- --------- Total operating expenses................. 626,147 437,337 396,643 --------- --------- --------- Operating income (loss).................. (126,327) 41,978 37,864 --------- --------- --------- Other (income) expense: Interest expense................................. 159,985 151,207 144,376 Gain on sale of assets........................... (201,278) -- (6,442) --------- --------- --------- Total other (income) expense............. (41,293) 151,207 137,934 --------- --------- --------- Loss before extraordinary item................................... (85,034) (109,229) (100,070) Extraordinary item -- loss on early retirement of debt............................................. (9,059) -- -- --------- --------- --------- Net loss................................. $ (94,093) $(109,229) $(100,070) ========= ========= =========
See accompanying notes to consolidated financial statements. F-93 305 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY/PARTNERS' CAPITAL (IN THOUSANDS)
MARCUS CLASS B CABLE GENERAL LIMITED PROPERTIES, VULCAN PARTNERS PARTNERS L.L.C. CABLE, INC. TOTAL -------- -------- ----------- ----------- ----- Balance at December 31, 1995..... $(21,396) $ 310,722 -- -- $ 289,326 Net loss....................... (200) (99,870) -- -- (100,070) -------- --------- -------- -------- --------- Balance at December 31, 1996..... (21,596) 210,852 -- -- 189,256 Net loss....................... (218) (109,011) -- -- (109,229) -------- --------- -------- -------- --------- Balance at December 31, 1997..... (21,814) 101,841 -- -- 80,027 Net loss -- January 1, 1998 to April 22, 1998.............. (224) (111,838) -- -- (112,062) Capital contributions.......... -- -- -- 118,350 118,350 Reorganization of limited partnership to limited liability company........... 22,038 9,997 (22,038) (9,997) -- Net income -- April 23, 1998 to December 31, 1998........... -- -- 683 17,286 17,969 -------- --------- -------- -------- --------- Balance at December 31, 1998..... $ -- $ -- $(21,355) $125,639 $ 104,284 ======== ========= ======== ======== =========
See accompanying notes to consolidated financial statements. F-94 306 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net loss.................................................. $ (94,093) $(109,229) $(100,070) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item -- loss on early retirement of debt................................................... 9,059 -- -- Gain on sale of assets.................................. (201,278) -- (6,442) Depreciation and amortization........................... 215,789 188,471 166,429 Non cash interest expense............................... 82,416 72,657 63,278 Changes in assets and liabilities, net of working capital adjustments for acquisitions: Accounts receivable, net.............................. 7,880 (6,439) (70) Prepaid expenses and other............................ (4,017) 95 (574) Other assets.......................................... 413 (385) (502) Accrued liabilities................................... (1,769) 9,132 (3,063) --------- --------- --------- Net cash provided by operating activities:......... 14,400 154,302 118,986 --------- --------- --------- Cash flows from investing activities: Acquisition of cable systems.............................. (57,500) (53,812) (10,272) Proceeds from sale of assets, net of cash acquired and selling costs........................................... 401,432 -- 20,638 Additions to property, plant and equipment................ (224,723) (197,275) (110,639) Other..................................................... (689) -- -- --------- --------- --------- Net cash provided by (used in) investing activities:...................................... 118,520 (251,087) (100,273) --------- --------- --------- Cash flows from financing activities: Borrowings under Senior Credit Facility................... 217,750 226,000 65,000 Repayments under Senior Credit Facility................... (359,500) (131,250) (95,000) Repayments of notes and debentures........................ (109,344) -- -- Payment of debt issuance costs............................ (99) (1,725) -- Cash contributed by member................................ 118,350 -- -- Payments on other long-term liabilities................... (871) (667) (88) --------- --------- --------- Net cash provided by (used in) financing activities....................................... (133,714) 92,358 (30,088) --------- --------- --------- Net decrease in cash and cash equivalents................... (794) (4,427) (11,375) Cash and cash equivalents at the beginning of the period.... 1,607 6,034 17,409 --------- --------- --------- Cash and cash equivalents at the end of the period.......... $ 813 $ 1,607 $ 6,034 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid............................................. $ 81,765 $ 81,155 $ 83,473 ========= ========= =========
See accompanying notes to consolidated financial statements. F-95 307 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (1) ORGANIZATION AND BASIS OF PRESENTATION Marcus Cable Holdings, LLC ("MCHLLC"), a Delaware limited liability company, was formed in February 1999 as parent of Marcus Cable Company, L.L.C. ("MCCLLC"), formerly Marcus Cable Company, L.P. ("MCCLP"). MCCLP was formed as a Delaware limited partnership and was converted to a Delaware limited liability company on June 9, 1998 (See Note 3). MCHLLC and its subsidiaries (collectively, the "Company") derive their primary source of revenues by providing various levels of cable television programming and services to residential and business customers. The Company's operations are conducted through Marcus Cable Operating Company, L.L.C. ("MCOC"), a wholly-owned subsidiary of the Company. The Company operates its cable television systems primarily in Texas, Wisconsin, Indiana, California and Alabama. The accompanying consolidated financial statements include the accounts of MCHLLC, which is the predecessor of MCCLLC, and its subsidiary limited liability companies and corporations. All significant intercompany accounts and transactions have been eliminated in consolidation. On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively referred to as "Vulcan") acquired all of the outstanding limited partnership interests and substantially all of the general partner interest in MCCLP for cash payments of $1,392,000 ("the Vulcan Acquisition"). Under the terms of the purchase agreement, the owner of the remaining 0.6% general partner interest in the Company (the "Minority Interest"), which represents 100% of the voting control of the Company, could cause Vulcan to purchase the 0.6% general partner interest under certain conditions, or Vulcan could cause the Minority Interest to sell its interest to Vulcan under certain conditions, at a fair value of not less than $8,000. The accompanying consolidated financial statements do not reflect the application of purchase accounting for the Vulcan Acquisition because the Securities and Exchange Commission staff challenged such accounting treatment since, as of December 31, 1998, Vulcan had not acquired voting control of the Company. On March 31, 1999, Vulcan acquired voting control of the Company by its acquisition of the Minority Interest for cash consideration. In connection with the Vulcan Acquisition, the Company incurred transaction costs of approximately $119,345, comprised primarily of $90,200 of compensation paid to employees of the Company by Vulcan in settlement of specially designated Class B units in MCCLP ("EUnit") granted in past periods by the general partner of MCCLP, $24,000 of transaction fees paid to certain equity partners for investment banking services and $5,200 of expenses for professional fees. These transaction costs have been included in the accompanying consolidated statement of operations for the year ended December 31, 1998. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter Communications, Inc. ("Charter"). Beginning in October 1998, Charter managed the operations of the Company. In March 1999, Charter transferred all of its cable television operating subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter Holdings) in connection with the issuance of Senior Notes and Senior Discount Notes totaling $3.6 billion. These operating subsidiaries were then transferred to Charter Communications Operating, LLC ("Charter Operating"). On April 7, 1999, the cable operations of the Company were transferred to Charter Operating subsequent to the purchase by Paul G. Allen of the Minority Interest. F-96 308 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As a result of the Vulcan Acquisition, the Company recognized severance and stay-on bonus compensation of $16,034, which is included in Transaction and Severance Costs in the accompanying statement of operations for the year ended December 31, 1998. As of December 31, 1998, 35 employees and officers of the Company had been terminated and $13,634 had been paid under severance and bonus arrangements. By March 31, 1999, an additional 50 employees will be terminated. The remaining balance of $2,400 is to be paid by April 30, 1999 and an additional $400 in stay-on bonuses will be recorded as compensation in 1999 as the related services are provided. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1998 and 1997, cash equivalents consist of certificates of deposit and money market funds. These investments are carried at cost which approximates market value. (b) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for maintenance and repairs are charged to expense as incurred and equipment replacements and betterments are capitalized. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets as follows: Cable distribution systems...................... 3-10 years Buildings and leasehold improvements............ 5-15 years Vehicles and equipment.......................... 3-5 years
(c) FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the estimated lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable television systems represent management's estimate of fair value and are amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Accumulated amortization was $317,335 and $264,600 at December 31, 1998 and 1997, respectively. (d) NONCOMPETITION AGREEMENTS Noncompetition agreements are amortized using the straight-line method over the term of the respective agreements. Accumulated amortization was $20,267 and $19,144 at December 31, 1998 and 1997, respectively. F-97 309 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (e) OTHER ASSETS Debt issuance costs are amortized to interest expense over the term of the related debt. Going concern value of acquired cable systems is amortized using the straight-line method over a period up to 10 years. (f) IMPAIRMENT OF ASSETS If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. (g) REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable television system. As of December 31, 1998 and 1997, no installation revenue has been deferred, as direct selling costs exceeded installation revenue. Management fee revenues are recognized concurrently with the recognition of revenues by the managed cable television system, or as a specified monthly amount as stipulated in the management agreement. Incentive management fee revenue is recognized upon performance of specified actions as stipulated in the management agreement. (h) INCOME TAXES Income taxes are the responsibility of the individual members and are not provided for in the accompanying financial statements. The Company's subsidiary corporations are subject to federal income tax but have had no operations and therefore, no taxable income since inception. (i) INTEREST RATE HEDGE AGREEMENTS The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain of its debt agreements. Interest rate swaps and caps are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating thereby creating fixed rate debt. Interest rate caps are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. (j) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-98 310 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) ACCOUNTING STANDARD NOT IMPLEMENTED In June 1998, the Financial Accounting Standards Boards adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Financial Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility of earnings (loss). (3) CAPITAL STRUCTURE PARTNERS' CAPITAL (a) CLASSES OF PARTNERSHIP INTERESTS The MCCLP partnership agreement (the "Partnership Agreement") provided for Class B Units and Convertible Preference Units. Class B Units consisted of General Partner Units ("GP Units") and Limited Partner Units ("LP Units"). To the extent that GP Units had the right to vote, GP Units voted as Class B Units together with Class B LP Units. Voting rights of Class B LP Units were limited to items specified under the Partnership Agreement. Prior to the dissolution of the Partnership on June 9, 1998, there were 18,848.19 GP Units and 294,937.67 Class B LP Units outstanding. The Partnership Agreement also provided for the issuance of a class of Convertible Preference Units. These units were entitled to a general distribution preference over the Class B LP Units and were convertible into Class B LP Units. The Convertible Preference Units could vote together with Class B Units as a single class, and the voting percentage of each Convertible Preference Unit, at a given time, was based on the number of Class B LP Units into which such Convertible Preference Unit is then convertible. MCCLP had issued 7,500 Convertible Preference Units with a distribution preference and conversion price of two thousand dollars per unit. The Partnership Agreement permitted the General Partner, at its sole discretion, to issue up to 31,517 Employee Units (classified as Class B Units) to key individuals providing services to the Company. Employee Units were not entitled to distributions until such time as all units have received certain distributions as calculated under provisions of the Partnership Agreement ("subordinated thresholds"). At December 31, 1997 28,033.20 Employee Units were outstanding with a subordinated threshold ranging from $1,600 to $1,750 per unit (per unit amounts in whole numbers). In connection with the Vulcan Acquisition, the amount paid to EUnit holders of $90,200 was recognized as Transaction and Severance Costs in the year ended December 31, 1998. F-99 311 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (b) ALLOCATION OF INCOME AND LOSS TO PARTNERS MCCLP incurred losses from inception. Losses were allocated as follows: (1) First, among the partners whose capital accounts exceed their unreturned capital contributions in proportion to such excesses until each such partner's capital account equals its unreturned capital contribution; and (2) Next, to the holders of Class B Units in accordance with their unreturned capital contribution percentages. The General Partner was allocated a minimum of 0.2% to 1% of income or loss at all times, depending on the level of capital contributions made by the partners. MEMBERS' EQUITY Upon completion of the Vulcan Acquisition, Vulcan collectively owned 99.4% of MCCLP through direct ownership of all LP Units and through 80% ownership of Marcus Cable Properties, Inc. ("MCPI"), the general partner of Marcus Cable Properties, L.P. ("MCPLP"), the general partner of MCCLP. The Minority Interest owned the voting common stock, or the remaining 20% of MCPI. In July 1998, Vulcan contributed $20,000 in cash to the Company relating to certain employee severance arrangements. On June 9, 1998, MCCLP was converted into a Delaware limited liability company with two members: Vulcan Cable, Inc., with 96.2% ownership, and Marcus Cable Properties, L.L.C. ("MCPLLC") (formerly MCPLP), with 3.8% ownership. Vulcan Cable, Inc. owns approximately 25.6% and MCPI owns approximately 74.4% of MCPLLC, with Vulcan's interest in MCPI unchanged. As there was no change in ownership interests, the historical partners' capital balances at June 9, 1998 were transferred to and became the initial equity of MCCLLC, and thus the accompanying statement of members' equity has been presented as if the conversion of MCCLP into MCCLLC occurred on April 23, 1998, the date of the Vulcan Acquisition (see Note 1). As of December 31, 1998, MCCLLC has 100 issued and outstanding membership units. Income and losses of MCCLLC are allocated to the members in accordance with their ownership interests. Members are not personally liable for obligations of MCCLLC. (4) ACQUISITIONS AND DISPOSITIONS In 1998, the Company acquired cable television systems in the Birmingham, Alabama area for a purchase price of $57,500. The excess of the cost of properties acquired over the amounts assigned to net tangible assets and noncompetition agreements as of the date of acquisition was approximately $44,603 and is included in franchises. Additionally, in 1998, the Company completed the sale of certain cable television systems for an aggregate net sales price of $401,432, resulting in a total gain of $201,278. In 1997, the Company acquired cable television systems in the Dallas-Ft. Worth, Texas area for a purchase price of $35,263. The excess of the cost of properties acquired over the amounts assigned to net tangible assets as of the date of acquisition was $15,098 and is included in franchises. Additionally, in July 1997, the Company completed an exchange of cable television systems in Indiana and Wisconsin. According to the terms of the trade agreement, in addition to the contribution of its systems, the Company paid $18,549. F-100 312 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1996, the Company acquired cable television systems in three separate transactions for an aggregate purchase price of $10,272. The excess of the cost of properties acquired over the amounts assigned to net tangible assets as of the date of acquisition was $4,861 and is included in franchises. Additionally, in 1996, the Company completed the sale of cable television systems in Washington, D.C. for a sale price of $20,638. The sale resulted in a gain of $6,442. The above acquisitions were accounted for using the purchase method of accounting and, accordingly, results of operations of the acquired assets have been included in the accompanying consolidated financial statements from the dates of acquisition. The purchase prices were allocated to tangible and intangible assets based on estimated fair market values at the dates of acquisition. The cable system trade discussed above was accounted for as a nonmonetary exchange and, accordingly, the additional cash contribution was allocated to tangible and intangible assets based on recorded amounts of the nonmonetary assets relinquished. Unaudited pro forma operating results as though 1998 and 1997 acquisitions and divestitures discussed above had occurred on January 1, 1997, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows for the years ended December 31, 1998 and 1997:
1998 1997 ---- ---- (UNAUDITED) Revenues........................................... $ 457,929 $ 421,665 Operating income (loss)............................ (148,472) 9,064 Net loss........................................... (150,841) (142,143)
(5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31:
1998 1997 ---- ---- Cable distribution systems........................ $ 996,804 $ 878,721 Vehicles and other................................ 40,243 37,943 Land and buildings................................ 18,861 17,271 ---------- --------- 1,055,908 933,935 Accumulated depreciation.......................... (314,887) (227,309) ---------- --------- $ 741,021 $ 706,626 ========== =========
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $129,663, $96,220, and $72,281, respectively. (6) OTHER ASSETS Other assets consist of the following at December 31, 1998 and 1997:
1998 1997 -------- -------- Debt issuance costs.................................. $ 41,079 $ 45,225 Going concern value.................................. 37,274 37,274 Other................................................ 677 1,090 -------- -------- 79,030 83,589 Accumulated amortization............................. (26,102) (19,289) -------- -------- $ 52,928 $ 64,300 ======== ========
F-101 313 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31, 1998 and 1997:
1998 1997 ------- ------- Accrued operating liabilities.......................... $26,334 $27,923 Accrued programming costs.............................. 9,539 9,704 Accrued franchise fees................................. 8,907 10,131 Accrued property taxes................................. 4,586 5,125 Accrued interest....................................... 3,752 7,949 Other accrued liabilities.............................. 13,867 7,922 ------- ------- $66,985 $68,754 ======= =======
(8) LONG-TERM DEBT The Company has outstanding the following borrowings on long-term debt arrangements at December 31, 1998 and 1997:
1998 1997 ---------- ---------- Senior Credit Facility............................ $ 808,000 $ 949,750 13 1/2% Senior Subordinated Discount Notes........ 383,236 336,304 14 1/4% Senior Discount Notes..................... 241,183 213,372 11 7/8% Senior Debentures......................... -- 100,000 ---------- ---------- 1,432,419 1,599,426 Less current maturities........................... 77,500 67,499 ---------- ---------- $1,354,919 $1,531,927 ========== ==========
The Company, through MCOC, maintains a senior credit facility ("Senior Credit Facility"), which provides for two term loan facilities, one with a principal amount of $490,000 that matures on December 31, 2002 ("Tranche A") and the other with a principal amount of $300,000 million that matures on April 30, 2004 ("Tranche B"). The Senior Credit Facility provides for scheduled amortization of the two term loan facilities which began in September 1997. The Senior Credit Facility also provides for a $360,000 revolving credit facility ("Revolving Credit Facility"), with a maturity date of December 31, 2002. Amounts outstanding under the Senior Credit Facility bear interest at either the: i) Eurodollar rate, ii) prime rate, or iii) CD base rate or Federal Funds rate, plus a margin of up to 2.25%, which is subject to certain quarterly adjustments based on the ratio of MCOC's total debt to annualized operating cash flow, as defined. The variable interest rates ranged from 6.23% to 7.75% and 5.97% to 8.00% at December 23, 1998, and December 31, 1997, respectively. A quarterly commitment fee ranging from 0.250% to 0.375% per annum is payable on the unused commitment under the Senior Credit Facility. On October 16, 1998, the Company entered into an agreement to amend its Senior Credit Facility. The amendment provides for, among other items, a reduction in the permitted leverage and cash flow ratios, a reduction in the interest rate charge under the Senior Credit Facility and a change in the restriction related to the use of cash proceeds from asset sales to allow such proceeds to be used to redeem the 11 7/8% Senior Debentures. In 1995, the Company issued $299,228 of 14 1/4% Senior Discount Notes due December 15, 2005 (the "14 1/4% Notes") for net proceeds of $150,003. The 14 1/4% Notes are unsecured and rank pari passu to the 11 7/8% Debentures (defined below). The 14 1/4% Notes are redeemable at the option of MCHLLC at amounts decreasing from 107% to 100% of par beginning on June 15, 2000. No interest is payable until December 15, 2000. Thereafter interest is payable semi- F-102 314 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) annually until maturity. The discount on the 14 1/4% Notes is being accreted using the effective interest method. The unamortized discount was $85,856 at December 31, 1997. In 1994, the Company, through MCOC, issued $413,461 face amount of 13 1/2% Senior Subordinated Discount Notes due August 1, 2004 (the "13 1/2% Notes") for net proceeds of $215,000. The 13 1/2% Notes are unsecured, are guaranteed by MCHLLC and are redeemable, at the option of MCOC, at amounts decreasing from 105% to 100% of par beginning on August 1, 1999. No interest is payable on the 13 1/2% Notes until February 1, 2000. Thereafter, interest is payable semi-annually until maturity. The discount on the 13 1/2% Notes is being accreted using the effective interest method. The unamortized discount was $77,157 at December 31, 1997. In 1993, the Company issued $100,000 principal amount of 11 7/8% Senior Debentures due October 1, 2005 (the "11 7/8% Debentures"). The 11 7/8% Debentures were unsecured and were redeemable at the option of the Company on or after October 1, 1998 at amounts decreasing from 105.9% to 100% of par at October 1, 2002, plus accrued interest, to the date of redemption. Interest on the 11 7/8% Debentures was payable semi-annually each April 1 and October 1 until maturity. On July 1, 1998, $4,500 face amount of the 14 1/4% Notes and $500 face amount of the 11 7/8% Notes were tendered for gross tender payments of $3,472 and $520 respectively. The payments resulted in a gain on the retirement of the debt of $753. On December 11, 1998, the 11 7/8% Notes were redeemed for a gross payment of $107,668, including accrued interest. The redemption resulted in a loss on the retirement of the debt of $9,059. The 14 1/4% Notes, 13 1/2% Notes, 11 7/8% Debentures and Senior Credit Facility are all unsecured and require the Company and/or its subsidiaries to comply with various financial and other covenants, including the maintenance of certain operating and financial ratios. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens, asset sales and certain other items. (9) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying and fair values of the Company's significant financial instruments as of December 31, 1998 and 1997 are as follows:
1998 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ----- -------- ----- Senior Credit Facility......................... $808,000 $808,000 $949,750 $949,750 13 1/2% Notes.................................. 383,236 418,629 336,304 381,418 14 1/4% Notes.................................. 241,183 279,992 213,372 258,084 11 7/8% Debentures............................. -- -- 100,000 108,500
The carrying amount of the Senior Credit Facility approximates fair value as the outstanding borrowings bear interest at market rates. The fair values of the 14 1/4% Notes, 13 1/2% Notes, and 11 7/8% Debentures, are based on quoted market prices. The Company had interest rate swap agreements covering a notional amount of $500,000 at December 31, 1998 and 1997. The fair value of such swap agreements was ($5,761) at December 31, 1998. The weighted average interest pay rate for the interest rate swap agreements was 5.7% at December 31, 1998, and 1997. Certain of these agreements allow for optional extension by the counterparty or for automatic extension in the event that one month LIBOR exceeds a stipulated rate on any monthly reset date. Approximately $100,000 notional amount included in the $500,000 notional amount described above is also modified by an interest rate cap agreement which resets monthly. F-103 315 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The notional amounts of the interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair values of the interest rate hedge agreements generally reflect the estimated amounts that the Company would receive or (pay) (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's Senior Credit Facility thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of the major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's consolidated financial position or results of operations. (10) RELATED PARTY TRANSACTIONS The Company and Charter entered into a management agreement on October 6, 1998 whereby Charter began to manage the day-to-day operations of the Company. In consideration for the management consulting services provided by Charter, Marcus pays Charter an annual fee equal to 3% of the gross revenues of the cable system operations, plus expenses. From October 6, 1998 to December 31, 1998, management fees under this agreement were $3,341. Prior to the consummation of the Vulcan Acquisition, affiliates of Goldman Sachs owned limited partnership interests in MCCLP. Maryland Cable Partners, L.P. ("Maryland Cable"), which was controlled by an affiliate of Goldman Sachs, owned the Maryland Cable systems. MCOC managed the Maryland Cable systems under the Maryland Cable Agreement. Pursuant to such agreement, MCOC earned a management fee equal to 4.7% of the revenues of Maryland Cable. Effective January 31, 1997, Maryland Cable was sold to a third party. Pursuant to the Maryland Cable Agreement, MCOC recognized incentive management fees of $5,069 during the twelve months ended December 31, 1997 in conjunction with the sale. Although MCOC is no longer involved in the active management of the Maryland Cable systems, MCOC has entered into an agreement with Maryland Cable to oversee the activities, if any, of Maryland Cable through the liquidation of the partnership. Pursuant to such agreement, MCOC earns a nominal monthly fee. During the year ended December 31, 1998, MCOC earned total management fees of $555. Including the incentive management fees noted above, during the years ended December 31, 1997 and 1996, MCOC earned total management fees of $5,614 and $2,335, respectively. (11) EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) plan for its employees whereby employees that qualify for participation under the plan can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company matches participant contributions up to a maximum of 2% of a participant's salary. For the years ended December 31, 1998, 1997 and 1996, the Company made contributions to the plan of $765, $761 and $480, respectively. F-104 316 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the years ended December 31, 1998, 1997 and 1996 were $3,394, $3,230, and $2,767, respectively. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense for pole attachments for the years ended December 31, 1998, 1997 and 1996 were $4,081, $4,314, and $4,008, respectively. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. As of December 23, 1998, the amount returned by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. F-105 317 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. LITIGATION In Alabama, Indiana, Texas and Wisconsin, customers have filed punitive class action lawsuits on behalf of all person residing in those respective states who are or were potential customers of the Company's cable television service, and who have been charged a processing fee for delinquent payment of their cable bill. The actions challenge the legality of the processing fee and seek declaratory judgment, injunctive relief and unspecified damages. In Alabama and Wisconsin, the Company has entered into joint speculation and case management orders with attorneys for plaintiffs. A Motion to Dismiss is pending in Indiana. The Company intends to vigorously defend the actions. At this stage of the actions, the Company is not able to project the expenses of defending the actions or the potential outcome of the actions, including the impact on the consolidated financial position or results of operations. The Company is also party to lawsuits which are generally incidental to its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. (13) SUBSEQUENT EVENT (UNAUDITED) In March 1999, concurrent with the issuance of Senior Notes and Senior Discount Notes, the combined company (Charter and the Company, see note 1) extinguished all long-term debt, excluding borrowings of Charter and the Company under their respective credit agreements, and refinanced all existing credit agreements at various subsidiaries of the Company and Charter with a new credit agreement entered into by a wholly owned subsidiary of the combined company. F-106 318 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Renaissance Media Group LLC We have audited the accompanying consolidated balance sheet of Renaissance Media Group LLC (the "Company") as of April 30, 1999 and the related consolidated statements of operations, changes in members' equity, and cash flows for the four months ended April 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at April 30, 1999, and the consolidated results of its operations and its cash flows for the four months then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York June 4, 1999 except for Note 11, as to which the date is June 29, 1999 F-107 319 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
APRIL 30, 1999 -------------- ASSETS Cash and cash equivalents................................... $ 5,400 Accounts receivable -- trade (less allowance for doubtful accounts of $86).......................................... 520 Accounts receivable -- other................................ 492 Prepaid expenses and other assets........................... 416 Investment in cable television systems: Property, plant and equipment............................. 76,250 Less: accumulated depreciation............................ (10,706) -------- 65,544 -------- Cable television franchises............................... 238,429 Less: accumulated amortization............................ (16,754) -------- 221,675 -------- Intangible assets......................................... 17,544 Less: accumulated amortization............................ (1,525) -------- 16,019 -------- Net investment in cable television systems................ 303,238 -------- Total assets................................................ $310,066 ======== LIABILITIES AND MEMBERS' EQUITY Accounts payable............................................ $ 546 Accrued expenses............................................ 3,222 Subscriber advance payments and deposits.................... 657 Deferred marketing credits.................................. 650 Debt........................................................ 213,402 -------- Total liabilities........................................... 218,477 -------- Members' equity: Paid-in capital........................................... 108,600 Accumulated deficit....................................... (17,011) -------- Total members' equity....................................... 91,589 -------- Total liabilities and members' equity....................... $310,066 ========
See accompanying notes to consolidated financial statements. F-108 320 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS)
FOUR MONTHS ENDED APRIL 30, 1999 -------------- Revenues.................................................... $20,396 Costs and expenses: Service costs............................................. 6,325 Selling, general and administrative....................... 3,057 Depreciation and amortization............................. 8,912 ------- Operating income............................................ 2,102 Interest income............................................. 122 Interest (expense).......................................... (6,321) ------- (Loss) before credit for taxes.............................. (4,097) Credit for taxes............................................ 65 ------- Net (loss).................................................. $(4,032) =======
See accompanying notes to consolidated financial statements. F-109 321 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (IN THOUSANDS)
TOTAL PAID-IN ACCUMULATED MEMBERS' CAPITAL DEFICIT EQUITY -------- ----------- -------- Balance December 31, 1998............................... $108,600 $(12,979) $95,621 Net (loss).............................................. -- (4,032) (4,032) -------- -------- ------- Balance April 30, 1999.................................. $108,600 $(17,011) $91,589 ======== ======== =======
See accompanying notes to consolidated financial statements. F-110 322 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOUR MONTHS ENDED APRIL 30, 1999 -------------- OPERATING ACTIVITIES Net (loss).................................................. $(4,032) Adjustments to non-cash and non-operating items: Depreciation and amortization............................. 8,912 Accretion on Senior Discount Notes........................ 3,528 Other non-cash charges.................................... 322 Changes in operating assets and liabilities: Accounts receivable -- trade, net...................... 206 Accounts receivable -- other........................... 92 Prepaid expenses and other assets...................... (75) Accounts payable....................................... (1,496) Accrued expenses....................................... (3,449) Subscriber advance payments and deposits............... 49 Deferred marketing support............................. (150) ------- Net cash provided by operating activities................... 3,907 ------- INVESTING ACTIVITIES Purchased cable television systems: Property, plant and equipment............................. (830) Cable television franchises............................... (1,940) Escrow deposit.............................................. 150 Capital expenditures........................................ (4,250) Other intangible assets..................................... 16 ------- Net cash used in investing activities....................... (6,854) ------- FINANCING ACTIVITIES Repayment of advances from Holdings......................... (135) ------- Net cash used in financing activities....................... (135) ------- Net decrease in cash and cash equivalents................... (3,082) Cash and cash equivalents at December 31, 1998.............. 8,482 ======= Cash and cash equivalents at April 30, 1999................. $ 5,400 ======= SUPPLEMENTAL DISCLOSURES Interest paid............................................... $ 4,210 =======
See accompanying notes to consolidated financial statements F-111 323 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL DOLLAR AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION Renaissance Media Group LLC ("Group") a wholly owned subsidiary of Renaissance Media Holdings LLC ("Holdings"), was formed in March 1998 to own and operate cable television systems in small and medium sized markets, which provide programming, and other related services, to subscribers through its hybrid coaxial and fiber optic distribution plant for a monthly fee. Group and its wholly owned subsidiaries, Renaissance Media (Louisiana) LLC ("Louisiana"), Renaissance Media (Tennessee) LLC ("Tennessee"), and Renaissance Media LLC ("Media") are collectively referred to as the "Company". On April 9, 1998, the Company acquired six cable television systems (the "Acquisition") from TWI Cable, Inc., a subsidiary of Time Warner Inc. ("Time Warner"). Prior to the Acquisition, the Company had no operations other than start-up related activities. On February 23, 1999, Holdings, Charter Communications, Inc. ("Charter"), now known as Charter Investment, Inc. and Charter Communications, LLC ("Buyer" or "CC LLC") executed a purchase agreement (the "Charter Purchase Agreement"), providing for Holdings to sell and Buyer to purchase, all of the outstanding limited liability company membership interests in Group held by Holdings (the "Charter Transaction") subject to certain covenants and restrictions pending satisfaction of certain conditions prior to closing. The purchase price was $459,000, consisting of $348,000 in cash and $111,000 in assumed debt. On April 30, 1999, the Charter Transaction was consummated. These financial statements have been prepared as of and for the four months ended April 30, 1999 immediately prior to the consummation of the Charter Transaction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NEW ACCOUNTING STANDARDS During 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No. 133" has delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to have a material impact on the consolidated financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated. F-112 324 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) CONCENTRATION OF CREDIT RISK A significant portion of the customer base is concentrated within the local geographical area of each of the individual cable television systems. The Company generally extends credit to customers and the ultimate collection of accounts receivable could be affected by the local economy. Management performs continuous credit evaluations of its customers and may require cash in advance or other special arrangements from certain customers. Management does not believe that there is any significant credit risk which could have a material effect on the Company's financial condition. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and investments in short-term, highly liquid securities, which have maturities when purchased of three months or less. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at purchased and capitalized cost. Capitalized internal costs principally consist of employee costs and interest on funds borrowed during construction. Capitalized labor, materials and associated overhead amounted to approximately $721 for the four months ended April 30, 1999. Replacements, renewals and improvements to installed cable plant are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation expense for the four months ended April 30, 1999 amounted to $3,434. Property, plant and equipment is depreciated using the straight-line method over the following estimated service lives: Buildings and leasehold improvements........................ 5-30 years Cable systems, equipment and subscriber devices............. 5-30 years Transportation equipment.................................... 3-5 years Furniture, fixtures and office equipment.................... 5-10 years
Property, plant and equipment at April 30, 1999 consisted of: Land........................................................ $ 436 Buildings and leasehold improvements........................ 1,445 Cable systems, equipment and subscriber devices............. 64,658 Transportation equipment.................................... 2,301 Furniture, fixtures and office equipment.................... 923 Construction in progress.................................... 6,487 ------- 76,250 Less: accumulated depreciation.............................. (10,706) ------- Total....................................................... $65,544 =======
F-113 325 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS Cable television franchise costs include the assigned fair value, at the date of acquisition, of the franchises from purchased cable television systems. Intangible assets include goodwill, deferred financing and other intangible assets. Cable television franchises and intangible assets are amortized using the straight-line method over the following estimated useful lives: Cable television franchises................................. 15 years Goodwill.................................................... 25 years Deferred financing and other intangible assets.............. 2-10 years
Intangible assets at April 30, 1999 consisted of: Goodwill.................................................... $ 8,608 Deferred financing costs.................................... 8,307 Other intangible assets..................................... 629 ------- 17,544 Less: accumulated amortization.............................. (1,525) ------- Total....................................................... $16,019 =======
The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, cable television franchises and intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized to the extent that the carrying value of such asset is greater than its fair value. REVENUES AND COSTS Subscriber fees are recorded as revenue in the period the related services are provided and advertising revenues are recognized in the period the related advertisements are exhibited. Rights to exhibit programming are purchased from various cable networks. The costs of such rights are generally expensed as the related services are made available to subscribers. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements and are recorded net of marketing credits earned from launch incentive and cooperative advertising programs. During the four months ended April 30, 1999 the company earned marketing credits in excess of advertising expense incurred. Advertising expense and marketing credits amounted to $263 and $306, respectively, for the four months ended April 30, 1999. ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-114 326 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) 3. ACQUISITIONS BAYOU VISION, INC. On February 3, 1999, Media acquired the cable television assets of Bayou Vision, Inc. and Gulf South Cable, Inc. serving approximately 1,950 subscribers in the Villages of Estherwood, Morse and Mermentau and Acadia and Livingston Parish, Louisiana. The cash purchase price was approximately $2,700 and was paid out of available Company funds. 4. DEBT As of April 30, 1999, debt consisted of: 10% Senior Discount Notes at accreted value (a)............. $110,902 Credit Agreement (b)........................................ 102,500 -------- $213,402 ========
- - - --------------- (a) On April 9, 1998, the Company issued $163,175 principal amount at maturity, $100,012 initial accreted value, of 10% senior discount notes due 2008 (the "Notes"). The Notes pay no cash interest until April 15, 2003. From and after April 15, 2003 the Notes will bear interest, payable semi-annually in cash, at a rate of 10% per annum on April 15 and October 15 of each year, commencing October 15, 2003. The Notes are due on April 15, 2008. The fair market value of the Notes at April 30, 1999 was $116,262. See Note 11 regarding the offer to repurchase the Notes. (b) On April 9, 1998, Media entered into a credit agreement among Morgan Stanley & Co. Incorporated as Placement Agent, Morgan Stanley Senior Funding Inc., as Syndication Agent, the Lenders, CIBC Inc., as Documentation Agent and Bankers Trust Company as Administrative Agent (the "Credit Agreement"). The aggregate commitments under the Credit Agreement total $150,000, consisting of a $40,000 revolver (the "Revolver"), $60,000 Tranche A Term Loans and $50,000 Tranche B Term Loans (collectively the "Term Loans"). The Revolver and Term Loans are collateralized by a first lien position on all present and future assets and the member's interest of Media, Louisiana and Tennessee. The Credit Agreement provides for interest at varying rates based upon various borrowing options and the attainment of certain financial ratios and for commitment fees of 1/2% on the unused portion of the revolver. Management believes the terms are comparable to those that could be obtained from third parties. The effective interest rate, including commitment fees and amortization of related deferred financing costs and the interest-rate cap, for the four months ended April 30, 1999 was 7.58%. See Note 11 regarding the repayment of amounts outstanding under the Credit Agreement upon consummation of the Charter Transaction. The Credit Agreement and the indenture pursuant to which the Notes were issued contain restrictive covenants on the Company regarding additional indebtedness, investment guarantees, loans, acquisitions, dividends and merger or sale of the subsidiaries and require the maintenance of certain financial ratios. 5. INTEREST RATE CAP AGREEMENT The Company purchases interest rate cap agreements that are designed to limit its exposure to increasing interest rates and are designated to its floating rate debt. The strike price of these agreements exceeds the current market levels at the time they are entered into. The interest rate F-115 327 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) indices specified by the agreements have been and are expected to be highly correlated with the interest rates the Company incurs on its floating rate debt. Payments to be received as a result of the specified interest rate index exceeding the strike price are accrued in other assets and are recognized as a reduction of interest expense (the accrual accounting method). The cost of these agreements is included in other assets and amortized to interest expense ratably during the life of the agreement. Upon termination of interest rate cap agreements, any gain is deferred in other liabilities and amortized over the remaining term of the original contractual life of the agreement as a reduction of interest expense. The Company purchased an interest rate cap agreement from Morgan Stanley Capital Services Inc. The carrying value as of April 30, 1999 was $34. The fair value of the interest rate cap was $0 as of April 30, 1999. The following table summarizes the interest rate cap agreement:
NOTIONAL INITIAL FIXED RATE PRINCIPAL EFFECTIVE TERMINATION CONTRACT (PAY AMOUNT TERM DATE DATE COST RATE) - - - --------- ------- --------- ----------- -------- ---------- $100,000 2 Years 12/1/97 12/1/99 $100 7.25%
6. TAXES For the four months ended April 30, 1999, the credit for taxes has been calculated on a separate company basis. The components of the credit for taxes are as follows:
FOUR MONTHS ENDED APRIL 30, 1999 -------------- Federal: Current................................................... $ -- Deferred.................................................. -- State:...................................................... -- Current................................................... (65) Deferred.................................................. -- ---- (Credit) for taxes.......................................... $(65) ====
The Company's current state tax credit results from overpayment in 1998 of franchise tax in Tennessee and Mississippi and tax on capital in New York. The Company has a net operating loss ("NOL") carry-forward for income tax purposes which is available to offset future taxable income. This NOL totals approximately $22,324 and will expire in the year 2018 and 2019 at $14,900 and $7,424 respectively. The Company has established a valuation allowance to offset the entire potential future tax benefit of the NOL carry-forward and, therefore, has recognized no deferred tax asset with respect to the NOL. Louisiana and Tennessee have elected to be treated as corporations for federal income tax purposes and have not recorded any tax benefit for their losses as the realization of these losses by reducing future taxable income in the carry forward period is uncertain at this time. F-116 328 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) 7. RELATED PARTY TRANSACTIONS (A) Transactions with Morgan Stanley entities In connection with the Acquisition, Media entered into the Credit Agreement with Morgan Stanley Senior Funding Inc. and Morgan Stanley & Co. Incorporated (collectively the "Morgan Stanley Entities") acted as the Placement Agent for the Notes. In connection with these services the Morgan Stanley Entities received customary fees and expense reimbursement comparable to that of a third party exchange. (B) Transactions with Time Warner and related parties In connection with the Acquisition, Media entered into an agreement with Time Warner (the "Time Warner Agreement"), pursuant to which Time Warner managed the Company's programming in exchange for providing the Company access to certain Time Warner programming arrangements (the "Programming Arrangements"). Management believes that programming rates made available to the Company through its relationship with Time Warner are lower than rates that the Company could obtain separately. Such volume rates will not continue to be available after the Charter Transaction. For the four months ended April 30, 1999, the Company incurred approximately $2,716 in costs under the Programming Arrangements. In addition, the Company has incurred programming costs of approximately $958 for programming services owned directly or indirectly by Time Warner entities for the four months ended April 30, 1999. (C) Transactions with board member The Company has utilized the law firm of one of its board members for legal services for the Acquisition, financing agreements and various ongoing legal matters. These fees totaled approximately $154 for the four months ended April 30, 1999. 8. ACCRUED EXPENSES Accrued expenses as of April 30, 1999 consist of the following: Accrued franchise fees...................................... $ 830 Accrued programming costs................................... 644 Accrued salaries, wages and benefits........................ 516 Accrued interest............................................ 340 Accrued property and sales tax.............................. 231 Accrued legal and professional fees......................... 43 Other accrued expenses...................................... 618 ------ $3,222 ======
9. EMPLOYEE BENEFIT PLAN The Company sponsors a defined contribution plan which covers substantially all employees (the "Plan"). The Plan provides for contributions from eligible employees up to 15% of their compensation subject to Internal Revenue Code limitations. The Company's contribution to the Plan is limited to 50% of each eligible employee's contribution up to 10% of his or her F-117 329 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) compensation. The Company has the right in any year to set the amount of the Company's contribution percentage. Company matching contributions to the Plan for the four months ended April 30, 1999 were approximately $54. All participant contributions and earnings are fully vested upon contribution and Company contributions and earnings vest 20% per year of employment with the Company, becoming fully vested after five years. In connection with the Charter Transaction, the Plan's assets were frozen as of April 30, 1999, and employees became fully vested. Effective July 1, 1999, the Company's employees with two months of service are eligible to participate in the Charter Communications, Inc. 401(k) Plan. 10. COMMITMENTS AND CONTINGENCIES (A) Leases The Company had rental expense under various lease and rental agreements primarily for offices, tower sites and warehouses of approximately $59 for the four months ended April 30, 1999. In addition, the Company rents utility poles in its operations generally under short term arrangements, but the Company expects these arrangements to recur. Total rent expense for utility poles was approximately $272 for the four months ended April 30, 1999. Future minimum annual rental payments under noncancellable leases are as follows: 1999........................................................ $ 29 2000........................................................ 38 2001........................................................ 24 2002........................................................ 21 2003 and thereafter......................................... 70 ---- Total....................................................... $182 ====
(B) Employment Agreements Media entered into employment agreements with six senior executives, who are also investors in Holdings, for the payment of salaries and bonuses. In connection with the Charter Transaction, the employment agreements with the six senior executives were terminated with no liability to the Company. (C) Other Agreements In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996, Time Warner agreed with the Federal Communications Commission ("FCC") to invest in certain upgrades to its cable infrastructure (consisting primarily of materials and labor in connection with the plant upgrades up to 750 MHz) by November 30, 2000. This agreement with the FCC (the "FCC Agreement") has been assumed by the Company as part of the Acquisition and did not terminate as a result of the Charter Transaction. The Company has agreed to invest approximately $25,100 in upgrades to its cable infrastructure in accordance with the FCC Agreement. The Company has spent approximately $3,650 on such upgrades as of April 30, 1999. 11. SUBSEQUENT EVENTS The Charter Transaction was consummated at the close of business on April 30, 1999. In connection with the closing of the Charter Transaction, all amounts outstanding under the Credit F-118 330 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Agreement, including accrued interest and unpaid fees, were paid in full and the Credit Agreement was terminated. The effects of the debt repayment and the CC LLC capital contribution will be reflected in the consolidated financial statements of the Company for periods subsequent to April 30, 1999. In connection with the closing of the Charter Transaction, the Time Warner Agreement was terminated on April 30, 1999 and Media paid Time Warner $650 for deferred marketing credits owed to program providers under the Programming Arrangements. See Note 7 (Transactions with Time Warner and related parties). On May 28, 1999, as a result of the Charter Transaction (i.e., change of control) and in accordance with the terms and conditions of the indenture governing the Notes, the Company made an offer (the "Tender Offer") to purchase any and all of the Notes at 101% of their accreted value, plus accrued and unpaid interest, if any, through June 28, 1999. The Tender Offer expired on June 23, 1999, whereby 48,762 notes ($1,000 face amount at maturity) were validly tendered and accepted for purchase. On June 28, 1999, Charter Communications Operating, LLC, the indirect parent of Group, paid a sum of $34,223 for all of the Notes validly tendered. Accordingly, the Company recorded this payment for the extinguishment of debt as a capital contribution. 12. MANAGEMENT AGREEMENT (UNAUDITED) Effective May 1, 1999, the Company is charged a management fee equal to 3.5% of revenues, as stipulated in the previous management agreement between Charter and Charter Communications Operating, LLC ("CCO"), the indirect parent of Group. To the extent that management fees charged to the Company are greater/(less) than the proportionate share (based on basic subscribers) of corporate expenses incurred by Charter on behalf of the Company, Group will record distributions to/(capital contributions from) Charter. On November 12, 1999, Charter and CCO entered into a revised management agreement eliminating the 3.5% management fee and entitling Charter to reimbursement from CCO of all of its costs incurred in connection with the performance of its services under the revised management agreement. F-119 331 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Renaissance Media Group LLC We have audited the accompanying consolidated balance sheet of Renaissance Media Group LLC as of December 31, 1998 and the related consolidated statements of operations, changes in members' equity, and cash flows for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Renaissance Media Group LLC at December 31, 1998, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York February 22, 1999 except for Note 11, as to which the date is February 24, 1999 F-120 332 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 (IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 8,482 Accounts receivable -- trade (less allowance for doubtful accounts of $92).......................................... 726 Accounts receivable -- other................................ 584 Prepaid expenses and other assets........................... 340 Escrow deposit.............................................. 150 Investment in cable television systems: Property, plant and equipment............................. 71,246 Less: Accumulated depreciation............................ (7,294) -------- 63,952 -------- Cable television franchises............................... 236,489 Less: Accumulated amortization............................ (11,473) -------- 225,016 -------- Intangible assets......................................... 17,559 Less: Accumulated amortization............................ (1,059) -------- 16,500 -------- Total investment in cable television systems......... 305,468 -------- Total assets...................................... $315,750 ======== LIABILITIES AND MEMBERS' EQUITY Accounts payable............................................ $ 2,042 Accrued expenses(a)......................................... 6,670 Subscriber advance payments and deposits.................... 608 Deferred marketing support.................................. 800 Advances from Holdings...................................... 135 Debt........................................................ 209,874 -------- Total Liabilities................................. 220,129 -------- Members' Equity: Paid in capital............................................. 108,600 Accumulated deficit......................................... (12,979) -------- Total members' equity................................ 95,621 -------- Total liabilities and members' equity............. $315,750 ========
- - - --------------- (a) includes accrued costs from transactions with affiliated companies of $921. See accompanying notes to financial statements. F-121 333 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS) REVENUES.................................................... $ 41,524 -------- COSTS & EXPENSES Service Costs(a).......................................... 13,326 Selling, General & Administrative......................... 7,711 Depreciation & Amortization............................... 19,107 -------- Operating Income....................................... 1,380 Interest Income........................................ 158 Interest (Expense) (b)................................. (14,358) -------- (Loss) Before Provision for Taxes...................... (12,820) Provision for Taxes.................................... 135 -------- Net (Loss)............................................. $(12,955) ========
- - - --------------- (a) includes costs from transactions with affiliated companies of $7,523. (b) includes $676 of amortization of deferred financing costs. See accompanying notes to financial statements. F-122 334 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
PAID TOTAL IN ACCUMULATED MEMBER'S CAPITAL (DEFICIT) EQUITY ------- ----------- -------- Contributed Members' Equity -- Renaissance Media Holdings LLC and Renaissance Media LLC................ $ 15,000 $ (24) $14,976 Additional capital contributions........................ 93,600 -- 93,600 Net (Loss).............................................. -- (12,955) (12,955) -------- -------- ------- Balance December 31, 1998............................... $108,600 $(12,979) $95,621 ======== ======== =======
See accompanying notes to financial statements. F-123 335 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS) OPERATING ACTIVITIES: Net (loss).................................................. $(12,955) Adjustments to non-cash and non-operating items: Depreciation and amortization............................. 19,107 Accretion on Senior Discount Notes........................ 7,363 Other non-cash charges.................................... 730 Changes in operating assets and liabilities: Accounts receivable -- trade, net...................... (726) Accounts receivable -- other........................... (584) Prepaid expenses and other assets...................... (338) Accounts payable....................................... 2,031 Accrued expenses....................................... 6,660 Subscriber advance payments and deposits............... 608 Deferred marketing support............................. 800 -------- Net cash provided by operating activities................... 22,696 -------- INVESTING ACTIVITIES: Purchased cable television systems: Property, plant and equipment.......................... (65,580) Cable television franchises............................ (235,412) Cash paid in excess of identifiable assets............. (8,608) Escrow deposit............................................ (150) Capital expenditures...................................... (5,683) Cable television franchises............................... (1,077) Other intangible assets................................... (526) -------- Net cash (used in) investing activities..................... (317,036) -------- FINANCING ACTIVITIES: Debt acquisition costs.................................... (8,323) Principal repayments on bank debt......................... (7,500) Advances from Holdings.................................... 33 Proceeds from bank debt................................... 110,000 Proceeds from 10% Senior Discount Notes................... 100,012 Capital contributions..................................... 108,600 -------- Net cash provided by financing activities................... 302,822 -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,482 CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997.............. -- -------- CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1998.............. $ 8,482 ======== SUPPLEMENTAL DISCLOSURES: INTEREST PAID............................................. $ 4,639 ========
See accompanying notes to financial statements. F-124 336 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION Renaissance Media Group LLC ("Group") was formed on March 13, 1998 by Renaissance Media Holdings LLC ("Holdings"). Holdings is owned by Morgan Stanley Capital Partners III, L.P. ("MSCP III"), Morgan Stanley Capital Investors, L.P. ("MSCI"), MSCP III 892 Investors, L.P. ("MSCP Investors" and, collectively, with its affiliates, MSCP III and MSCI and their respective affiliates, the "Morgan Stanley Entities"), Time Warner and the Management Investors. On March 20, 1998, Holdings contributed to Group its membership interests in two wholly-owned subsidiaries; Renaissance Media (Louisiana) LLC ("Louisiana") and Renaissance Media (Tennessee) LLC ("Tennessee"), which were formed on January 7, 1998. Louisiana and Tennessee acquired a 76% interest and 24% interest, respectively, in Renaissance Media LLC ("Media") from Morgan Stanley Capital Partners III, Inc. ("MSCP"), on February 13, 1998 through an acquisition of entities under common control accounted for as if it were a pooling of interests. As a result, Media became a subsidiary of Group and Holdings. Group and its aforementioned subsidiaries are collectively referred to as the "Company". On April 9, 1998, the Company acquired (the "Acquisition") six cable television systems (the "Systems") from TWI Cable, Inc. ("TWI Cable"), a subsidiary of Time Warner Inc. ("Time Warner"). See Note 3. Prior to this Acquisition, the Company had no operations other than start-up related activities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NEW ACCOUNTING STANDARDS During fiscal 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company will adopt FAS 133 as of January 1, 2000. The impact of the adoption on the Company's consolidated financial statements is not expected to be material. PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. CONCENTRATION OF CREDIT RISK A significant portion of the customer base is concentrated within the local geographical area of each of the individual cable television systems. The Company generally extends credit to customers and the ultimate collection of accounts receivable could be affected by the local economy. Management performs continuous credit evaluations of its customers and may require cash in advance or other special arrangements from certain customers. Management does not believe that there is any significant credit risk which could have a material effect on the Company's financial condition. REVENUE AND COSTS Subscriber fees are recorded as revenue in the period the related services are provided and advertising revenues are recognized in the period the related advertisements are exhibited. F-125 337 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) Rights to exhibit programming are purchased from various cable networks. The costs of such rights are generally expensed as the related services are made available to subscribers. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements. Advertising expense amounted to $491 in 1998. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and investments in short-term, highly liquid securities, which have maturities when purchased of three months or less. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at purchased and capitalized cost. Capitalized internal costs principally, consist of employee costs and interest on funds borrowed during construction. Capitalized labor, materials and associated overhead amounted to approximately $1,429 in 1998. Replacements, renewals and improvements to installed cable plant are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation expense for the year ended December 31, 1998 amounted to $7,314. Property, plant and equipment is depreciated using the straight-line method over the following estimated service lives: Buildings and leasehold improvements........................ 5 - 30 years Cable systems, equipment and subscriber devices............. 5 - 30 years Transportation equipment.................................... 3 - 5 years Furniture, fixtures and office equipment.................... 5 - 10 years
Property, plant and equipment at December 31, 1998 consisted of: Land...................................................... $ 432 Buildings and leasehold improvements...................... 1,347 Cable systems, equipment and subscriber devices........... 62,740 Transportation equipment.................................. 2,181 Furniture, Fixtures and office equipment.................. 904 Construction in progress.................................. 3,642 ------- 71,246 Less: accumulated depreciation.............................. (7,294) ------- Total............................................. $63,952 =======
F-126 338 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS Cable television franchise costs include the assigned fair value, at the date of acquisition, of the franchises from purchased cable television systems. Intangible assets include goodwill, deferred financing and other intangible assets. Cable television franchises and intangible assets are amortized using the straight-line method over the following estimated useful lives: Cable television franchises................................. 15 years Goodwill.................................................... 25 years Deferred financing and other intangible assets.............. 2 - 10 years
Intangible assets at December 31, 1998 consisted of: Goodwill.................................................... $ 8,608 Deferred Financing Costs.................................... 8,323 Other intangible assets..................................... 628 ------- 17,559 Less: accumulated amortization.............................. (1,059) ------- Total............................................. $16,500 =======
The Company periodically reviews the carrying value of its long-lived assets, including property, plant and equipment, cable television franchises and intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attributable to the asset, less estimated future cash outflows, is less than the carrying amount, an impairment loss is recognized to the extent that the carrying value of such asset is greater than its fair value. ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITIONS TWI CABLE On April 9, 1998, the Company acquired six cable television systems from TWI Cable. The systems are clustered in southern Louisiana, western Mississippi and western Tennessee. This Acquisition represented the first acquisition by the Company. The purchase price for the systems was $309,500 which was paid as follows: TWI Cable received $300,000 in cash, inclusive of an escrow deposit of $15,000, and a $9,500 (9,500 units) equity interest in Renaissance Media Holdings LLC, the parent company of Group. In addition to the purchase price, the Company incurred approximately $1,385 in transaction costs, exclusive of financing costs. The Acquisition was accounted for using the purchase method and, accordingly, results of operations are reported from the date of the Acquisition (April 9, 1998). The excess of the purchase price over the estimated fair value of the tangible assets acquired has been allocated to cable television franchises and goodwill in the amount of $235,387 and $8,608, respectively. F-127 339 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) DEFFNER CABLE On August 31, 1998, the Company acquired the assets of Deffner Cable, a cable television company located in Gadsden, Tennessee. The purchase price was $100 and was accounted for using the purchase method. The allocation of the purchase price is subject to change, although management does not believe that any material adjustment to such allocation is expected. BAYOU VISION, INC. On February 3, 1999, Media acquired the cable television assets of Bayou Vision, Inc. and Gulf South Cable, Inc. serving approximately 1,950 subscribers in the Villages of Estherwood, Morse and Mermentau and Acadia and Livingston Parish, Louisiana. The cash purchase price was approximately $2,700 and was paid out of available Company funds. Unaudited Pro Forma summarized results of operations for the Company for the year ended December 31, 1998 and 1997, assuming the Acquisition, Notes (as hereinafter defined) offering and Credit Agreement (as hereinafter defined) had been consummated on January 1, 1998 and 1997, are as follows:
YEAR ENDED DECEMBER 31 ---------------------- 1997 1998 ---- ---- Revenues.................................................... $ 50,987 $ 56,745 Expenses.................................................... 53,022 55,210 -------- -------- Operating (loss) income..................................... (2,035) 1,535 Interest expense and other expenses......................... (19,740) (19,699) -------- -------- Net (Loss).................................................. $(21,775) $(18,164) ======== ========
4. DEBT As of December 31, 1998, debt consisted of: 10.00% Senior Discount Notes at Accreted Value(a)........... $107,374 Credit Agreement(b)......................................... 102,500 -------- $209,874 ========
(a) On April 9, 1998, in connection with the Acquisition described in Note 3, the Company issued $163,175 principal amount at maturity, $100,012 initial accreted value, of 10.00% senior discount notes due 2008 ("Notes"). The Notes pay no interest until April 15, 2003. From and after April 15, 2003 the Notes will bear interest, payable semi-annually in cash, at a rate of 10% per annum on April 15 and October 15 of each year, commencing October 15, 2003. The Notes are due on April 15, 2008. (b) On April 9, 1998, Renaissance Media entered into a credit agreement among Morgan Stanley & Co. Incorporated as Placement Agent, Morgan Stanley Senior Funding Inc., as Syndication Agent, the Lenders, CIBC Inc., as Documentation Agent and Bankers Trust Company as Administrative Agent (the "Credit Agreement"). The aggregate commitments under the Credit Agreement total $150,000, consisting of a $40,000 revolver, $60,000 Tranche A Term Loans and $50,000 Tranche B Term Loans (collectively the "Term Loans"). The revolving credit and term loans are collateralized by a first lien position on all present and future assets and the member's F-128 340 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) interest of Media, Louisiana and Tennessee. The Credit Agreement provides for interest at varying rates based upon various borrowing options and the attainment of certain financial ratios and for commitment fees of 1/2% on the unused portion of the revolver. The effective interest rate, including commitment fees and amortization of related deferred financing costs and the interest-rate cap, for the year ended December 31, 1998 was 8.82%. On April 9, 1998, $110,000 was borrowed under the Credit Agreement's Tranche A and B Term Loans. On June 23, 1998, $7,500 was repaid resulting in $102,500 of outstanding Tranche A and B Term Loans as of December 31, 1998. As of December 31, 1998, the Company had unrestricted use of the $40,000 revolver. No borrowings had been made by the Company under the revolver through that date. Annual maturities of borrowings under the Credit Agreement for the years ending December 31 are as follows: 1999........................................................ $ 776 2000........................................................ 1,035 2001........................................................ 2,701 2002........................................................ 9,506 2003........................................................ 11,590 2004........................................................ 11,590 Thereafter.................................................. 65,302 -------- 102,500 Less: Current portion....................................... (776) -------- $101,724 ========
The Credit Agreement and the Indenture pursuant to which the Notes were issued contain restrictive covenants on the Company and subsidiaries regarding additional indebtedness, investment guarantees, loans, acquisitions, dividends and merger or sale of the subsidiaries and require the maintenance of certain financial ratios. Total interest cost incurred for the year ended December 31, 1998, including commitment fees and amortization of deferred financing and interest-rate cap costs was $14,358, net of capitalized interest of $42. 5. INTEREST RATE-CAP AGREEMENT The Company purchases interest-rate cap agreements that are designed to limit its exposure to increasing interest rates and are designated to its floating rate debt. The strike price of these agreements exceeds the current market levels at the time they are entered into. The interest rate indices specified by the agreements have been and are expected to be highly correlated with the interest rates the Company incurs on its floating rate debt. Payments to be received as a result of the specified interest rate index exceeding the strike price are accrued in other assets and are recognized as a reduction of interest expense (the accrual accounting method). The cost of these agreements is included in other assets and amortized to interest expense ratably during the life of the agreement. Upon termination of an interest-rate cap agreement, any gain is deferred in other liabilities and amortized over the remaining term of the original contractual life of the agreement as a reduction of interest expense. F-129 341 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) On December 1, 1997, the Company purchased an interest-rate cap agreement from Morgan Stanley Capital Services Inc. The carrying value as of December 31, 1998 was $47. The fair value of the interest-rate cap, which is based upon the estimated amount that the Company would receive or pay to terminate the cap agreement as of December 31, 1998, taking into consideration current interest rates and the credit worthiness of the counterparties, approximates its carrying value. The following table summarizes the interest-rate cap agreement:
NOTIONAL INITIAL PRINCIPAL EFFECTIVE TERMINATION CONTRACT FIXED RATE AMOUNT TERM DATE DATE COST (PAY RATE) - - - --------- ---- --------- ----------- -------- ---------- $100,000 2 years 12/1/97 12/1/99 $100 7.25%
6. TAXES For the year ended December 31, 1998, the provision for income taxes has been calculated on a separate company basis. The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, 1998 ----------------- Federal: Current................................................... $ -- Deferred.................................................. -- State: Current................................................... 135 Deferred.................................................. -- ---- Provision for income taxes............................. $135 ====
The Company's current state tax liability results from its obligation to pay franchise tax in Tennessee and Mississippi and tax on capital in New York. The Company has a net operating loss ("NOL") carryforward for income tax purposes which is available to offset future taxable income. This NOL totals approximately $14,900 and expires in the year 2018. The Company has established a valuation allowance to offset the entire potential future tax benefit of the NOL carryforward and, therefore, has recognized no deferred tax asset with respect to the NOL. Louisiana and Tennessee have elected to be treated as corporations for federal income tax purposes and have not recorded any tax benefit for their losses as the realization of theses losses by reducing future taxable income in the carry forward period is uncertain at this time. 7. RELATED PARTY TRANSACTIONS (a) TRANSACTIONS WITH MORGAN STANLEY ENTITIES In connection with the Acquisition, Media entered into the Credit Agreement with Morgan Stanley Senior Funding Inc. and Morgan Stanley & Co. Incorporated acted as the Placement Agent for the Notes. In connection with these services the Morgan Stanley Entities received customary fees and expense reimbursement. F-130 342 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) (b) TRANSACTIONS WITH TIME WARNER AND RELATED PARTIES In connection with the Acquisition, Media entered into an agreement with Time Warner, pursuant to which Time Warner manages the Company's programming in exchange for providing the Company access to certain Time Warner programming arrangements. (c) Transactions with Management Prior to the consummation of the Acquisition described in Note 3, Media paid fees in 1998 to six senior executives of the Company who are investors in the Company (the "Management Investors") for services rendered prior to their employment by Media relating to the Acquisition and the Credit Agreement. These fees totaled $287 and were recorded as transaction and financing costs. (d) DUE TO MANAGEMENT INVESTORS Prior to the formation of the Company, the Management Investors advanced $1,000 to Holdings, which was used primarily for working capital purposes. Upon formation of the Company, Holdings contributed certain assets and liabilities to Group and the $1,000 advance from the Management Investors was recorded as paid in capital. (e) TRANSACTIONS WITH BOARD MEMBER The Company has utilized the law firm of one of its board members for legal services for the Acquisition, financing agreements and various ongoing legal matters. These fees totaled approximately $1,348 for the year ended December 31, 1998. 8. ACCRUED EXPENSES Accrued expenses as of December 31, 1998 consist of the following: Accrued programming costs................................... $1,986 Accrued interest............................................ 1,671 Accrued franchise fees...................................... 1,022 Accrued legal and professional fees,........................ 254 Accrued salaries, wages and benefits........................ 570 Accrued property and sales tax.............................. 637 Other accrued expenses...................................... 530 ------ $6,670 ======
9. EMPLOYEE BENEFIT PLAN Effective April 9, 1998, the Company began sponsoring a defined contribution plan which covers substantially all employees (the "Plan"). The Plan provides for contributions from eligible employees up to 15% of their compensation. The Company's contribution to the Plan is limited to 50% of each eligible employee's contribution up to 10% of his or her compensation. The Company has the right in any year to set the amount of the Company's contribution percentage. Company matching contributions to the Plan for the year ended December 31, 1998 were approximately $97. All participant contributions and earnings are fully vested upon contribution F-131 343 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) and company contributions and earnings vest 20% per year of employment with the Company, becoming fully vested after five years. 10. COMMITMENTS AND CONTINGENCIES (a) LEASES The Company had rental expense under various lease and rental agreements primarily for offices, tower sites and warehouses of approximately $125 in 1998. In addition, the Company rents utility poles in its operations generally under short term arrangements, but the Company expects these arrangements to recur. Total rent expense for utility poles was approximately $620 in 1998. Future minimum annual rental payments under noncancellable leases are as follows: 1999............................................... $162 2000............................................... 38 2001............................................... 24 2002............................................... 20 2003 and thereafter................................ 66 ---- Total......................................... $310 ====
(b) EMPLOYMENT AGREEMENTS Media has entered into employment agreements with six senior executives who are also investors in Holdings. Under the conditions of five of the agreements the employment term is five years, expiring in April 2003 and requires Media to continue salary payments (including any bonus) through the term if the executive's employment is terminated by Media without cause, as defined in the employment agreement. Media's obligations under the employment agreements may be reduced in certain situations based on actual operating performance relative to the business plan, death or disability or by actions of the other senior executives. The employment agreement for one senior executive has a term of one year and may be renewed annually. This agreement has been renewed through April 8, 2000. (c) OTHER AGREEMENTS In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996, Time Warner agreed with the Federal Communications Commission ("FCC") to invest in certain upgrades to its cable infrastructure (consisting primarily of materials and labor in connection with the plant upgrades up to 750 megahertz) by 1999 (approximately $23 million). This agreement with the FCC has been assumed by the Company as part of the Acquisition. 11. SUBSEQUENT EVENT On February 23, 1999, Holdings entered into an agreement with Charter Communications, LLC and Charter Communications, Inc., to sell 100% of its members' equity in the Company for approximately $459,000, subject to certain closing conditions. This transaction is expected to close during the third quarter of 1999. F-132 344 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 12. YEAR 2000 ISSUES (UNAUDITED) The Company relies on computer systems, related software applications and other control devices in operating and monitoring all major aspects of its business, including, but not limited to, its financial systems (such as general ledger, accounts payable, payroll and fixed asset modules), subscriber billing systems, internal networks and telecommunications equipment. The Company also relies, directly and indirectly, on the external systems of various independent business enterprises, such as its suppliers and financial organizations, for the accurate exchange of data. The Company continues to assess the likely impact of Year 2000 issues on its business operations, including its material information technology ("IT") and non-IT applications. These material applications include all billing and subscriber information systems, general ledger software, payroll systems, accounting software, phone switches and certain headend applications, all of which are third party supported. The Company believes it has identified all systems that may be affected by Year 2000 Issues. Concurrent with the identification phase, the Company is securing compliance determinations relative to all identified systems. For those systems that the Company believes are material, compliance programs have been received or such systems have been certified by independent parities as Year 2000 compliant. For those material systems that are subject to compliance programs, the Company expects to receive Year 2000 certifications from independent parties by the second quarter 1999. Determinations of Year 2000 compliance requirements for less mission critical systems are in progress and are expected to be completed in the second quarter of 1999. With respect to third parties with which the Company has a material relationship, the Company believes its most significant relationships are with financial institutions, who receive subscriber monthly payments and maintain Company bank accounts, and subscriber billing and management systems providers. We have received compliance programs which if executed as planned should provide a high degree of assurance that all Year 2000 issues will be addressed by mid 1999. The Company has not incurred any material Year 2000 costs to date, and excluding the need for contingency plans, does not expect to incur any material Year 2000 costs in the future because most of its applications are maintained by third parties who have borne Year 2000 compliance costs. The Company cannot be certain that it or third parties supporting its systems have resolved or will resolve all Year 2000 issues in a timely manner. Failure by the Company or any such third party to successfully address the relevant Year 2000 issues could result in disruptions of the Company's business and the incurrence of significant expenses by the Company. Additionally, the Company could be affected by any disruption to third parties with which the Company does business if such third parties have not successfully addressed their Year 2000 issues. Failure to resolve Year 2000 issues could result in improper billing to the Company's subscribers which could have a major impact on the recording of revenue and the collection of cash as well as create significant customer dissatisfaction. In addition, failure on the part of the financial institutions with which the Company relies on for its cash collection and management services could also have a significant impact on collections, results of operations and the liquidity of the Company. F-133 345 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) The Company has not yet finalized contingency plans necessary to handle the most likely worst case scenarios. Before concluding as to possible contingency plans, the Company must determine whether the material service providers contemplate having such plans in place. In the event that contingency plans from material service providers are not in place or are deemed inadequate, management expects to have such plans in place by the third quarter of 1999. F-134 346 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of TWI Cable, Inc. We have audited the accompanying combined balance sheet of the Picayune MS, Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson TN cable television systems, (collectively, the "Combined Systems") included in TWI Cable, Inc. ("TWI Cable"), as of April 8, 1998, and the related combined statements of operations, changes in net assets and cash flows for the period from January 1, 1998 through April 8, 1998. These combined financial statements are the responsibility of the Combined Systems' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Systems, included in TWI Cable, at April 8, 1998, and the combined results of their operations and their cash flows for the period from January 1, 1998 through April 8, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York February 22, 1999 F-135 347 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED BALANCE SHEET (IN THOUSANDS)
APRIL 8, 1998 ------------- ASSETS Cash and cash equivalents................................... $ 7 Receivables, less allowance of $116......................... 576 Prepaid expenses and other assets........................... 438 Property, plant and equipment, net.......................... 35,992 Cable television franchises, net............................ 195,907 Goodwill and other intangibles, net......................... 50,023 -------- Total assets...................................... $282,943 ======== LIABILITIES AND NET ASSETS Accounts payable............................................ $ 63 Accrued programming expenses................................ 978 Accrued franchise fees...................................... 616 Subscriber advance payments and deposits.................... 593 Deferred income taxes....................................... 61,792 Other liabilities........................................... 747 -------- Total liabilities................................. 64,789 Total net assets.................................. 218,154 -------- Total liabilities and net assets.................. $282,943 ========
See accompanying notes to combined financial statements. F-136 348 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED STATEMENT OF OPERATIONS (IN THOUSANDS)
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH APRIL 8, 1998 --------------- REVENUES.................................................... $15,221 COSTS AND EXPENSES: Operating and programming................................... 3,603 Selling, general and administrative......................... 4,134 Depreciation and amortization............................... 5,031 (Gain) on disposal of fixed assets.......................... (96) ------- Total costs and expenses.......................... 12,672 ------- Operating income............................................ 2,549 Provision for income taxes.................................. 1,191 ------- Net income.................................................. $ 1,358 =======
See accompanying notes to combined financial statements. F-137 349 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS) Balance at December 31, 1997................................ $224,546 Repayment of advances from Parent......................... (17,408) Advances from Parent...................................... 9,658 Net income................................................ 1,358 -------- Balance at April 8, 1998.................................... $218,154 ========
See accompanying notes to combined financial statements. F-138 350 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH APRIL 8, 1998 --------------- OPERATING ACTIVITIES: Net income.................................................. $ 1,358 Adjustments for noncash and nonoperating items: Income tax expense........................................ 1,191 Depreciation and amortization............................. 5,031 (Gain) on disposal of fixed assets........................ (96) Changes in operating assets and liabilities: Receivables, prepaids and other assets................. 289 Accounts payable, accrued expenses and other liabilities........................................... (770) Other balance sheet changes............................ (4) ------- Net cash provided by operations............................. 6,999 ------- INVESTING ACTIVITIES: Capital expenditures........................................ (613) ------- Net cash used in investing activities....................... (613) ------- FINANCING ACTIVITIES: Net repayment of advances from Parent....................... (7,750) ------- Net cash (used in) financing activities..................... (7,750) INCREASE IN CASH AND CASH EQUIVALENTS....................... (1,364) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,371 ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7 =======
See accompanying notes to combined financial statements. F-139 351 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The cable television systems operating in the metropolitan areas of Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St. Landry, Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the "Combined Systems") are principally engaged in the cable television business under non-exclusive franchise agreements, which expire at various times beginning in 1999. The Combined Systems' operations consist primarily of selling video programming which is distributed to subscribers for a monthly fee through a network of coaxial and fiber-optic cables. Prior to January 4, 1996, the Combined Systems were included in certain subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4, 1996, CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a reorganization amongst certain of its wholly owned cable television subsidiaries whereby CVI was renamed TWI Cable Inc. ("TWI Cable"). BASIS OF PRESENTATION TWI Cable has sold the Combined Systems to Renaissance Media Holdings LLC ("Renaissance") pursuant to an Asset Purchase Agreement with Renaissance, dated November 14, 1997 (see Note 8). Accordingly, the accompanying combined financial statements of the Combined Systems reflect the "carved out" historical financial position, results of operations, cash flows and changes in net assets of the operations of the Combined Systems as if they had been operating as a separate company. Effective as of January 1, 1996, the Combined Systems' financial statements reflect the new basis of accounting arising from Time Warner's merger with CVI. Based on Time Warner's allocation of the purchase price, the assets and liabilities of the Combined Systems were revalued resulting in goodwill allocated to the Combined Systems of approximately $52,971,000, which is being amortized over its estimated life of 40 years. In addition, approximately $220,981,000 was allocated to cable television franchises and other intangible assets, which is being amortized over periods up to 20 years. The combined statements have been adjusted to include the allocation of certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on the Combined Systems' behalf, based upon the number of Combined System subscribers managed by Time Warner Cable and the ratio of Combined System subscribers to total TWI Cable subscribers, respectively. These allocations reflect all costs of doing business that the Combined Systems would have incurred on a stand alone basis as disclosed in Note 3. Management believes that these allocations are reasonable. BASIS OF COMBINATION The combined financial statements include the assets, liabilities, revenues, expenses, income, loss and cash flows of the Combined Systems, as if the Combined Systems were a single company. Significant intercompany accounts and transactions between the Combined Systems have been eliminated. Significant accounts and transactions with Time Warner and its affiliates are disclosed as related party transactions (see Note 3). F-140 352 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and footnotes thereto. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK A significant portion of the customer base is concentrated within the local geographical area of each of the individual cable television systems. The Combined Systems generally extend credit to customers and the ultimate collection of accounts receivable could be affected by the local economy. Management performs continuous credit evaluations of its customers and may require cash in advance or other special arrangements from certain customers. Management does not believe that there is any significant credit risk which could have a material effect on the financial condition of the Combined Systems. REVENUE AND COSTS Subscriber fees are recorded as revenue in the period the related services are provided and advertising revenues are recognized in the period the related advertisements are exhibited. Rights to exhibit programming are purchased from various cable networks. The costs of such rights are generally expensed as the related services are made available to subscribers. FRANCHISE FEES Local governmental authorities impose franchise fees on the cable television systems owned by the Combined Systems ranging up to a federally mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected from the Combined Systems' customers and such fees are not included as revenue or as a franchise fee expense. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements. Advertising expense amounted to $105,000 for the period from January 1, 1998 through April 8, 1998. STATEMENT OF CASH FLOWS The Combined Systems participate in a cash management system with affiliates whereby cash receipts are transferred to a centralized bank account from which centralized payments to various suppliers and creditors are made on behalf of the Combined Systems. The excess of such cash receipts over payments is included in net assets. Amounts shown as cash represent the Combined Systems' net cash receipts not transferred to the centralized account as of December 31, 1996 and 1997. The average net intercompany payable balances was $166,522,000 for the period from January 1, 1998 through April 8, 1998. For purposes of this statement, cash and cash equivalents includes all highly liquid investments purchased with original maturities of three months or less. F-141 353 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Additions to property, plant and equipment generally include material, labor, overhead and interest. Depreciation is provided on the straight-line method over estimated useful lives as follows: Buildings and improvements.................................. 5-20 years Cable television equipment.................................. 5-15 years Furniture, fixtures and other equipment..................... 3-10 years
Property, plant and equipment consist of:
APRIL 8, 1998 ------------- (IN THOUSANDS) Land and buildings.......................................... $ 2,255 Cable television equipment.................................. 40,276 Furniture, fixtures and other equipment..................... 2,308 Construction in progress.................................... 1,183 -------- 46,022 Less accumulated depreciation............................... (10,030) -------- Total............................................. $ 35,992 ========
INTANGIBLE ASSETS The Combined Systems amortized goodwill over periods up to 40 years and cable television franchises over periods up to 20 years, both using the straight-line method. For the period from January 1, 1998 through April 8, 1998 amortization of goodwill amounted to $360,000 and amortization of cable television franchises amounted to $3,008,000. Accumulated amortization of intangible assets amounted to $28,114,000 at April 8, 1998. IMPAIRMENT Management separately reviews the carrying value of acquired long-lived assets for each acquired entity on a quarterly basis to determine whether an impairment may exist. Management considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of long-lived assets can be recovered. Upon a determination that the carrying value of long-lived assets will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such long-lived assets would be considered impaired and would be reduced by a charge to operations in the amount of the impairment. An impairment charge is measured as a deficiency in estimated discounted future cash flows of the acquired business to recover the carrying value related to the long-lived assets. INCOME TAXES Income taxes have been provided using the liability method prescribed by FASB Statement No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statements and income tax purposes, as determined under enacted tax laws and rates. F-142 354 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 2. EMPLOYEE BENEFIT PLANS Following the CVI Merger, the Combined Systems began participation in the Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined benefit pension plan, and the Time Warner Cable Employee Savings Plan (the "Savings Plan") which are administered by a committee appointed by the Board of Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate of Time Warner, and which cover substantially all employees. Benefits under the Pension Plan are determined based on formulas which reflect an employee's years of service and compensation levels during the employment period. Pension expense for the period from January 1, 1998 through April 8, 1998 totaled $61,000. The Combined Systems' contributions to the Savings Plan are limited to 6.67% of an employee's eligible compensation during the plan year. The Board of Representatives of TWE has the right in any year to set the maximum amount of the Combined Systems' contribution. Defined contribution plan expense for the period from January 1, 1998 through April 8, 1998 totaled $38,000. The Combined Systems have no material obligations for other post retirement benefits. 3. RELATED PARTIES In the normal course of conducting business, the Combined Systems had various transactions with Time Warner and its affiliates, generally on terms resulting from a negotiation between the affected units that in management's view resulted in reasonable allocations. PROGRAMMING Included in the Combined Systems' operating expenses are charges for programming and promotional services provided by Home Box Office, Turner Broadcasting System, Inc. and other affiliates of Time Warner. These charges are based on customary rates and are in the ordinary course of business. These charges totaled $1,164,000 for the period from January 1, 1998 through April 8, 1998. Accrued related party expenses for these programming and promotional services included in accrued programming expenses approximated $409,000 for the period from January 1, 1998 through April 8, 1998. MANAGEMENT FEES TWI Cable entered into a management service arrangement with Time Warner Cable ("TWC"), pursuant to which TWC is responsible for the management and operation of TWI Cable, which includes the Combined Systems. The management fees paid to TWC by TWI Cable are based on an allocation of the corporate expenses of TWC's cable division in proportion to the respective number of subscribers of all cable systems managed by TWC's cable division. The allocation of the TWI Cable management fee to the Combined Systems approximated $486,000 for the period from January 1, 1998 through April 8, 1998. Other divisional expenses allocated to the Combined Systems approximated $299,000 for the period from January 1, 1998 through April 8, 1998. F-143 355 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. INTEREST EXPENSE Prior to the CVI Merger, the Jackson, Tennessee system was included in Cablevision Industries Limited Partnership and Combined Entities ("CILP"). The Jackson system was charged interest expense in connection with CILP's (a) senior and subordinated bank credit agreements; and (b) senior unsecured subordinated Series A and Series B notes payable to CVI. The remaining five systems comprising the Combined Systems were included in Cablevision Industries of the Southeast, Inc. and Combined Entities ("CIOS"). These systems were charged interest expense in connection with CIOS's (a) bank revolving credit agreement; and (b) junior and senior subordinated debt to CVI. 5. INCOME TAXES Effective January 4, 1996, the Combined Systems are included in the consolidated federal income tax return of Time Warner. Prior to January 4, 1996, the Combined Systems were included in the consolidated federal income tax return of CVI. The provision for income taxes has been calculated on a separate company basis. The components of the provision for income taxes are as follows:
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH APRIL 8, 1998 -------------------- (IN THOUSANDS) Federal: Current................................................. $ -- Deferred................................................ 962 State: Current................................................. -- Deferred................................................ 229 ------ Net provision for income taxes....................... $1,191 ======
The Combined Systems did not, and will not, have a tax sharing agreement with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems have not and will not be compensated for the utilization of the Combined Systems' tax losses, by Time Warner, TWI Cable or CVI. In addition, the Combined Systems have not and will not be required to make payments to either Time Warner or TWI Cable for the current tax provision of the Combined Systems. The differences between the income tax provision expected at the U.S. federal statutory income tax rate and the total income tax provision are due to nondeductible goodwill amortization and state taxes. F-144 356 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Combined Systems' deferred tax assets and liabilities, as calculated on a separate company basis, are as follows:
APRIL 8, 1998 ------------- (IN THOUSANDS) Deferred tax liabilities: Amortization.............................................. $57,817 Depreciation.............................................. 4,181 ------- Total gross deferred tax liabilities.............. 61,998 ------- Deferred tax assets: Tax loss carryforwards.................................... 160 Allowance for doubtful accounts........................... 46 ------- Total deferred tax assets......................... 206 ------- Net deferred tax liability........................ $61,792 =======
On a separate company basis, the Combined Systems have tax loss carryforwards of approximately $400,000 at April 8, 1998. However, if the Combined Systems are acquired in an asset purchase, the tax loss carryforwards, and net deferred tax liabilities relating to temporary differences will not carry over to Renaissance (see Note 8). 6. COMMITMENTS AND CONTINGENCIES The Combined Systems had rental expense of approximately $244,000 for the period from January 1, 1998 through April 8, 1998 under various lease and rental agreements for offices, utility poles, warehouses and computer equipment. Future minimum annual rental payments under noncancellable leases will approximate $1,000,000 annually over the next five years. In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996, TWC has agreed with the Federal Communications Commission ("FCC") to invest in certain upgrades to its cable infrastructure (consisting primarily of materials and labor in connection with the plant upgrades up to 750 megahertz) over the next three years (approximately $25 million at December 31, 1997). This agreement with the FCC, which extends to the Combined Systems, will be assumed by Renaissance as it relates to the Combined Systems in accordance with the Asset Purchase Agreement. F-145 357 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. OTHER LIABILITIES Other liabilities consist of:
APRIL 8, 1998 ------------- (IN THOUSANDS) Compensation................................................ $279 Data Processing Costs....................................... 161 Sales and other taxes....................................... 146 Copyright Fees.............................................. 35 Pole Rent................................................... 93 Other....................................................... 33 ---- Total............................................. $747 ====
8. SUBSEQUENT EVENT The sale of the Combined Systems, in connection with the Asset Purchase Agreement with Renaissance, closed on April 9, 1998 at the purchase price of $309,500,000. F-146 358 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of TWI Cable Inc. We have audited the accompanying combined balance sheets of the Picayune MS, Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson TN cable television systems, (collectively, the "Combined Systems") included in TWI Cable, Inc. ("TWI Cable"), as of December 31, 1996 and 1997, the related combined statements of operations, changes in net assets and cash flows for the years then ended. In addition, we have audited the combined statement of operations and cash flows for the year ended December 31, 1995 of the Predecessor Combined Systems. These combined financial statements are the responsibility of the Combined Systems' or the Predecessor's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Combined Systems, included in TWI Cable or the Predecessor, at December 31, 1996 and 1997, and the combined results of their operations and their cash flows for the years ended December 31, 1995, 1996 and 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York March 16, 1998 F-147 359 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1996 1997 ---- ---- ASSETS Cash and cash equivalents................................... $ 570 $ 1,371 Receivables, less allowance of $71 and $116 for the years ended December 31, 1996 and 1997, respectively............ 794 1,120 Prepaid expenses and other assets........................... 45 183 Property, plant and equipment, net.......................... 36,966 36,944 Cable television franchises, net............................ 209,952 198,913 Goodwill and other intangibles, net......................... 51,722 50,383 -------- -------- Total assets...................................... $300,049 $288,914 ======== ======== LIABILITIES AND NET ASSETS Accounts payable............................................ $ 1,640 $ 652 Accrued programming expenses................................ 847 904 Accrued franchise fees...................................... 736 835 Subscriber advance payments and deposits.................... 66 407 Deferred income taxes....................................... 58,340 60,601 Other liabilities........................................... 945 969 -------- -------- Total liabilities................................. 62,574 64,368 Total net assets.................................. 237,475 224,546 -------- -------- Total liabilities and net assets.................. $300,049 $288,914 ======== ========
See accompanying notes to combined financial statements. F-148 360 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1995 1996 1997 ---- ---- ---- (PREDECESSOR) (INCLUDED IN TWI CABLE INC.) REVENUES............................................ $43,549 $47,327 $50,987 COSTS AND EXPENSES: Operating and programming........................... 13,010 12,413 12,101 Selling, general and administrative................. 9,977 12,946 13,823 Depreciation and amortization....................... 17,610 18,360 18,697 (Gain) loss on disposal of fixed assets............. -- (244) 620 ------- ------- ------- Total costs and expenses.................. 40,597 43,475 45,241 ------- ------- ------- Operating income.................................... 2,952 3,852 5,746 Interest expense.................................... 11,871 -- -- ------- ------- ------- (Loss) income before income tax (benefit) expense... (8,919) 3,852 5,746 Income tax (benefit) expense........................ (3,567) 1,502 2,262 ------- ------- ------- Net (loss) income................................... $(5,352) $ 2,350 $ 3,484 ======= ======= =======
See accompanying notes to combined financial statements. F-149 361 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) Contribution by Parent...................................... $250,039 Repayment of advances from Parent......................... (47,895) Advances from Parent...................................... 32,981 Net income................................................ 2,350 -------- Balance at December 31, 1996................................ 237,475 Repayment of advances from Parent......................... (50,661) Advances from Parent...................................... 34,248 Net income................................................ 3,484 -------- Balance at December 31, 1997................................ $224,546 ========
See accompanying notes to combined financial statements. F-150 362 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1996 1997 ---- ---- ---- (PREDECESSOR) (INCLUDED IN TWI CABLE INC.) OPERATING ACTIVITIES: Net (loss) income................................... $(5,352) $ 2,350 $ 3,484 Adjustments for noncash and nonoperating items: Income tax (benefit) expense................... (3,567) 1,502 2,262 Depreciation and amortization.................. 17,610 18,360 18,697 (Gain) loss on disposal of fixed assets........ -- (244) 620 Changes in operating assets and liabilities: Receivables, prepaids and other assets....... (196) 944 (464) Accounts payable, accrued expenses and other liabilities............................... (972) 176 (466) Other balance sheet changes.................. -- -- (529) ------- --------- -------- Net cash provided by operations..................... 7,523 23,088 23,604 INVESTING ACTIVITIES: Purchase of Predecessor cable systems, net of cash acquired.......................................... -- (249,473) -- Capital expenditures................................ (7,376) (8,170) (6,390) ------- --------- -------- Net cash used in investing activities............... (7,376) (257,643) (6,390) FINANCING ACTIVITIES: Advance from Parent for purchase of Predecessor..... -- 250,039 -- Net repayment of advances from Parent............... -- (14,914) (16,413) ------- --------- -------- Net cash provided by (used in) financing activities........................................ -- 235,125 (16,413) INCREASE IN CASH AND CASH EQUIVALENTS............... 147 570 801 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 419 0 570 ------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 566 $ 570 $ 1,371 ======= ========= ========
See accompanying notes to combined financial statements. F-151 363 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The cable television systems operating in the metropolitan areas of Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St. Landry, Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the "Combined Systems") are principally engaged in the cable television business under non-exclusive franchise agreements, which expire at various times beginning in 1999. The Combined Systems' operations consist primarily of selling video programming which is distributed to subscribers for a monthly fee through a network of coaxial and fiber-optic cables. Prior to January 4, 1996, the Combined Systems were included in certain subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4, 1996, CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a reorganization amongst certain of its wholly owned cable television subsidiaries whereby CVI was renamed TWI Cable Inc. ("TWI Cable"). BASIS OF PRESENTATION TWI Cable has committed to sell the Combined Systems to Renaissance Media Holdings LLC ("Renaissance") pursuant to an Asset Purchase Agreement with Renaissance, dated November 14, 1997. Accordingly, the accompanying combined financial statements of the Combined Systems reflect the "carved out" historical financial position, results of operations, cash flows and changes in net assets of the operations of the Combined Systems as if they had been operating as a separate company. Effective as of January 1, 1996, the Combined Systems' financial statements reflect the new basis of accounting arising from Time Warner's merger with CVI. Based on Time Warner's allocation of the purchase price, the assets and liabilities of the Combined Systems were revalued resulting in goodwill allocated to the Combined Systems of approximately $52,971,000, which is being amortized over its estimated life of 40 years. In addition, approximately $220,981,000 was allocated to cable television franchises and other intangible assets, which is being amortized over periods up to 20 years. The Combined Systems' financial statements through December 31, 1995 reflect the historical cost of their assets and liabilities and results of their operations. The combined statements have been adjusted to include the allocation of certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on the Combined Systems' behalf, based upon the number of Combined System subscribers managed by Time Warner Cable and the ratio of Combined System subscribers to total TWI Cable subscribers, respectively. These allocations reflect all costs of doing business that the Combined Systems would have incurred on a stand alone basis as disclosed in Note 3. Management believes that these allocations are reasonable. BASIS OF COMBINATION The combined financial statements include the assets, liabilities, revenues, expenses, income, loss and cash flows of the Combined Systems, as if the Combined Systems were a single company. Significant intercompany accounts and transactions between the Combined Systems have been eliminated. Significant accounts and transactions with Time Warner and its affiliates are disclosed as related party transactions (see Note 3). F-152 364 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and footnotes thereto. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK A significant portion of the customer base is concentrated within the local geographical area of each of the individual cable television systems. The Combined Systems generally extend credit to customers and the ultimate collection of accounts receivable could be affected by the local economy. Management performs continuous credit evaluations of its customers and may require cash in advance or other special arrangements from certain customers. Management does not believe that there is any significant credit risk which could have a material effect on the financial condition of the Combined Systems. REVENUE AND COSTS Subscriber fees are recorded as revenue in the period the related services are provided and advertising revenues are recognized in the period the related advertisements are exhibited. Rights to exhibit programming are purchased from various cable networks. The costs of such rights are generally expensed as the related services are made available to subscribers. FRANCHISE FEES Local governmental authorities impose franchise fees on the cable television systems owned by the Combined Systems ranging up to a federally mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected from the Combined Systems' customers. Prior to January 1997, franchise fees were not separately itemized on customers' bills. Such fees were considered part of the monthly charge for basic services and equipment, and therefore were reported as revenue and expense in the Combined Systems' financial results. Management began the process of itemizing such fees on all customers' bills beginning in January 1997. In conjunction with itemizing these charges, the Combined Systems began separately collecting the franchise fee on all revenues subject to franchise fees. As a result, such fees are no longer included as revenue or as franchise fee expense. The net effect of this change is a reduction in 1997 revenue and franchise fee expense of approximately $1,500,000 versus the comparable period in 1996. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements. Advertising expense amounted to $308,000, $632,000 and $510,000 for the years ended 1995, 1996 and 1997, respectively. STATEMENT OF CASH FLOWS The Combined Systems participate in a cash management system with affiliates whereby cash receipts are transferred to a centralized bank account from which centralized payments to various suppliers and creditors are made on behalf of the Combined Systems. The excess of F-153 365 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) such cash receipts over payments is included in net assets. Amounts shown as cash represent the Combined Systems' net cash receipts not transferred to the centralized account as of December 31, 1996 and 1997. The average net intercompany payable balances were $173,348,000 and $170,438,000 for the years ended December 31, 1996 and 1997, respectively. For purposes of this statement, cash and cash equivalents includes all highly liquid investments purchased with original maturities of three months or less. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Additions to property, plant and equipment generally include material, labor, overhead and interest. Depreciation is provided on the straight-line method over estimated useful lives as follows: Buildings and improvements.................................. 5-20 years Cable television equipment.................................. 5-15 years Furniture, fixtures and other equipment..................... 3-10 years
Property, plant and equipment consist of:
DECEMBER 31, ------------------ 1996 1997 ---- ---- Land and buildings.......................................... $ 2,003 $ 2,265 Cable television equipment.................................. 32,324 39,589 Furniture, fixtures and other equipment..................... 1,455 2,341 Construction in progress.................................... 5,657 1,028 ------- ------- 41,439 45,223 Less accumulated depreciation............................... (4,473) (8,279) ------- ------- Total............................................. $36,966 $36,944 ======= =======
INTANGIBLE ASSETS During 1996 and 1997, the Combined Systems amortized goodwill over periods up to 40 years and cable television franchises over periods up to 20 years, both using the straight-line method. Prior to the CVI Merger, goodwill and cable television franchises were amortized over 15 years using the straight-line method. For the years ended 1995, 1996, and 1997, amortization of goodwill amounted to $8,199,000, $1,325,000, and $1,325,000, respectively, and amortization of cable television franchises amounted to $1,284,000, $11,048,000, and $11,048,000, respectively. Accumulated amortization of intangible assets at December 31, 1996 and 1997 amounted to $12,373,000 and $24,746,000, respectively. IMPAIRMENT Management separately reviews the carrying value of acquired long-lived assets for each acquired entity on a quarterly basis to determine whether an impairment may exist. Management considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of long-lived assets can be recovered. Upon a determination that the carrying value of long-lived assets F-154 366 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) will not be recovered from the undiscounted future cash flows of the acquired business, the carrying value of such long-lived assets would be considered impaired and would be reduced by a charge to operations in the amount of the impairment. An impairment charge is measured as a deficiency in estimated discounted future cash flows of the acquired business to recover the carrying value related to the long-lived assets. INCOME TAXES Income taxes have been provided using the liability method prescribed by FASB Statement No. 109, "Accounting for Income Taxes." Under the liability method, deferred income taxes reflect tax carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statements and income tax purposes, as determined under enacted tax laws and rates. 2. EMPLOYEE BENEFIT PLANS Following the CVI Merger, the Combined Systems began participation in the Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined benefit pension plan, and the Time Warner Cable Employee Savings Plan (the "Savings Plan") which are administered by a committee appointed by the Board of Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate of Time Warner, and which cover substantially all employees. Benefits under the Pension Plan are determined based on formulas which reflect an employee's years of service and compensation levels during the employment period. Pension expense for the years ended December 31, 1996 and 1997 totaled $184,000 and $192,000, respectively. The Combined Systems' contributions to the Savings Plan are limited to 6.67% of an employee's eligible compensation during the plan year. The Board of Representatives of TWE has the right in any year to set the maximum amount of the Combined Systems' contribution. Defined contribution plan expense for the years ended December 31, 1996 and 1997 totaled $107,000 and $117,000, respectively. Prior to the CVI Merger, substantially all employees were eligible to participate in a profit sharing plan or a defined contribution plan. The profit sharing plan provided that the Combined Systems may contribute, at the discretion of their board of directors, an amount up to 15% of compensation for all eligible participants out of its accumulated earnings and profits, as defined. Profit sharing expense amounted to approximately $31,000 for the year ended December 31, 1995. The defined contribution plan contained a qualified cash or deferred arrangement pursuant to Internal Revenue Code Section 401(k). This plan provided that eligible employees may contribute from 2% to 10% of their compensation to the plan. The Combined Systems matched contributions of up to 4% of the employees' compensation. The expense for this plan amounted to approximately $96,000 for the year ended December 31, 1995. The Combined Systems have no material obligations for other post retirement benefits. F-155 367 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. RELATED PARTIES In the normal course of conducting business, the Combined Systems had various transactions with Time Warner and its affiliates, generally on terms resulting from a negotiation between the affected units that in management's view resulted in reasonable allocations. PROGRAMMING Included in the Combined Systems' 1996 and 1997 operating expenses are charges for programming and promotional services provided by Home Box Office, Turner Broadcasting System, Inc. and other affiliates of Time Warner. These charges are based on customary rates and are in the ordinary course of business. For the year ended December 31, 1996 and 1997, these charges totaled $3,260,000 and $3,458,000, respectively. Accrued related party expenses for these programming and promotional services included in accrued programming expenses approximated $327,000 and $291,000 for the years ended December 31, 1996 and 1997, respectively. There were no such programming and promotional service related party transactions in 1995. MANAGEMENT FEES TWI Cable entered into a management service arrangement with Time Warner Cable ("TWC"), pursuant to which TWC is responsible for the management and operation of TWI Cable, which includes the Combined Systems. The management fees paid to TWC by TWI Cable are based on an allocation of the corporate expenses of TWC's cable division in proportion to the respective number of subscribers of all cable systems managed by TWC's cable division. The allocation of the TWI Cable management fee to the Combined Systems approximated $1,432,000 and $1,715,000 for the years ended December 31, 1996 and 1997, respectively. Other divisional expenses allocated to the Combined Systems approximated $1,301,000 and $1,067,000 for the years ended December 31, 1996 and 1997, respectively. 4. INTEREST EXPENSE Prior to the CVI Merger, the Jackson, Tennessee system was included in Cablevision Industries Limited Partnership and Combined Entities ("CILP"). The Jackson system was charged interest expense in connection with CILP's (a) senior and subordinated bank credit agreements; and (b) senior unsecured subordinated Series A and Series B notes payable to CVI. The remaining five systems comprising the Combined Systems were included in Cablevision Industries of the Southeast, Inc. and Combined Entities ("CIOS"). These systems were charged interest expense in connection with CIOS's (a) bank revolving credit agreement; and (b) junior and senior subordinated debt to CVI. 5. INCOME TAXES Effective January 4, 1996, the Combined Systems are included in the consolidated federal income tax return of Time Warner. Prior to January 4, 1996, the Combined Systems were included in the consolidated federal income tax return of CVI. The provision (benefit) for income F-156 368 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) taxes has been calculated on a separate company basis. The components of the provision (benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1995 1996 1997 ---- ---- ---- (IN THOUSANDS) FEDERAL: Current............................. $ -- $ -- $ -- Deferred............................ (2,881) 1,213 1,826 STATE: Current............................. -- -- -- Deferred............................ (686) 289 436 ------- ------ ------ Net provision (benefit) for income taxes............................ $(3,567) $1,502 $2,262 ======= ====== ======
The Combined Systems did not, and will not, have a tax sharing agreement with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems have not and will not be compensated for the utilization of the Combined Systems' tax losses, by Time Warner, TWI Cable or CVI. In addition, the Combined Systems have not and will not be required to make payments to either Time Warner or TWI Cable for the current tax provision of the Combined Systems. The differences between the income tax provision (benefit) expected at the U.S. federal statutory income tax rate and the total income tax provision (benefit) are due to nondeductible goodwill amortization and state taxes. Significant components of the Combined Systems' deferred tax assets and liabilities, as calculated on a separate company basis, are as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1996 1997 ---- ---- (IN THOUSANDS) DEFERRED TAX LIABILITIES: Amortization............................... $61,266 $58,507 Depreciation............................... 3,576 4,060 ------- ------- Total gross deferred tax liabilities...................... 64,842 62,567 ------- ------- DEFERRED TAX ASSETS: Tax loss carryforwards..................... 6,474 1,920 Allowance for doubtful accounts............ 28 46 ------- ------- Total deferred tax assets.......... 6,502 1,966 ------- ------- Net deferred tax liability................. $58,340 $60,601 ======= =======
On a separate company basis, the Combined Systems have tax loss carryforwards of approximately $4.8 million at December 31, 1997. However, if the Combined Systems are acquired in an asset purchase, the tax loss carryforwards, and net deferred tax liabilities relating to temporary differences will not carry over to Renaissance (see Note 8). F-157 369 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES The Combined Systems had rental expense of approximately $642,000, $824,000, and $843,000 for the years ended December 31, 1995, 1996 and 1997, respectively, under various lease and rental agreements for offices, utility poles, warehouses and computer equipment. Future minimum annual rental payments under noncancellable leases will approximate $1,000,000 annually over the next five years. In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996, TWC has agreed with the Federal Communications Commission ("FCC") to invest in certain upgrades to its cable infrastructure (consisting primarily of materials and labor in connection with the plant upgrades up to 750 megahertz) over the next three years (approximately $22 million). This agreement with the FCC, which extends to the Combined Systems, will be assumed by Renaissance as it relates to the Combined Systems in accordance with the Asset Purchase Agreement. 7. OTHER LIABILITIES Other liabilities consist of:
DECEMBER 31, ------------ 1996 1997 ---- ---- (IN THOUSANDS) Compensation................................................ $217 $250 Data Processing Costs....................................... 100 90 Sales and other taxes....................................... 101 90 Copyright Fees.............................................. 85 83 Pole Rent................................................... 66 63 Other....................................................... 376 393 ---- ---- Total.................................................. $945 $969 ==== ====
8. SUBSEQUENT EVENT (UNAUDITED) The sale of the Combined Systems, in connection with the Asset Purchase Agreement with Renaissance, closed on April 9, 1998 at the purchase price of $309,500,000. F-158 370 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Greater Media, Inc.: We have audited the accompanying combined statements of income, changes in net assets and cash flows of Greater Media Cablevision Systems (see Note 1) (collectively, the "Combined Systems") included in Greater Media, Inc., for the nine months ended June 30, 1999. These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of operations of the Combined Systems and their cash flows for the nine months ended June 30, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, March 6, 2000 F-159 371 GREATER MEDIA CABLEVISION SYSTEMS COMBINED STATEMENT OF INCOME (IN THOUSANDS)
NINE MONTHS ENDED JUNE 30, 1999 ----------- REVENUES.................................................... $62,469 ------- OPERATING EXPENSES: Operating................................................. 26,248 General and administrative................................ 9,150 Corporate charges- related party.......................... 3,175 Depreciation and amortization............................. 7,398 ------- 45,971 ------- Income from operations................................. 16,498 ------- OTHER EXPENSE: Interest expense, net..................................... (705) Other..................................................... (365) ------- INCOME BEFORE PROVISION IN LIEU OF INCOME TAXES............. 15,428 PROVISION IN LIEU OF INCOME TAXES........................... 6,646 ------- NET INCOME.................................................. $ 8,782 =======
The accompanying notes are an integral part of these combined statements. F-160 372 GREATER MEDIA CABLEVISION SYSTEMS COMBINED STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS) BALANCE, September 30, 1998................................. $54,131 Net income................................................ 8,782 Provision in lieu of income taxes......................... 6,646 Net payments to affiliates................................ (34) ------- BALANCE, June 30, 1999...................................... $69,525 =======
The accompanying notes are an integral part of these combined statements. F-161 373 GREATER MEDIA CABLEVISION SYSTEMS COMBINED STATEMENT OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED JUNE 30, 1999 ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 8,782 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization.......................... 7,398 Provision in lieu of income taxes...................... 6,646 Loss on sale of fixed assets........................... 465 Changes in assets and liabilities -- Accounts receivable, prepaid expenses and other current assets...................................... (1,431) Other assets......................................... 10 Accounts payable and accrued expenses................ (178) Customers' prepayments and deferred installation revenue............................................. 218 -------- Net cash provided by operating activities......... 21,910 -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (13,797) Other.................................................. (512) -------- Net cash used in investing activities............. (14,309) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net payments to affiliates................................ (34) -------- Net cash used in financing activities............. (34) -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 7,567 CASH AND CASH EQUIVALENTS, beginning of period.............. 4,080 -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 11,647 ======== CASH PAID FOR NON-AFFILIATE INTEREST........................ $ 264 ========
The accompanying notes are an integral part of these combined statements. F-162 374 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization, Basis of Presentation and Operations Greater Media Cablevision Systems is comprised of the following Massachusetts-based cable television systems: Auburn, Boylston, Chicopee, Dudley, East Longmeadow, Easthampton, Grafton, Hampden, Holden, Leicester, Ludlow, Millbury, Northborough, Northbridge, Oxford, Paxton, Southampton, Southborough, Southbridge, Spencer, Sturbridge, Upton, Webster, West Boylston, West Brookfield, Westborough, Wilbraham and Worcester (the "Combined Systems"). The Combined Systems are wholly-owned by Greater Media Cablevision, Inc. (the "Company"). The combined financial statements do not include the accounts of Greater Philadelphia Cablevision, Inc. or Greater Philadelphia Cablevision Limited Partnership, which are also wholly-owned by the Company. The Company is a wholly-owned subsidiary of Greater Media, Inc. (the "Parent"). On June 30, 1999, Charter Communications Entertainment I, LLC, an indirect subsidiary of Charter Communications Holdings Company, LLC purchased the Combined Systems for an aggregate purchase price of $500 million plus a working capital adjustment (the "Charter Sale"). Effective with this change of ownership, the Combined Systems will be managed by Charter Investment, Inc. Significant intercompany accounts and transactions between the Combined Systems have been eliminated in the combined financial statements. The Combined Systems primarily provide cable television services to subscribers in central and western Massachusetts. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Property, Plant and Equipment Maintenance and repair costs are expensed when incurred. For financial reporting purposes, depreciation is provided on the straight-line method based on the following estimated useful lives: Land improvements........................................... 20 years Furniture, fixtures and equipment........................... 3-15 years Buildings................................................... 15-40 years Trunk and distribution systems.............................. 7-12 years
Depreciation expense for the nine months ended June 30, 1999, was $7,343. Intangible Assets Intangible assets consist primarily of goodwill, which is amortized over forty years, and costs incurred in obtaining and renewing cable franchises, which are amortized over the life of the respective franchise agreements. Amortization expense for the nine months ended June 30, 1999, was $55. F-163 375 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Revenues Cable television revenues from basic and premium services are recognized when the related services are provided. Segments Segments have been identified based upon management responsibility. The Company operates in one segment, cable services. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INCOME TAXES The Combined Systems are included in the consolidated federal income tax return of the Parent. The Parent is responsible for tax payments applicable to the Combined Systems. The combined financial statements reflect a provision in lieu of income taxes as if the Combined Systems were filing on a separate company basis. Accordingly, the Combined Systems have included the provision in lieu of income taxes as a component of net assets. The provision in lieu of income taxes approximates the amount of tax computed using U.S. statutory rates, after reflecting state income tax expense. 3. RELATED PARTY TRANSACTIONS The Company and each of its subsidiaries are guarantors of the Parent's debt. The combined statements include charges for certain corporate expenses incurred by the Parent on behalf of the Combined Systems. Such charges amounted to $3,175 for the nine months ended June 30, 1999. Management believes that this cost is reasonable and reflects costs of doing business that the Combined Systems would have incurred on a stand-alone basis. 4. EMPLOYEE BENEFIT PLANS 401(k) Plan The Combined Systems' employees participate in the Greater Media, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 12% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Combined Systems' contribute an amount equal to 50% of the participant's contribution, limited to the lessor of 3% of the participant's compensation or $1 per year. In connection with the Charter Sale, all employees became fully vested. Following the Charter Sale, the Company's 401(k) plan was merged into Charter Communication, Inc.'s. The Combined Systems expense relating to the 401(k) Plan for the nine months ended June 30, 1999, was $123. F-164 376 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED PENSION Certain employees of the Combined Systems participate in a pension plan sponsored by the Parent. The Combined Systems allocable share of the pension expense amounted to $57 for the nine months ended June 30, 1999. As a result of the Charter Sale, the Combined Systems' employees became fully vested with respect to their plan benefits. No additional benefits will accrue to such employees in the future. In addition, the Parent is responsible for the allocable pension liability and will continue to administer the plan on behalf of the Combined Systems' employees. 5. COMMITMENTS AND CONTINGENCIES Leases The Combined Systems lease certain facilities and equipment under noncancelable operating leases. Rent expense incurred for the nine months ended June 30, 1999, was $249. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the nine months ended June 30, 1999, was $479. Litigation The Combined Systems are a party to lawsuits that arise in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Combined Systems' combined financial position or results of operations. Regulation in the Cable Television Industry The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Combined Systems cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. The Combined Systems may be required to refund additional amounts in the future. The Combined Systems believe that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Combined Systems are unable to justify its basic rates. The Combined Systems are unable to estimate at this time the amount of refunds, if F-165 377 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED any, that may be payable by the Combined Systems in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Combined Systems do not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Combined Systems. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Combined Systems do not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Combined Systems' financial position or results of operations. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. F-166 378 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Greater Media, Inc.: We have audited the accompanying combined balance sheets of Greater Media Cablevision Systems (see Note 1) (collectively, the "Combined Systems") included in Greater Media, Inc., as of September 30, 1998 and 1997, and the related combined statements of income, changes in net assets, and cash flows for each of the three years in the period ended September 30, 1998. These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Systems, as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Roseland, New Jersey March 2, 1999 F-167 379 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED BALANCE SHEETS (IN THOUSANDS)
SEPTEMBER 30, ------------------ 1998 1997 ---- ---- Current assets: Cash and cash equivalents................................. $ 4,080 $ 3,680 Accounts receivable (less allowance for doubtful accounts of $308 (unaudited), $244 and $337).................... 2,755 2,739 Prepaid expenses and other current assets................. 2,746 1,949 ------- ------- Total current assets.............................. 9,581 8,368 Property and equipment, net................................. 54,468 41,971 Intangible assets, net...................................... 2,690 1,647 Other assets................................................ 77 103 ------- ------- Total assets...................................... $66,816 $52,089 ======= ======= Current liabilities: Accounts payable and accrued expenses..................... $ 7,125 $ 5,299 Customers' prepayments and deferred installation revenue................................................ 1,910 1,815 ------- ------- Total current liabilities......................... 9,035 7,114 Other long-term liabilities................................. 3,650 3,920 Net assets.................................................. 54,131 41,055 ------- ------- Total liabilities and net assets.................. $66,816 $52,089 ======= =======
The accompanying notes are an integral part of these combined balance sheets. F-168 380 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ----------------------------- 1998 1997 1996 ---- ---- ---- NET REVENUES.............................................. $77,127 $73,436 $66,816 ------- ------- ------- OPERATING EXPENSES: Operating expenses...................................... 32,665 31,115 29,460 General and administrative.............................. 10,869 11,211 10,321 Corporate charges....................................... 3,888 3,696 3,365 Depreciation and amortization........................... 8,183 7,368 7,353 ------- ------- ------- 55,605 53,390 50,499 ------- ------- ------- Income from operations............................... 21,522 20,046 16,317 OTHER INCOME (EXPENSES): Interest expense, net..................................... (504) (307) (764) Other..................................................... (532) (957) (366) ------- ------- ------- INCOME BEFORE PROVISION IN LIEU OF INCOME TAXES........... 20,486 18,782 15,187 Provision in lieu of income taxes (Note 6)................ 8,008 7,964 5,987 ------- ------- ------- Net income................................................ $12,478 $10,818 $ 9,200 ======= ======= =======
The accompanying notes are an integral part of these combined statements. F-169 381 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS)
TOTAL ----- Balance, September 30, 1995................................. $ 42,185 Net income................................................ 9,200 Provision in lieu of income taxes......................... 5,987 Net payments to affiliates................................ (17,038) -------- Balance, September 30, 1996................................. 40,334 Net income................................................ 10,818 Provision in lieu of income taxes......................... 7,964 Net payments to affiliates................................ (18,061) -------- Balance, September 30, 1997................................. 41,055 Net income................................................ 12,478 Provision in lieu of income taxes......................... 8,008 Net payments to affiliates................................ (7,410) -------- Balance, September 30, 1998................................. $ 54,131 ========
The accompanying notes are an integral part of these combined statements. F-170 382 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, ------------------------------ 1998 1997 1996 ---- ---- ---- Net income................................................. $12,478 $10,818 $ 9,200 Adjustments to reconcile net income to net cash provided by operating activities: Provision in lieu of income taxes........................ 8,008 7,964 5,987 Depreciation and amortization............................ 8,183 7,368 7,353 (Gain) loss on sale of fixed assets...................... 300 715 274 Changes in assets and liabilities: Accounts receivable, prepaid expenses and other assets... (813) (1,115) (498) Other assets............................................. 24 (30) (11) Accounts payable and accrued expenses.................... 1,825 (440) (1,900) Customers' prepayments and deferred installation revenue.................................. 96 367 94 Customers' deposits and deferred revenue................. (270) (69) 466 ------- ------- -------- Net cash provided by operating activities.................. 29,831 25,578 20,965 ------- ------- -------- Cash flow from investing activities: Capital expenditures....................................... (21,049) (7,587) (5,122) Proceeds from disposition of property and equipment........ 72 -- 128 Purchase of licenses....................................... (1,044) (99) -- ------- ------- -------- Net cash used in investing activities...................... (22,021) (7,686) (4,994) ------- ------- -------- Cash flow from financing activities: Net payments to affiliates................................. (7,410) (18,061) (17,038) ------- ------- -------- Net increase (decrease) in cash and cash equivalents....... 400 (169) (1,067) Cash and cash equivalents, beginning of year............... 3,680 3,849 4,916 ------- ------- -------- Cash and cash equivalents, end of year..................... $ 4,080 $ 3,680 $ 3,849 ======= ======= ======== Supplemental disclosure of cash flow information: Non-affiliate interest paid during the year.............. $ 296 $ 155 $ 447 ======= ======= ========
The accompanying notes are an integral part of these combined statements. F-171 383 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, BASIS OF PRESENTATION AND OPERATIONS Greater Media Cablevision Systems is the owner and operator of the following Massachusetts-based cable television systems: Auburn, Boylston, Chicopee, Dudley, East Longmeadow, Easthampton, Grafton, Hampden, Holden, Leicester, Ludlow, Millbury, Northborough, Northbridge, Oxford, Paxton, Southampton, Southborough, Southbridge, Spencer, Sturbridge, Upton, Webster, West Boylston, West Brookfield, Westborough, Wilbraham and Worcester ("the Combined Systems"). The Combined Systems are wholly-owned by Greater Media Cablevision, Inc. ("the Company"). The combined financial statements do not include the accounts of Greater Philadelphia Cablevision, Inc. or Greater Philadelphia Cablevision Limited Partnership (the "Philadelphia System"), which are also wholly-owned by the Company. The Company is a wholly-owned subsidiary of Greater Media, Inc. ("the Parent"). In February 1999, the Parent and the Company entered into an agreement ("Sales Agreement") to sell the net assets of the Company including the Combined Systems but excluding the Philadelphia Systems to Charter Communications Holdings, LLC. Significant intercompany accounts and transactions between the Combined Systems have been eliminated in the combined financial statements. Significant accounts and transactions with the Parent and other affiliates are disclosed as related party transactions (See Note 7). The Combined Systems primarily provide cable television services to subscribers in central and western Massachusetts. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Maintenance and repair costs are expensed when incurred. For financial reporting purposes, depreciation is provided on the straight-line method based on the following estimated useful lives:
CLASSIFICATION YEARS -------------- ----- Land improvements........................................... 20 Buildings................................................... 15-40 Furniture, fixtures and equipment........................... 3-15 Trunk and distribution systems.............................. 7-12
INTANGIBLE ASSETS Intangible assets consist primarily of goodwill amortized over forty years and costs incurred in obtaining and renewing cable franchises which are amortized over the life of the respective franchise agreements. REVENUES Cable revenues from basic and premium services are recognized when the related services are provided. F-172 384 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. QUARTERLY RESULTS The financial statements included herein as of December 31, 1998 and for the three months ended December 31, 1998 and 1997 have been prepared by the Company without audit. In the opinion of management, all adjustments have been made which are of a normal recurring nature necessary to present fairly the Combined Systems' financial position as of December 31, 1998 and the results of operations, changes in net assets and cash flows for the three months ended December 31, 1998 and 1997. Certain information and footnote disclosures have been condensed or omitted for these periods. The results for interim periods are not necessarily indicative of results for the entire year. 2. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid and other current assets consist of the following at September 30:
1998 1997 ---- ---- Franchise grant.......................................... $1,445 $ 604 Corporate business tax................................... 1,015 882 Other.................................................... 286 463 ------ ------ Prepaid expenses and other current assets................ $2,746 $1,949 ====== ======
3. PROPERTY AND EQUIPMENT Property and equipment consist of the following at September 30:
1998 1997 ---- ---- Land and land improvements........................... $ 1,229 $ 1,134 Buildings............................................ 4,521 4,521 Furniture, fixtures and equipment.................... 5,503 4,822 Trunk and distribution systems....................... 109,253 97,042 Construction in progress............................. 9,026 4,450 -------- -------- 129,532 111,969 Accumulated depreciation............................. (75,064) (69,998) -------- -------- Property and equipment, net.......................... $ 54,468 $ 41,971 ======== ========
Depreciation expense for the years ended September 30, 1998, 1997 and 1996 was $8,081, $7,337, and $7,314, respectively. Construction in progress results primarily from costs to upgrade the systems to fiber optic technologies in the areas served by the Combined Systems. F-173 385 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. INTANGIBLE ASSETS Intangible assets consist of the following at September 30:
1998 1997 ---- ---- Franchise agreements..................................... $3,230 $2,883 Customer lists........................................... 1,751 1,751 Organization expenses.................................... 146 146 Goodwill................................................. 2,260 1,510 Covenant not to compete.................................. 40 40 ------ ------ 7,427 6,330 Accumulated amortization................................. 4,737 4,683 ------ ------ Intangible assets, net................................... $2,690 $1,647 ====== ======
Amortization expense for the years ended September 30, 1998, 1997 and 1996 was $102, $31 and $39, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at September 30:
1998 1997 ---- ---- Accounts payable......................................... $4,733 $3,544 Rate refund liability.................................... 923 481 Programming expenses..................................... 586 557 Other.................................................... 883 717 ------ ------ $7,125 $5,299 ====== ======
6. INCOME TAXES The Combined Systems are included in the consolidated federal income tax return of the Parent. However, the Parent is responsible for tax payments applicable to the Combined Systems. The combined financial statements reflect a provision in lieu of income taxes as if the combined systems were filing on a separate company basis. Accordingly, the Combined Systems have included the provision in lieu of income taxes as a component of net assets for all periods presented. The provision in lieu of income taxes approximates the amount of tax computed using U.S. statutory rates, after reflecting state income tax expense of $2,053, $1,924 and $1,486, for 1998, 1997 and 1996, respectively. As the Sales Agreement represents a sale of assets, Charter Communications Holdings, LLC will have new tax basis in the Combined Systems' assets and liabilities acquired. 7. RELATED PARTY TRANSACTIONS The Company and each of its subsidiaries are guarantors of the Parent Company's debt. F-174 386 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The combined statements include the charge for certain corporate expenses incurred by the Parent on behalf of the Combined Systems. Such charges amounted to $3,888, $3,696, and $3,365 for the three years ended September 30, 1998, 1997 and 1996. Management believes that these costs are reasonable and reflect costs of doing business that the Combined Systems would have incurred on a stand-alone basis. The Combined Systems charge an affiliate interest on certain balances, aggregating $15,000 per year, at an annual rate of 12%. Interest income on such balances amounted to $1,800 for each of the three years in the period ended September 30, 1998. In addition, the Combined Systems are required to pay the Parent interest on certain balances, at an annual rate of 12%. Interest expense on such balances amounted to $2,340 for each of these years in the period ended September 30, 1998, all which were due during the periods presented. The amounts described above and certain non-interest bearing amounts due affiliates are included in Net Assets in the Combined Systems balance sheet. As a result of the Sales Agreement, such amounts will be assumed by the Parent. The interest income and expense have been netted in the accompanying statement of operations. 8. EMPLOYEE BENEFIT PLAN 401(k) PLAN The Combined Systems' employees participate in the Greater Media, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 12% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Parent contributes an amount equal to 50% of the participant's contribution, limited to the lessor of 3% of the participant's compensation or $1 per year. The Combined Systems expense relating to the 401(k) Plan was $140, $127, and $96 in 1998, 1997, and 1996, respectively. PENSION Employees of the Combined Systems participate in a pension plan sponsored by the Parent. The Combined Systems allocable share of the pension expense amounted to $105, $204 and $217 during the years ended September 30, 1998, 1997 and 1996, respectively. As a result of the Sales Agreement, the Combined Systems' employees will be fully vested with respect to their plan benefits, although no additional benefits will accrue to such employees in the future. In addition, the Parent will be responsible for the allocable pension liability ($838 at September 30, 1998) and will continue to administer the plan on behalf of the Combined Systems' employees after the sale is consummated. 9. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain facilities and equipment under noncancellable operating leases. Leases and rental costs charged to expense for the years ended September 30, 1998, 1997 and 1996, was $2,124, $2,133 and $1,636, respectively. Rent expense incurred under leases for the F-175 387 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) years ended September 30, 1998, 1997 and 1996, was $678, $665 and $660, respectively. Future minimum lease payments are as follows: 1999................................................. $ 690 2000................................................. 618 2001................................................. 524 2002................................................. 402 2003................................................. 396 Thereafter........................................... 3,267
The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the years ended September 30, 1998, 1997 and 1996, was $1,008, $840 and $578, respectively. LITIGATION The Company is party to lawsuits that arise in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's combined financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. The Company may be required to refund additional amounts in the future. The Combined Systems believe that they have complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if a company is unable to justify its basic rates. The Combined Systems are unable to estimate at this time the amount of refunds, if any, that may be payable by the Combined Systems in the event certain of its rates are successfully F-176 388 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) challenged by franchising authorities or found to be unreasonable by the FCC. The Combined Systems do not believe that the amount of any such refunds would have a material adverse effect on their financial position or results of operations. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Combined Systems cannot predict the ultimate effect of the 1996 Telecom Act on their financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Combined Systems. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. The Combined Systems are subject to state regulation in Massachusetts. 10. SUBSEQUENT EVENT (UNAUDITED) On June 30, 1999, Charter Communications Entertainment I, LLC, an indirect subsidiary of Charter Communications Holdings Company, LLC purchased the Combined Systems for an aggregate purchase price of $500 million plus a working capital adjustment. Effective with this change of ownership, the Combined Systems will be managed by Charter Investment, Inc. F-177 389 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Helicon Partners I, L.P.: We have audited the accompanying combined statements of operations, changes in net assets and cash flows of Helicon Partners I, L.P. and affiliates for the seven months ended July 30, 1999. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the results of operations of Helicon Partners I, L.P. and affiliates and their cash flows for the seven months ended July 30, 1999 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, March 6, 2000 F-178 390 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENT OF OPERATIONS
SEVEN MONTHS ENDED JULY 30, 1999 ------------ REVENUES.................................................... $ 49,564,581 ------------ OPERATING EXPENSES: Operating expenses........................................ 16,358,995 General and administrative expenses....................... 13,877,357 Marketing expenses........................................ 1,327,669 Depreciation and amortization............................. 16,616,529 Management fee charged by affiliate....................... 2,511,416 ------------ Total operating expenses............................. 50,691,966 ------------ Operating income.................................. (1,127,385) ------------ INTEREST INCOME (EXPENSE): Interest expense.......................................... (20,681,592) Interest income........................................... 124,486 ------------ NET LOSS.................................................... $(21,684,491) ============
The accompanying notes are an integral part of these combined statements. F-179 391 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
PREFERRED CLASS A CLASS B CAPITAL LIMITED GENERAL LIMITED LIMITED CONTRIBUTION PARTNERS' PARTNERS PARTNER PARTNERS PARTNER RECEIVABLE DEFICIT --------- ------- -------- ------- ------------ --------- Balance at December 31, 1998........... $8,567,467 $ (989,962) $(134,807,570) -- $(1,000) $(127,231,065) Distribution of additional preferred partnership interests.......... 609,621 (6,097) (603,524) -- -- -- Accretion of redeemable partnership interests.......... -- (269,961) (26,726,132) -- -- (26,996,093) Capital contribution....... -- -- -- 3,628,250 -- 3,628,250 Net loss............. -- (216,845) (21,467,646) -- -- (21,684,491) ---------- ----------- ------------- ---------- ------- ------------- Balance at July 30, 1999............... $9,177,088 $(1,482,865) $(183,604,872) $3,628,250 $(1,000) $(172,283,399) ========== =========== ============= ========== ======= =============
The accompanying notes are an integral part of these combined statements. F-180 392 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENT OF CASH FLOWS
SEVEN MONTHS ENDED JULY 30, 1999 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(21,684,491) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization.......................... 16,616,529 Amortization of debt discount and deferred financing costs................................................. 2,801,895 Gain on sale of equipment.............................. (22,536) Interest on 12% subordinated notes paid through the issuance of additional notes.......................... 2,706,044 Changes in operating assets and liabilities- Receivables from subscribers......................... (1,544,469) Prepaid expenses and other assets.................... 2,773,825 Accounts payable and accrued expenses................ (2,937,602) Subscriptions received in advance.................... 803,151 Accrued interest..................................... 2,557,212 ------------ Net cash provided by operating activities......... 2,069,558 ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (6,332,987) Proceeds from sale of equipment........................ 32,288 Cash paid for net assets of cable television systems, net of cash acquired....................................... (6,217,143) Increase in intangible assets............................. (487,595) ------------ Net cash used in investing activities............. (13,005,437) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank loans.................................. 13,000,000 Repayments of bank loans and other notes.................. (483,178) Capital contribution...................................... 3,628,250 Advances to affiliates, net............................... (247,043) Payment of financing costs................................ (240,000) ------------ Net cash provided by financing activities......... 15,658,029 ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,722,150 CASH AND CASH EQUIVALENTS, beginning of period.............. 5,130,561 ------------ CASH AND CASH EQUIVALENTS, end of period.................... $ 9,852,711 ============ CASH PAID FOR INTEREST...................................... $ 12,582,725 ============ ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT THROUGH THE ISSUANCE OF OTHER NOTES PAYABLE........................... $ 389,223 ============
The accompanying notes are an integral part of these combined statements. F-181 393 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND OPERATIONS Helicon Partners I, L.P. ("the Partnership") was organized as a limited partnership under the laws of the State of Delaware. The Partnership owns all of the limited partnership interests in THGLP, representing a 99% ownership, and Baum Investment, Inc. ("Baum"), the general partner of THGLP, owns the 1% general partnership interest in THGLP. The Partnership also owns a 99% interest and THGLP owns a 1% interest in HPI Acquisition Co., LLC ("HPIAC"). The Partnership also owns an 89% limited partnership interest and Baum a 1% general partnership interest in Helicon OnLine, L.P. ("HOL"). The Partnership, THGLP, HPIAC and HOL are referred to collectively herein as the Company. The Company operates in one business segment offering cable television services in the states of Pennsylvania, West Virginia, North Carolina, South Carolina, Louisiana, Vermont, New Hampshire, Georgia and Tennessee. The Company also offers to customers advanced services, such as paging and private data network systems, including dial up access and a broad range of Internet access services in Pennsylvania and Vermont, dedicated high speed access, high speed cable modem access, world wide web design, and hosting services. On July 30, 1999, Charter-Helicon, LLC ("Charter-Helicon"), acquired a 1% interest in THGLP previously owned by Baum and became the General Partner of THGLP. Concurrently, Charter-Helicon and Charter Communications, LLC ("CC-LLC"), parent of Charter-Helicon, acquired all of the partnership interests of the Partnership. These transactions are collectively referred to as the "Helicon/Charter Deal" herein. In connection with the Helicon/Charter Deal, $228,985,000 of cash was paid to the equity holders; Baum retained a $25,000,000 limited liability company membership interest in Charter-Helicon; debt of $197,447,000 was repaid; debt of $115,000,000 was assumed; and other costs totaling $4,285,000 were incurred by CC-LLC. The post-closing process associated with the Helicon/Charter Deal has not been finished. Accordingly, the accompanying combined financial statements may not give effect to all adjustments arising from the change of ownership of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Combination The accompanying financial statements include the accounts of the Partnership, THGLP, HPIAC and HOL, which have been combined because of common ownership and control. They also reflect the accounts of THGLP's subsidiary, Helicon Capital Corp., which has nominal assets and no operations since its incorporation. All intercompany accounts and transactions have been eliminated in combination. Partnership Profits, Losses and Distributions Under the terms of the partnership agreements of the Partnership and THGLP, profits, losses and distributions will be made to the general and Class A Limited Partners pro-rata based on their respective partnership interest. Holders of Preferred Limited Partnership Interests are entitled to an aggregate preference on liquidation of $6,250,000 plus cumulative in-kind distributions of additional Preferred Limited Partnership interests at an annual rate of 12%. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. F-182 394 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Revenue Recognition Revenue is recognized as services are provided to subscribers. Subscription revenues billed in advance for services are deferred and recorded as income in the period in which services are rendered. Property, Plant and Equipment Property, plant and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. Intangible Assets and Deferred Costs Intangible assets and deferred costs are carried at cost and are amortized using the straight-line method over the estimated useful lives of the respective assets. When changes in events or circumstances warrant, the Company reviews the amortization periods of their intangible assets and deferred costs. The Company evaluates whether there has been a permanent impairment in the value of these assets by considering such factors including the projected undiscounted cash flows, current market conditions and changes in the cable television industry that would impact the recoverability of such assets. Income Taxes No provision for Federal or state income taxes has been made in the accompanying combined financial statements since any liability for such income taxes is that of the partners and not of the Company. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITIONS On January 7, 1999, THGLP acquired cable television systems serving subscribers in the North Carolina counties of Carter, Johnson and Unicol. The aggregate purchase price was $5,228,097 and was allocated to the net assets acquired, which included property, plant and equipment and intangible assets, based on their estimated fair values. On March 1, 1999, HPIAC acquired a cable television system serving subscribers in the communities of Abbeville, Donalds and Due West, South Carolina. The aggregate purchase price was $723,356 and was allocated to the net assets acquired, which included property, plant and equipment, and intangible assets, based on their estimated fair value. The operating results relating to the above acquisitions are included in the accompanying combined financial statements from the acquisition dates forward. Pro forma operating results for 1999 as though the acquisitions had occurred on January 1, 1999, would not be materially different than historical operating results. F-183 395 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED 4. TRANSACTIONS WITH AFFILIATES Amounts due from/to affiliates result from management fees, expense allocations and temporary non-interest bearing loans. The affiliates are related to the Company through common ownership. Effective upon the execution of the Charter/Helicon Deal, Charter Investment, Inc. is the manager of the Company's operations. The Partnership was managed by Helicon Corp., an affiliated management company. During the seven months ended July 30, 1999, the Partnership was charged a management fee of $2,511,416. Management fees are calculated based on the gross revenues of the systems. 5. SENIOR SECURED NOTES THGLP and HCC (the "Issuers"), through a private placement offering, issued $115,000,000 aggregate principal amount of 11% Senior Secured Notes due 2003 (the "Senior Secured Notes"), secured by substantially all the assets of THGLP. Interest is payable on a semi-annual basis in arrears on November 1 and May 1. The discount on the Senior Secured Notes is being amortized over the term of the Senior Secured Notes so as to result in an effective interest rate of 11% per annum. 6. LOANS PAYABLE TO BANKS On January 5, 1999, THGLP entered into a $12,000,000 Senior Subordinated Loan Agreement with Paribas Capital Funding, LLC (the "1999 Credit Facility"). Initial borrowings of $7,000,000 under the 1999 Credit Facility financed the acquisition of certain cable television systems in North Carolina. On February 19, 1999, the Company borrowed the remaining $5,000,000 available under the 1999 Credit Facility. Interest on the 1999 Credit Facility is payable at 11.5% per annum. On July 30, 1999, the amounts outstanding were repaid and the 1999 Credit Facility was terminated in connection with the Helicon/Charter Deal. 7. REDEEMABLE PARTNERSHIP INTERESTS In April 1996, the Partnership sold to unrelated investors, $34,000,000 aggregate principal amount of 12% Subordinated Notes (the "Subordinated Notes") and warrants (the "Warrants") to purchase 2,419.1 units of Class B Limited Partnership Interests (the "Units"). The Subordinated Notes are subordinated to the senior indebtedness of the Partnership and are due April 1, 2004. Interest is payable semi-annually on each October 1 and April 1 in cash or through the issuance of additional Subordinated Notes, at the option of the Partnership. In the past, the Partnership has elected to satisfy interest due through the issuance of additional Subordinated Notes. The Partnership issued $2,706,044 of additional Subordinated Notes to pay interest due in April 1999. Holders of the Warrants had the right to acquire the Units at any time for a price of $1,500 per Unit. The Partnership estimated the Net Equity Value of the Warrants to be approximately $43,250,000 at December 31, 1998. The Net Equity Value, pursuant to the terms of the agreement, is the estimated amount of cash that would be available for distribution to the Partnership interests upon a sale of all the assets of the Partnership and its subsequent dissolution and liquidation. Such estimate as of December 31, 1998 reflects the amount that the holders of the Warrants have agreed to accept for their interests assuming a proposed sale of all of the interests of the Partnership is consummated. The increase in the Net Equity Value over the original carrying value of the Warrants is being accreted evenly over the period beginning with the date of the increase through September 2001. Such accretion is being reflected in the F-184 396 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED accompanying financial statements as an increase in the carrying value of the Warrants and the corresponding reduction in the carrying value of the capital accounts of the General and Class A Limited Partners. Immediately prior to the closing of the Helicon/Charter Deal. Baum contributed $3,628, 250 to exercise the Warrants and received 2,419.1 Units. This transaction triggered the acceleration of the accretion of the Units to their estimated Net Equity Value. Upon the close of the Charter/ Helicon Deal, the holders received $43,250,000 in exchange for the Units. 8. COMMITMENTS AND CONTINGENCIES Leases The Company leases telephone and utility poles on an annual basis. The leases are self-renewing. Pole rental expenses for the seven months ended July 30, 1999 was $687. The Company utilizes certain office space under operating lease agreements, which expire at various dates through August 2013 and contain renewal options. Office rent expense was $192 for the seven months ended July 30, 1999. Litigation The Company is a party to lawsuits that arise in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's combined financial position or results of operations. Regulation in the Cable Television Industry The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The F-185 397 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Company does not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Company's financial position or results of operations. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. F-186 398 INDEPENDENT AUDITORS' REPORT The Partners Helicon Partners I, L.P.: We have audited the accompanying combined balance sheets of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998, and the related combined statements of operations, changes in partners' deficit, and cash flows for each of the years in the three-year period ended December 31, 1998. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP New York, New York March 26, 1999 F-187 399 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1997 AND 1998
1997 1998 ------------- ------------- ASSETS (NOTES 8 AND 9) Cash and cash equivalents (note 2)..................... $ 4,372,281 $ 5,130,561 Receivables from subscribers........................... 1,439,720 1,631,931 Prepaid expenses and other assets...................... 2,205,794 3,469,228 Property, plant and equipment, net (notes 3, 4, and 11).................................................. 80,104,377 86,737,580 Intangible assets and deferred costs, net (notes 3 and 5)................................................... 85,066,665 94,876,847 ------------- ------------- Total assets................................. $ 173,188,837 $ 191,846,147 ============= ============= LIABILITIES AND PARTNERS' DEFICIT Liabilities: Accounts payable..................................... $ 7,416,901 $ 8,037,193 Accrued expenses..................................... 1,539,116 1,589,240 Subscriptions received in advance.................... 1,018,310 819,564 Accrued interest..................................... 3,760,360 3,742,456 Due to principal owner (note 7)...................... 5,000,000 5,000,000 Senior secured notes (note 8)........................ 115,000,000 115,000,000 Loans payable to banks (note 9)...................... 85,776,641 120,266,922 12% subordinated notes, net of unamortized discount of $2,889,541 in 1997 and $2,543,869 in 1998 (note 10)............................................... 37,249,948 42,672,085 Redeemable partnership interests (note 10)........... 6,437,142 16,253,906 Other notes payable (note 11)........................ 5,747,076 5,448,804 Due to affiliates, net (note 6)...................... 71,474 247,042 ------------- ------------- Total liabilities............................ 269,016,968 319,077,212 ------------- ------------- Commitments (notes 8, 9, 10, 11 and 13) Partners' deficit (note 12): Preferred limited partners........................... 7,649,988 8,567,467 Accumulated partners' deficit........................ (103,477,119) (135,797,532) Less capital contribution receivable................. (1,000) (1,000) ------------- ------------- Total partners' deficit...................... (95,828,131) (127,231,065) ------------- ------------- Total liabilities and partners' deficit...... $ 173,188,837 $ 191,846,147 ============= =============
See accompanying notes to combined financial statements. F-188 400 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998 ------------ ------------ ------------ Revenues.................................... $ 42,061,537 $ 59,957,434 $ 75,576,810 ------------ ------------ ------------ Operating expenses: Operating expenses (note 13).............. 11,395,509 17,408,265 22,687,850 General and administrative expenses (notes 6 and 13).............................. 7,244,663 9,762,931 13,365,824 Marketing expenses........................ 1,235,553 2,266,627 3,521,893 Depreciation and amortization............. 12,556,023 19,411,813 24,290,088 Management fee charged by affiliate (note 6)..................................... 2,103,077 2,997,872 3,496,271 Corporate and other expenses.............. 426,672 549,222 602,987 ------------ ------------ ------------ Total operating expenses.......... 34,961,497 52,396,730 67,964,913 ------------ ------------ ------------ Operating income.......................... 7,100,040 7,560,704 7,611,897 ------------ ------------ ------------ Interest expense (note 7)................... (17,418,266) (23,586,227) (27,633,714) Interest income............................. 563,362 154,037 92,967 ------------ ------------ ------------ (16,854,904) (23,432,190) (27,540,747) ------------ ------------ ------------ Loss before extraordinary item............ (9,754,864) (15,871,486) (19,928,850) ------------ ------------ ------------ Extraordinary item -- write-off of deferred financing costs (note 9).................. -- -- (1,657,320) ------------ ------------ ------------ Net loss.................................. $ (9,754,864) $(15,871,486) $(21,586,170) ============ ============ ============
See accompanying notes to combined financial statements. F-189 401 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
PARTNERS' DEFICIT ------------------------- PREFERRED CLASS A CAPITAL LIMITED GENERAL LIMITED CONTRIBUTION PARTNERS PARTNER PARTNERS RECEIVABLE TOTAL ---------- --------- ------------- ------------ ------------- Balance at December 31, 1995.... $ -- $(307,994) $ (67,144,287) $(1,000) $ (67,453,281) Issuance of preferred limited partnership interests (note 10)........................... 6,250,000 (62,500) (6,187,500) -- -- Partner capital contributions (note 10)..................... -- 1,500 -- -- 1,500 Distribution of additional preferred partnership interests (note 10)........... 558,430 (5,584) (552,846) -- -- Net loss........................ -- (97,549) (9,657,315) -- (9,754,864) ---------- --------- ------------- ------- ------------- Balance at December 31, 1996.... 6,808,430 (472,127) (83,541,948) (1,000) (77,206,645) Distribution of additional preferred partnership interests (note 10)........... 841,558 (8,416) (833,142) -- -- Accretion of redeemable partnership interests (note 10)........................... -- (27,500) (2,722,500) -- (2,750,000) Net loss........................ -- (158,715) (15,712,771) -- (15,871,486) ---------- --------- ------------- ------- ------------- Balance at December 31, 1997.... 7,649,988 (666,758) (102,810,361) (1,000) (95,828,131) Distribution of additional preferred partnership interests (note 10)........... 917,479 (9,175) (908,304) -- -- Accretion of redeemable partnership interests (note 10)........................... -- (98,168) (9,718,596) -- (9,816,764) Net loss........................ -- (215,861) (21,370,309) -- (21,586,170) ---------- --------- ------------- ------- ------------- Balance at December 31, 1998.... $8,567,467 $(989,962) $(134,807,570) $(1,000) $(127,231,065) ========== ========= ============= ======= =============
See accompanying notes to combined financial statements. F-190 402 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1996 1997 1998 ------------ ------------ ------------ Cash flows from operating activities: Net loss.................................................. $ (9,754,864) $(15,871,486) $(21,586,170) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item...................................... -- -- 1,657,320 Depreciation and amortization........................... 12,556,023 19,411,813 24,290,088 Gain on sale of equipment............................... (20,375) (1,069) (29,323) Interest on 12% subordinated notes paid through the issuance of additional notes.......................... 1,945,667 4,193,819 4,961,241 Interest on other notes payable added to principal...... 168,328 185,160 -- Amortization of debt discount and deferred financing costs................................................. 2,115,392 849,826 919,439 Change in operating assets and liabilities, net of acquisitions: Decrease (increase) in receivables from subscribers... 176,432 (496,146) (79,535) Increase in prepaid expenses and other assets......... (269,156) (976,491) (1,255,018) Increase in financing costs incurred.................. (4,525,331) (434,000) (2,200,000) Increase in accounts payable and accrued expenses..... 2,182,762 2,957,524 681,037 Increase (decrease) in subscriptions received in advance............................................ 119,277 325,815 (208,803) Increase (decrease) in accrued interest............... 1,613,630 376,158 (17,904) ------------ ------------ ------------ Total adjustments.................................. 16,062,649 26,392,409 28,718,542 ------------ ------------ ------------ Net cash provided by operating activities.......... 6,307,785 10,520,923 7,132,372 ------------ ------------ ------------ Cash flows from investing activities: Purchases of property, plant and equipment................ (8,987,766) (15,824,306) (13,538,978) Proceeds from sale of equipment........................... 21,947 23,270 118,953 Cash paid for net assets of cable television systems acquired................................................ (35,829,389) (70,275,153) (26,063,284) Cash paid for net assets of internet businesses acquired................................................ (40,000) (993,760) -- Increase in intangible assets and deferred costs.......... (127,673) (308,759) (183,018) ------------ ------------ ------------ Net cash used in investing activities.............. (44,962,881) (87,378,708) (39,666,327) ------------ ------------ ------------ Cash flows from financing activities: Capital contributions..................................... 1,500 -- -- Decrease in restricted cash............................... -- 1,000,000 -- Proceeds from issuance of 12% subordinated notes and redeemable partnership interests........................ 34,000,000 -- -- Proceeds from bank loans.................................. 8,900,000 77,285,000 104,000,000 Repayment of bank loans................................... (952,777) (1,505,581) (69,509,719) Repayment of other notes payable.......................... (527,514) (1,145,989) (1,362,995) Advances to affiliates.................................... (3,207,996) (3,412,411) (8,856,491) Repayments of advances to affiliates...................... 3,479,336 2,986,778 9,021,440 ------------ ------------ ------------ Net cash provided by financing activities.......... 41,692,549 75,207,797 33,292,235 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents...................................... 3,037,453 (1,649,988) 758,280 Cash and cash equivalents at beginning of year.............. 2,984,816 6,022,269 4,372,281 ------------ ------------ ------------ Cash and cash equivalents at end of year.................... $ 6,022,269 $ 4,372,281 $ 5,130,561 ============ ============ ============ Supplemental cash flow information: Interest paid............................................. $ 11,575,250 $ 17,981,264 $ 21,770,938 ============ ============ ============ Other non-cash items: Acquisition of property, plant and equipment through issuance of other notes payable....................... $ 1,222,000 $ 917,815 $ 1,025,319 ============ ============ ============ Issuance of notes payable in connection with the acquisition of cable television and internet systems, net of imputed interest............................... $ 569,500 $ 1,914,479 -- ============ ============ ============
See accompanying notes to combined financial statements. F-191 403 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 1. ORGANIZATION AND NATURE OF BUSINESS Helicon Partners I, L.P. ("the Partnership") was organized as a limited partnership on November 30, 1994 under the laws of the State of Delaware. On April 8, 1996, Baum Investments, Inc. acquired a 1% general partnership interest in the Partnership through an initial capital contribution of $1,500 and the existing limited partners of The Helicon Group, L.P. ("THGLP"), formed in 1993, exchanged their limited partnership interests in THGLP for all Class A Common Limited Partnership Interests and Preferred Limited Partnership Interests in the Partnership. As a result of this exchange, THGLP became 99% owned by the Partnership. The Partnership now owns all of the limited partnership interests in THGLP and Baum Investments, Inc. continues to be the general partner of THGLP and to own a 1% general partnership interest in THGLP. The Partnership also owns a 99% interest and THGLP a 1% interest in HPI Acquisition Co., LLC ("HPIAC"), a Delaware limited liability company formed on February 7, 1996. The Partnership also owned an 89% limited partnership interest and Baum Investments, Inc. a 1% general partnership interest in Helicon OnLine, L. P. ("HOL"), a Delaware limited partnership formed May 31, 1997. On June 29, 1998, the net assets of HOL were transferred to THGLP in settlement of the inter-company loans THGLP had made to HOL. The Partnership, THGLP, HPIAC and HOL are referred to collectively herein as the Company. On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc. and all the holders of partnership interests in HPI entered into a purchase agreement by and among Charter Communications, Inc, Charter Communications, LLC and Charter Helicon, LLC (collectively the "Charter Entities") providing for the sale of all such partnership interests and Helicon Corp.'s interest in the management agreements with THGLP and HPIAC to the Charter Entities. The sale price is $550 million which amount will be reduced by any outstanding indebtedness assumed by the Charter Entities. The Company operates cable television systems located in Pennsylvania, West Virginia, North Carolina, South Carolina, Louisiana, Vermont, New Hampshire, Georgia and Tennessee. The Company also offers a broad range of Internet access service, including dial-up access, dedicated high speed access, both two-way and asymmetrical ("Hybrid"), high speed cable modem access, World Wide Web design and hosting services and other value added services such as paging and private network systems within the Company's cable service and contiguous areas. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) PRINCIPLES OF COMBINATION The accompanying financial statements include the accounts of the Partnership, THGLP and HPIAC and HOL which have been combined because of common ownership and control. They also reflect the accounts of THGLP's subsidiary, Helicon Capital Corp. ("HCC"), which has nominal assets and no operations since its incorporation. All intercompany accounts and transactions have been eliminated in combination. b) PARTNERSHIP PROFITS, LOSSES AND DISTRIBUTIONS Under the terms of the partnership agreements of the Partnership and THGLP, profits, losses and distributions will be made to the general and Class A Limited Partners pro-rata based on their respective partnership interest. F-192 404 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Holders of Preferred Limited Partnership Interests are entitled to an aggregate preference on liquidation of $6,250,000 plus cumulative in-kind distributions of additional Preferred Limited Partnership interests at an annual rate of 12%. c) REVENUE RECOGNITION Revenue is recognized as services are provided to subscribers. Subscription revenues billed in advance for services are deferred and recorded as income in the period in which services are rendered. d) Property, Plant and Equipment Property, plant and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. e) INTANGIBLE ASSETS AND DEFERRED COSTS Intangible assets and deferred costs are carried at cost and are amortized using the straight-line method over the estimated useful lives of the respective assets. The Company periodically reviews the amortization periods of their intangible assets and deferred costs. The Company evaluates whether there has been a permanent impairment in the value of these assets by considering such factors including projected undiscounted cash flows, current market conditions and changes in the cable television industry that would impact the recoverability of such assets, among other things. f) INCOME TAXES No provision for Federal or state income taxes has been made in the accompanying combined financial statements since any liability for such income taxes is that of the partners and not of the Partnership or its affiliates. Certain assets have a basis for income tax purposes that differs from the carrying value for financial reporting purposes, primarily due to differences in depreciation methods. As a result of these differences, at December 31, 1997 and 1998 the net carrying value of these assets for financial reporting purposes exceeded the net basis for income tax purposes by approximately $22 million and $27 million respectively. g) CASH AND CASH EQUIVALENTS Cash and cash equivalents, consisting of amounts on deposit in money market accounts, checking accounts and certificates of deposit, were $4,372,281 and $5,130,561 at December 31, 1997 and 1998, respectively. h) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. i) INTEREST RATE CAP AGREEMENTS The cost paid is amortized over the life of the agreements. F-193 405 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) j) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued Expenses The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, current receivables, notes receivable, accounts payable, and accrued expenses approximate fair values. Senior Secured Notes and Long-term Debt For the Senior Secured Notes, fair values are based on quoted market prices. The fair market value at December 31, 1997 and 1998 was approximately $123,000,000 and $120,000,000, respectively. For long-term debt, their values approximate carrying value due to the short-term maturity of the debt and/or fluctuating interest. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholder's equity and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. The Company has no items that qualify as comprehensive income. 3. ACQUISITIONS Cable Acquisitions On January 31, 1995, THGLP acquired a cable television system, serving approximately 1,100 (unaudited) subscribers in the Vermont communities of Bradford, South Royalton and Chelsea. The aggregate purchase price was approximately $350,000 and was allocated to the net assets acquired which included property and equipment and intangible assets. In June and July, 1996, HPIAC completed the acquisitions of all the operating assets of the cable television systems, serving approximately 26,000 (unaudited) subscribers, in the areas of Jasper and Skyline, Tennessee and Summerville, Trenton, Menlo, Decatur and Chatsworth, Georgia (collectively referred to as the Tennessee cluster). The aggregate purchase price of $36,398,889, including acquisition costs of $742,837, was allocated to the net assets acquired based on their estimated fair value. Such allocation is summarized as follows: Land.................................................... $ 25,000 Cable television system................................. 17,876,244 Other property, plant and equipment..................... 185,000 Subscriber lists........................................ 17,474,762 Noncompete agreement.................................... 1,000 Other intangible assets................................. 742,837 Other net operating items............................... 94,046 ----------- Total aggregate purchase price.......................... $36,398,889 ===========
F-194 406 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A portion of the purchase price was paid through the issuance of notes to the sellers of one of the systems totaling $750,000. Such notes were reported net of imputed interest of $180,500 computed at 9% per annum (see note 11). On January 16, 1997, HPIAC acquired an adjacent cable television system serving approximately 2,256 (unaudited) subscribers in the communities of Ten Mile and Hamilton, Tennessee. The aggregate purchase price was approximately $2,960,294 and was allocated to the net assets acquired which included property, equipment and intangible assets, based on their estimated fair value. On January 31, 1997, THGLP acquired a cable television system, serving approximately 823 (unaudited) subscribers in the West Virginia counties of Wirt and Wood. The aggregate purchase price was approximately $1,053,457, and was allocated to the net assets acquired which included property, equipment and intangible assets, based on their estimated fair value. On April 18, 1997, HPIAC acquired a cable television system serving approximately 839 (unaudited) subscribers in the communities of Charleston and Calhoun, Tennessee. The aggregate purchase price was approximately $1,055,693 and was allocated to the net assets acquired which included property and equipment and intangible assets, based on their estimated fair value. On June 26, 1997, HPIAC acquired the net assets of cable television systems serving approximately 21,500 (unaudited) subscribers primarily in the North Carolina communities of Avery County and surrounding areas and in the South Carolina community of Anderson County. The aggregate purchase price was approximately $45,258,279, including acquisition costs of $547,235, and was allocated to the net assets acquired which included property, plant, equipment and intangible assets, based on their estimated fair value. On June 26, 1997, THGLP acquired the net assets of a cable television system serving approximately 11,000 (unaudited) subscribers in the North Carolina communities of Watauga County, Blowing Rock, Beech Mountain and the town of Boone. The aggregate purchase price was $19,947,430 and was allocated to the net assets acquired which included, property, plant, equipment and intangible assets, based on their estimated fair value. The aggregate purchase price of the 1997 cable acquisitions was $70,275,153 and was allocated to the net assets acquired based on their estimated fair market value as follows: Land...................................................... $ 158,500 Cable television system................................... 21,320,900 Vehicles.................................................. 1,473,600 Computer equipment........................................ 240,000 Subscriber lists.......................................... 46,925,173 Organization and other costs.............................. 688,816 Other net operating items................................. (531,836) ----------- Total aggregate purchase price............................ $70,275,153 ===========
On December 31, 1998, HPIAC acquired the net assets of cable television systems serving approximately 11,225 (unaudited) subscribers primarily in the North Carolina community of Roanoke Rapids. The aggregate purchase price was $26,063,284 including acquisition costs of F-195 407 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) $535,875 and was allocated to the net assets acquired, which included, property, equipment and intangible assets, based on their estimated fair value. Land...................................................... $ 250,000 Cable television system................................... 4,258,000 Other property, plant and equipment....................... 1,103,375 Subscriber lists.......................................... 19,805,000 Organization and other costs.............................. 535,875 Other net operating items................................. 111,034 ----------- Total aggregate purchase price............................ $26,063,284 ===========
Internet Acquisitions On March 22, 1996, THGLP acquired the net assets of a telephone dial-up internet access provider ("ISP") serving approximately 350 (unaudited) customers in and around the area of Uniontown, Pennsylvania. The aggregate purchase price was approximately $40,000. On April 1, 1997, the Partnership acquired the net assets of a telephone dial-up ISP serving approximately 2,500 (unaudited) customers in and around the area of Uniontown, Pennsylvania. The aggregate purchase price was $757,029. On May 31, 1997, the Partnership acquired the net assets of a telephone dial-up ISP serving approximately 1,800 (unaudited) customers in and around the area of Uniontown, Pennsylvania. The aggregate purchase price was $213,629. On November 14, 1997, HOL acquired the net assets of a telephone dial-up ISP serving approximately 1,744 (unaudited) customers in and around the area of Johnstown, Pennsylvania. The aggregate purchase price was $348,927. On December 17, 1997, HOL acquired the net assets of a telephone dial-up ISP serving 1,571 (unaudited) customers in and around the area of Plainfield, Vermont. The aggregate purchase price was $497,307. On December 17, 1997, HOL acquired the net assets of a telephone dial-up ISP serving approximately 2,110 (unaudited) customers in and around the area of Wells River, Vermont. The aggregate purchase price was $673,170. The aggregate purchase price of the 1997 ISP acquisitions was $2,490,062 and was allocated to the net assets acquired, based on their estimated fair value. Such allocation is summarized as follows: Internet service equipment................................. $ 237,064 Customer lists............................................. 1,409,768 Non-compete Agreement...................................... 883,097 Other intangible assets.................................... 35,000 Other net operating items.................................. (74,867) ---------- Total aggregate purchase price............................. $2,490,062 ==========
F-196 408 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A portion of the purchase price was paid through the issuance of notes to the Sellers totaling $1,801,000. Such notes were reported net of imputed interest of $304,698 computed at 9% per annum (see Note 11). The operating results relating to the above acquisitions, effective with their acquisition dates, are included in the accompanying combined financial statements. 4. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net is summarized as follows at December 31:
ESTIMATED USEFUL 1997 1998 LIFE IN YEARS ------------ ------------ ---------------- Land........................... $ 121,689 $ 320,689 -- Cable television system........ 124,684,403 140,441,324 5 to 20 Internet service equipment..... 1,281,362 2,483,602 2 to 3 Office furniture and fixtures..................... 677,672 728,253 5 and 10 Vehicles....................... 3,536,358 4,570,990 3 and 5 Building....................... 805,525 1,585,384 5 and 10 Building and leasehold Improvements................. 398,843 445,820 1 to 5 Computers...................... 3,232,355 4,159,506 3 to 5 ------------ ------------ 134,738,207 154,735,568 Less accumulated depreciation................. (54,633,830) (67,997,988) ------------ ------------ $ 80,104,377 $ 86,737,580 ============ ============
5. INTANGIBLE ASSETS AND DEFERRED COSTS Intangible assets and deferred costs are summarized as follows at December 31:
ESTIMATED USEFUL 1997 1998 LIFE IN YEARS ------------ ------------ ---------------- Covenants not-to-compete......... $ 14,270,120 $ 14,270,120 5 Franchise agreements............. 19,650,889 19,650,889 9 to 17 Goodwill......................... 1,703,760 1,703,760 20 Subscriber lists................. 82,292,573 102,097,574 6 to 10 Financing costs.................. 9,414,809 9,291,640 8 to 10 Organization and other costs..... 3,631,650 4,306,777 5 to 10 ------------ ------------ 130,963,801 151,320,760 Less accumulated amortization.... (45,897,136) (56,443,913) ------------ ------------ $ 85,066,665 $ 94,876,847 ============ ============
F-197 409 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. TRANSACTIONS WITH AFFILIATES Amounts due from/to affiliates result from management fees, expense allocations and temporary non-interest bearing loans. The affiliates are related to the Company through common-ownership. The Partnership is managed by Helicon Corp., an affiliated management company. During 1996, 1997 and 1998, the Partnership was charged management fees of $2,103,077, $2,997,872, and $3,496,271, respectively. In 1997 and 1998, $2,685,172 and $3,231,362 of the management fees were paid and $312,700 and $172,476 were deferred, in accordance with the terms of the Partnership's credit agreements, respectively. Management fees are calculated based on the gross revenues of the systems. Additionally, during 1996, 1997 and 1998, THGLP was also charged $980,000, $713,906, and $1,315,315, respectively, for certain costs incurred by this related party on their behalf. In May 1997, immediately after the formation of HOL, HPI sold 10% of its limited partner interest in HOL to certain employees of Helicon Corp. Such interests were sold at HPI's proportionate carrying value of HOL of $83,631 in exchange for notes receivable from these individuals. These notes are due upon the liquidation of HOL or the sale of all or substantially all of its assets. On June 26, 1998, the notes were cancelled in consideration of the return by the Helicon employees of their 10% limited partnership interests. 7. DUE TO PRINCIPAL OWNER Mr. Theodore Baum, directly or indirectly, is the principal owner of 96.17% of the general and limited partnership interests of the Partnership (the "Principal Owner"). Due to Principal Owner consists of $5,000,000 at December 31, 1997 and 1998 payable by THGLP. Beginning on November 3, 1993, interest on the $5,000,000 due to the Principal Owner did not accrue and in accordance with the provisions of the Senior Secured Notes was not paid for twenty four months. Interest resumed on November 3, 1995 (see Note 8). The principal may only be repaid thereafter subject to the passage of certain limiting tests under the covenants of the Senior Secured Notes. Prior to the issuance of the Senior Secured Notes, amounts due to Principal Owner bore interest at varying rates per annum based on the prime rate and were due on demand. Interest expense includes $521,701 in 1996 and $530,082 in 1997 and $524,880 in 1998 related to this debt. 8. SENIOR SECURED NOTES On November 3, 1993, THGLP and HCC (the "Issuers"), through a private placement offering, issued $115,000,000 aggregate principal amount of 11% Senior Secured Notes due 2003 (the "Senior Secured Notes"), secured by substantially all the assets of THGLP. The Senior Secured Notes were issued at a substantial discount from their principal amount and generated net proceeds to the Issuers of approximately $105,699,000. Interest is payable on a semi-annual basis in arrears on November 1 and May 1, beginning on May 1, 1994. Until November 1, 1996 the Senior Secured Notes bore interest at the rate of 9% per annum. After November 1, 1996, the Senior Secured Notes bear interest at the rate of 11% per annum. The discount on the Senior Secured Notes has been amortized over the term of the Senior Secured Notes so as to result in an effective interest rate of 11% per annum. F-198 410 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Senior Secured Notes may be redeemed at the option of the Issuers in whole or in part at any time on or after November 1, 1997 at the redemption price of 108% reducing ratably to 100% of the principal amount, in each case together with accrued interest to the redemption date. The Issuers are required to redeem $25,000,000 principal amount of the Senior Secured Notes on each of November 1, 2001 and November 1, 2002. The indenture under which the Senior Secured Notes were issued contains various restrictive covenants, the more significant of which are, limitations on distributions to partners, the incurrence or guarantee of indebtedness, the payment of management fees, other transactions with officers, directors and affiliates, and the issuance of certain types of equity interests or distributions relating thereto. 9. LOANS PAYABLE TO BANKS On July 12, 1996, HPIAC entered into $85,000,000 of senior secured credit facilities ("Facilities") with a group of banks and The First National Bank of Chicago, as agent. The Facilities were comprised of a $55,000,000 senior secured two and one-half year revolving credit facility, converting on December 31, 1998 to a five and one-half year amortizing term loan due June 30, 2004 ("Facility A"); and, a $30,000,000 senior secured, amortizing, multiple draw nine year term loan facility due June 30, 2005 ("Facility B"). The Facilities financed certain permitted acquisitions, transaction expenses and general corporate purposes. Interest on outstanding borrowings was payable at specified margins over either LIBOR or the higher of the corporate base rate of The First National Bank of Chicago or the rates on overnight Federal funds transactions with members of the Federal Reserve System. The margins varied based on the Company's total leverage ratio, as defined, at the time of an advance. As of December 31, 1997, the amounts outstanding were $30,000,000 under Facility B and $35,500,000 outstanding under Facility A. Interest was payable at LIBOR plus 3.50% for Facility B and LIBOR plus 3.00% for Facility A. In addition, HPIAC paid a commitment fee of .5% of the unused balance of the Facilities. On December 15, 1998, the Facilities were repaid in full together with accrued interest thereon from the proceeds of the new credit agreements (see below). In connection with the early retirement of the aforementioned bank debt, HPIAC wrote off related unamortized deferred financing costs totaling $1,657,320. Such amount has been classified as an extraordinary item in the accompanying 1998 combined statement of operations. In connection with the aforementioned Facilities, HPIAC entered into an interest rate cap agreement to reduce its exposure to interest rate risk. Interest rate cap transactions generally involve the exchange of fixed and floating rate interest payment obligations and provide for a ceiling on interest to be paid, respectively, without the exchange of the underlying notional principal amount. These types of transactions involve risk of counterpart nonperformance under the terms of the contract. At December 31, 1997, HPIAC had cap agreements with aggregate notional amounts of $42,500,000 expiring through March 29, 2000. On December 15, 1998, in connection with the early retirement of the related bank debt, the cap agreements were terminated and HPIAC wrote off the unamortized costs of these cap agreements. On December 15, 1998, HPIAC entered into credit agreements with a group of banks and Paribas, as agent, providing maximum borrowings of $110,000,000 (the 1998 Credit Facilities). The agreements include (i) a senior secured Credit Agreement consisting of a $35,000,000 A Term Loan, maturing on December 31, 2005, $45,000,000 B Term Loan, maturing on December 31, 2006 and a $10,000,000 Revolving Commitment, maturing on December 31, 2005 and (ii) a Loan Agreement consisting of a $20,000,000 Hybrid Facility, maturing on December 31, 2007. F-199 411 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1998, the A Term Loan, B Term Loan and Hybrid Facility were fully drawn down and there was nothing outstanding under the Revolving Commitment. The principal cash payments required under the Company's credit agreements for the fiscal years ended December 31, 1999, 2000, 2001, 2002 and 2003 are estimated to aggregate $0, $812,500, $3,950,000, $5,700,000 and $7,450,000, respectively. Interest is payable at LIBOR plus an applicable margin, which is based on a ratio of loans outstanding to annualized EBITDAM, as defined in the agreement and can not exceed 3.00% for A Term Loan and Revolving Commitments, 3.25% for B Term Loan and 4.50% for the Hybrid Facility. In addition, the Company pays a commitment fee of .50% of the unused balance of the Revolving Commitment. The 1998 Credit Facilities are secured by a first perfected security interest in all of the assets of HPIAC and a pledge of all equity interests of HPIAC. The credit agreement contains various restrictive covenants that include the achievement of certain financial ratios relating to interest, fixed charges, leverage, limitations on capital expenditures, incurrence or guarantee of indebtedness, other transactions with affiliates and distributions to members. In addition, management fees in the aggregate cannot exceed 5% of gross revenues of HPIAC. On June 26, 1997, THGLP entered into a $20,000,000 senior secured credit facility with Banque Paribas, as Agent (the 1997 Credit Facility). On January 5, 1999, the 1997 Credit Facility was restated and amended. The facility is non-amortizing and is due November 1, 2000. Borrowings under the facility financed the acquisition of certain cable television assets in North Carolina (see note 3). Interest on the $20,000,000 outstanding is payable at specified margins over either LIBOR or the rate of interest publicly announced in New York City by The Chase Manhattan Bank from time to time as its prime commercial lending rate. The margins vary based on the THGLP's total leverage ratio, as defined, at the time of an advance. Currently interest is payable at LIBOR plus 2.75%. The 1997 Credit Facility is secured by a first perfected security interest in all of the assets of the Partnership and a pledge of all equity interests of the THGLP. The credit agreement contains various restrictive covenants that include the achievement of certain financial ratios relating to interest, fixed charges, leverage, limitations on capital expenditures, incurrence or guarantee of indebtedness, transactions with affiliates, distributions to members and management fees which accrue at 5% of gross revenues. Also included in loans payable to banks is a mortgage note of $266,922 payable to a bank that is secured by THGLP's office building in Vermont. The interest is payable at Prime plus 1% and the mortgage note is due March 1, 2012. Principal payments on the mortgage note are summarized as follows at December 31, 1998:
YEAR ENDING DECEMBER 31 AMOUNT - - - ----------------------- -------- 1999........................................................ $ 10,581 2000........................................................ 11,631 2001........................................................ 12,786 2002........................................................ 14,055 2003 and thereafter......................................... 217,869 -------- $266,922 ========
F-200 412 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. SUBORDINATED NOTES AND REDEEMABLE PARTNERSHIP INTERESTS In April 1996 the Partnership sold to unrelated investors, $34,000,000 aggregate principal amount of its 12% Subordinated Notes (the "Subordinated Notes") and warrants to purchase 2,419.1 units (the "Units") of Class B Common Limited Partnership Interests representing in the aggregate 24.191% of the outstanding limited partner interests of the Partnership on a fully diluted basis (the "Warrants"). Of the $34,000,000 of gross proceeds, $3,687,142 was determined to be the value of the Warrants, and $30,312,858 was allocated to the Subordinated Notes. The discount on the Subordinated Notes is being amortized over the term of these Notes. The Subordinated Notes are subordinated to the senior indebtedness of the Partnership and are due April 1, 2004. Interest is payable semi-annually on each October 1 and April 1 in cash or through the issuance of additional Subordinated Notes, at the option of the Partnership. In October 1996, April 1997, October 1997, April 1998 and October 1998, the Partnership elected to satisfy interest due through the issuance of $1,945,667, $2,156,740, $2,037,079, $2,408,370 and $2,552,871, respectively, additional Subordinated Notes. After September 2001, a holder or holders of no less than 33 1/3% of the aggregate principal amount of the Subordinated Notes can require the Partnership to repurchase their Subordinated Notes at a price equal to the principal amount thereof plus accrued interest. The Partnership has an option to redeem the Subordinated Notes at 102% of the aggregate principal amount after the fifth anniversary of their issuance, at 101% of the aggregate principal amount after the sixth anniversary of issuance and at 100% of the aggregate principal amount after the seventh anniversary of issuance. Holders of the Warrants have the right to acquire the Units at any time for a price of $1,500 per Unit. After September 2001, a holder or holders of at least 33 1/3% of the Warrants can require the Partnership to either purchase their Warrants at their interest in the Net Equity Value of the Partnership or seek a purchaser for all of the assets or equity interests of the Partnership. Net Equity Value pursuant to the terms of the underlying agreements is the estimated amount of cash that would be available for distribution to the Partnership interests upon a sale of all of the assets of the Partnership and its subsequent dissolution and liquidation. The Net Equity Value is the amount agreed to by the Partnership and 66 2/3% of the holders of the Subordinated Notes and Warrants or, absent such agreement, determined through a specified appraisal process. The Partnership estimated the Net Equity Value of the Warrants to be approximately $43,250,000 at December 31, 1998 and $16,750,000 at December 31, 1997. Such estimate as of December 31, 1998 reflects the amount that the holders of the warrants have agreed to accept for their interests assuming the proposed sale of all of the interests of the partnership is consummated (see note 14). The increase in the estimated Net Equity Value over the original carrying value of the Warrants is being accreted evenly over the period beginning with the date of the increase and September 2001. Such accretion is being reflected in the accompanying financial statements as an increase in the carrying value of the Warrants and a corresponding reduction in the carrying value of the capital accounts of the General and Class A Limited Partners. The agreements underlying the Subordinated Notes and the Warrants contain various restrictive covenants that include limitations on incurrence or guarantee of indebtedness, transactions with affiliates, and distributions to partners. In addition, management fees in the aggregate cannot exceed 5% of gross revenues of the Partnership. F-201 413 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 11. OTHER NOTES PAYABLE Other Notes payable consists of the following at December 31:
1997 1998 ---------- ---------- Promissory note in consideration for acquisition of a cable television system, accruing interest at 10% per annum on principal and accrued interest which is added to principal on certain specified dates; interest becomes payable on January 1, 1998 and the principal is payable in full on August 20, 2000 $2,036,765 $2,036,765 Non-interest bearing promissory notes issued in connection with the acquisition of a cable television system. Principal payments begin on July 16, 1997, in the amount of $70,000 and four installments in the amount of $170,000 on each July 16 thereafter. Such notes are reported net of imputed interest of $141,116 and $101,732 in 1997 and 1998, respectively, computed at 9% per annum 538,884 408,268 Non-interest bearing promissory notes issued in connection with the acquisitions of the internet businesses. Principal payments are due in January, February, and March of each year and continue quarterly thereafter through June, 2001. Such notes are reported net of imputed interest of $180,727 and $146,441 in the 1997 and 1998, respectively, computed at 9% per annum 1,398,478 1,021,474 Installment notes, collateralized by vehicles and other equipment and payable in monthly installments, at interest rates between 5.5% to 14.25% per annum, through January, 2003 1,772,949 1,982,297 ---------- ---------- $5,747,076 $5,448,804 ========== ==========
Principal payments due on the above notes payable are summarized as follows at December 31, 1998:
YEAR ENDING DECEMBER 31 AMOUNT - - - ----------------------- ---------- 1999..................................................... $1,337,476 2000..................................................... 3,276,529 2001..................................................... 678,349 2002..................................................... 140,944 2003..................................................... 15,506 ---------- $5,448,804 ==========
12. PARTNERS' DEFICIT During 1993, the Principal Owner contributed a $6,500,000 unsecured, non-interest bearing personal promissory note due on demand to the general partner of THGLP. Additionally, the F-202 414 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Principal Owner contributed to THGLP an unsecured, non-interest bearing personal promissory note in the aggregate principal amount of $24,000,000 (together with the $6,500,000 note, the "Baum Notes"). The Baum Notes have been issued for the purpose of THGLP's credit enhancement. Although the Baum Notes are unconditional, they do not become payable except (i) in increasing amounts presently up to $19,500,000 and in installments thereafter to a maximum of $30,500,000 on December 16, 1996 and (ii) at such time after such dates as THGLP's creditors shall have exhausted all claims against THGLP's assets. 13. COMMITMENTS The Partnership and affiliates leases telephone and utility poles on an annual basis. The leases are self renewing. Pole rental expense for the years ended December 31, 1996, 1997 and 1998 was $609,075, $873,264 and $982,306, respectively. In connection with certain lease and franchise agreements, the Partnership, from time to time, issues security bonds. The Partnership and affiliates utilizes certain office space under operating lease agreements which expire at various dates through August 2013 and contain renewal options. At December 31, 1998 the future minimum rental commitments under such leases were as follows:
YEAR ENDING DECEMBER 31 - - - ----------------------- 1999..................................................... $ 166,825 2000..................................................... 142,136 2001..................................................... 141,727 2002..................................................... 147,912 2003..................................................... 151,412 Thereafter............................................... 1,418,017 ---------- $2,168,029 ==========
Office rent expense was $102,801 in 1996, $203,506 in 1997 and $254,955 in 1998. 14. SUBSEQUENT EVENTS On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc. and all the holders of partnership interests in HPI entered into a purchase agreement by and among Charter Communications, Inc, Charter Communications, LLC and Charter Helicon, LLC (collectively the "Charter Entities") providing for the sale of all such partnership interests and Helicon Corp.'s interest in the management agreements with THGLP and HPIAC to the Charter Entities. The sale price is $550 million which amount will be reduced by any outstanding indebtedness assumed by the Charter Entities. F-203 415 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Rifkin Cable Income Partners L.P. In our opinion, the accompanying balance sheet and the related statements of operations, of equity and of cash flows present fairly, in all material respects, the financial position of Rifkin Cable Income Partners L.P. (the "Partnership") at September 13, 1999, and the results of its operations and its cash flows for the period January 1, 1999 to September 13, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. On September 13, 1999, all of the Partnership's interest were sold to Charter Communications, LLC. These financial statements represent the Partnership just prior to that transaction and do not reflect any adjustments related thereto. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado February 15, 2000 F-204 416 RIFKIN CABLE INCOME PARTNERS, L.P. BALANCE SHEET
SEPTEMBER 13, 1999 ------------------ ASSETS Cash...................................................... $ 145,036 Customer accounts receivable, net of allowance for doubtful accounts of $2,349............................ 109,874 Accounts receivable, related party........................ 7,328 Accounts receivable, interpartnership..................... 13,638,312 Other receivables......................................... 96,318 Prepaid expenses and deposits............................. 20,920 Property, plant and equipment, at cost: Transmission and distribution systems and related equipment............................................. 11,038,202 Vehicles, office furniture and fixtures................ 426,977 Land, buildings and leasehold improvements............. 125,000 Construction in process and spare parts inventory...... 66,122 ----------- 11,656,301 Less accumulated depreciation............................... (831,684) ----------- Property, plant and equipment, net..................... 10,824,617 Franchise costs, net of accumulated amortization of $792,708.................................................. 12,706,195 ----------- Total assets........................................... $37,548,600 =========== LIABILITIES AND EQUITY Liabilities: Accrued liabilities....................................... $ 161,084 Customer deposits and prepayments......................... 321,419 Interpartnership debt..................................... 15,621,000 ----------- Total liabilities...................................... 16,103,503 Commitments and contingencies (Notes 4 and 7) Divisional equity......................................... 21,445,097 ----------- Total equity........................................... 21,445,097 ----------- Total liabilities and equity......................... $37,548,600 ===========
The accompanying notes are an integral part of these financial statements. F-205 417 RIFKIN CABLE INCOME PARTNERS, L.P. STATEMENT OF OPERATIONS
PERIOD JANUARY 1, 1999 TO SEPTEMBER 13, 1999 --------------------- REVENUE Service................................................... $3,533,718 Installation and other.................................... 273,757 ---------- Total revenue.......................................... 3,807,475 COSTS AND EXPENSES Operating expense......................................... 455,528 Programming expense....................................... 862,317 Selling, general and administrative expense............... 472,088 Depreciation.............................................. 836,050 Amortization.............................................. 792,708 Management fees........................................... 190,374 Loss on disposal of assets................................ 52,885 ---------- Total costs and expenses............................... 3,661,950 ---------- Operating income.......................................... 145,525 Interest expense.......................................... 536,877 ---------- Net loss............................................... $ (391,352) ==========
The accompanying notes are an integral part of these financial statements. F-206 418 RIFKIN CABLE INCOME PARTNERS, L.P. STATEMENT OF EQUITY
PERIOD JANUARY 1, 1999 TO SEPTEMBER 13, 1999 ------------------------------------- DIVISIONAL EQUITY TOTAL ----------------- ----------------- Equity contribution.................................... $21,836,449 $21,836,449 Net loss............................................. (391,352) (391,352) ----------- ----------- Equity, September 13, 1999............................. $21,445,097 $21,445,097 =========== ===========
The accompanying notes are an integral part of these financial statements. F-207 419 RIFKIN CABLE INCOME PARTNERS, L.P. STATEMENT OF CASH FLOWS
PERIOD JANUARY 1, 1999 TO SEPTEMBER 13, 1999 ------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $ (391,352) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................. 1,628,758 Loss on disposal of fixed assets.......................... 52,885 Increase in customer accounts receivable.................. (58,351) Increase in accounts receivable, related party............ (7,328) Increase in accounts receivable, interpartnership......... (13,638,312) Decrease in other receivables............................. 36,960 Decrease in prepaid expenses and deposits................. 49,755 Decrease in accrued liabilities........................... (235,521) Increase in customer deposits and prepayments............. 195,207 ------------ Net cash used in operating activities.................. (12,367,299) ------------ CASH FLOWS FROM INVESTING ACTIVITIES Initial cash acquisition cost, net of cash acquired....... (21,771,547) Additions to property, plant and equipment................ (289,533) Additions to franchise costs.............................. (20,108) Net proceeds from sale of assets.......................... 1,500 ------------ Net cash used in investing activities.................. (22,079,688) ------------ CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions..................................... 21,836,449 Proceeds from interpartnership debt....................... 13,119,981 Payments on interpartnership debt......................... (364,407) ------------ Net cash provided by financing activities.............. 34,592,023 ------------ Increase in cash.......................................... 145,036 Cash, beginning of period................................. -- ------------ Cash, end of period....................................... $ 145,036 ============ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid............................................. $ 536,877 ============
The accompanying notes are an integral part of these financial statements. F-208 420 RIFKIN CABLE INCOME PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Rifkin Cable Income Partners L.P. (the "Partnership") was originally formed in 1986 as a limited partnership under the laws of the State of Delaware. The Partnership owns, operates and develops cable television systems in Missouri and New Mexico. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP AND BASIS OF PRESENTATION Effective December 31, 1998, Interlink Communications Partners, LLLP ("ICP") acquired all of the Partnership's limited partner interest, and agreed to purchase all of the Partnership's interest for $21.7 million. This transaction was accounted for as a purchase; as such, assets and liabilities were written up to their fair value, resulting in an increase to property, plant and equipment and franchise costs of $6.4 million and $11.7 million, respectively. Effective April 1, 1999, ICP completed the purchase of the remaining general partner interest in the Partnership and the Partnership was merged into ICP and ceased to exist as a separate legal entity. The Partnership's financial statements subsequent to that date represent a divisional carve-out from ICP. These financial statements include all the direct costs of operating its business; however, certain assets, liabilities and costs not specifically related to the Partnership's activities were allocated and reflected in the financial position as of September 13, 1999, and the results of its operations and its cash flows for the period January 1, 1999 to September 13, 1999. Allocations from ICP include amounts for debt, interest expense and management expense. Both debt and interest expense were allocated pro rata based on the Partnership's percentage of subscribers to total ICP subscribers. Management expense was allocated in accordance with the management agreement (Note 2). In addition, receivables and payables to ICP are presented in the accompanying financial statements net as amounts due to/from interpartnership. Management believes these allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect what the financial position and results of operations of the Partnership would have been as a stand-alone entity. ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC On February 12, 1999, ICP signed a letter of intent to sell all of ICP's partnership interest to Charter Communications Holdings, LLC ("Charter"). On April 26, 1999, ICP signed a definitive Purchase and Sales Agreement with Charter for the sale of the individual partner's interest. The sales transaction closed on September 13, 1999. These financial statements represent the Partnership just prior to the transaction and do not reflect any related adjustments. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed includes amounts for material, labor, overhead and capitalized interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation were removed from the accounts and any gain or loss is recognized. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Transmission and distribution systems and related equipment................................................. 1-15 years Vehicles, office furniture and fixtures..................... 1-5 years Land, buildings and leasehold improvements.................. 1-30 years
F-209 421 RIFKIN CABLE INCOME PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from 1 to 18 years. The carrying value is assessed for recoverability by management based on an analysis of undiscounted expected future cash flows. The Partnership's management believes that there has been no impairment thereof as of September 13, 1999. INCOME TAXES No provision for federal or state income taxes is necessary in the financial statements of the Partnership, because as a partnership, it is not subject to federal or state income tax as the tax effect of its activities accrues to the partners. REVENUE RECOGNITION Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the period shown. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. MANAGEMENT AGREEMENT The Partnership has a management agreement with R & A Management, LLC ("RML"). The management agreement provides that RML shall act as manager of the Partnership's CATV systems, and shall be entitled to annual compensation of 5% of the Partnership's CATV revenues, net of certain CATV programming costs. The result of this transaction included the conveyance of the Rifkin management agreement ("Rifkin Agreement") to RML ("RML Agreement"). Expenses incurred pursuant to this agreement and the RML Agreement are disclosed in total on the Statement of Operations. 3. DEBT The Partnership has an interpartnership debt with ICP. Borrowings, including both principal and interest, at September 13, 1999 were $15,621,000 and had an effective interest rate of 8.68%. ICP has a term loan and revolving loan agreement with a bank. The amount of the term loan is $150,000,000, and requires varying quarterly payments plus interest commencing September 30, 2001 and continuing through March 31, 2007. On February 1, 1999, the term loan agreement was amended to increase the loan amount to $250,000,000. On July 16, 1999, the F-210 422 RIFKIN CABLE INCOME PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) term loan agreement was amended again to increase the loan amount to $290,000,000. The interest rate on the term loan is generally the bank's prime rate plus 0% to 1.50%. The weighted average effective rate at September 13, 1999 was 8.74%. The revolving loan agreement provided for borrowing up to $100,000,000 at the Company's discretion. At September 13, 1999, $91,000,000 had been drawn against the $100,000,000 commitment. The revolving credit agreement expires on March 31, 2007. The revolver bears an interest rate at the bank's prime rate plus 0% to 1.50% or LIBOR plus 1.25% to 2.75%. The specific rate is dependent upon the leverage ratio of ICP, which is recalculated quarterly. The weighted average effective interest rate at September 13, 1999 was 8.5%. The term loan and revolving loan agreement are collateralized by substantially all assets of ICP and its consolidated entities, including the Partnership. 4. LEASE COMMITMENTS The Partnership leases certain real and personal property under noncancelable operating leases. Future minimum lease payments under these arrangements at September 13, 1999, were as follows: 1999........................................................ $ 60,870 2000........................................................ 30,825 2001........................................................ 30,000 2002........................................................ 8,750 -------- $130,445 ========
Total rent expense for the period January 1, 1999 to September 13, 1999 was $60,870, including $38,239 relating to cancelable pole rental agreements. 5. RETIREMENT BENEFITS The Partnership has a 401(k) plan for its employees that have been employed by the Partnership for at least one year. Employees of the Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1999 contribution of $10,000 (as set by the Internal Revenue Service). The Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Partnership contributions and earnings vest 20% per year of employment with the Partnership, becoming fully vested after five years. The Partnership's matching contributions for the period January 1, 1999 to September 13, 1999 were $3,850. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Partnership to estimate the fair values of financial instruments as disclosed herein: Cash, customer accounts receivable, other receivables, accounts payable and accrued liabilities and customer deposits and prepayments: The carrying value amount approximates fair value because of the short period to maturity. The interest rate on debt is adjusted at least quarterly; therefore, the carrying value of debt approximates its fair value. F-211 423 RIFKIN CABLE INCOME PARTNERS, L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Partnership's financial position or results of operations. F-212 424 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Rifkin Cable Income Partners L.P. In our opinion, the accompanying balance sheet and the related statements of operations, of partners' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Rifkin Cable Income Partners L.P. (the "Partnership") at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado March 19, 1999 F-213 425 RIFKIN CABLE INCOME PARTNERS L. P. BALANCE SHEET
12/31/97 12/31/98 ----------- ----------- ASSETS Cash and cash equivalents.................................. $ 381,378 $ 65,699 Customer accounts receivable, net of allowance for doubtful accounts of $12,455 in 1997 and $18,278 in 1998.......... 49,585 51,523 Other receivables.......................................... 123,828 133,278 Prepaid expenses and deposits.............................. 81,114 70,675 Property, plant and equipment, at cost: Cable television transmission and distribution systems and related equipment................................. 8,536,060 8,758,525 Land, buildings, vehicles and furniture and fixtures..... 618,671 623,281 ----------- ----------- 9,154,731 9,381,806 Less accumulated depreciation............................ (3,847,679) (4,354,685) ----------- ----------- Net property, plant and equipment..................... 5,307,052 5,027,121 Franchise costs and other intangible assets, net of accumulated amortization of $1,819,324 in 1997 and $2,033,405 in 1998....................................... 2,005,342 1,772,345 ----------- ----------- Total assets..................................... $ 7,948,299 $ 7,120,641 =========== =========== LIABILITIES AND PARTNERS' EQUITY Accounts payable and accrued liabilities................... $ 365,392 $ 396,605 Customer deposits and prepayments.......................... 177,307 126,212 Interest payable........................................... 58,093 -- Long-term debt............................................. 4,914,000 -- Interpartnership debt...................................... -- 2,865,426 ----------- ----------- Total liabilities................................ 5,514,792 3,388,243 Commitments and contingencies (Notes 4 and 8) Partners' equity: General partner.......................................... 263,171 822,837 Limited partners......................................... 2,170,336 2,909,561 ----------- ----------- Total partner's equity........................... 2,433,507 3,732,398 ----------- ----------- Total liabilities and partners' equity........... $ 7,948,299 $ 7,120,641 =========== ===========
The accompanying notes are an integral part of the financial statements. F-214 426 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF OPERATIONS
YEARS ENDED ------------------------------------ 12/31/96 12/31/97 12/31/98 ---------- ---------- ---------- REVENUE: Service............................................ $4,104,841 $4,491,983 $4,790,052 Installation and other............................. 206,044 239,402 345,484 ---------- ---------- ---------- Total revenue............................ 4,310,885 4,731,385 5,135,536 COSTS AND EXPENSES: Operating expense.................................. 643,950 691,700 671,968 Programming expense................................ 787,124 879,939 1,077,540 Selling, general and administrative expense........ 683,571 663,903 622,774 Depreciation....................................... 535,559 602,863 628,515 Amortization....................................... 377,749 332,770 199,854 Management fees.................................... 215,544 236,569 256,777 Loss (gain) on disposal of assets.................. 1,530 2,980 (2,138) ---------- ---------- ---------- Total costs and expenses................. 3,245,027 3,410,724 3,455,290 ---------- ---------- ---------- Operating income................................... 1,065,858 1,320,661 1,680,246 Interest expense................................... 533,294 448,530 362,439 ---------- ---------- ---------- Net income before extraordinary item............... 532,564 872,131 1,317,807 Extraordinary item -- Loss on early retirement of debt (Note 1).................................... -- -- 18,916 ---------- ---------- ---------- Net income......................................... $ 532,564 $ 872,131 $1,298,891 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-215 427 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF PARTNERS' EQUITY (DEFICIT)
GENERAL LIMITED PARTNER PARTNERS TOTAL --------- ---------- ---------- Partners' equity (deficit), December 31, 1995... $(299,131) $1,427,630 $1,128,499 Net income...................................... 229,471 303,093 532,564 Equity distribution............................. (42,953) (56,734) (99,687) --------- ---------- ---------- Partners' equity (deficit), December 31, 1996... (112,613) 1,673,989 1,561,376 Net income...................................... 375,784 496,347 872,131 --------- ---------- ---------- Partners' equity, December 31, 1997............. 263,171 2,170,336 2,433,507 Net income...................................... 559,666 739,225 1,298,891 --------- ---------- ---------- Partners' equity December 31, 1998.............. $ 822,837 $2,909,561 $3,732,398 ========= ========== ==========
The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. The accompanying notes are an integral part of the financial statements. F-216 428 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF CASH FLOWS
YEARS ENDED ------------------------------------- 12/31/96 12/31/97 12/31/98 ---------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $ 532,564 $ 872,131 $ 1,298,891 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............... 913,308 935,633 828,369 Amortization of deferred loan cost.......... 18,970 18,970 14,228 Loss on early retirement of debt............ -- -- 18,916 Loss (gain) on disposal of fixed assets..... 1,530 2,980 (2,138) Decrease (increase) in customer accounts receivables............................... 521 (5,729) (1,938) Increase in other receivables............... (45,274) (56,059) (9,450) Decrease in prepaid expense and other....... 40,737 13,230 10,439 Increase (decrease) in accounts payable and accrued liabilities....................... (207,035) 61,625 31,213 Increase (decrease) in customer deposits and prepayment................................ 673 (63,524) (51,095) Increase (decrease) in interest payable..... 35,638 (3,145) (58,093) ---------- ---------- ----------- Net cash provided by operating activities............................. 1,291,632 1,776,112 2,079,342 ---------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment..... (824,359) (679,394) (415,534) Additions to other intangible assets, net of refranchises................................ -- (112) -- Net proceeds from the sale of assets........... 18,255 57,113 69,087 Sales tax related to Florida assets sold in 1994........................................ (14,694) -- -- ---------- ---------- ----------- Net cash used in investing activities..... (820,798) (622,393) (346,447) ---------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from interpartnership debt............ -- -- 4,265,426 Payments of long-term debt..................... (715,000) (871,000) (4,914,000) Payments of interpartnership debt.............. -- -- (1,400,000) Partners' capital distributions................ (99,687) -- -- ---------- ---------- ----------- Net cash used in financing activities..... (814,687) (871,000) (2,048,574) ---------- ---------- ----------- Net increase (decrease) in cash and cash equivalents.................................... (343,853) 282,719 (315,679) Cash and cash equivalents at beginning of period......................................... 442,512 98,659 381,378 ---------- ---------- ----------- Cash and cash equivalents at end of period....... $ 98,659 $ 381,378 $ 65,699 ========== ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid.................................. $ 455,124 $ 431,722 $ 406,304 ========== ========== ===========
The accompanying notes are an integral part of the financial statements. F-217 429 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Rifkin Cable Income Partners L.P. (the "Partnership") was formed in 1986 as a limited partnership under the laws of the State of Delaware. The Partnership owns, operates and develops cable television systems in Missouri and New Mexico. Rifkin Cable Management Partners L.P., an affiliate of Rifkin & Associates, Inc. (Note 3), is the general partner of the Partnership. The Partnership Agreement (the "Agreement") establishes the respective rights, obligations and interests of the partners. The Agreement provides that net income or loss, certain capital events, and cash distributions (all as defined in the Agreement) are generally allocated 43% to the general partner and 57% to the limited partners. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP During 1998, Interlink Communications Partners, LLLP ("ICP") agreed to purchase all of the interests of the Partnership. ICP acquired the limited partner interests, effective December 31, 1998, and is currently in the process of obtaining the necessary consents to transfer all of the Partnership's franchises to ICP. Once obtained, ICP will then purchase the general partner interest in the Partnership, and the Partnership will, by operation of law, be consolidated into ICP. REVENUE RECOGNITION Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the periods shown. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed includes amounts for material, labor, overhead and capitalized interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings................................................. 21-30 years Cable television transmission and distribution systems and related equipment....................................... 3-15 years Vehicles and furniture and fixtures....................... 3-5 years
FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from eight to twenty-five years. The F-218 430 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) carrying value of intangibles is assessed for recoverability by management based on an analysis of undiscounted expected future cash flows. The Partnership's management believes that there has been no impairment thereof as of December 31, 1998. OTHER INTANGIBLE ASSETS Loan costs of the Partnership have been deferred and have been amortized to interest expense utilizing the straight-line method over the term of the related debt. Use of the straight-line method approximates the results of the application of the interest method. The net amount remaining at December 31, 1997 was $37,886. On December 30, 1998, the loan with a financial institution was paid in full (Note 2). The related deferred loan costs and associated accumulated amortization were written off and an extraordinary loss of $18,916 was recorded. CASH AND CASH EQUIVALENTS All highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. INCOME TAXES No provision for Federal or State income taxes is necessary in the financial statements of the Partnership, because as a partnership, it is not subject to Federal or State income tax as the tax effect of its activities accrues to the partners. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities," which requires the Partnership to expense all start up costs related to opening a new facility, introduction of anew product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnership's 1999 fiscal year. Management believes that SOP 98-5 will have no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION Certain reclassifications have been made to the 1996 and 1997 financial statements to conform with the 1998 financial statement presentation. 2. DEBT The Partnership had a term loan with a financial institution which required varying quarterly payments. At December 31, 1997, the term loan had a balance of $4,914,000. At December 30, 1998, the term loan had a balance of $4,216,875; at that date, the total balance and accrued interest were paid in full. On that same date, the Partnership obtained a new interpartnership loan with ICP (Note 1). Borrowing under the interpartnership loan, as well as interest and principle payments are due at F-219 431 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the discretion of the management of ICP, resulting in no minimum required annual principle payments. The balance of the interpartnership loan at December 31, 1998 was $2,865,426. The effective interest rate at December 31, 1998 was 8.5%. 3. MANAGEMENT AGREEMENT The Partnership has entered into a management agreement with Rifkin and Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall act as manager of the Partnership's CATV systems, and shall be entitled to annual compensation of 5% of the Partnership's CATV revenues, net of certain CATV programming costs. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction included the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed in total on the Statement of Operations. 4. COMMITMENTS AND RENTAL EXPENSE The Partnership leases certain real and personal property under noncancelable operating leases expiring through the year 2001. Future minimum lease payments under such noncancelable leases as of December 31, 1998 are: $30,000 for each year 1999, 2000 and 2001, totaling $90,000. Total rental expense for the years ended December 31, 1996, 1997 and 1998 was $60,323, $68,593 and $68,776, respectively, including $27,442, $36,822 and $36,716, respectively, relating to cancelable pole rental agreements. 5. RETIREMENT BENEFITS The Partnership has a 401(k) plan for its employees that have been employed by the Partnership for at least one year. Employees of the Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Partnership contributions and earnings vest 20% per year of employment with the Partnership, becoming fully vested after five years. The Partnership's matching contributions for the years ended December 31, 1996, 1997 and 1998 were $2,693, $3,653 and $2,680, respectively. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Partnership to estimate the fair values of financial instruments as disclosed herein: Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables, Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments: The carrying value amount approximates fair value because of the short period to maturity. Debt: The carrying value amount approximates the fair value because the Partnership's interpartnership debt was obtained on December 30, 1998. F-220 432 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. CABLE REREGULATION Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the Cable Act) and has amended it at various times since. The total effects of the present law are, at this time, still unknown. However, one provision of the present law further redefines a small cable system, and exempts these systems from rate regulation on the upper tiers of cable service. The Partnership is awaiting an FCC rulemaking implementing the present law to determine whether its systems qualify as small cable systems. 8. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Partnership's financial position or results of operations. F-221 433 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Rifkin Acquisition Partners, L.L.L.P. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, partners' capital and cash flows present fairly, in all material respects, the financial position of Rifkin Acquisition Partners, L.L.L.P. and its subsidiaries (the "Company") at September 13, 1999, and the results of their operations and their cash flows for the period from January 1, 1999 through September 13, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, the Partnership has changed its method of accounting for start up costs in fiscal 1999. On September 13, 1999, all of the Partnership's interest were sold to Charter Communications, LLC. These financial statements represent the Partnership just prior to that transaction and do not reflect any adjustments related thereto. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado February 15, 2000 F-222 434 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED BALANCE SHEET
SEPTEMBER 13, 1999 ------------------ ASSETS Cash........................................................ $ 4,475,108 Customer accounts receivable, net of allowance for doubtful accounts of $292,183...................................... 1,258,522 Other receivables........................................... 3,384,472 Prepaid expenses and other.................................. 1,616,219 Property, plant and equipment, at cost: Cable television transmission and distribution system and related equipment...................................... 171,842,780 Land, buildings, vehicles and furniture and fixtures...... 8,946,860 ------------ 180,789,640 Less accumulated depreciation............................... (45,505,661) ------------ Net property, plant and equipment...................... 135,283,979 Franchise costs and other intangible assets, net of accumulated amortization of $80,047,118................... 164,685,102 ------------ Total assets......................................... $310,703,402 ============ LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable and accrued liabilities.................. $ 21,110,015 Customer deposits and prepayments......................... 1,514,732 Payables to affiliates.................................... 303,047 Interest payable.......................................... 3,234,019 Deferred tax liability, net............................... 5,967,000 Notes payable............................................. 236,075,000 ------------ Total liabilities.................................... 268,203,813 Commitments and contingencies (Notes 5 and 9) Redeemable partners' interests.............................. 16,128,800 Partners' capital (deficit): General partner........................................... (2,951,394) Limited partners.......................................... 29,029,520 Preferred equity interest................................. 292,663 ------------ Total partners' capital.............................. 26,370,789 ------------ Total liabilities and partners' capital........... $310,703,402 ============
The accompanying notes are an integral part of these consolidated financial statements. F-223 435 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1999 THROUGH SEPTEMBER 13, 1999 ------------- REVENUE Service..................................................... $ 62,252,012 Installation and other...................................... 6,577,154 ------------ Total revenue............................................. 68,829,166 COSTS AND EXPENSES Operating expense........................................... 10,060,135 Programming expense......................................... 15,312,179 Selling, general and administrative expense................. 17,566,230 Depreciation................................................ 11,760,429 Amortization................................................ 17,681,246 Management fees............................................. 2,406,596 Loss on disposal of assets.................................. 996,459 ------------ Total costs and expenses.................................. 75,783,274 ------------ Operating loss.............................................. (6,954,108) Interest expense............................................ 16,591,877 ------------ Loss before income taxes.................................... (23,545,985) Income tax benefit.......................................... (1,975,000) ------------ Loss before cumulative effect of accounting change.......... (21,570,985) Cumulative effect of accounting change for organizational costs..................................................... (111,607) ------------ Net loss.................................................. $(21,682,592) ============
The accompanying notes are an integral part of these consolidated financial statements. F-224 436 RIFKIN ACQUISITION PARTNERS, L.L.L.P CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
PREFERRED EQUITY GENERAL LIMITED INTEREST PARTNERS PARTNERS TOTAL --------- ----------- ------------ ------------ Partners' capital (deficit), December 31, 1998............................ $ 422,758 $(1,991,018) $ 55,570,041 $ 54,001,781 Accretion of redeemable partners' interest......................... -- (743,550) (5,204,850) (5,948,400) Net loss............................ (130,095) (216,826) (21,335,671) (21,682,592) --------- ----------- ------------ ------------ Partners' capital (deficit), September 13, 1999............................ $ 292,663 $(2,951,394) $ 29,029,520 $ 26,370,789 ========= =========== ============ ============
The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. The accompanying notes are an integral part of these consolidated financial statements. F-225 437 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1999 THROUGH SEPTEMBER 13, 1999 ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $(21,682,592) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................. 29,441,675 Amortization of deferred loan costs....................... 684,095 Loss on disposal of fixed assets.......................... 996,459 Deferred tax benefit...................................... (1,975,000) Changes in accounting for organizational costs............ 111,607 Decrease in customer accounts receivables................. 673,618 Decrease in other receivables............................. 2,253,299 Decrease in prepaid expenses and other.................... 782,309 Increase in accounts payable and accrued liabilities...... 9,425,421 Decrease in customer deposits and prepayments............. (162,168) Decrease in interest payable.............................. (4,008,935) Increase in payable to affiliates......................... 303,047 ------------ Net cash provided by operating activities.............. 16,842,835 ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment.................. (26,692,423) Proceeds from purchase price adjustment for Tennessee trade..................................................... 276,147 Net proceeds from the sale of other assets.................. 223,657 ------------ Net cash used in investing activities.................. (26,192,619) ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term bank debt........................... 11,500,000 ------------ Net cash provided by financing activities.............. 11,500,000 ------------ Net increase in cash........................................ 2,150,216 Cash, beginning of period................................... 2,324,892 ------------ Cash, end of period......................................... $ 4,475,108 ============ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid............................................... $ 13,357,858 ============
The accompanying notes are an integral part of these consolidated financial statements. F-226 438 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL INFORMATION Rifkin Acquisition Partners, L.L.L.P. ("the Partnership") was formed pursuant to the laws of the State of Colorado. The Partnership and its subsidiaries are hereinafter referred to on a consolidated basis as the "Company." The Company owns, operates, and develops cable television systems in Georgia, Tennessee and Illinois. Rifkin Acquisition Management, L.P., an affiliate of R & A Management LLC (Note 4), is the general partner of the Partnership ("General Partner"). The Partnership operates under a limited liability limited partnership agreement (the "Partnership Agreement") which establishes contribution requirements, enumerates the rights and responsibilities of the partners and advisory committee, provides for allocations of income, losses and distributions and defines certain items relating thereto. The Partnership Agreement provides that net income or loss, certain defined capital events and cash distributions, all as defined in the Partnership Agreement, are generally allocated 99% to the limited partners and 1% to the General Partner. ACQUISITION BY CHARTER COMMUNICATIONS, LLC On February 12, 1999, the Company signed a letter of intent for the partners to sell all of their partnership interests to Charter Communications, LLC ("Charter"). On April 26, 1999, the Company signed a definitive Purchase and Sale Agreement with Charter for the sale of the individual partners' interest. The sales transaction closed on September 13, 1999. These statements represent the Company just prior to the transaction and do not reflect any adjustment related thereto. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the following entities: Rifkin Acquisition Partners, L.L.L.P. Cable Equities of Colorado ("CEC") Cable Equities of Colorado, Ltd. Cable Equities, Inc. ("CEI") Management Corp. ("CEM") Rifkin Acquisition Capital Corp. ("RACC")
All significant intercompany accounts and transactions have been eliminated. REVENUE AND PROGRAMMING Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the period shown. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed, includes amounts for material, labor, overhead and interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Capitalized interest was not significant for the period shown. F-227 439 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings................................................... 27-30years Cable television transmission and distribution systems and related equipment......................................... 3-15years Vehicles and furniture and fixtures......................... 3-5years
Expenditures for maintenance and repairs are expensed as incurred. FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from one to twenty years. The carrying value of franchise costs is assessed for recoverability by management based on an analysis of undiscounted future expected cash flows from the underlying operations of the Company. Management believes that there has been no impairment thereof as of September 13, 1999. OTHER INTANGIBLE ASSETS Certain loan costs have been deferred and are amortized to interest expense utilizing the straight-line method over the remaining term of the related debt. Use of the straight-line method approximates the results of the application of the interest method. The net amounts remaining at September 13, 1999 were $5,481,111. REDEEMABLE PARTNERS' INTERESTS The Partnership Agreement provides that if a certain partner dies or becomes disabled, that partner (or his personal representative) shall have the option, exercisable by notice given to the partners at any time within 270 days after his death or disability (except that if that partner dies or becomes disabled prior to August 31, 2000, the option may not be exercised until August 31, 2000 and then by notice by that partner or his personal representative given to the partners within 270 days after August 31, 2000) to sell, and require the General Partner and certain trusts controlled by that partner to sell, and the Partnership to purchase, up to 50% of the partnership interests owned by any of such partners and certain current and former members of management of R&A Management LLC that requests to sell their interest, for a purchase price equal to the fair market value of those interests determined by appraisal in accordance with the Partnership Agreement. Accordingly, the current fair value of such partnership interests have been reclassified outside of partners' capital. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT Effective January 1, 1999, the Company adopted, the Accounting Standards Executive Committee's Statement of Position 98-5 ("SOP 98-5") Reporting on the Costs of Start-Up F-228 440 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Activities, which requires the Company to expense all start up costs related to organizing a new business. During the first quarter of 1999, the Company wrote off the net book value of organization costs capitalized in prior years resulting in the recognition of a cumulative effect of accounting change of $111,607. 2. INCOME TAXES Although the Partnership is not a taxable entity, two corporations (the "Subsidiaries") are included in the consolidated financial statements. These subsidiaries are required to pay taxes on their taxable income, if any. The following represents a reconciliation of pre-tax losses as reported in accordance with accounting principles generally accepted in the United States and the losses attributable to the partners and included in their individual income tax returns for the period from January 1, 1999 through September 13, 1999: Pre-tax loss as reported, including cumulative effect of change in accounting principle............................ $ (23,657,592) (Increase) decrease due to: Separately taxed book results of corporate subsidiaries... 5,274,000 Effect of different depreciation and amortization methods for tax and book purposes.............................. 672,000 Other....................................................... (68,408) ------------- Tax loss attributed to the partners......................... $ (17,780,000) =============
The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. As a result of a change in control in 1995, the book value of the Company's net assets was increased to reflect their fair market value. In connection with this revaluation, a deferred income tax liability in the amount of $22,801,000 was established to provide for future taxes payable on the revised valuation of the net assets. A deferred tax benefit of $1,975,000 was recognized for the period from January 1, 1999 through September 13, 1999, reducing the liability to $5,967,000. Deferred tax asset (liability) was comprised of the following at September 13, 1999: Deferred tax assets resulting from loss carryforwards....... $ 13,006,000 Deferred tax liabilities resulting from depreciation and amortization.............................................. (18,973,000) ------------- Net deferred tax liability.................................. $ (5,967,000) =============
As of September 13, 1999, the Subsidiaries have net operating loss carryforwards ("NOLs") for income tax purposes of $34,589,000 substantially all of which are limited. The NOLs will expire at various times between the years 2000 and 2018. It is the opinion of management that the NOLs will be released from this limitation prior to their expiration dates and, as such, have not been limited in their calculation of deferred taxes. As the result of the sale of the Partnership's interest to Charter, a change in control, as defined in Section 382 of the Internal Revenue Code, has occurred which may limit Charter's ability to utilize these NOLs. F-229 441 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The benefit for taxes differs from the amount which would be computed by applying the statutory federal income tax rate of 35% to the Company's pre-tax loss before cumulative effect of change in accounting principle as a result of the following for the period January 1, 1999 through September 13, 1999: Tax benefit computed at statutory rate...................... $(8,241,095) Increase (decrease) due to: Tax benefit for non-corporate loss........................ 6,395,195 Permanent differences between financial statement income and taxable income..................................... (36,200) State income tax............................................ (139,800) Other....................................................... 46,900 ----------- Income tax benefit.......................................... $(1,975,000) ===========
3. NOTES PAYABLE Debt consisted of the following at September 13, 1999: Senior Subordinated Notes................................... $125,000,000 Tranche A Term Loan......................................... 21,575,000 Tranche B Term Loan......................................... 40,000,000 Reducing Revolving Loan..................................... 46,500,000 Senior Subordinated Debt.................................... 3,000,000 ------------ $236,075,000 ============
The notes and loans are collateralized by substantially all of the assets of the Company. On January 26, 1996, the Company and its wholly owned subsidiary, RACC (the "Issuers"), co-issued $125,000,000 of 11 1/8% Senior Subordinated Notes (the "Notes") to institutional investors. These notes were subsequently exchanged on June 18, 1996 for publicly registered notes with identical terms. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year. The Notes, which mature on January 15, 2006, can be redeemed in whole or in part, at the Issuers' option, at any time on or after January 15, 2001, at redeemable prices contained in the Notes plus accrued interest. At September 13, 1999, all of the Notes were outstanding (see also Note 8). The Company has a $25,000,000 Tranche A term loan with a financial institution. This loan requires quarterly payments of $1,875,000 plus interest commencing on March 31, 2000. Any unpaid balance is due March 31, 2003. The agreement requires what it defines as excess proceeds from the sale of a cable system to be used to retire Tranche A term debt. As a result of the Company selling its assets in the State of Michigan in a prior year, there was $3,425,000 in excess proceeds which were used to pay principal. The interest rate on the Tranche A term loan is either the bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%. The specific rate is dependent upon the senior funded debt ratio which is recalculated quarterly. The weighted average effective interest rate at September 13, 1999 was 7.23%. In addition, the Company has a $40,000,000 Tranche B term loan, which requires principal payments of $2,000,000 on March 31, 2002, $18,000,000 on March 31, 2003, and $20,000,000 on March 31, 2004. The Tranche B term loan bears an interest rate of 9.75% and is payable quarterly. F-230 442 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company also has a reducing revolving loan providing for borrowing up to $20,000,000 at the Company's discretion, subject to certain restrictions, and an additional $60,000,000 available to finance acquisitions subject to certain restrictions. The additional financing amount available at September 13, 1999 was $40,000,000. At September 13, 1999, the full $20,000,000 available had been borrowed, and $26,500,000 had been drawn against the $40,000,000 commitment. The amount available for borrowing will decrease annually during its term with changes over the three years following September 13, 1999 as follows: 1999 -- $2,500,000 reduction per quarter and 2000 through 2002 -- $3,625,000 reduction per quarter. Any unpaid balance is due on March 31, 2003. The revolving loan bears an interest rate of either the bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%. The specific rate is dependent upon the senior funded debt ratio which is recalculated quarterly. The weighted average effective interest rates at September 13, 1999 was 8.92%. The reducing revolving loan includes a commitment fee of 1/2% per annum on the unborrowed balance. Certain mandatory prepayments may also be required on the Tranche A term loan, the Tranche B term loan, and the reducing revolving credit based on the Company's cash flow calculations, proceeds from the sale of a cable system or equity contributions. Optional prepayments are allowed, subject to certain restrictions. The related loan agreement contains covenants limiting additional indebtedness, dispositions of assets, investments in securities, distribution to partners, management fees and capital expenditures. In addition, the Company must maintain certain financial levels and ratios. At September 13, 1999, the Company was in compliance with these covenants. The Company also has $3,000,000 of senior subordinated debt payable to a Rifkin Partner. The debt has a scheduled maturity, interest rate and interest payment schedule identical to that of the Notes, as discussed above. Based on the outstanding debt as of September 13, 1999, the minimum aggregate maturities for the four years following 1999 are: $13,500,000 in 2000, $22,000,000 in 2001, $23,075,000 in 2002, $29,500,000 in 2003 and $20,000,000 in 2004. Subsequent to September 13, 1999, $124.1 million of the $125 million in notes outstanding were purchased by Charter Communication and will be reflected as intercompany payable between Charter and RAP. The remaining $900,000 of outstanding notes were delisted and are no longer public. 4. RELATED PARTY TRANSACTIONS The Company has a management agreement with R & A Management LLC ("RML"). The management agreement provides that RML shall manage the Company's CATV systems and shall be entitled to annual compensation of 3.5% of the Company's revenue. Expenses incurred pursuant to this agreement are disclosed in total in the Consolidated Statement of Operations. Certain Partnership expenses were paid by Charter and are reflected as Payables to affiliates in the accompanying financial statements. F-231 443 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. COMMITMENTS AND RENTAL EXPENSE The Company leases certain real and personal property under noncancelable operating leases expiring through the year 2007. Future minimum lease payments under such noncancelable leases as of September 13, 1999 are: 2000........................................................ $ 339,320 2001........................................................ 269,326 2002........................................................ 252,042 2003........................................................ 192,027 2004 and thereafter......................................... 393,479 ---------- $1,446,194 ==========
Total rental expense and the amount included therein which pertains to cancelable pole rental agreements were as follows for the period indicated:
TOTAL RENTAL CANCELABLE PERIOD EXPENSE POLE RENTAL ------ ------------ ----------- For the period January 1, 1999 through September 13, 1999... $1,105,840 $767,270
6. COMPENSATION PLANS AND RETIREMENT PLANS EQUITY INCENTIVE PLAN The Company maintains an Equity Incentive Plan (the "Plan") in which certain Rifkin executive officers and key employees, and certain key employees of the Company are eligible to participate. Plan participants in the aggregate, have the right to receive (i) cash payments of up to 2.0% of the aggregate value of all partnership interests of the Company (the "Maximum Incentive Percentage"), based upon the achievement of certain annual Operating Cash Flow (as defined in the Plan) targets for the Company for each of the calendar years 1996 through 2000, and (ii) an additional cash payment equal to up to 0.5% of the aggregate value of all partnership interests of the Company (the "Additional Incentive Percentage"), based upon the achievement of certain cumulative Operating Cash Flow targets for the Company for the five-year period ended December 31, 2000. Subject to the achievement of such annual targets and the satisfaction of certain other criteria based on the Company's operating performance, up to 20% of the Maximum Incentive Percentage will vest in each such year; provided, that in certain events vesting may accelerate. Payments under the Plan are subject to certain restrictive covenants contained in the Notes. No amounts are payable under the Plan except upon (i) the sale of substantially all of the assets or partnership interests of the Company or (ii) termination of a Plan participant's employment with Rifkin or the Company, as applicable, due to (a) the decision of the Advisory Committee to terminate such participant's employment due to disability, (b) the retirement of such participant with the Advisory Committee's approval or (c) the death of such Participant. The value of amounts payable pursuant to clause (i) above will be based upon the aggregate net proceeds received by the holders of all of the partnership interests in the Company, as determined by the Advisory Committee, and the amounts payable pursuant to clause (ii) above will be based upon the Enterprise Value determined at the time of such payment. For purposes of the Plan, Enterprise Value generally is defined as Operating Cash Flow for the immediately preceding calendar year times a specified multiple and adjusted based on the Company's working capital. F-232 444 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount expensed for the period January 1, 1999 through September 13, 1999 relating to this plan was $7,440,964. The incentive accrual is recorded in accounts payable and accrued liabilities in the accompanying financial statements. RETIREMENT BENEFITS The Company has a 401(k) plan for employees that have been employed by the Company for at least one year. Employees of the Company can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1999 contribution of $10,000 (as set by the Internal Revenue Service). The Company matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Company contributions and earnings vest 20% per year of employment with the Company, becoming fully vested after five years. The Company's matching contribution for the period from January 1, 1999 through September 13, 1999 was $61,178. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Company to estimate the fair values of financial instruments as disclosed herein: Cash, customer accounts receivable, other receivables, accounts payable and accrued liabilities and customer deposits and prepayments: The carrying value amount approximates fair value because of the short period to maturity. Debt: The fair value of bank debt is estimated based on interest rates for the same or similar debt offered to the Company having the same or similar remaining maturities and collateral requirements. The fair value of public Senior Subordinated Notes is based on the market quoted trading value. The fair value of the Company's debt is estimated at $247,637,500 and is carried on the balance sheet at $236,075,000. 8. SUMMARIZED FINANCIAL INFORMATION CEM, CEI and CEC (collectively, the "Guarantors") are all wholly owned subsidiaries of the Company and, together with RACC, constitute all of the Partnership's direct and indirect subsidiaries. Each of the Guarantors provides a full, unconditional, joint and several guaranty of the obligations under the Notes discussed in Note 6. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors. The following present summarized financial information of the Guarantors on a combined basis as of September 13, 1999 and for the period January 1, 1999 through September 13, 1999. F-233 445 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) BALANCE SHEET
SEPTEMBER 13, 1999 ------------- Cash........................................................ $ 569,544 Accounts and other receivables, net......................... 2,907,837 Prepaid expenses............................................ 620,284 Property, plant and equipment, net.......................... 52,383,861 Franchise costs and other intangible assets, net............ 51,397,528 Accounts payable and accrued liabilities.................... 30,186,658 Other liabilities........................................... 669,223 Deferred taxes payable...................................... 5,967,000 Notes payable............................................... 140,846,262 Equity (deficit)............................................ (69,790,089)
F-234 446 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1999 THROUGH SEPTEMBER 13, 1999 ------------- Total revenue............................................... $24,183,281 Total costs and expenses.................................... 23,313,494 Interest expense............................................ 9,920,062 Income tax benefit.......................................... (1,975,000) ----------- Net loss.................................................... $(7,075,275) ===========
9. LITIGATION The Company could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Company will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Company's financial position or results of operations. F-235 447 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Rifkin Acquisition Partners, L.L.L.P. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, partners' capital (deficit) and cash flows present fairly, in all material respects, the financial position of Rifkin Acquisition Partners, L.L.L.P. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado March 19, 1999 F-236 448 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED BALANCE SHEET
12/31/98 12/31/97 ------------ ------------ ASSETS Cash and cash equivalents................................ $ 2,324,892 $ 1,902,555 Customer accounts receivable, net of allowance for doubtful accounts of $444,839 in 1998 and $425,843 in 1997................................................... 1,932,140 1,371,050 Other receivables........................................ 5,637,771 4,615,089 Prepaid expenses and other............................... 2,398,528 1,753,257 Property, plant and equipment at cost: Cable television transmission and distribution systems and related equipment............................... 149,376,914 131,806,310 Land, buildings, vehicles and furniture and fixtures... 7,421,960 7,123,429 ------------ ------------ 156,798,874 138,929,739 Less accumulated depreciation.......................... (35,226,773) (26,591,458) ------------ ------------ Net property, plant and equipment.............. 121,572,101 112,338,281 Franchise costs and other intangible assets, net of accumulated amortization of $67,857,545 in 1998 and $53,449,637 in 1997.................................... 183,438,197 180,059,655 ------------ ------------ Total assets................................... $317,303,629 $302,039,887 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued liabilities................. $ 11,684,594 $ 11,690,894 Customer deposits and prepayments........................ 1,676,900 1,503,449 Interest payable......................................... 7,242,954 7,384,509 Deferred tax liability, net.............................. 7,942,000 12,138,000 Notes payable............................................ 224,575,000 229,500,000 ------------ ------------ Total liabilities.............................. 253,121,448 262,216,852 Commitments and contingencies (Notes 8 and 14) Redeemable partners' interests........................... 10,180,400 7,387,360 Partners' capital (deficit): General partner........................................ (1,991,018) (1,885,480) Limited partners....................................... 55,570,041 34,044,912 Preferred equity interest.............................. 422,758 276,243 ------------ ------------ Total partners' capital.................................. 54,001,781 32,435,675 ------------ ------------ Total liabilities and partners' capital........ $317,303,629 $302,039,887 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-237 449 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED ------------------------------------------ 12/31/98 12/31/97 12/31/96 ------------ ------------ ------------ REVENUE: Service..................................... $ 82,498,638 $ 78,588,503 $ 66,433,321 Installation and other...................... 7,422,675 5,736,412 4,852,124 ------------ ------------ ------------ Total revenue..................... 89,921,313 84,324,915 71,285,445 COSTS AND EXPENSES: Operating expense........................... 13,305,376 14,147,031 10,362,671 Programming expense......................... 18,020,812 15,678,977 14,109,527 Selling, general and administrative expense................................... 13,757,090 12,695,176 11,352,870 Depreciation................................ 15,109,327 14,422,631 11,725,246 Amortization................................ 22,104,249 24,208,169 23,572,457 Management fees............................. 3,147,246 2,951,372 2,475,381 Loss on disposal of assets.................. 3,436,739 7,834,968 1,357,180 ------------ ------------ ------------ Total costs and expenses.......... 88,880,839 91,938,324 74,955,332 ------------ ------------ ------------ Operating income (loss)..................... 1,040,474 (7,613,409) (3,669,887) Gain from the sale of assets (Note 4)....... (42,863,060) -- -- Interest expense............................ 23,662,248 23,765,239 21,607,174 ------------ ------------ ------------ Income (loss) before income taxes........... 20,241,286 (31,378,648) (25,277,061) Income tax benefit.......................... (4,177,925) (5,335,000) (3,645,719) ------------ ------------ ------------ Net income (loss)........................... $ 24,419,211 $(26,043,648) $(21,631,342) ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-238 450 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED ------------------------------------------ 12/31/98 12/31/97 12/31/96 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................... $ 24,419,211 $(26,043,648) $(21,631,342) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................... 37,213,576 38,630,800 35,297,703 Amortization of deferred loan costs.............. 989,760 989,760 970,753 Gain on sale of assets (Note 4).................. (42,863,060) -- -- Loss on disposal of fixed assets................. 3,436,739 7,834,968 1,357,180 Deferred tax benefit............................. (4,196,000) (5,335,000) (3,654,000) Increase in customer accounts receivables........ (300,823) (186,976) (117,278) Increase in other receivables.................... (474,599) (1,992,714) (994,681) (Increase) decrease in prepaid expenses and other.......................................... (684,643) 23,015 (494,252) Increase in accounts payable and accrued liabilities.................................... 34,073 1,753,656 3,245,736 Increase (decrease) in customer deposits and prepayments.................................... (86,648) 231,170 164,824 Increase (decrease) in interest payable.......... (141,555) 600,248 6,692,988 ------------ ------------ ------------ Net cash provided by operating activities... 17,346,031 16,505,279 20,837,631 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of cable systems, net (Note 3).......... (2,212,958) (19,359,755) (71,797,038) Additions to property, plant and equipment.......... (26,354,756) (28,009,253) (16,896,582) Additions to cable television franchises, net of retirements...................................... (151,695) 72,162 (1,182,311) Net proceeds from the sale of cable systems (Note 4)............................................... 16,533,564 -- -- Net proceeds from the other sales of assets......... 247,216 306,890 197,523 ------------ ------------ ------------ Net cash used in investing activities....... (11,938,629) (46,989,956) (89,678,408) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from isssuance of senior subordinated notes............................................ -- -- 125,000,000 Proceeds from long-term bank debt................... 22,500,000 38,000,000 18,000,000 Deferred loan costs................................. -- -- (6,090,011) Payments of long-term bank debt..................... (27,425,000) (7,000,000) (82,000,000) Partners' capital contributions..................... -- -- 15,000,000 Equity distributions to partners.................... (60,065) -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities................................ (4,985,065) 31,000,000 69,909,989 ------------ ------------ ------------ Net increase in cash.................................. 422,337 515,323 1,069,212 Cash and cash equivalents at beginning of period...... 1,902,555 1,387,232 318,020 ------------ ------------ ------------ Cash and cash equivalents at end of period............ $ 2,324,892 $ 1,902,555 $ 1,387,232 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid....................................... $ 22,737,443 $ 22,098,732 $ 13,866,995 ============ ============ ============ Noncash investing activities: Proceeds from the sale of Michigan assets held in escrow......................................... $ 500,000 $ -- $ -- ============ ============ ============ Trade value related to the trade sale of Tennessee assets............................... $ 46,668,000 $ -- $ -- ============ ============ ============ Trade value related to trade acquisition of Tennessee assets............................... $(46,668,000) $ -- $ -- ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-239 451 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
PREFERRED GENERAL LIMITED EQUITY INTEREST PARTNER PARTNERS TOTAL --------------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1995............. $ 562,293 $(1,085,311) $ 69,421,043 $ 68,898,025 Partners' capital contributions................. -- 150,000 14,850,000 15,000,000 Accretion of redeemable partners' interest............ -- (157,730) (1,104,110) (1,261,840) Net loss........................ (129,788) (216,313) (21,285,241) (21,631,342) --------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1996............. 432,505 (1,309,354) 61,881,692 61,004,843 Accretion of redeemable partners' interest............ -- (315,690) (2,209,830) (2,525,520) Net loss........................ (156,262) (260,436) (25,626,950) (26,043,648) --------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1997............. 276,243 (1,885,480) 34,044,912 32,435,675 Accretion of redeemable partners' interest............ -- (349,130) (2,443,910) (2,793,040) Net income...................... 146,515 244,192 24,028,504 24,419,211 Partners' equity distribution... -- (600) (59,465) (60,065) --------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1998............. $ 422,758 $(1,991,018) $ 55,570,041 $ 54,001,781 ========= =========== ============ ============
The Partners' capital accounts for financial reporting purposes vary from the tax capital accounts. The accompanying notes are an integral part of the consolidated financial statements. F-240 452 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL INFORMATION Rifkin Acquisition Partners, L.L.L.P. ("the Partnership") was formed pursuant to the laws of the State of Colorado. The Partnership and its subsidiaries are hereinafter referred to on a consolidated basis as the "Company." The Company owns, operates, and develops cable television systems in Georgia, Tennessee, and Illinois. Rifkin Acquisition Management, L.P., an affiliate of Rifkin & Associates, Inc. (Note 7), is the general partner of the Partnership ("General Partner"). The Partnership operates under a limited liability limited partnership agreement (the "Partnership Agreement") which establishes contribution requirements, enumerates the rights and responsibilities of the partners and advisory committee, provides for allocations of income, losses and distributions, and defines certain items relating thereto. The Partnership Agreement provides that net income or loss, certain defined capital events, and cash distributions, all as defined in the Partnership Agreement, are generally allocated 99% to the limited partners and 1% to the general partner. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the following entities: - - - - Rifkin Acquisition Partners, L.L.L.P. - Cable Equities of Colorado, Ltd. (CEC) - - - - Cable Equities of Colorado - Cable Equities, Inc. (CEI) Management Corp. (CEM) - Rifkin Acquisition Capital Corp. (RACC)
The financial statements for 1997 and 1996 also included the following entities: - - - - Rifkin/Tennessee, Ltd. (RTL) - FNI Management Corp. (FNI)
Effective January 1, 1998, both the RTL and FNI entities were dissolved and the assets were transferred to the Partnership. All significant intercompany accounts and transactions have been eliminated. REVENUE AND PROGRAMMING Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the periods shown. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed, includes amounts for material, labor, overhead and interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Capitalized interest was not significant for the periods shown. F-241 453 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings................................................. 27-30 years Cable television transmission and distribution systems and related equipment....................................... 3-15 years Vehicles and furniture and fixtures....................... 3-5 years
Expenditures for maintenance and repairs are expensed as incurred. FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from one to twenty years. The carrying value of franchise costs is assessed for recoverability by management based on an analysis of undiscounted future expected cash flows from the underlying operations of the Company. Management believes that there has been no impairment thereof as of December 31, 1998. OTHER INTANGIBLE ASSETS Certain loan costs have been deferred and are amortized to interest expense utilizing the straight-line method over the remaining term of the related debt. Use of the straight-line method approximates the results of the application of the interest method. The net amounts remaining at December 31, 1998 and 1997 were $6,176,690 and $7,166,450, respectively. CASH AND CASH EQUIVALENTS All highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. REDEEMABLE PARTNERS' INTERESTS The Partnership Agreement provides that if a certain partner dies or becomes disabled, that partner (or his personal representative) shall have the option, exercisable by notice given to the partners at any time within 270 days after his death or disability (except that if that partner dies or becomes disabled prior to August 31, 2000, the option may not be exercised until August 31, 2000 and then by notice by that partner or his personal representative given to the partners within 270 days after August 31, 2000) to sell, and require the General Partner and certain trusts controlled by that partner to sell, and the Partnership to purchase, up to 50% of the partnership interests owned by any of such partners and certain current and former members of management of Rifkin & Associates, Inc. that requests to sell their interest, for a purchase price equal to the fair market value of those interests determined by appraisal in accordance with the Partnership Agreement. Accordingly, the current fair value of such partnership interests have been reclassified outside of partners' capital. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-242 454 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NEW ACCOUNTING PRONOUNCEMENT In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities," which requires the Partnership to expense all start up costs related to organizing a new business. This new standard also includes one-time activities related to opening a new facility, introduction of a new product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnership's 1999 fiscal year. Management believes that SOP 98-5 will have no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION Certain reclassifications have been made to the 1997 and 1996 financial statements to conform with the 1998 financial statement presentation. Such reclassification had no effect on the net loss as previously stated. 2. SUBSEQUENT EVENT On February 12, 1999, the Company signed a letter of intent for the partners to sell all of their partnership interests to Charter Communications ("Charter"). The Company and Charter are expected to sign a purchase agreement and complete the sale during the third quarter of 1999. 3. ACQUISITION OF CABLE PROPERTIES 1998 ACQUISITIONS At various times during the second half of 1998, the Company completed three separate acquisitions of cable operating assets. Two of the acquisitions serve communities in Gwinnett County, Georgia (the "Georgia Systems"). These acquisitions were accounted for using the purchase method of accounting. The third acquisition resulted from a trade of the Company's systems serving the communities of Paris and Piney Flats, Tennessee for the operating assets of another cable operator serving primarily the communities of Lewisburg and Crossville, Tennessee (the "Tennessee Trade"). The trade was for cable systems that are similar in size and was accounted for based on fair market value. Fair market value was established at $3,000 per customer relinquished, which was based on recent sales transactions of similar cable systems. The transaction included the payment of approximately $719,000, net, of additional cash (Note 4). F-243 455 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The combined purchase price was allocated based on estimated fair values from an independent appraisal to property, plant and equipment and franchise cost as follows (dollars in thousands):
GEORGIA TENNESSEE SYSTEMS TRADE TOTAL ------- --------- ------- Fair value of assets relinquished (Note 4)............ $ -- $46,668 $46,668 Cash paid............................................. 1,392 719 2,111 Acquisition Costs (appraisal, transfer fees and direct costs).............................................. 26 76 102 ------ ------- ------- Total acquisition cost................................ $1,418 $47,463 $48,881 ====== ======= ======= Allocation: Current assets........................................ $ (2) $ 447 $ 445 Current liabilities................................... (1) (397) (398) Property, plant and equipment......................... 333 11,811 12,144 Franchise Cost........................................ 1,088 35,602 36,690 ------ ------- ------- Total cost allocated.................................. $1,418 $47,463 $48,881 ====== ======= =======
The fair value of assets relinquished from the Tennessee Trade was treated as a noncash transaction on the Consolidated Statement of Cash Flows. The cash acquisition costs were funded by proceeds from the Company's reducing revolving loan with a financial institution. The following combined pro forma information presents a summary of consolidated results of operations for the Company as if the Tennessee Trade acquisitions had occurred at the beginning of 1997, with pro forma adjustments to show the effect on depreciation and amortization for the acquired assets, management fees on additional revenues and interest expense on additional debt (dollars in thousands):
YEARS ENDED ----------------------- 12/31/98 12/31/97 -------- ----------- (UNAUDITED) Total revenues.................................. $89,921 $ 84,325 Net income (loss)............................... 19,447 (29,631)
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Tennessee Trade actually been acquired on January 1, 1997. 1997 ACQUISITIONS On April 1, 1997, the Company acquired the cable operating assets of two cable systems serving the Tennessee communities of Shelbyville and Manchester (the "Manchester Systems"), for an aggregate purchase price of approximately $19.7 million of which $495,000 was paid as escrow in 1996. The acquisition was accounted for using the purchase method of accounting, and was funded by proceeds from the Company's reducing revolving loan with a financial institution. No pro forma information giving the effect of the acquisitions is shown due to the results being immaterial. F-244 456 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1996 ACQUISITIONS On March 1, 1996, the Company acquired certain cable operating assets ("Mid-Tennessee Systems") from Mid-Tennessee CATV, L.P., and on April 1, 1996 acquired the cable operating assets ("RCT Systems") from Rifkin Cablevision of Tennessee, Ltd. Both Mid-Tennessee CATV, L.P. and Rifkin Cablevision of Tennessee, Ltd. were affiliates of the General Partner. The acquisition costs were funded by $15 million of additional partner contributions and the remainder from a portion of the proceeds received from the issuance of $125 million of 11 1/8% Senior Subordinated Notes due 2006 (see Note 6). The acquisitions were recorded using the purchase method of accounting. The results of operations of the Mid-Tennessee Systems have been included in the consolidated financial statements since March 1, 1996, and the results of the RCT Systems have been included in the consolidated financial statements since April 1, 1996. The combined purchase price was allocated based on estimated fair values from an independent appraisal to property, plant and equipment and franchise cost as follows (dollars in thousands): Cash paid, net of acquired cash............................. $71,582 Acquisition costs (appraisal, transfer fees, and direct costs).................................................... 215 ------- Total acquisition cost...................................... $71,797 ======= Allocation: Current assets.............................................. $ 624 Current liabilities......................................... (969) Property, plant and equipment............................... 24,033 Franchise cost and other intangible assets.................. 48,109 ------- Total cost allocated........................................ $71,797 =======
The following combined pro forma information presents a summary of consolidated results of operations for the Company as if the Mid-Tennessee Systems and the RCT Systems acquisitions had occurred at the beginning of 1996, with pro forma adjustments to show the effect on depreciation and amortization for the acquired assets, management fees on additional revenues and interest expense on additional debt (dollars in thousands):
YEAR ENDED 12/31/96 ----------- (UNAUDITED) Total revenues............................................. $ 74,346 Net loss................................................... (22,558)
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Mid-Tennessee Systems and the RCT Systems actually been acquired on January 1, 1996. 4. SALE OF ASSETS On February 4, 1998, the Company sold all of its operating assets in the state of Michigan (the "Michigan Sale") to another cable operator for cash. In addition, on December 31, 1998, F-245 457 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Company traded certain cable systems in Tennessee (the "Tennessee Trade") for similar-sized cable systems (Note 3). Both sales resulted in a gain recognized by the Company as follows (dollars in thousands):
MICHIGAN TENNESSEE SALE TRADE TOTAL -------- --------- ------- Fair value of assets relinquished............. $ -- $46,668 $46,668 Original cash proceeds........................ 16,931 -- 16,931 Adjustments for value of assets and liabilities assumed......................... 120 (17) 103 ------- ------- ------- Net proceeds.................................. 17,051 46,651 63,702 Net book value of assets sold................. 11,061 9,778 20,839 ------- ------- ------- Net gain from sale............................ $ 5,990 $36,873 $42,863 ======= ======= =======
The Michigan Sale proceeds amount includes $500,000 that is currently being held in escrow. This amount and the fair value of assets relinquished, related to the Tennessee Trade, were both treated as noncash transactions on the Consolidated Statement of Cash Flows. The cash proceeds from the Michigan Sale were used by the Company to reduce its revolving and term loans with a financial institution. 5. INCOME TAXES Although the Partnership is not a taxable entity, two corporations (the "subsidiaries") are included in the consolidated financial statements. These subsidiaries are required to pay taxes on their taxable income, if any. F-246 458 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents a reconciliation of pre-tax losses as reported in accordance with generally accepted accounting principles and the losses attributable to the partners and included in their individual income tax returns:
YEAR ENDED YEAR ENDED YEAR ENDED 12/31/98 12/31/97 12/31/96 ------------ ------------ ------------ Pre-tax income (loss) as reported....... $ 20,241,286 $(31,378,648) $(25,277,061) (Increase) decrease due to: Separately taxed book results of corporate subsidiaries............. 9,397,000 15,512,000 9,716,000 Effect of different depreciation and amortization methods for tax and book purposes...................... (1,360,000) (2,973,000) (3,833,000) Additional tax gain from the sale of Michigan(Note 4)...................... 2,068,000 -- -- Book gain from trade sale of Tennessee assets(Note 4)........................ (36,873,000) -- -- Additional tax loss from dissolution of FNI stock............................. (7,235,000) -- -- Other................................... 81,714 (45,052) (22,539) ------------ ------------ ------------ Tax loss attributed to the partners..... $(13,680,000) $(18,884,700) $(19,416,600) ============ ============ ============
The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. As a result of a change in control in 1995, the book value of the Company's net assets was increased to reflect their fair market value. In connection with this revaluation, a deferred income tax liability in the amount of $22,801,000 was established to provide for future taxes payable on the revised valuation of the net assets. A deferred tax benefit of $4,196,000, $5,335,000 and $3,654,000 was recognized for the years ended December 31, 1998, 1997 and 1996, respectively, reducing the liability to $7,942,000. Deferred tax assets (liabilities) were comprised of the following at December 31, 1998 and 1997:
12/31/98 12/31/97 ------------ ------------ Deferred tax assets resulting from loss carryforwards.......................... $ 11,458,000 $ 9,499,000 Deferred tax liabilities resulting from depreciation and amortization.......... (19,400,000) (21,637,000) ------------ ------------ Net deferred tax liability............... $ (7,942,000) $(12,138,000) ============ ============
F-247 459 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1998 and 1997, the subsidiaries have net operating loss carryforwards ("NOLs") for income tax purposes of $30,317,000 and $25,264,000, respectively, substantially all of which are limited. The NOLs will expire at various times between the years 2000 and 2013. In 1998, one of the corporate entities was dissolved. The existing NOL's were used to offset taxable income down to $87,751, resulting in a current tax for 1998 of $18,075. Under the Internal Revenue Code of 1986, as amended (the "Code"), the subsidiaries generally would be entitled to reduce their future federal income tax liabilities by carrying the unused NOLs forward for a period of 15 years to offset their future income taxes. The subsidiaries' ability to utilize any NOLs in future years may be restricted, however, in the event the subsidiaries undergo an "ownership change" as defined in Section 382 of the Code. In the event of an ownership change, the amount of NOLs attributable to the period prior to the ownership change that may be used to offset taxable income in any year thereafter generally may not exceed the fair market value of the subsidiary immediately before the ownership change (subject to certain adjustments) multiplied by the applicable long-term, tax exempt rate published by the Internal Revenue Service for the date of the ownership change. Two of the subsidiaries underwent an ownership change on September 1, 1995 pursuant to Section 382 of the Code. As such, the NOLs of the subsidiaries are subject to limitation from that date forward. It is the opinion of management that the NOLs will be released from this limitation prior to their expiration dates and, as such, have not been limited in their calculation of deferred taxes. The provision for income tax expense (benefit) differs from the amount which would be computed by applying the statutory federal income tax rate of 35% to pre-tax income before extraordinary loss as a result of the following:
YEARS ENDED ----------------------------------------- 12/31/98 12/31/97 12/31/96 ------------ ------------ ----------- Tax expense (benefit) computed at statutory rate...................................... $ 7,084,450 $(10,982,527) $(8,846,971) Increase (decrease) due to: Tax benefit (expense) for non-corporate loss................................... (10,373,252) 5,900,546 5,446,721 Permanent differences between financial statement income and taxable income.... (36,200) 84,500 48,270 State income tax.......................... (247,000) (377,500) (252,590) Tax benefit from dissolved corporation.... (148,925) -- -- Other..................................... (456,998) 39,981 (41,149) ------------ ------------ ----------- Income Tax Benefit........................ $ (4,177,925) $ (5,335,000) $(3,645,719) ============ ============ ===========
F-248 460 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. NOTES PAYABLE Debt consisted of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Senior Subordinated Notes................ $125,000,000 $125,000,000 Tranche A Term Loan...................... 21,575,000 25,000,000 Tranche B Term Loan...................... 40,000,000 40,000,000 Reducing Revolving Loan.................. 35,000,000 36,500,000 Senior Subordinated Debt................. 3,000,000 3,000,000 ------------ ------------ $224,575,000 $229,500,000 ============ ============
The Notes and loans are collateralized by substantially all of the assets of the Company. On January 26, 1996, the Company and its wholly-owned subsidiary, RACC (the "Issuers"), co-issued $125,000,000 of 11 1/8% Senior Subordinated Notes (the "Notes") to institutional investors. These notes were subsequently exchanged on June 18, 1996 for publicly registered notes with identical terms. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year. The Notes, which mature on January 15, 2006, can be redeemed in whole or in part, at the Issuers' option, at any time on or after January 15, 2001, at redeemable prices contained in the Notes plus accrued interest. In addition, at any time on or prior to January 15, 1999, the Issuers, at their option, may redeem up to 25% of the principle amount of the Notes issued to institutional investors of not less than $25,000,000. At December 31, 1998 and 1997, all of the Notes were outstanding (see also Note 10). The Company has a $25,000,000 Tranche A term loan with a financial institution. This loan requires quarterly payments of $1,875,000 plus interest commencing on March 31, 2000. Any unpaid balance is due March 31, 2003. The agreement requires that what it defines as excess proceeds from the sale of a cable system be used to retire Tranche A term debt. As a result of the Michigan sale (Note 4), there was $3,425,000 of excess proceeds used to pay principal in 1998. The interest rate on the Tranche A term loan is either the bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%. The specific rate is dependent upon the senior funded debt ratio which is recalculated quarterly. The weighted average effective interest rate at December 31, 1998 and 1997 was 7.59% and 8.24%, respectively. In addition, the Company has a $40,000,000 Tranche B term loan, which requires principal payments of $2,000,000 on March 31, 2002, $18,000,000 on March 31, 2003, and $20,000,000 on March 31, 2004. The Tranche B term loan bears an interest rate of 9.75% and is payable quarterly. The Company also has a reducing revolving loan providing for borrowing up to $20,000,000 at the Company's discretion, subject to certain restrictions, and an additional $60,000,000 available to finance acquisitions subject to certain restrictions. On March 4, 1998, the reducing revolving loan agreement was amended to revise the scheduled reduction in revolving commitments. The additional financing amounts available at December 31, 1998 and 1997 were $45,000,000 and $52,500,000, respectively. At December 31, 1998, the full $20,000,000 available had been borrowed, and $15,000,000 had been drawn against the $45,000,000 commitment. At F-249 461 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1997, the full $20,000,000 available had been borrowed, and $16,500,000 had been drawn against the $52,500,000 commitment. The amount available for borrowing will decrease annually during its term with changes over the four years following December 31, 1998 as follows: 1999 -- $2,500,000 reduction per quarter, and 2000 through 2002 -- $3,625,000 per quarter. Any unpaid balance is due on March 31, 2003. The revolving loan bears an interest rate of either the bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%. The specific rate is dependent upon the senior funded debt ratio which is recalculated quarterly. The weighted average effective interest rates at December 31, 1998 and 1997 was 8.08% and 8.29%, respectively. The reducing revolving loan includes a commitment fee of 1/2% per annum on the unborrowed balance. Certain mandatory prepayments may also be required, commencing in fiscal 1997, on the Tranche A term loan, the Tranche B term loan, and the reducing revolving credit based on the Company's cash flow calculations, proceeds from the sale of a cable system or equity contributions. Based on the 1998 calculation and the Michigan sale, $3,425,000 of prepayments were required. Optional prepayments are allowed, subject to certain restrictions. The related loan agreement contains covenants limiting additional indebtedness, dispositions of assets, investments in securities, distribution to partners, management fees and capital expenditures. In addition, the Company must maintain certain financial levels and ratios. At December 31, 1998, the Company was in compliance with these covenants. The Company also has $3,000,000 of senior subordinated debt payable to a Rifkin Partner. The debt has a scheduled maturity, interest rate and interest payment schedule identical to that of the Notes, as discussed above. Based on the outstanding debt as of December 31, 1998, the minimum aggregate maturities for the five years following 1998 are none in 1999, $7,500,000 in 2000, $16,500,000 in 2001, $23,075,000 in 2002 and $29,500,000 in 2003. 7. RELATED PARTY TRANSACTIONS The Company entered into a management agreement with Rifkin & Associates, Inc. (Rifkin). The management agreement provides that Rifkin will act as manager of the Company's CATV systems and be entitled to annual compensation of 3.5% of the Company's revenue. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction included the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed in total on the Consolidated Statement of Operations. The Company is associated with a company to purchase certain cable television programming at a discount. Rifkin acted as the agent and held the deposit funds required for the Company to participate. Effective September 1, 1998, Rifkin conveyed this contract and deposit amount to RML. The deposit amount recorded at December 31, 1998 and 1997 was $2,139,274 and $1,225,274, respectively. The Company subsequently received $1,225,274 of the December 31, 1998 balance. The Company paid approximately $550,000 to a law firm in connection with the public offering in 1996. A partner of this law firm is a relative of one of the Company's partners. F-250 462 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. COMMITMENTS AND RENTAL EXPENSE The Company leases certain real and personal property under noncancelable operating leases expiring through the year 2007. Future minimum lease payments under such noncancelable leases as of December 31, 1998 are: $316,091 in 1999; $249,179 in 2000; $225,768 in 2001; $222,669 in 2002; and $139,910 in 2003; and $344,153 thereafter, totaling $1,497,770. Total rental expense and the amount included therein which pertains to cancelable pole rental agreements were as follows for the periods indicated:
TOTAL CANCELABLE RENTAL POLE RENTAL PERIOD EXPENSE EXPENSE - - - ------ ---------- ----------- Year Ended December 31, 1998................. $1,592,080 $1,109,544 Year Ended December 31, 1997................. $1,577,743 $1,061,722 Year Ended December 31, 1996................. $1,294,084 $ 874,778
9. COMPENSATION PLANS AND RETIREMENT PLANS EQUITY INCENTIVE PLAN In 1996, the Company implemented an Equity Incentive Plan (the "Plan") in which certain Rifkin & Associates' executive officers and key employees, and certain key employees of the Company are eligible to participate. Plan participants in the aggregate, have the right to receive (i) cash payments of up to 2.0% of the aggregate value of all partnership interests of the Company (the "Maximum Incentive Percentage"), based upon the achievement of certain annual Operating Cash Flow (as defined in the Plan) targets for the Company for each of the calendar years 1996 through 2000, and (ii) an additional cash payment equal to up to 0.5% of the aggregate value of all partnership interests of the Company (the "Additional Incentive Percentage"), based upon the achievement of certain cumulative Operating Cash Flow targets for the Company for the five-year period ended December 31, 2000. Subject to the achievement of such annual targets and the satisfaction of certain other criteria based on the Company's operating performance, up to 20% of the Maximum Incentive Percentage will vest in each such year; provided, that in certain events vesting may accelerate. Payments under the Plan are subject to certain restrictive covenants contained in the Notes. No amounts are payable under the Plan except upon (i) the sale of substantially all of the assets or partnership interests of the Company or (ii) termination of a Plan participant's employment with Rifkin & Associates or the Company, as applicable, due to (a) the decision of the Advisory Committee to terminate such participant's employment due to disability, (b) the retirement of such participant with the Advisory Committee's approval or (c) the death of such Participant. The value of amounts payable pursuant to clause (i) above will be based upon the aggregate net proceeds received by the holders of all of the partnership interests in the Company, as determined by the Advisory Committee, and the amounts payable pursuant to clause (ii) above will be based upon the Enterprise Value determined at the time of such payment. For purposes of the Plan, Enterprise Value generally is defined as Operating Cash Flow for the immediately preceding calendar year times a specified multiple and adjusted based on the Company's working capital. F-251 463 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The amount expensed for the years ended December 31, 1998, 1997 and 1996 relating to this plan were $1,119,996, $859,992 and $660,000, respectively. RETIREMENT BENEFITS The Company has a 401(k) plan for employees that have been employed by the Company for at least one year. Employees of the Company can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Company matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Company contributions and earnings vest 20% per year of employment with the Company, becoming fully vested after five years. The Company's matching contributions for the years ended December 31, 1998, 1997 and 1996 were $50,335, $72,707 and $42,636, respectively. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Company to estimate the fair values of financial instruments as disclosed herein: Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables, Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments: The carrying value amount approximates fair value because of the short period to maturity. Debt: The fair value of bank debt is estimated based on interest rates for the same or similar debt offered to the Company having the same or similar remaining maturities and collateral requirements. The fair value of public Senior Subordinated Notes is based on the market quoted trading value. The fair value of the Company's debt is estimated at $236,137,500 and is carried on the balance sheet at $224,575,000. 11. CABLE REREGULATION Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the Cable Act) and has amended it at various times since. The total effects of the present law are, at this time, still unknown. However, one provision of the present law further redefines a small cable system, and exempts these systems from rate regulation on the upper tiers of cable service. The Partnership is awaiting an FCC rulemaking implementing the present law to determine whether its systems qualify as small cable systems. 12. SUMMARIZED FINANCIAL INFORMATION CEM, CEI and CEC (collective, the "Guarantors") are all wholly-owned subsidiaries of the Company and, together with RACC, constitute all of the Partnership's direct and indirect subsidiaries. As discussed in Note 1, RTL and FNI were dissolved on January 1, 1998 and the assets were transferred to the Company, however, prior thereto, RTL and FNI, as wholly-owned subsidiaries of the Company, were Guarantors. Each of the Guarantors provides a full, unconditional, joint and several guaranty of the obligations under the Notes discussed in Note 6. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors. F-252 464 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables present summarized financial information of the Guarantors on a combined basis as of December 31, 1998 and 1997 and for the years ended December 31, 1998, and 1997 and 1996.
12/31/98 12/31/97 BALANCE SHEET ------------ ------------ Cash............................ $ 373,543 $ 780,368 Accounts and other receivables, net........................... 3,125,830 3,012,571 Prepaid expenses................ 791,492 970,154 Property, plant and equipment net........................... 48,614,536 66,509,120 Franchise costs and other intangible assets, net........ 56,965,148 103,293,631 Accounts payable and accrued liabilities................... 22,843,354 18,040,588 Other liabilities............... 980,536 1,122,404 Deferred taxes payable.......... 7,942,000 12,138,000 Notes payable................... 140,050,373 167,200,500 Equity (deficit)................ (61,945,714) (23,935,648)
YEAR ENDED YEAR ENDED YEAR ENDED 12/31/98 12/31/97 12/31/96 STATEMENTS OF OPERATIONS ------------ ------------ ------------ Total revenue................... $ 29,845,826 $ 47,523,592 $ 42,845,044 Total costs and expenses........... (31,190,388) (53,049,962) (43,578,178) Interest expense................ (14,398,939) (17,868,497) (16,238,221) Income tax benefit.............. 4,177,925 5,335,000 3,645,719 ------------ ------------ ------------ Net loss........................ $(11,565,576) $(18,059,867) $(13,325,636) ============ ============ ============
13. QUARTERLY INFORMATION (UNAUDITED) The following interim financial information of the Company presents the 1998 and 1997 consolidated results of operations on a quarterly basis (in thousands):
QUARTERS ENDED 1998 ------------------------------------------------ MARCH 31(A) JUNE 30 SEPT. 30 DEC. 31(B) ----------- ------- -------- ---------- Revenue........................ $22,006 $22,296 $22,335 $23,284 Operating income (loss)........ 295 511 (1,522) 1,756 Net income (loss).............. 1,437 (4,458) (5,907) 33,347
- - - ------------------------- (a) First quarter includes a $5,900 gain from the sale of Michigan assets (Note 4). (b) Fourth quarter includes a $36,873 gain from the trade sale of certain Tennessee assets (Note 4). F-253 465 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERS ENDED 1997 ------------------------------------------ MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ------- -------- ------- Revenue............................. $19,337 $21,331 $21,458 $22,199 Operating loss...................... (1,220) (2,818) (2,777) (798) Net loss............................ (5,998) (6,890) (8,127) (5,029)
14. LITIGATION The Company could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Company will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Company's financial position or results of operations. F-254 466 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Indiana Cable Associates, Ltd. In our opinion, the accompanying balance sheet and the related statements of operations, of equity and of cash flows present fairly, in all material respects, the financial position of Rifkin Cable Income Partners L.P. (the "Partnership") at September 13, 1999, and the results of its operations and its cash flows for the period January 1, 1999 to September 13, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. On September 13, 1999, all of the Partnership's interest were sold to Charter Communications, LLC. These financial statements represent the Partnership just prior to that transaction and do not reflect any adjustments related thereto. /S/ PRICEWATERHOUSECOOPERS LLP DENVER, COLORADO FEBRUARY 15, 2000 F-255 467 INDIANA CABLE ASSOCIATES, LTD. BALANCE SHEET
SEPTEMBER 13, 1999 ----------------- ASSETS Cash........................................................ $ 166,550 Customer accounts receivable, less allowance for doubtful accounts of $6,523........................................ 211,069 Accounts receivable, interpartnership....................... 13,814,907 Other receivables........................................... 436,723 Prepaid expenses and deposits............................... 50,196 Property, plant and equipment, at cost: Transmission and distribution systems and related equipment.............................................. 10,025,106 Buildings and leasehold improvements...................... 55,480 Vehicles, office furniture and fixtures................... 493,607 Spare parts and construction inventory.................... 101,334 ----------- 10,675,527 Less accumulated depreciation............................... (838,673) ----------- Property, plant and equipment, net..................... 9,836,854 Franchise costs, net of accumulated amortization of $2,910,123................................................ 18,944,392 ----------- Total assets......................................... $43,460,691 =========== LIABILITIES AND EQUITY Liabilities: Accrued liabilities....................................... $ 263,342 Customer deposits and prepayments......................... 314,413 Accounts payable, related party........................... 20,514 Interpartnership debt..................................... 24,003,000 ----------- Total liabilities.................................... 24,601,269 Commitments and contingencies (Notes 4 and 8) Divisional equity........................................... 18,859,422 ----------- Total equity......................................... 18,859,422 ----------- Total liabilities and equity...................... $43,460,691 ===========
The accompanying notes are an integral part of these financial statements. F-256 468 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF OPERATIONS
JANUARY 1, 1999 TO SEPTEMBER 13, 1999 ------------------- REVENUE Service..................................................... $ 5,267,890 Installation and other...................................... 765,902 ----------- Total revenue............................................. 6,033,792 COSTS AND EXPENSES Operating expense........................................... 631,956 Programming expense......................................... 1,268,904 Selling, general and administrative expense................. 1,143,407 Depreciation................................................ 1,009,515 Amortization................................................ 2,910,123 Management fees............................................. 301,890 Loss on disposal of assets.................................. 2,481,838 ----------- Total costs and expenses.................................. 9,747,633 ----------- Operating loss.............................................. (3,713,841) Interest expense............................................ 621,956 ----------- Net loss.................................................. $(4,335,797) ===========
The accompanying notes are an integral part of these financial statements. F-257 469 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF EQUITY
JANUARY 1, 1999 TO SEPTEMBER 13, 1999 ------------------------- DIVISIONAL EQUITY TOTAL ----------- ----------- Equity contribution......................................... $23,195,219 $23,195,219 Net loss.................................................. (4,335,797) (4,335,797) ----------- ----------- Equity, September 13, 1999.................................. $18,859,422 $18,859,422 =========== ===========
The accompanying notes are an integral part of these financial statements. F-258 470 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF CASH FLOWS
JANUARY 1, 1999 TO SEPTEMBER 13, 1999 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $ (4,335,797) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............................. 3,919,638 Loss on disposal of assets................................ 2,481,838 Increase in customer accounts receivable.................. (125,274) Increase in accounts receivable, interpartnership......... (13,814,907) Increase in other receivables............................. (141,700) Decrease in prepaid expenses and deposits................. 102,379 Increase in accrued liabilities........................... (634,431) Increase in customer deposits and prepayments............. 266,955 Increase in accounts payable, related party............... 20,514 ------------ Net cash used in operating activities.................. (12,260,785) ------------ CASH FLOWS FROM INVESTING ACTIVITIES Initial cash acquisition cost, net of cash acquired......... (23,086,600) Purchases of property, plant and equipment.................. (2,054,791) Proceeds from sale of assets................................ 2,734 Additions to franchise costs................................ (25,597) ------------ Net cash used in investing activities.................. (25,164,254) ------------ CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions....................................... 23,195,219 Proceeds from interpartnership debt......................... 14,807,682 Payments on interpartnership debt........................... (411,312) ------------ Net cash provided by financing activities.............. 37,591,589 ------------ Increase in cash............................................ 166,550 Cash, beginning of period................................... -- ------------ Cash, end of period......................................... $ 166,550 ============ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid............................................... $ 621,956 ============
The accompanying notes are an integral part of these financial statements. F-259 471 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Indiana Cable Associates, Ltd. (the "Partnership"), a Colorado limited partnership, was originally organized in March 1987 for the purpose of acquiring and operating cable television systems and related operations in Indiana and Illinois. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP AND BASIS OF PRESENTATION Effective December 31, 1998, Interlink Communications Partners, LLLP ("ICP") acquired all of the Partnership's limited partner interest, and agreed to purchase all of the general Partners' interest for $23.1 million. This transaction was accounted for as a purchase; as such, assets and liabilities were written up to their fair value, resulting in an increase to property, plant and equipment and franchise costs of $7.0 million and $16.8 million, respectively. Effective April 1, 1999, ICP completed the purchase of the remaining general partner interest in the Partnership and the Partnership was merged into ICP and ceased to exist as a separate legal entity. The Partnership's financial statements subsequent to that date represent a divisional carve-out from ICP. These financial statements include all the direct costs of operating its business; however, certain assets, liabilities and costs not specifically related to the Partnership's activities were allocated and reflected in the financial position as of September 13, 1999, and the results of its operations and its cash flows for the period January 1, 1999 to September 13, 1999. Allocations from ICP include amounts for debt, interest expense and management expense. Both debt and interest expense were allocated pro rata based on the Partnership's percentage of subscribers to total ICP subscribers. Management expense was allocated in accordance with the management agreement (Note 2). In addition, receivables and payables to ICP are presented in the accompanying financial statements net as amounts due to/from interpartnership. Management believes these allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect what the financial position and results of operations of the Partnership would have been as a stand-alone entity. ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC On February 12, 1999, ICP signed a letter of intent to sell all of ICP's partnership interest to Charter Communications Holdings, LLC ("Charter"). On April 26, 1999, ICP signed a definitive Purchase and Sales Agreement with Charter for the sale of the individual partner's interest. The sales transaction closed on September 13, 1999. These financial statements represent the Partnership just prior to the transaction and do not reflect any related adjustments. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed, include amounts for material, labor, overhead and capitalized interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. F-260 472 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Transmission and distribution systems and related equipment................................................. 1-15 years Buildings and leasehold improvements........................ 5-27 years Vehicles, office furniture and fixtures..................... 2-5 years
FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from 2 to 10 years. The carrying value is assessed for recoverability by management based on an analysis of undiscounted expected future cash flows. The Partnership's management believes that there has been no impairment thereof as of September 13, 1999. INCOME TAXES No provision for federal or state income taxes is necessary in the financial statements of the Partnership, because as a partnership, it is not subject to federal or state income tax as the tax effect of its activities accrues to the partners. REVENUE RECOGNITION Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the period shown. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. MANAGEMENT AGREEMENT The Partnership has a management agreement with R & A Management, LLC ("RML"). The management agreement provides that RML shall manage the Partnership and shall receive annual compensation equal to 5% of gross revenues and an additional 5% if a defined cash flow level is met. The result of this transaction included the conveyance of the Rifkin management agreement (the "Rifkin Agreement") to RML (the "RML Agreement"). Expenses incurred pursuant to this agreement are disclosed in the Consolidated Statement of Operations. F-261 473 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3. DEBT The Partnership has interpartnership debt with ICP. Borrowings, including both principal and interest, at September 13, 1999 were $24,003,000 and had an effective interest rate of 8.68%. ICP has a term loan and revolving loan agreement with a bank. The amount of the term loan is $150,000,000, and requires varying quarterly payments plus interest commencing September 30, 2001 and continuing through March 31, 2007. On February 1, 1999, the term loan agreement was amended to increase the loan amount to $250,000,000. On July 16, 1999, the term loan agreement was amended again to increase the loan amount to $290,000,000. The interest rate on the term loan is generally the bank's prime rate plus 0% to 1.50%. The weighted average effective rate at September 13, 1999 was 8.74%. The revolving loan agreement provided for borrowing up to $100,000,000 at the Company's discretion. At September 13, 1999, $91,000,000 had been drawn against the $100,000,000 commitment. The revolving credit agreement expires on March 31, 2007. The revolver bears an interest rate at the bank's prime rate plus 0% to 1.50% or LIBOR plus 1.25% to 2.75%. The specific rate is dependent upon the leverage ratio of ICP, which is recalculated quarterly. The weighted average effective interest rate at September 13, 1999 was 8.5%. The term loan and revolving loan agreement are collateralized by substantially all assets of ICP and its consolidated entities, including the Partnership. 4. LEASE COMMITMENTS The Partnership leases certain real and personal property under noncancelable operating leases. Future minimum lease payments under these arrangements at September 13, 1999, were as follows: 1999........................................................ $ 77,802 2000........................................................ 57,386 2001........................................................ 45,749 2002........................................................ 43,500 2003........................................................ 43,500 Thereafter.................................................. 40,875 -------- $308,812 ========
Total rent expense for the period January 1, 1999 to September 13, 1999 was $77,802, including $43,253 relating to cancelable pole rental agreements. 5. RETIREMENT BENEFITS The Partnership has a 401(k) plan for its employees that have been employed by the Partnership for at least one year. Employees of the Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1999 contribution of $10,000 (as set by the Internal Revenue Service). The Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Partnership contributions and earnings vest 20% per year of employment with the Partnership, becoming fully vested after five years. The Partnership's matching contributions for the period January 1, 1999 to September 13, 1999 were $10,524. F-262 474 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Partnership to estimate the fair values of financial instruments as disclosed herein: Cash, customer accounts receivable, other receivables, accounts payable and accrued liabilities and customer deposits and prepayments: The carrying value amount approximates fair value because of the short period to maturity. The interest rate on debt is adjusted at least quarterly; therefore, the carrying value of debt approximates its fair value. 7. RELATED PARTY TRANSACTIONS Certain Partnership expenses were paid by Charter and are reflected as Payables to affiliates in the accompanying financial statements. 8. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Partnership's financial position or results of operations. F-263 475 REPORT OF INDEPENDENT AUDITORS The Partners Indiana Cable Associates, Ltd. We have audited the accompanying balance sheet of Indiana Cable Associates, Ltd. as of December 31, 1997 and 1998, and the related statements of operations, partners' deficit and cash flows for the years ended December 31, 1996, 1997 and 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Indiana Cable Associates, Ltd. at December 31, 1997 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1996, 1997 and 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Denver, Colorado February 19, 1999 F-264 476 INDIANA CABLE ASSOCIATES, LTD. BALANCE SHEET DECEMBER 31, 1997 AND 1998
1997 1998 ----------- ----------- ASSETS (PLEDGED) Cash and cash equivalents.................................. $ 82,684 $ 108,619 Customer accounts receivable, less allowance for doubtful accounts of $18,311 in 1997 and $24,729 in 1998.......... 87,154 85,795 Other receivables.......................................... 257,236 295,023 Prepaid expenses and deposits.............................. 172,614 152,575 Property, plant and equipment, at cost: Buildings................................................ 78,740 91,682 Transmission and distribution systems and related equipment............................................. 10,174,650 11,336,892 Office furniture and equipment........................... 144,137 161,327 Spare parts and construction inventory................... 435,554 742,022 ----------- ----------- 10,833,081 12,331,923 Less accumulated depreciation............................ 7,624,570 8,008,158 ----------- ----------- Net property, plant and equipment..................... 3,208,511 4,323,765 Other assets, at cost less accumulated amortization (Note 3)....................................................... 5,817,422 5,083,029 ----------- ----------- Total assets..................................... $ 9,625,621 $10,048,806 =========== =========== LIABILITIES AND PARTNERS' DEFICIT Liabilities: Accounts payable and accrued liabilities................. $ 718,716 $ 897,773 Customer prepayments..................................... 50,693 47,458 Interest payable......................................... 32,475 -- Long-term debt (Note 4).................................. 10,650,000 -- Interpartnership debt (Note 4)........................... -- 9,606,630 ----------- ----------- Total liabilities................................ 11,451,884 10,551,861 Commitments (Notes 5 and 6) Partners' deficit: General partner.......................................... (66,418) (20,106) Limited partner.......................................... (1,759,845) (482,949) ----------- ----------- Total partners' deficit.................................... (1,826,263) (503,055) ----------- ----------- Total liabilities and partners' deficit.......... $ 9,625,621 $10,048,806 =========== ===========
See accompanying notes. F-265 477 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF OPERATIONS
YEARS ENDED ------------------------------------ 12/31/96 12/31/97 12/31/98 ---------- ---------- ---------- REVENUE: Service............................................ $6,272,049 $6,827,504 $7,165,843 Installation and other............................. 538,158 622,699 773,283 ---------- ---------- ---------- Total revenue............................ 6,810,207 7,450,203 7,939,126 COSTS AND EXPENSES: Operating expense.................................. 989,456 1,142,932 974,617 Programming expense................................ 1,474,067 1,485,943 1,727,089 Selling, general and administrative expense........ 1,112,441 1,142,247 1,128,957 Depreciation....................................... 889,854 602,554 537,884 Amortization....................................... 718,334 718,335 707,539 Management fees.................................... 340,510 372,510 396,956 Loss on disposal of assets......................... 6,266 639 74,714 ---------- ---------- ---------- Total costs and expenses................. 5,530,928 5,465,160 5,547,756 ---------- ---------- ---------- Operating income................................... 1,279,279 1,985,043 2,391,370 Interest expense................................... 1,361,415 1,292,469 970,160 ---------- ---------- ---------- Net income (loss) before extraordinary item........ (82,136) 692,574 1,421,210 Extraordinary item--loss on early retirement of debt (Note 3 and 4).............................. -- -- 98,002 ---------- ---------- ---------- Net income (loss).................................. $ (82,136) $ 692,574 $1,323,208 ========== ========== ==========
See accompanying notes. F-266 478 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF PARTNERS' DEFICIT
GENERAL LIMITED PARTNERS PARTNERS TOTAL -------- ----------- ----------- Partners' deficit at December 31, 1995......... $(87,783) $(2,348,918) $(2,436,701) Net loss for the year ended December 31, 1996...................................... (2,875) (79,261) (82,136) -------- ----------- ----------- Partners' deficit at December 31, 1996......... (90,658) (2,428,179) (2,518,837) Net income for the year ended December 31, 1997...................................... 24,240 668,334 692,574 -------- ----------- ----------- Partners' deficit at December 31, 1997......... (66,418) (1,759,845) (1,826,263) Net income for the year ended December 31, 1998...................................... 46,312 1,276,896 1,323,208 -------- ----------- ----------- Partners' deficit at December 31, 1998......... $(20,106) $ (482,949) $ (503,055) ======== =========== ===========
The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. See accompanying notes. F-267 479 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF CASH FLOWS
YEARS ENDED ------------------------------------------ 12/31/96 12/31/97 12/31/98 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................. $ (82,136) $ 692,574 $ 1,323,208 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................. 1,608,188 1,320,889 1,245,423 Amortization of deferred loan costs............ 48,764 72,922 23,149 Loss on disposal of assets..................... 6,266 639 74,714 Loss on write-off of deferred loan cost associated with early retirement of debt..... -- -- 95,832 Decrease (increase) in customer accounts receivable................................... (13,110) 1,536 1,359 Increase in other receivables.................. (80,843) (108,256) (37,787) Decrease (increase) in prepaid expenses and deposits..................................... (53,259) (5,928) 20,039 Increase (decrease) in accounts payable and accrued liabilities.......................... (190,357) (147,971) 179,057 Increase (decrease) in customer prepayments.... 16,355 (13,190) (3,235) Decrease in interest payable................... (12,314) (39,471) (32,475) ----------- ----------- ------------ Net cash provided by operating activities.............................. 1,247,554 1,773,744 2,889,284 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment........ (675,244) (592,685) (1,732,831) Proceeds from sale of assets...................... 227,025 23,662 4,979 ----------- ----------- ------------ Net cash used in investing activities..... (448,219) (569,023) (1,727,852) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt...................... 2,000,000 1,450,000 10,636,421 Proceeds from interpartnership debt............... -- -- 9,606,630 Deferred loan cost................................ (70,000) (29,776) (92,127) Payments of long-term debt........................ (2,200,000) (3,100,000) (21,286,421) ----------- ----------- ------------ Net cash used in financing activities..... (270,000) (1,679,776) (1,135,497) ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents....................................... 529,335 (475,055) 25,935 Cash and cash equivalents at beginning of year...... 28,404 557,739 82,684 ----------- ----------- ------------ Cash and cash equivalents at end of year............ $ 557,739 $ 82,684 $ 108,619 =========== =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid..................................... $ 1,324,965 $ 1,258,078 $ 947,606 =========== =========== ============
See accompanying notes. F-268 480 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS 1. GENERAL INFORMATION GENERAL INFORMATION: Indiana Cable Associates, Ltd. (the "Partnership"), a Colorado limited partnership, was organized in March 1987 for the purpose of acquiring and operating cable television systems and related operations in Indiana and Illinois. For financial reporting purposes, Partnership profits or losses are allocated 3.5% to the general partners and 96.5% to the limited partners. Limited partners are not required to fund any losses in excess of their capital contributions. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP: Interlink Communications Partners, LLLP ("ICP") agreed to purchase all of the interests of the Partnership. ICP acquired all of the limited partner interests, effective December 31, 1998, and is currently in the process of obtaining the necessary consents to transfer all of the Partnership's franchises to ICP. Once these are obtained, ICP will then purchase the general partner interest in the Partnership, and the Partnership will, by operation of law, be consolidated into ICP. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTY, PLANT AND EQUIPMENT: The Partnership records additions to property, plant and equipment at cost, which in the case of assets constructed includes amounts for material, labor, overhead and capitalized interest, if applicable. For financial reporting purposes, the Partnership uses the straight-line method of depreciation over the estimated useful lives of the assets as follows: Buildings and improvements................................. 5-30 years Transmission and distribution systems and related equipment................................................ 3-15 years Office furniture and equipment............................. 5 years
OTHER ASSETS: Other assets are carried at cost and are amortized on a straight-line basis over the following lives: Franchises -- the terms of the franchises (10-19 1/2 years) Goodwill -- the term of the Partnership agreement (12 3/4 years) Deferred loan costs -- the term of the debt (1-6 years) Organization costs -- 5 years
F-269 481 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES: No provision for the payment or refund of income taxes has been provided for the Partnership since the partners are responsible for reporting their distributive share of Partnership net income or loss in their personal capacities. CASH AND CASH EQUIVALENTS: The Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. REVENUE RECOGNITION: Customer fees are recorded as revenue in the period the service is provided. FAIR VALUE OF FINANCIAL INVESTMENTS: The carrying values of cash and cash equivalents, customer accounts receivable, accounts payable and interpartnership debt approximate fair value. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPACT OF YEAR 2000 (UNAUDITED): The Partnership recognizes that certain of its time-sensitive computer programs and product distribution equipment may be affected by conversion to the year 2000. During 1998, management began their evaluation of the information systems, product distribution facilities, and vendor and supplier readiness. To date, considerable progress has been made to complete the evaluation process, to integrate and test compliance installations, and to prepare contingency plans. In addition, third party suppliers are either fully compliant or are expected to be compliant by December 31, 1999. Management expects to have all systems compliant, or have a contingency plan in effect that will result in minimal impact on the operations. NEW ACCOUNTING PRONOUNCEMENT: In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities," which requires the Partnerships to expense all start-up costs related to organizing a new business. This new standard also includes one-time activities related to opening a new facility, introduction of a new product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnerships' 1999 fiscal year. Organization costs are all fully amortized resulting in SOP 98-5 having no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION: Certain reclassifications have been made to the 1996 and 1997 financial statements to conform with the 1998 financial statement presentation. Such reclassifications had no effect on the net income or loss as previously stated. F-270 482 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. OTHER ASSETS At December 31, 1997 and 1998, other assets consisted of the following:
1997 1998 ----------- ----------- Franchises......................................... $13,144,332 $12,996,580 Goodwill........................................... 378,336 378,336 Deferred loan costs................................ 26,854 -- Organization costs................................. 63,393 63,393 ----------- ----------- 13,612,915 13,438,309 Less accumulated amortization...................... 7,795,493 8,355,280 ----------- ----------- $ 5,817,422 $ 5,083,029 =========== ===========
On December 31, 1997, the loan agreement with a financial institution was amended (Note 4). At that time, the original loan's costs, which were fully amortized, and the accumulated amortization were written off. The bank loan amendment required the payment of additional loan costs which will be amortized over the remaining term of the bank loan. On August 31, 1998, the loan with a financial institution and the subordinated debt loan with two investor groups were paid in full (Note 4). The related deferred loan costs and associated accumulated amortization were written off and $9,263 was recorded as an extraordinary loss. On December 30, 1998, the new loan agreement with a financial institution was paid in full (Note 4). The related deferred loan costs and associated accumulated amortization were written off and $86,569 was recorded as an extraordinary loss. 4. DEBT The Partnership had a revolving credit agreement with a financial institution which provided for borrowing up to $7,000,000 with a maturity date of December 31, 1997, at which time the balance of the loan was $4,650,000. On December 31, 1997, the credit agreement was amended to reduce the amount available to borrow to $5,200,000 and extend the maturity date to December 31, 1998. The Partnership also had subordinated term notes with two investors totalling $6,000,000 at December 31, 1997. Total outstanding loans at December 31, 1997 were $10,650,000. On August 31, 1998, the revolving credit loan and subordinated term notes had a balance of $3,450,000 and $6,000,000, respectively; at that date, the total balance of $10,650,000 and accrued interest were paid in full. On that same date, the Partnership obtained a new credit agreement with a financial institution. The new credit agreement provided for a senior term note payable in the amount of $7,500,000 and a revolving credit loan which provided for borrowing up to $7,500,000. At December 30, 1998, the term note and revolving credit had a balance of $7,500,000 and $1,950,000, respectively; at that date, the total balance of $9,450,000 and accrued interest were paid in full. The Partnership also incurred a LIBOR break fee of $2,170 in conjunction with the retirement of debt which was recorded as an extraordinary item. Also on December 30, 1998, the Partnership obtained a new interpartnership loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as well as interest and principal payments are due at the discretion of the management of ICP, resulting in no minimum required annual principal payments. The balance of the interpartnership loan at December 31, 1998 was $9,606,630. The effective interest rate at December 31, 1998 was 8.5%. F-271 483 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. MANAGEMENT AGREEMENT The Partnership has entered into a management agreement with Rifkin and Associates, Inc., (Rifkin) whose sole stockholder is affiliated with a general partner of the Partnership. The agreement provides that Rifkin shall manage the Partnership and shall receive annual compensation equal to 2 1/2% of gross revenues and an additional 2 1/2% if a defined cash flow level is met. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction was the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed on the Statement of Operations. 6. LEASE COMMITMENTS At December 31, 1998, the Partnership had lease commitments under long-term operating leases as follows: 1999........................................................ $27,408 2000........................................................ 6,300 2001........................................................ 2,700 2002........................................................ 1,500 2003........................................................ 1,500 Thereafter.................................................. 10,500 ------- Total............................................. $49,908 =======
Rent expense, including pole rent, was as follows for the periods indicated:
TOTAL RENTAL PERIOD EXPENSE - - - ------ -------- Year Ended December 31, 1996................................ $105,590 Year Ended December 31, 1997................................ 98,693 Year Ended December 31, 1998................................ 104,155
7. RETIREMENT BENEFITS The Partnership has a 401(k) plan for its employees that have been employed by the Partnership for at least one year. Employees of the Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Partnership contributions and earnings vest 20% per year of employment with the Partnership, becoming fully vested after five years. The Partnership's matching contributions for the years ended December 31, 1996, 1997 and 1998 were $4,723, $8,769 and $8,639, respectively. F-272 484 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of R/N South Florida Cable Management Limited Partnership In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of equity and of cash flows present fairly, in all material respects, the financial position of R/N South Florida Cable Management Limited Partnership and its subsidiaries (the "Partnership") at September 13, 1999, and the results of their operations and their cash flows for the period January 1, 1999 to September 13, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. On September 13, 1999, all of the Partnership's interest were sold to Charter Communications, LLC. These financial statements represent the Partnership just prior to that transaction and do not reflect any adjustments related thereto. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado February 15, 2000 F-273 485 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 13, 1999 ------------------ ASSETS Cash........................................................ $ 453,963 Customer accounts receivable, less allowance for doubtful accounts of $27,131....................................... 933,646 Accounts receivable, related party.......................... 394,142 Accounts receivable, interpartnership....................... 30,273,104 Other receivables........................................... 780,723 Prepaid expenses and deposits............................... 195,198 Property, plant and equipment, at cost: Transmission and distribution systems and related equipment.............................................. 24,629,591 Vehicles, office furniture and equipment.................. 1,131,040 Leasehold improvements.................................... 6,759 Construction in process and spare parts inventory......... 1,519,099 ------------ 27,286,489 Less accumulated depreciation............................... (1,935,932) ------------ Property, plant and equipment, net..................... 25,350,557 Franchise costs, less accumulated amortization of $17,527,564............................................... 65,160,673 Total assets...................................... $123,542,006 ============ LIABILITIES AND EQUITY Liabilities: Accounts payable and accrued liabilities.................. $ 2,074,095 Customer deposits and prepayments......................... 1,209,481 Interpartnership debt..................................... 60,960,000 ------------ Total liabilities................................. 64,243,576 Commitments and contingencies (Notes 4 and 7) Divisional equity.................................................... 59,298,430 ------------ Total equity...................................... 59,298,430 ------------ Total liabilities and equity...................... $123,542,006 ============
The accompanying notes are an integral part of these consolidated financial statements. F-274 486 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD JANUARY 1, 1999 TO SEPTEMBER 13, 1999 --------------------- REVENUE Service................................................... $ 14,790,346 Installation and other.................................... 2,725,293 ------------ Total revenue..................................... 17,515,639 COSTS AND EXPENSES Operating expense......................................... 2,958,925 Programming expense....................................... 3,957,126 Selling, general and administrative expense............... 4,532,320 Depreciation.............................................. 1,997,656 Amortization.............................................. 17,527,564 Management fees........................................... 700,626 Loss on disposal of assets................................ 685,800 ------------ Total costs and expenses.......................... 32,360,017 ------------ Operating loss............................................ (14,844,378) Interest expense.......................................... 760,517 ------------ Net loss............................................... $(15,604,895) ============
The accompanying notes are an integral part of these consolidated financial statements. F-275 487 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF EQUITY
FOR THE PERIOD JANUARY 1, 1999 TO SEPTEMBER 13, 1999 ------------------------------- DIVISIONAL EQUITY TOTAL ------------ ------------ Equity contribution......................................... $ 74,903,325 $ 74,903,325 Net loss.................................................. (15,604,895) (15,604,895) ------------ ------------ Divisional equity, September 13, 1999....................... $ 59,298,430 $ 59,298,430 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-276 488 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1999 TO SEPTEMBER 13, 1999 --------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................. $(15,604,895) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 19,525,221 Loss on disposal of assets............................. 685,800 Increase in customer accounts receivable............... (478,307) Increase in accounts receivable, related party......... (394,142) Increase in accounts receivable, intercompany.......... (30,273,104) Decrease in other receivables.......................... 910,870 Decrease in prepaid expenses and deposits.............. 197,824 Decrease in accounts payable and accrued liabilities... (282,445) Increase in customer prepayments and deposits.......... 519,116 ------------ Net cash used in operating activities................ (25,194,062) ------------ CASH FLOWS FROM INVESTING ACTIVITIES Initial cash acquisition cost, net of cash acquired....... (74,224,586) Purchases of property, plant and equipment................ (4,487,237) Additions to franchise costs.............................. (383,932) Proceeds from the sale of assets.......................... 102,891 ------------ Net cash used in investing activities................ (78,992,864) ------------ CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions..................................... 74,903,325 Proceeds from interpartnership debt....................... 30,587,226 Payments on interpartnership debt......................... (849,662) ------------ Net cash provided by financing activities............ 104,640,889 ------------ Increase in cash............................................ 453,963 Cash, beginning of period................................... -- Cash, end of period......................................... $ 453,963 ============ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid............................................. $ 760,517 ============
The accompanying notes are an integral part of these consolidated financial statements. F-277 489 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES PRINCIPLES OF CONSOLIDATION AND ORGANIZATION The accompanying consolidated financial statements include the accounts of R/N South Florida Cable Management Limited Partnership (the "Partnership") and its substantially wholly owned subsidiary, Rifkin/Narragansett South Florida CATV Limited Partnership (the "Operating Partnership"). Each partnership is a Florida Limited Partnership. The Partnership was originally organized in 1988 for the purpose of being the general partner to the Operating Partnership which is engaged in the installation, ownership, operation and management of cable television systems in Florida. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP AND BASIS OF PRESENTATION Effective December 31, 1998, Interlink Communications Partners, LLLP ("ICP") acquired all of the Partnership's limited partner interest, and agreed to purchase all of the Partnership's interest for $74.2 million. This transaction was accounted for as a purchase; as such, assets and liabilities were written up to their fair value, resulting in an increase to property, plant and equipment and franchise costs of $5.0 million $77.1 million, respectively. Effective July 1, 1999, ICP completed the purchase of the remaining general partner interest in the Partnership and the Partnership was merged into ICP and ceased to exist as a separate legal entity. The Partnership's financial statements subsequent to that date represent a divisional carve-out from ICP. These financial statements include all the direct costs of operating its business; however, certain assets, liabilities and costs not specifically related to the Partnership's activities were allocated and reflected in the financial position as of September 13, 1999, and the results of its operations and its cash flows for the period January 1, 1999 to September 13, 1999. Allocations from ICP include amounts for debt, interest expense and management expense. Both debt and interest expense were allocated pro rata based on the Partnership's percentage of subscribers to total ICP subscribers. Management expense was allocated in accordance with the management agreement (Note 2). In addition, receivables and payables to ICP are presented in the accompanying financial statements net as amounts due to/from interpartnership. Management believes these allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect what the financial position and results of operations of the Partnership would have been as a stand-alone entity. ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC On February 12, 1999, ICP signed a letter of intent to sell all of ICP's partnership interest to Charter Communications Holdings, LLC ("Charter"). On April 26, 1999, ICP signed a definitive Purchase and Sales Agreement with Charter for the sale of the individual partner's interest. The sales transaction closed on September 13, 1999. These financial statements represent the Partnership just prior to the transaction and do not reflect any related adjustments. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed, include amounts for material, labor, overhead and capitalized interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. F-278 490 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation expense is calculated using the straight-line method of depreciation over the estimated useful lives of the assets as follows: Transmission and distribution systems and related equipment................................................. 1-15 years Vehicles, office furniture and equipment.................... 2-5 years Leasehold improvements...................................... 5 years
FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from 2 to 10 years. The carrying value is assessed for recoverability by management based on an analysis of undiscounted expected future cash flows. The Partnership's management believes that there has been no impairment thereof as of September 13, 1999. INCOME TAXES No provision for federal or state income taxes is necessary in the financial statements of the Partnership, because as a partnership, it is not subject to federal or state income tax as the tax effect of its activities accrues to the partners. REVENUE RECOGNITION Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the period shown. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. MANAGEMENT AGREEMENT The Partnership has a management agreement with R & A Management, LLC ("RML"). The management agreement provides that RML shall manage the Operating Partnership and shall be entitled to annual compensation of 4% of gross revenues. The result of this transaction included the conveyance of the Rifkin management agreement (the "Rifkin Agreement") to RML (the "RML Agreement"). Expenses incurred pursuant to this agreement are disclosed in the Consolidated Statement of Operations. F-279 491 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. DEBT The Partnership has an interpartnership debt with ICP. Borrowings, including both principal and interest, at September 13, 1999 were $60,960,000 and had an effective interest rate of 8.68%. ICP has a term loan and revolving loan agreement with a bank. The amount of the term loan is $150,000,000, and requires varying quarterly payments plus interest commencing September 30, 2001 and continuing through March 31, 2007. On February 1, 1999, the term loan agreement was amended to increase the loan amount to $250,000,000. On July 16, 1999, the term loan agreement was amended again to increase the loan amount to $290,000,000. The interest rate on the term loan is generally the bank's prime rate plus 0% to 1.50%. The weighted average effective rate at September 13, 1999 was 8.74%. The revolving loan agreement provided for borrowing up to $100,000,000 at the Company's discretion. At September 13, 1999, $91,000,000 had been drawn against the $100,000,000 commitment. The revolving credit agreement expires on March 31, 2007. The revolver bears an interest rate at the bank's prime rate plus 0% to 1.50% or LIBOR plus 1.25% to 2.75%. The specific rate is dependent upon the leverage ratio of ICP, which is recalculated quarterly. The weighted average effective interest rate at September 13, 1999 was 8.5%. The term loan and revolving loan agreement are collateralized by substantially all assets of ICP and its consolidated entities, including the Partnership. 4. LEASE COMMITMENTS The Partnership leases certain real and personal property under noncancelable operating leases. Future minimum lease payments under these arrangements at September 13, 1999, were as follows: 1999........................................................ $203,667 2000........................................................ 178,432 2001........................................................ 148,399 -------- $530,498 ========
Total rent expense for the period January 1, 1999 to September 13, 1999 was $187,831, including $68,806 relating to cancelable pole rental agreements. 5. RETIREMENT BENEFITS The Operating Partnership has a 401(k) plan for its employees that have been employed by the Operating Partnership for at least one year. Employees of the Operating Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1999 contribution of $10,000 (as set by the Internal Revenue Service). The Operating Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Operating Partnership contributions and earnings vest 20% per year of employment with the Operating Partnership, becoming fully vested after five years. The Operating Partnership's matching contributions for the period January 1, 1999 to September 13, 1999 were $19,721. F-280 492 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Partnership to estimate the fair values of financial instruments as disclosed herein: Cash, customer accounts receivable, other receivables, accounts payable and accrued liabilities and customer deposits and prepayments: The carrying value amount approximates fair value because of the short period to maturity. The interest rate on debt is adjusted at least quarterly; therefore, the carrying value of debt approximates its fair value. 7. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Partnership's financial position or results of operations. F-281 493 REPORT OF INDEPENDENT AUDITORS The Partners R/N South Florida Cable Management Limited Partnership We have audited the accompanying consolidated balance sheet of R/N South Florida Cable Management Limited Partnership as of December 31, 1997 and 1998, and the related consolidated statements of operations, partners' equity (deficit) and cash flows for the years ended December 31, 1996, 1997 and 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of R/N South Florida Cable Management Limited Partnership at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for the years ended December 31, 1996, 1997 and 1998 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Denver, Colorado February 19, 1999 F-282 494 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 AND 1998
1997 1998 ASSETS (PLEDGED) ----------- ----------- Cash and cash equivalents.................................. $ 362,619 $ 678,739 Customer accounts receivable, less allowance for doubtful accounts of $85,867 in 1997 and $84,474 in 1998.......... 569,296 455,339 Other receivables.......................................... 1,180,507 1,691,593 Prepaid expenses and deposits.............................. 416,455 393,022 Property, plant and equipment, at cost: Transmission and distribution system and related equipment................................................ 22,836,588 27,981,959 Office furniture and equipment............................. 704,135 755,398 Leasehold improvements..................................... 546,909 549,969 Construction in process and spare parts inventory.......... 718,165 744,806 ----------- ----------- 24,805,797 30,032,132 Less accumulated depreciation.............................. 9,530,513 11,368,764 ----------- ----------- Net property, plant and equipment................ 15,275,284 18,663,368 Other assets, at cost less accumulated amortization (Note 2)....................................................... 6,806,578 5,181,012 ----------- ----------- Total assets..................................... $24,610,739 $27,063,073 =========== =========== LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Liabilities: Accounts payable and accrued liabilities................... $ 2,994,797 $ 2,356,540 Interest payable........................................... 287,343 -- Customer prepayments....................................... 699,332 690,365 Long-term debt (Note 3).................................... 29,437,500 -- Interpartnership debt (Note 3)............................. -- 31,222,436 ----------- ----------- Total liabilities................................ 33,418,972 34,269,341 Commitments (Notes 4 and 5) Partners' equity (deficit): General partner.......................................... (96,602) (81,688) Limited partner.......................................... (9,582,050) (8,104,718) Special limited partner.................................. 870,419 980,138 ----------- ----------- Total partners' equity (deficit)........................... (8,808,233) (7,206,268) ----------- ----------- Total liabilities and partners' deficit.......... $24,610,739 $27,063,073 =========== ===========
See accompanying notes. F-283 495 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED --------------------------------------- 12/31/96 12/31/97 12/31/98 ----------- ----------- ----------- REVENUES: Service......................................... $16,615,767 $17,520,883 $18,890,202 Installation and other.......................... 1,732,681 2,425,742 3,158,742 ----------- ----------- ----------- 18,348,448 19,946,625 22,048,944 COSTS AND EXPENSES: Operating expense............................... 2,758,704 3,489,285 3,707,802 Programming expense............................. 4,075,555 4,014,850 4,573,296 Selling, general and administrative expense..... 3,979,002 4,087,845 4,537,535 Depreciation.................................... 1,787,003 1,912,905 2,256,765 Amortization.................................... 1,350,195 1,287,588 1,293,674 Management fees................................. 733,938 797,863 881,958 Loss on disposal of assets...................... 373,860 513,177 178,142 ----------- ----------- ----------- Total costs and expenses.............. 15,058,257 16,103,513 17,429,172 ----------- ----------- ----------- Operating income................................ 3,290,191 3,843,112 4,619,772 Interest expense................................ 2,528,617 2,571,976 2,583,338 ----------- ----------- ----------- Net income before extraordinary item............ 761,574 1,271,136 2,036,434 Extraordinary item -- loss on early retirement of debt (Note 2).............................. -- -- 434,469 ----------- ----------- ----------- Net income...................................... $ 761,574 $ 1,271,136 $ 1,601,965 =========== =========== ===========
See accompanying notes. F-284 496 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (DEFICIT)
SPECIAL GENERAL LIMITED LIMITED PARTNERS PARTNERS PARTNERS TOTAL --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1995............................ $(115,526) $(11,456,616) $731,199 $(10,840,943) Net income for the year ended December 31, 1996................ 7,090 702,324 52,160 761,574 --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1996............................ (108,436) (10,754,292) 783,359 (10,079,369) Net income for the year ended December 31, 1997................ 11,834 1,172,242 87,060 1,271,136 --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1997............................ (96,602) (9,582,050) 870,419 (8,808,233) Net income for the year ended December 31, 1998................ 14,914 1,477,332 109,719 1,601,965 --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1998............................ $ (81,688) $ (8,104,718) $980,138 $ (7,206,268) ========= ============ ======== ============
The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. See accompanying notes. F-285 497 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED ------------------------------------------ 12/31/96 12/31/97 12/31/98 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................... $ 761,574 $ 1,271,136 $ 1,601,965 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 3,137,198 3,200,493 3,550,439 Amortization of deferred loan cost.... 68,898 79,108 89,788 Loss on early retirement of debt...... -- -- 434,469 Loss on disposal of assets............ 373,860 513,177 178,142 Decrease (increase) in customer accounts receivable................. 1,420 (152,229) 113,957 Increase in other receivables......... (377,553) (506,325) (511,086) Decrease (increase) in prepaid expenses and deposits............... (114,720) 115,734 23,433 Increase (decrease) in accounts payable and accrued liabilities..... 122,512 513,839 (638,257) Increase (decrease) in customer prepayments......................... 362 208,021 (8,967) Increase (decrease) in interest payable............................. 180 16,207 (287,343) ----------- ----------- ------------ Net cash provided by operating activities.................... 3,973,731 5,259,161 4,546,540 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............................. (4,000,631) (4,288,776) (5,915,434) Additions to other assets, net of refranchises.......................... (10,600) (164,560) (186,790) Proceeds from the sale of assets......... 16,674 70,865 92,443 ----------- ----------- ------------ Net cash used in investing activities.................... (3,994,557) (4,382,471) (6,009,781) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............. 2,750,000 3,850,000 5,550,000 Proceeds from interpartnership debt...... -- -- 31,222,436 Payments of long-term debt............... (2,604,913) (4,562,500) (34,987,500) Deferred loan costs...................... -- (132,727) (5,575) ----------- ----------- ------------ Net cash provided by (used in) financing activities.......... 145,087 (845,227) 1,779,361 ----------- ----------- ------------ Net increase in cash and cash equivalents.............................. 124,261 31,463 316,120 Cash and cash equivalents at beginning of the year................................. 206,895 331,156 362,619 ----------- ----------- ------------ Cash and cash equivalents at end of year... $ 331,156 $ 362,619 $ 678,739 =========== =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid............................ $ 2,412,038 $ 2,441,662 $ 2,780,893 =========== =========== ============
See accompanying notes F-286 498 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND ORGANIZATION: The accompanying consolidated financial statements include the accounts of R/N South Florida Cable Management Limited Partnership (the "Partnership") and its substantially wholly-owned subsidiary Rifkin/Narragansett South Florida CATV Limited Partnership (the "Operating Partnership"). Each partnership is a Florida Limited Partnership. The Partnership was organized in 1988 for the purpose of being the general partner to the Operating Partnership which is engaged in the installation, ownership, operation and management of cable television systems in Florida. In 1992, the Partnership adopted an amendment to the Partnership agreement (the "Amendment") and entered into a Partnership Interest Purchase Agreement whereby certain Special Limited Partnership interests were issued in the aggregate amount of $1,250,000. These new Special Limited Partners are affiliated with the current General and Limited Partners of the Partnership. The Amendment provides for the methods under which the gains, losses, adjustments and distributions are allocated to the accounts of the Special Limited Partners. For financial reporting purposes, partnership profits or losses are allocated to the limited partners, special limited partners and general partners in the following ratios: 92.22%, 6.849% and .931%, respectively. Limited partners and special limited partners are not required to fund any losses in excess of their capital contributions. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP: InterLink Communications Partners, LLLP ("ICP") agreed to purchase all of the interests of the Partnerships. ICP acquired all of the limited partner interests of the Operating Partnership, effective December 31, 1998, and is currently in the process of obtaining the necessary consents to transfer all of the Operating Partnership's franchises to ICP. Once obtained, ICP will then purchase the general partner interest, and the Partnership, by operation of law, will consolidate into ICP. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment additions are recorded at cost, which in the case of assets constructed includes amounts for material, labor, overhead and capitalized interest, if applicable. For financial reporting purposes, the Operating Partnership uses the straight-line method of depreciation over the estimated useful lives of the assets as follows: Transmission and distribution systems and related equipment............................................... 15 years Office furniture and equipment............................ 3-15 years Leasehold improvements.................................... 5-8 years
OTHER ASSETS: Other assets are carried at cost and are amortized on a straight-line basis over the following lives: Franchises................... -- the terms of the franchises (3-13 years) Goodwill..................... -- 40 years Organization costs........... -- 5 years Deferred loan costs.......... -- the term of the debt (8 years)
F-287 499 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES: No provision for the payment or refund of income taxes has been provided since the partners are responsible for reporting their distributive share of partnerships net income or loss in their personal capacities. CASH AND CASH EQUIVALENTS: The Partnerships consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. REVENUE RECOGNITION: Customer fees are recorded as revenue in the period the service is provided. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and cash equivalents, customer accounts receivable, accounts payable and interpartnership debt approximate fair value. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPACT OF YEAR 2000 (UNAUDITED): The Partnerships recognize that certain of its time-sensitive computer programs and product distribution equipment may be affected by conversion to the year 2000. During 1998, management began their evaluation of the information systems, product distribution facilities, and vendor and supplier readiness. To date, considerable progress has been made to complete the evaluation process, to integrate and test compliance installations, and to prepare contingency plans. In addition, third party suppliers are either fully compliant or are expected to be compliant by December 31, 1999. Management expects to have all systems compliant, or have a contingency plan in effect that will result in minimal impact on the operations. NEW ACCOUNTING PRONOUNCEMENT: In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the costs of Start-Up Activities," which requires the Partnerships to expense all start-up costs related to organizing a new business. This new standard also includes one-time activities related to opening a new facility, introduction of a new product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnerships' 1999 fiscal year. The organization costs are fully amortized, resulting in SOP 98-5 having no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION: Certain reclassifications have been made to the 1996 and 1997 financial statements to conform with the 1998 financial statement presentation. Such reclassifications had no effect on the net income as previously stated. F-288 500 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. OTHER ASSETS At December 31, 1997 and 1998, other assets consisted of the following:
1997 1998 ----------- ----------- Franchises and other....................... $14,348,984 $14,535,774 Goodwill................................... 3,429,845 3,429,845 Deferred loan costs........................ 694,819 -- Organization costs......................... 23,218 23,218 ----------- ----------- 18,496,866 17,988,837 Less accumulated amortization.............. 11,690,288 12,807,825 ----------- ----------- $ 6,806,578 $ 5,181,012 =========== ===========
On December 30, 1998, the Partnerships' loan with a financial institution was paid in full (Note 3). The related deferred loan costs and associated accumulated amortization were written off and an extraordinary loss of $434,469 was recorded. 3. DEBT The Partnerships had senior term note payable and a revolving credit loan agreement with a financial institution. The senior term note payable was a $29,500,000 loan which required varying quarterly payments which commenced on September 30, 1996. On June 30, 1997, the loan agreement was amended to defer the June 30, 1997 and September 30, 1997 principal payments and restructured the required principal payment amounts due through December 31, 2003. The revolving credit loan provided for borrowing up to $3,000,000 at the discretion of the Partnerships. On June 30, 1997, the loan agreement was amended to increase the amount provided for borrowing under the revolving credit loan to $3,750,000. At December 31, 1997, the term notes and the revolving credit loan had a balance of $28,387,500 and $1,050,000, respectively, with a total balance of $29,437,500. At December 30, 1998, the term notes and the revolving credit loan had a balance of $27,637,500 and $3,300,000, respectively; at that date, the total balance of $30,937,500 and accrued interest were paid in full. Also on December 30, 1998, the Partnerships obtained a new interpartnership loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as well as interest and principal payments are due at the discretion of the management of ICP, resulting in no minimum required annual principal payments. The balance of the interpartnership loan at December 31, 1998 was $31,222,436. The effective interest rate at December 31, 1998 was 8.5%. 4. MANAGEMENT AGREEMENT The Partnerships have entered into a management agreement with Rifkin & Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall manage the Operating Partnership and shall be entitled to annual compensation of 4% of gross revenues. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction was the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed on the Consolidated Statement of Operations. F-289 501 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LEASE COMMITMENTS At December 31, 1998, the Operating Partnership had lease commitments under long-term operating leases as follows: 1999........................................................ $195,437 2000........................................................ 189,643 2001........................................................ 116,837 -------- Total............................................. $501,917 ========
Rent expense, including pole rent, was as follows for the periods indicated:
TOTAL RENTAL PERIOD EXPENSE - - - ------ -------- Year Ended December 31, 1996............................... $262,231 Year Ended December 31, 1997............................... 279,655 Year Ended December 31, 1998............................... 295,107
6. RETIREMENT BENEFITS The Operating Partnership has a 401(k) plan for its employees that have been employed by the Operating Partnership for at least one year. Employees of the Operating Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Operating Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Operating Partnership contributions and earnings vest 20% per year of employment with the Operating Partnership, becoming fully vested after five years. The Operating Partnership's matching contributions for the years ended December 31, 1996, 1997 and 1998 were $15,549, $23,292 and $20,652, respectively. F-290 502 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of InterMedia Partners and InterMedia Capital Partners IV, L.P. In our opinion, the accompanying combined balance sheets and the related combined statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the financial position of InterMedia Cable Systems (comprised of components of InterMedia Partners and InterMedia Capital Partners IV, L.P.) at September 30, 1999 and December 31, 1998, and the results of their operations and their cash flows for the nine-months ended September 30, 1999 and for the years ended December 31, 1998 and 1997 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the management of InterMedia Partners and InterMedia Capital Partners IV, L.P.; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California January 6, 2000 F-291 503 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ ASSETS Accounts receivable, net of allowance for doubtful accounts of $903 and $899, respectively............................ $ 14,971 $ 14,425 Receivables from affiliates................................. 7,966 5,623 Prepaid expenses............................................ 1,100 423 Other current assets........................................ 186 350 -------- -------- Total current assets...................................... 24,223 20,821 Intangible assets, net...................................... 214,182 255,356 Property and equipment, net................................. 228,676 218,465 Deferred income taxes....................................... 15,279 12,598 Investments and other non-current assets.................... 544 2,804 -------- -------- Total assets.............................................. $482,904 $510,044 -------- -------- LIABILITIES AND EQUITY Accounts payable and accrued liabilities.................... $ 15,504 $ 19,230 Deferred revenue............................................ 11,151 11,104 Payables to affiliates...................................... 2,265 3,158 -------- -------- Total current liabilities................................. 28,920 33,492 Note payable to InterMedia Partners IV, L.P................. 406,975 396,579 Deferred channel launch revenue............................. 3,583 4,045 -------- -------- Total liabilities......................................... 439,478 434,116 -------- -------- Commitments and contingencies Mandatorily redeemable preferred shares..................... 14,934 14,184 Equity...................................................... 28,492 61,744 -------- -------- Total liabilities and equity.............................. $482,904 $510,044 ======== ========
See accompanying notes to combined financial statements. F-292 504 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------------- 1999 1998 1997 ------------- -------- -------- REVENUES Basic and cable services............................ $105,275 $125,920 $112,592 Pay services........................................ 20,699 23,975 24,467 Other services...................................... 26,815 26,167 25,519 -------- -------- -------- 152,789 176,062 162,578 COSTS AND EXPENSES Program fees........................................ 35,579 39,386 33,936 Other direct expenses............................... 15,280 16,580 16,500 Selling, general and administrative expenses........ 33,315 30,787 29,181 Management and consulting fees...................... 2,356 3,147 2,870 Depreciation and amortization....................... 79,325 85,982 81,303 -------- -------- -------- 165,855 175,882 163,790 -------- -------- -------- Profit/(loss) from operations....................... (13,066) 180 (1,212) -------- -------- -------- OTHER INCOME (EXPENSE) Interest expense.................................... (17,636) (25,449) (28,458) Interest and other income........................... 187 341 429 Gain on sale of investment.......................... 1,678 -- -- Gain on sale/exchange of cable systems.............. -- 26,218 10,006 Other expense....................................... (4,397) (3,188) (1,431) -------- -------- -------- (20,168) (2,078) (19,454) -------- -------- -------- Loss before income tax benefit (expense)............ (33,234) (1,898) (20,666) Income tax benefit (expense)........................ 2,681 (1,623) 4,026 -------- -------- -------- NET LOSS............................................ $(30,553) $ (3,521) $(16,640) ======== ======== ========
See accompanying notes to combined financial statements. F-293 505 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENT OF CHANGES IN EQUITY (DOLLARS IN THOUSANDS) Balance at January 1, 1997.................................. $ 69,746 Net loss.................................................... (16,640) Accretion for mandatorily redeemable preferred shares....... (882) Net contributions from parent............................... 6,489 -------- Balance at December 31, 1997................................ 58,713 Net loss.................................................... (3,521) Accretion for mandatorily redeemable preferred shares....... (945) Net cash contributions from parent.......................... 6,350 In-kind contribution from parent............................ 1,147 -------- Balance at December 31, 1998................................ 61,744 Net loss.................................................... (30,553) Accretion for mandatorily redeemable preferred shares....... (750) Net distributions to parent................................. (1,949) -------- Balance at September 30, 1999............................... $ 28,492 ========
See accompanying notes to combined financial statements. F-294 506 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------------- 1999 1998 1997 ------------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss............................................ $(30,553) $ (3,521) $(16,640) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization..................... 79,325 85,982 81,303 Loss on disposal of fixed assets.................. 1,497 3,177 504 Gain on sale of investment........................ (1,678) -- -- Gain on sale/exchange of cable systems............ -- (26,218) (10,006) Changes in assets and liabilities: Accounts receivable............................ (546) (1,395) (2,846) Receivables from affiliates.................... (2,343) (3,904) (639) Prepaid expenses............................... (677) 203 (251) Other current assets........................... 164 (106) (10) Deferred income taxes.......................... (2,681) 1,623 (4,311) Other non-current assets....................... 1,088 (517) (58) Accounts payable and accrued liabilities....... 134 (2,073) 4,436 Deferred revenue............................... 740 1,208 1,399 Payables to affiliates......................... (893) 373 469 Accrued interest............................... 17,636 25,449 28,458 Deferred channel launch revenue................ (1,155) 2,895 2,817 -------- -------- -------- Cash flows from operating activities.............. 60,058 83,176 84,625 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment............... (52,848) (72,673) (87,253) Sale/exchange of cable systems.................... -- (398) 11,157 Proceeds from sale of investment.................. 2,850 -- -- Intangible assets................................. (871) (372) (506) -------- -------- -------- Cash flows from investing activities.............. (50,869) (73,443) (76,602) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net (distributions) contributions to/from parent......................................... (1,949) 6,350 6,489 Net repayment of borrowings....................... (7,240) (16,083) (14,512) -------- -------- -------- Cash flows from financing activities.............. (9,189) (9,733) (8,023) -------- -------- -------- Net change in cash.................................. -- -- -- -------- -------- -------- Cash at beginning of period......................... -- -- -- -------- -------- -------- Cash at end of period............................... $ -- $ -- $ -- ======== ======== ========
See accompanying notes to combined financial statements. F-295 507 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION THE CHARTER TRANSACTIONS InterMedia Partners, a California limited partnership ("IP-I"), and InterMedia Capital Partners IV, L.P., a California limited partnership, ("ICP-IV", together with IP-I, "InterMedia") are affiliated through common control and management. Robin Media Group, Inc. , a Nevada corporation, ("RMG") is a majority owned subsidiary of ICP-IV. On April 20, 1999 InterMedia and certain of its affiliates entered into agreements (the "Agreements") with affiliates of Charter Communications, Inc. ("Charter") to sell and exchange certain of their cable television systems ("the Charter Transactions"). The Charter Transactions closed on October 1, 1999. Specifically, ICP-IV and its affiliates sold certain of their cable television systems in Tennessee and Gainesville, Georgia through a combination of asset sales and the sale of their equity interests in RMG, and exchanged their systems in and around Greenville and Spartanburg, South Carolina for Charter systems located in Indiana, Kentucky, Utah and Montana. Immediately upon Charter's acquisition of RMG, IP-I exchanged its cable television systems in Athens, Georgia, Asheville and Marion, North Carolina and Cleveland, Tennessee for RMG's cable television systems located in middle Tennessee. The cable systems retained by Charter upon consummation of the Charter Transactions, together with RMG, are referred to as the "InterMedia Cable Systems," or the "Systems." PRESENTATION The accompanying combined financial statements represent the financial position of the InterMedia Cable Systems as of September 30, 1999 and December 31, 1998 and 1997 and the results of their operations and their cash flows for the nine months ended September 30, 1999 and the years ended December 31, 1998 and 1997. The Systems being sold or exchanged do not individually or collectively comprise a separate legal entity. Accordingly, the combined financial statements have been carved-out from the historical accounting records of InterMedia. CARVE-OUT METHODOLOGY Throughout the periods covered by the combined financial statements, the individual cable systems were operated and accounted for separately. However, the Charter Transactions exclude certain systems (the "Excluded Systems") which were operated as part of the Marion, North Carolina and western Tennessee systems throughout the periods presented in the combined financial statements. For purposes of carving out and excluding the results of operations and financial position of the Excluded Systems from the combined financial statements, management has estimated the revenues, expenses, assets and liabilities associated with each Excluded System based on the ratio of each Excluded System's basic subscribers to the total basic subscribers served by the Marion, North Carolina and western Tennessee systems, respectively. Management believes the basis used for these allocations is reasonable. The Systems' results of operations are not necessarily indicative of future operating results or the results that would have occurred if the Systems were a separate legal entity. Management and consulting fees represent an allocation of management fees charged to IP-I and ICP-IV by InterMedia Capital Management, a California limited partnership ("ICM") and InterMedia Management, Inc. ("IMI"), respectively. ICM is a limited partner of IP-I. IMI is the managing member of each of the general partners of IP-I and ICP-IV. These fees are charged at a fixed amount per annum and have been allocated to the Systems based upon the allocated F-296 508 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) contributed capital of the individual systems as compared to the total contributed capital of InterMedia's subsidiaries. As more fully described in Note 9 -- "Related Party Transactions," certain administrative services are also provided by IMI and are charged to all affiliates based on relative basic subscriber percentages. CASH AND INTERCOMPANY ACCOUNTS Under InterMedia's centralized cash management system, cash requirements of its individual operating units were generally provided directly by InterMedia and the cash generated or used by the Systems was transferred to/from InterMedia, as appropriate, through intercompany accounts. The intercompany account balances between InterMedia and the individual operating units, except RMG's intercompany note payable to InterMedia Partners IV, L.P. ("IP-IV"), as described in Note 7 -- "Note Payable to InterMedia Partners IV, L.P.," are not intended to be settled. Accordingly, the balances, other than RMG's note payable to IP-IV, are included in equity and all net cash flows from operations, investing activities and financing activities have been included in the Systems' net (distributions) contributions to/from parent in the combined statements of cash flows. IP-I and ICP-IV or its subsidiaries maintain all external debt to fund and manage InterMedia's operations on a centralized basis. The combined financial statements present only the debt and related interest expense of RMG, which was assumed and repaid by Charter pursuant to the Charter Transactions. See Note 7 -- "Note Payable to InterMedia Partners IV, L.P." Debt, unamortized debt issue costs and interest expense related to the financing of the cable systems not owned by RMG have not been allocated to the InterMedia Cable Systems. As such, the level of debt, unamortized debt issue costs and related interest expense presented in the combined financial statements are not representative of the debt that would be required or interest expense incurred if InterMedia Cable Systems were a separate legal entity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Cable television service revenue is recognized in the period in which services are provided to customers. Deferred revenue generally represents revenue billed in advance and deferred until cable service is provided. Installation fees are recognized immediately into revenue to the extent of direct selling costs incurred. Any fees in excess of such costs are deferred and amortized into income over the period that customers are expected to remain connected to the cable television system. PROPERTY AND EQUIPMENT Additions to property and equipment, including new customer installations, are recorded at cost. Self-constructed fixed assets include materials, labor and overhead. Costs of disconnecting and reconnecting cable service are expensed. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. Capitalized fixed assets are written down to recoverable values whenever recoverability through operations or sale of the systems becomes doubtful. Gains and losses on disposal of property and equipment are included in the Systems' statements of operations when the assets are sold or retired from service. F-297 509 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Depreciation is computed using the double-declining balance method over the following estimated useful lives:
YEARS ------- Cable television plant...................................... 5 -- 10 Buildings and improvements.................................. 10 Furniture and fixtures...................................... 3 -- 7 Equipment and other......................................... 3 -- 10
INTANGIBLE ASSETS The Systems have franchise rights to operate cable television systems in various towns and political subdivisions. Franchise rights are being amortized over the lesser of the remaining franchise lives or the base ten and twelve-year terms of IP-I and ICP-IV, respectively. The remaining lives of the franchises range from one to seventeen years. Goodwill represents the excess of acquisition costs over the fair value of net tangible and franchise assets acquired and liabilities assumed and is being amortized on a straight-line basis over the base ten or twelve-year term of IP-I and ICP-IV, respectively. Capitalized intangibles are written down to recoverable values whenever recoverability through operations or sale of the systems becomes doubtful. Each year, the Systems evaluate the recoverability of the carrying value of their intangible assets by assessing whether the projected cash flows, including projected cash flows from sale of the systems, is sufficient to recover the unamortized costs of these assets. INCOME TAXES Income taxes reported in InterMedia Cable Systems' combined financial statements represent the tax effects of RMG's results of operations. RMG as a corporation is the only entity within InterMedia Cable Systems which reports a provision/benefit for income taxes. No provision or benefit for income taxes is reported by any of the other cable systems within the InterMedia Cable Systems structure because these systems are currently owned by various partnerships, and, as such, the tax effects of these cable systems' results of operations accrue to the partners. RMG accounts for income taxes using the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. F-298 510 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of receivables, payables, deferred revenue and accrued liabilities approximates fair value due to their short maturity. 3. SALE AND EXCHANGE OF CABLE PROPERTIES SALE On December 5, 1997, RMG sold its cable television assets serving approximately 7,400 (unaudited) basic subscribers in and around Royston and Toccoa, Georgia. The sale resulted in a gain, calculated as follows: Proceeds from sale.......................................... $ 11,212 Net book value of assets sold............................... (1,206) -------- Gain on sale................................................ $ 10,006 ========
EXCHANGE On December 31, 1998, certain of the Systems' cable television assets located in and around western and eastern Tennessee ("Exchanged Assets"), serving approximately 10,600 (unaudited) basic subscribers, plus cash of $398 were exchanged for other cable television assets located in and around western and eastern Tennessee, serving approximately 10,000 (unaudited) basic subscribers. The cable television assets received have been recorded at fair market value, allocated as follows: Property and equipment...................................... $ 5,141 Franchise rights............................................ 24,004 -------- Total....................................................... $ 29,145 ========
The exchange resulted in a gain of $26,218 calculated as the difference between the fair value of the assets received and the net book value of the Exchanged Assets less cash paid of $398. 4. INTANGIBLE ASSETS Intangible assets consist of the following:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Franchise rights...................................... $ 332,800 $ 332,157 Goodwill.............................................. 58,505 58,505 Other................................................. 573 345 --------- --------- 391,878 391,007 Accumulated amortization.............................. (177,696) (135,651) --------- --------- $ 214,182 $ 255,356 ========= =========
F-299 511 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Land.................................................. $ 1,080 $ 1,068 Cable television plant................................ 266,848 231,937 Building and improvements............................. 5,546 5,063 Furniture and fixtures................................ 3,509 3,170 Equipment and other................................... 29,953 25,396 Construction-in-progress.............................. 22,999 18,065 --------- --------- 329,935 284,699 Accumulated depreciation.............................. (101,259) (66,234) --------- --------- $ 228,676 $ 218,465 ========= =========
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Accounts payable...................................... $ 4,793 $ 1,780 Accrued program costs................................. 1,504 1,897 Accrued franchise fees................................ 2,659 4,676 Accrued copyright fees................................ 145 406 Accrued capital expenditures.......................... 1,355 5,215 Accrued payroll costs................................. 2,746 1,784 Accrued property and other taxes...................... 1,524 862 Other accrued liabilities............................. 778 2,610 -------- -------- $ 15,504 $ 19,230 ======== ========
7. NOTE PAYABLE TO INTERMEDIA PARTNERS IV, L.P. RMG's note payable to IP-IV consists of the following:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Intercompany revolving credit facility, $1,200,000 commitment as of September 30, 1999, interest currently at 6.60% payable on maturity, matures December 31, 2006................................... $406,975 $396,579 ======== ========
RMG's debt is outstanding under an intercompany revolving credit facility executed with IP-IV. The revolving credit facility currently provides for $1,200,000 of available credit. RMG's intercompany revolving credit facility requires repayment of the outstanding principal and accrued interest on the earlier of (i) December 31, 2006, or (ii) acceleration of any of IP-IV's obligations to repay under its bank debt outstanding under its revolving credit facility ("IP-IV F-300 512 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Revolving Credit Facility") and term loan agreement ("IP-IV Term Loan", together with the IP-IV Revolving Credit Facility, the "IP-IV Bank Facility") dated July 30, 1996. On October 1, 1999, Charter assumed and repaid RMG's intercompany revolving credit facility pursuant to the Charter Transactions. Interest rates under RMG's intercompany revolving credit facility are calculated monthly and are referenced to those made available under the IP-IV Bank Facility. Interest rates ranged from 6.21% to 6.96% during the nine months ended September 30, 1999. Advances under the IP-IV Bank Facility are available under interest rate options related to the base rate of the administrative agent for the IP-IV Bank Facility ("ABR") or LIBOR. Interest rates on borrowings under the IP-IV Term Loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR plus 0.75% based on IP-IV's ratio of debt outstanding to annualized quarterly operating cash flow ("Senior Debt Ratio"). Interest rates on borrowings under the IP-IV Revolving Credit Facility also vary from LIBOR plus 0.625% to LIBOR plus 1.50% or ABR to ABR plus 0.25% based on IP-IV's Senior Debt Ratio. The IP-IV Bank Facility requires quarterly payment of fees on the unused portion of the IP-IV Revolving Credit Facility of 0.375% per annum when the Senior Debt Ratio is greater than 4.0:1.0 and at 0.25% when the Senior Debt Ratio is less than or equal to 4.0:1.0. The terms and conditions of RMG's intercompany debt agreement are not necessarily indicative of the terms and conditions which would be available if the Systems were a separate legal entity. 8. MANDATORILY REDEEMABLE PREFERRED SHARES RMG has Redeemable Preferred Stock outstanding at September 30, 1999 and December 31, 1998, which has an annual dividend of 10.0% and participates in any dividends paid on the common stock at 10.0% of the dividend per share paid on the common stock. The Redeemable Preferred Stock bears a liquidation preference of $12,000 plus any accrued but unpaid dividends at the time of liquidation and is mandatorily redeemable on September 30, 2006 at the liquidation preference amount. Pursuant to the terms of the Agreements, upon consummation of the Charter Transactions, Charter redeemed RMG's Redeemable Preferred Stock at the liquidation preference amount. 9. RELATED PARTY TRANSACTIONS ICM and IMI provide certain management services to IP-I and ICP-IV, respectively, for per annum fixed fees, of which 20% per annum is deferred and payable in each following year in order to support InterMedia's debt. Management fees charged to InterMedia for the nine months ended September 30, 1999 and the years ended December 31, 1998 and 1997 amounted to $4,059, $5,410 and $6,395, respectively, of which $2,356, $3,147 and $2,870, respectively, has been charged to the Systems. IMI has entered into agreements with both IP-I and ICP-IV to provide accounting and administrative services at cost. Under the terms of the agreements, the expenses associated with rendering these services are charged to the Systems and other affiliates based upon relative basic subscriber percentages. Management believes this method to be reflective of the actual cost. IMI also pays on behalf of the Systems and other affiliates "pass through costs" that are specifically identifiable to the Systems and other affiliates. These include, but are not limited to programming fees and copyright fees. During the nine months ended September 30, 1999 and F-301 513 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) the years ended December 31, 1998 and 1997, IMI administrative fees charged to the Systems totaled $3,093, $3,657 and $4,153, respectively. Receivables from affiliates at September 30, 1999 and December 31, 1998 include $5,873 and $52, respectively, of advances to IMI, net of administrative fees charged by IMI and operating expenses paid by IMI on behalf of the Systems. IP-I is majority-owned, and ICP-IV is owned in part, by AT&T Broadband & Internet Services ("AT&TBIS"), formerly Tele-Communications, Inc. As affiliates of AT&TBIS, IP-I and ICP-IV are able to purchase programming services from a subsidiary of AT&TBIS. Management believes that the overall programming rates made available through this relationship are lower than the Systems could obtain separately. Such volume rates may not continue to be available in the future should AT&TBIS's ownership interest in InterMedia significantly decrease. Program fees charged by the AT&TBIS subsidiary to the Systems for the nine months ended September 30, 1999 and the years ended December 31, 1998 and 1997 amounted to $26,352, $30,884 and $26,815, respectively. Payables to affiliates include programming fees payable to the AT&TBIS subsidiary of $2,918 at December 31, 1998. There were no programming fees payable to the AT&TBIS subsidiary at September 30, 1999. On January 1, 1998 an affiliate of AT&TBIS entered into agreements with InterMedia to manage the Systems' advertising business and related services for an annual fixed fees per advertising sales subscriber as defined by the agreements. In addition to the annual fixed fee, AT&TBIS is entitled to varying percentage shares of the incremental growth in annual cash flows from advertising sales above specified targets. Management fees charged by the AT&TBIS subsidiary for the nine months ended September 30, 1999 and the year ended December 31, 1998 amounted to $227 and $292, respectively. Receivables from affiliates at September 30, 1999 and December 31, 1998 include $2,034 and $3,437, respectively, of receivable from AT&TBIS for advertising sales. As part of its normal course of business the Systems are involved in transactions with affiliates of InterMedia which own and operate cable television systems. Such transactions include purchases and sales, at cost, of inventories used in construction of cable plant. Receivables from affiliates at September 30, 1999 and December 31, 1998 include $59 and $2,134, respectively, of receivables from affiliated systems. Payables to affiliates at September 30, 1999 and December 31, 1998 include $2,265 and $208, respectively, of payables to affiliated systems. 10. CABLE TELEVISION REGULATION Cable television legislation and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past, and may in the future, materially affect the Systems and the cable television industry. The cable industry is currently regulated at the federal and local levels under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the Federal Communications Commission ("FCC") in response to the 1992 Act. FCC regulations govern the determination of rates charged for basic, expanded basic and certain ancillary services, and cover a number of other areas including customer services and technical performance standards, the required transmission of certain local broadcast stations and the requirement to negotiate retransmission consent from major network and certain local television stations. Among other provisions, the 1996 Act eliminated rate regulation on the expanded basic tier effective March 31, 1999. F-302 514 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Current regulations issued in conjunction with the 1992 Act empower the FCC and/or local franchise authorities to order reductions of existing rates which exceed the maximum permitted levels and to require refunds measured from the date a complaint is filed in some circumstances or retroactively for up to one year in other circumstances. Management believes it has made a fair interpretation of the 1992 Act and related FCC regulations in determining regulated cable television rates and other fees based on the information currently available. However, complaints have been filed with the FCC on rates for certain franchises and certain local franchise authorities have challenged existing and prior rates. Further complaints and challenges could be forthcoming, some of which could apply to revenue recorded in 1999 and prior years. Management believes that the effect, if any, of these complaints and challenges will not be material to the Systems' financial position or results of operations. Many aspects of regulation at the federal and local levels are currently the subject of judicial review and administrative proceedings. In addition, the FCC is required to conduct rulemaking proceedings to implement various provisions of the 1996 Act. It is not possible at this time to predict the ultimate outcome of these reviews or proceedings or their effect on the Systems. 11. COMMITMENTS AND CONTINGENCIES The Systems are committed to provide cable television services under franchise agreements with remaining terms of up to seventeen years. Franchise fees of up to 5% of gross revenues are payable under these agreements. Current FCC regulations require that cable television operators obtain permission to retransmit major network and certain local television station signals. The Systems have entered into long-term retransmission agreements with all applicable stations in exchange for in-kind and/or other consideration. InterMedia has been named in purported and certified class actions in various jurisdictions concerning late fee charges and practices. Certain cable systems owned by InterMedia charge late fees to customers who do not pay their cable bills on time. These late fee cases challenge the amount of the late fees and the practices under which they are imposed. The plaintiffs raise claims under state consumer protection statutes, other state statutes and common law. The plaintiffs generally allege that the late fees charged by InterMedia's cable systems, including the Systems in the States of Tennessee, South Carolina and Georgia are not reasonably related to the costs incurred by the cable systems as a result of the late payment. The plaintiffs seek to require cable systems to reduce their late fees on a prospective basis and to provide compensation for alleged excessive late fee charges for past periods. These cases are either at the early stages of the litigation process or are subject to a case management order that sets forth a process leading to mediation. Based upon the facts available management believes that, although no assurances can be given as to the outcome of these actions, the ultimate disposition of these matters should not have a material adverse effect upon the financial condition of the Systems. In the Spring of 1999 the Tennessee Department of Revenue ("TDOR") proposed legislation that was passed by the Tennessee State Legislature which replaced the former Amusement Tax with a new sales tax on all cable service revenues in excess of fifteen dollars per month effective September 1, 1999. The new tax is computed at a rate approximately equal to the former effective tax rate. F-303 515 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Prior to the passage of this legislation, the TDOR suggested that under its interpretation of the former legislation it could assess, for prior periods up to three years, additional taxes on expanded basic service revenue. Management believes that based on subsequent correspondence with the TDOR that the TDOR will not pursue additional taxes under the former amusement tax legislation. The Systems are subject to other claims and litigation in the ordinary course of business. In the opinion of management, the ultimate outcome of any existing litigation or other claims will not have a material effect on the Systems' financial position or results of operations. The Systems have entered into pole rental agreements and lease certain of its facilities and equipment under non-cancelable operating leases. Minimum rental commitments at September 30, 1999 for the next five years and thereafter under non-cancelable operating leases related to the Systems are as follows: 1999........................................................ $ 169 2000........................................................ 623 2001........................................................ 580 2002........................................................ 366 2003........................................................ 252 2004 and thereafter......................................... 1,080 ------ $3,070 ======
Rent expense, including pole rental agreements, for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997 was $2,243, $2,817 and $2,828, respectively. 12. INCOME TAXES Income tax benefit (expense) consists of the following:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ------------------ 1999 1998 1997 ------------- ------- ------- Current federal................................. $ -- $ -- $ (285) Deferred federal................................ 2,415 (1,454) 3,813 Deferred state.................................. 266 (169) 498 -------- ------- ------- $ 2,681 $(1,623) $ 4,026 ======== ======= =======
F-304 516 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Deferred income taxes relate to temporary differences as follows:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------- ------------ Property and equipment................................ $ (7,425) $ (7,258) Intangible assets..................................... (10,514) (12,930) --------- --------- (17,939) (20,188) Loss carryforward -- federal.......................... 31,924 31,547 Loss carryforward -- state............................ 341 297 Other................................................. 953 942 --------- --------- $ 15,279 $ 12,598 ========= =========
At December 31, 1998, RMG had net operating loss carryforwards for federal income tax purposes aggregating $92,785, which expire through 2018. RMG is a loss corporation as defined in Section 382 of the Internal Revenue Code. Therefore, if certain substantial changes in RMG's ownership should occur, there could be a significant annual limitation on the amount of loss carryforwards which can be utilized. InterMedia's management has not established a valuation allowance to reduce the deferred tax assets related to RMG's unexpired net operating loss carryforwards. Due to an excess of appreciated asset value over the tax basis of RMG's net assets, management believes it is more likely than not that the deferred tax assets related to unexpired net operating losses will be realized. A reconciliation of the tax benefit (expense) computed at the statutory federal rate and the benefit (expense) reported in the accompanying combined statements of operations is as follows:
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- 1999 1998 1997 ------------- --------- --------- Tax benefit at federal statutory rate...... $ 4,476 $ 626 $ 4,454 State taxes, net of federal benefit........ 522 73 498 Goodwill amortization...................... (1,675) (2,309) (2,056) Realization of acquired tax benefit........ -- -- 346 Other...................................... (642) (13) 784 --------- --------- --------- $ 2,681 $ (1,623) $ 4,026 ========= ========= =========
13. CHANNEL LAUNCH REVENUE During 1997 and 1998, the Systems were credited with amounts representing their share of payments received or to be received by InterMedia from certain programmers to launch and promote their new channels. Of the total amount credited, the Systems recognized advertising revenue of $434, $586 and $1,182 during the nine months ended September 30, 1999 and the years ended December 31, 1998 and 1997, respectively, for advertisements provided by the Systems to promote the new channels. The remaining amounts credited to the Systems are being amortized over the respective terms of the program agreements which range between five to ten years. For the nine months ended September 30, 1999 and the years ended December 31, F-305 517 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1998 and 1997, the Systems amortized and recorded as other service revenues $721, $956 and $894, respectively. Also, during 1998 the Systems recorded a receivable from a programmer, of which $853 and $1,791 remained outstanding at September 30, 1999 and December 31, 1998, respectively, for the launch and promotion of its new channel. 14. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS In connection with RMG's sale of its cable television assets located in Royston and Toccoa, Georgia in December 1997, as described in Note 3 -- "Sale and Exchange of Cable Properties," net cash proceeds received were as follows: Proceeds from sale.......................................... $ 11,212 Receivable from buyer....................................... (55) -------- Net proceeds received from buyer.......................... $ 11,157 ========
In connection with the exchange of certain cable assets in and around western and eastern Tennessee on December 31, 1998, as described in Note 3, the Systems paid cash of $398. In December 1998, IP-IV contributed its 4.99% partner interest in a limited partnership to RMG. The book value of the investment at the time of the contribution was $1,147. Total accretion on RMG's Redeemable Preferred Stock for the nine months ended September 30, 1999 and for the years ended December 31, 1998 and 1997 amounted to $750, $945 and $882, respectively. 15. EMPLOYEE BENEFIT PLANS The Systems participate in the InterMedia Partners Tax Deferred Savings Plan which covers all full-time employees who have completed at least six months of employment. The plan provides for a base employee contribution of 1% and a maximum of 15% of compensation. The Systems' matching contributions under the plan are at the rate of 50% of the employee's contribution, up to a maximum of 5% of compensation. F-306 518 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Holdings, LLC: We have audited the accompanying statements of operations and changes in net assets and cash flows of Sonic Communications Cable Television Systems for the period from April 1, 1998, through May 20, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Sonic Communications Cable Television Systems for the period from April 1, 1998, through May 20, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-307 519 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
PERIOD FROM APRIL 1, 1998, THROUGH MAY 20, 1998 ------------- REVENUES.................................................... $ 6,343,226 ----------- OPERATING EXPENSES: Operating costs........................................... 1,768,393 General and administrative................................ 1,731,471 Depreciation and amortization............................. 1,112,057 ----------- 4,611,921 ----------- Income from operations................................. 1,731,305 INTEREST EXPENSE............................................ 289,687 ----------- Income before provision for income taxes............... 1,441,618 PROVISION IN LIEU OF INCOME TAXES........................... 602,090 ----------- Net income............................................. 839,528 NET ASSETS, April 1, 1998................................... 55,089,511 ----------- NET ASSETS, May 20, 1998.................................... $55,929,039 ===========
The accompanying notes are an integral part of this statement. F-308 520 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS STATEMENT OF CASH FLOWS
PERIOD FROM APRIL 1, 1998, THROUGH MAY 20, 1998 ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 839,528 Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization.......................... 1,112,057 Changes in assets and liabilities -- Accounts receivable, net............................. 49,980 Prepaid expenses and other........................... 171,474 Accounts payable and accrued expenses................ (1,479,682) ----------- Net cash provided by operating activities......... 693,357 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (470,530) Payments of franchise costs............................... (166,183) ----------- Net cash used in investing activities............. (636,713) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt................................ (41,144) ----------- Net cash used in financing activities............. (41,144) NET INCREASE IN CASH AND CASH EQUIVALENTS................... 15,500 ----------- CASH AND CASH EQUIVALENTS, beginning of period.............. 532,238 ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ 547,738 ===========
The accompanying notes are an integral part of this statement. F-309 521 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION Sonic Communications Cable Television Systems (the Company) operates cable television systems in California and Utah. Effective May 21, 1998, the Company's net assets were acquired by Charter Communications Holdings, LLC. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT The Company depreciates its cable distribution systems using the straight-line method over estimated useful lives of 5 to 15 years for systems acquired on or after April 1, 1981. Systems acquired before April 1, 1981, are depreciated using the declining balance method over estimated useful lives of 8 to 20 years. Vehicles, machinery, office, and data processing equipment and buildings are depreciated using the straight-line or declining balance method over estimated useful lives of 3 to 25 years. Capital leases and leasehold improvements are amortized using the straight-line or declining balance method over the shorter of the lease term or the estimated useful life of the asset. INTANGIBLES The excess of amounts paid over the fair values of tangible and identifiable intangible assets acquired in business combinations are amortized using the straight-line method over the life of the franchise. Identifiable intangible assets such as franchise rights, noncompete agreements and subscriber lists are amortized using the straight-line method over their useful lives, generally 3 to 15 years. REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable television system. As of May 20, 1998, no installation revenue has been deferred, as direct selling costs exceeded installation revenue. INTEREST EXPENSE Interest expense relates to a note payable to a stockholder of the Company, which accrues interest at 7.8% per annum. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-310 522 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. COMMITMENTS AND CONTINGENCIES: FRANCHISES The Company has committed to provide cable television services under franchise agreements with various governmental bodies for remaining terms up to 13 years. Franchise fees of up to 5% of gross revenues are payable under these agreements. LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the period from April 1, 1998, through May 20, 1998, were $59,199. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the period from April 1, 1998, through May 20, 1998, was $64,159. 3. INCOME TAXES: The results of the Company are included in the consolidated federal income tax return of its parent, Sonic Enterprises, Inc., which is responsible for tax payments applicable to the Company. The financial statements reflect a provision in lieu of income taxes as if the Company was filing on a separate company basis. Accordingly, the Company has included the provision in lieu of income taxes in the accompanying statement of operations. The provision in lieu of income taxes approximates the amount of tax computed using U.S. statutory rates, after reflecting state income tax expense of $132,510 for the period from April 1, 1998, through May 20, 1998. 4. REGULATION IN THE CABLE TELEVISION INDUSTRY: The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject to judicial proceeding and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. F-311 523 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. For the period from April 1, 1998, through May 20, 1998, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the ownership of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company are unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Systems. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. F-312 524 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Long Beach Acquisition Corp.: We have audited the accompanying statements of operations, stockholder's equity and cash flows of Long Beach Acquisition Corp. (a Delaware corporation) for the period from April 1, 1997, through May 23, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Long Beach Acquisition Corp. for the period from April 1, 1997, through May 23, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, July 31, 1998 F-313 525 LONG BEACH ACQUISITION CORP. STATEMENT OF OPERATIONS FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997 SERVICE REVENUES............................................ $ 5,313,282 ----------- EXPENSES: Operating costs........................................... 1,743,493 General and administrative................................ 1,064,841 Depreciation and amortization............................. 3,576,166 Management fees -- related parties........................ 230,271 ----------- 6,614,771 ----------- Loss from operations................................... (1,301,489) INTEREST EXPENSE............................................ 753,491 ----------- Net loss............................................... $(2,054,980) ===========
The accompanying notes are an integral part of this statement. F-314 526 LONG BEACH ACQUISITION CORP. STATEMENT OF STOCKHOLDER'S EQUITY FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997
CLASS A, SENIOR VOTING REDEEMABLE ADDITIONAL TOTAL COMMON PREFERRED PAID-IN ACCUMULATED STOCKHOLDER'S STOCK STOCK CAPITAL DEFICIT EQUITY -------- ----------- ----------- ------------ ------------- BALANCE, April 1, 1997........... $100 $11,000,000 $33,258,723 $(51,789,655) $(7,530,832) Net loss................ -- -- -- (2,054,980) (2,054,980) ---- ----------- ----------- ------------ ----------- BALANCE, May 23, 1997............ $100 $11,000,000 $33,258,723 $(53,844,635) $(9,585,812) ==== =========== =========== ============ ===========
The accompanying notes are an integral part of this statement. F-315 527 LONG BEACH ACQUISITION CORP. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(2,054,980) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization.......................... 3,576,166 Changes in assets and liabilities, net of effects from acquisition- Accounts receivable, net............................. (830,725) Prepaid expenses and other........................... (19,583) Accounts payable and accrued expenses................ (528,534) Other current liabilities............................ 203,282 ----------- Net cash provided by operating activities......... 345,626 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (596,603) ----------- Net cash used in investing activities............. (596,603) ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (250,977) CASH AND CASH EQUIVALENTS, beginning of period.............. 3,544,462 ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ 3,293,485 =========== CASH PAID FOR INTEREST...................................... $ 1,316,462 ===========
The accompanying notes are an integral part of this statement. F-316 528 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS MAY 23, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION Long Beach Acquisition Corp. (LBAC or the "Company") was a wholly owned corporation of KC Cable Associates, L.P., a partnership formed through a joint venture agreement between Kohlberg, Kravis, Roberts & Co. (KKR) and Cablevision Industries Corporation (CVI). The Company was formed to acquire cable television systems serving Long Beach, California, and surrounding areas. On May 23, 1997, the Company executed a stock purchase agreement with Charter Communications Long Beach, Inc. (CC-LB) whereby CC-LB purchased all of the outstanding stock of the Company for an aggregate purchase price, net of cash acquired, of $150.9 million. Concurrent with this stock purchase, CC-LB was acquired by Charter Communications, Inc. (Charter) and Kelso Investment Associates V, L.P., an investment fund (Kelso). As of May 23, 1997, LBAC provided cable television service to subscribers in southern California. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, and equipment replacement costs and betterments are capitalized. Depreciation is provided on a straight-line basis over the estimated useful life of the related asset as follows: Leasehold improvements.................................. Life of respective lease Cable systems and equipment............................. 5-10 years Subscriber devices...................................... 5 years Vehicles................................................ 5 years Furniture, fixtures and office equipment................ 5-10 years
FRANCHISES Franchises include the assigned fair value of the franchise from purchased cable television systems. These franchises are amortized on a straight-line basis over six years, the remaining life of the franchise at acquisition. INTANGIBLE ASSETS Intangible assets include goodwill, which is amortized over fifteen years; subscriber lists, which are amortized over seven years; a covenant not to compete which is amortized over five F-317 529 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) years; organization costs which are amortized over five years and debt issuance costs which are amortized over ten years, the life of the loan. IMPAIRMENT OF ASSETS If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the average estimated period that customers are expected to remain connected to the cable television system. As of May 23, 1997, no installation revenue has been deferred, as direct selling costs have exceeded installation service revenues. INCOME TAXES LBAC's income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. STOCKHOLDER'S EQUITY: For the period from April 1, 1997, through May 23, 1997, stockholder's equity consisted of the following: Stockholder's (deficit) equity: Common stock -- Class A, voting $1 par value, 100 shares authorized, issued and outstanding..................... $ 100 Common stock -- Class B, nonvoting, $1 par value, 1,000 shares authorized, no shares issued.................... -- Senior redeemable preferred stock, no par value, 110,000 shares authorized, issued and outstanding, stated at redemption value....................................... 11,000,000 Additional paid-in capital................................ 33,258,723 Accumulated deficit....................................... (53,844,635) ------------ Total stockholder's (deficit) equity................... $ (9,585,812) ============
F-318 530 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. INTEREST EXPENSE: The Company has the option of paying interest at either the Base Rate of the Eurodollar rate, as defined, plus a margin which is based on the attainment of certain financial ratios. The weighted average interest rate for the period from April 1, 1997, through May 23, 1997, was 7.3%. 4. REGULATION IN THE CABLE TELEVISION INDUSTRY: The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject to judicial proceeding and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. As of May 23, 1997, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the ownership of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company are unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. F-319 531 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. 5. RELATED-PARTY TRANSACTIONS: The Company has entered into a management agreement (the "Management Agreement") with CVI under which CVI manages the operations of the Company for an annual management fee equal to 4% of gross operating revenues, as defined. Management fees under this agreement amounted to $210,100 for the period from April 1, 1997, through May 23, 1997. In addition, the Company has agreed to pay a monitoring fee of two dollars per basic subscriber, as defined, per year for services provided by KKR. Monitoring fees amounted to $20,171 for the period from April 1, 1997, through May 23, 1997. 6. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Rent expense incurred under these leases for the period from April 1, 1997, through May 23, 1997, was $67,600. The Company rents utility poles in its operations. Generally, pole rental agreements are short term, but LBAC anticipates that such rentals will recur. Rent expense for pole attachments for the period from April 1, 1997, through May 23, 1997, was $12,700. LITIGATION The Company is a party to lawsuits which are generally incidental to its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's financial position or results of operations. 7. INCOME TAXES: The Company has not recognized the tax benefit associated with its taxable loss for the period from April 1, 1997, through May 23, 1997, as the Company believes the benefit will likely not be realized. 8. EMPLOYEE BENEFIT PLANS: Substantially all employees of the Company are eligible to participate in a defined contribution plan containing a qualified cash or deferred arrangement pursuant to IRC Section 401(k). The plan provides that eligible employees may contribute up to 10% of their compensation to the plan. The Company made no contributions to the plan for the period from April 1, 1997, through May 23, 1997. F-320 532 REPORT OF INDEPENDENT AUDITORS The Audit Committee CHARTER COMMUNICATIONS, INC. We have audited the accompanying combined balance sheets of Fanch Cable Systems Sold to Charter Communications, Inc. (comprised of components of TWFanch-one Co., components of TWFanch-two Co., Mark Twain Cablevision, North Texas Cablevision LTD., Post Cablevision of Texas L.P., Spring Green Communications L.P., Fanch Narragansett CSI L.P., Cable Systems Inc., ARH, and Tioga), as of November 11, 1999 and December 31, 1998, and the related combined statements of operations, net assets and cash flows for the period from January 1, 1999 through November 11, 1999 and for the years ended December 31, 1998 and 1997. These financial statements are the responsibility of Fanch Communications, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of North Texas Cablevision, LTD., Spring Green Communications L.P., Cable Systems Inc. and Fanch Narragansett CSI Limited Partnership, which statements reflect total assets of $18,289,788 as of December 31, 1998 and total revenues of $14,562,704 and $11,906,101 for the years ended December 31, 1998 and 1997. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for North Texas Cablevision LTD., Spring Green Communications L.P., Cable Systems Inc. and Fanch Narragansett CSI Limited Partnership, is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the combined financial position of Fanch Cable Systems Sold to Charter Communications, Inc. at November 11, 1999 and December 31, 1998, and the combined results of its operations and its cash flows for the period from January 1, 1999 through November 11, 1999 and the years ended December 31, 1998 and 1997 in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Denver, Colorado January 28, 2000 F-321 533 REPORT OF INDEPENDENT AUDITORS The Shareholders CABLE SYSTEMS, INC. The Partners FANCH NARRAGANSETT CSI LIMITED PARTNERSHIP We have audited the accompanying balance sheets of Cable Systems, Inc. and Fanch Narragansett CSI Limited Partnership as of December 31, 1998 and 1997, and the related statements of operations and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying combined financial statements have been prepared pursuant to Section 5.04(a) of the Loan Agreement between Cable Systems, Inc., Fanch Narragansett CSI Limited Partnership and Fleet National Bank. Generally accepted accounting principles do not recognize consolidated financial statements when a less than 50% ownership ratio exists between two companies. As a result, our opinion is restricted to the individual company statements shown. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cable Systems, Inc. and Fanch Narragansett CSI Limited Partnership at December 31, 1998 and 1997, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ SHIELDS & CO. March 9, 1999 Englewood, Colorado F-322 534 REPORT OF INDEPENDENT AUDITORS The Partners NORTH TEXAS CABLEVISION, LTD. We have audited the accompanying consolidated balance sheets of North Texas Cablevision, Ltd. as of December 31, 1998 and 1997, and the related consolidated statements of operations and partners' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of North Texas Cablevision, Ltd. at December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ SHIELDS & CO. March 9, 1999 Englewood, Colorado F-323 535 REPORT OF INDEPENDENT AUDITORS The Partners SPRING GREEN COMMUNICATIONS, L.P. We have audited the accompanying balance sheet of Spring Green Communications, L.P. as of December 31, 1998 and 1997, and the related statements of operations and partners' capital and cash flows from inception November 3, 1997, through December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spring Green Communications, L.P. at December 31, 1998 and 1997, and the results of its operations and its cash flows for the periods ended December 31, 1997, and 1998 in conformity with generally accepted accounting principles. /s/ SHIELDS & CO. March 10, 1999 Englewood, Colorado F-324 536 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. COMBINED BALANCE SHEETS
NOVEMBER 11, DECEMBER 31, 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................ $ 568,583 $ 809,720 Accounts receivable, less allowance for doubtful accounts of approximately $229,000 and $443,000 in 1999 and 1998, respectively.................................... 7,424,375 3,236,751 Prepaid expenses and other current assets................ 1,529,577 1,645,785 ------------ ------------ Total current assets....................................... 9,522,535 5,692,256 Property, plant and equipment: Transmission and distribution systems and related equipment............................................. 325,687,737 200,526,755 Furniture and equipment.................................. 13,704,415 8,389,207 ------------ ------------ 339,392,152 208,915,962 Less accumulated depreciation............................ (73,807,164) (52,484,281) ------------ ------------ Net property, plant and equipment.......................... 265,584,988 156,431,681 Goodwill, net of accumulated amortization of approximately $85,370,000 and $63,030,000 in 1999 and 1998, respectively............................................. 515,312,398 266,776,690 Subscriber lists, net of accumulated amortization of approximately $28,168,000 and $15,024,000 in 1999 and 1998, respectively....................................... 67,444,869 17,615,056 Other intangible assets, net of accumulated amortization of approximately $17,157,000 and $14,411,000 in 1999 and 1998, respectively....................................... 12,032,316 11,482,409 ------------ ------------ Total intangible assets.................................... 594,789,583 295,874,155 Other assets............................................... -- 1,050,815 ============ ============ Total assets............................................... $869,897,106 $459,048,907 ============ ============ LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and other accrued liabilities........... $ 7,065,436 $ 13,630,205 Subscriber advances and deposits......................... 5,492,869 2,033,992 ------------ ------------ Total current liabilities.................................. 12,558,305 15,664,197 Net assets................................................. 857,338,801 443,384,710 ------------ ------------ Total liabilities and net assets........................... $869,897,106 $459,048,907 ============ ============
See accompanying notes. F-325 537 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. COMBINED STATEMENTS OF OPERATIONS
PERIOD FROM JANUARY 1 TO YEAR ENDED DECEMBER 31, NOVEMBER 11, --------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenues: Service..................................... $165,967,333 $123,183,391 $113,954,539 Installation and other...................... 19,948,268 17,920,743 16,587,074 ------------ ------------ ------------ 185,915,601 141,104,134 130,541,613 Operating expenses, excluding depreciation and amortization................................ 58,504,674 42,616,007 40,346,214 Selling, general and administrative expenses.................................... 27,071,932 20,361,890 21,363,377 ------------ ------------ ------------ 85,576,606 62,977,897 61,709,591 Income before other expenses.................. 100,338,995 78,126,237 68,832,022 Other expenses: Depreciation and amortization............... 62,097,138 45,885,038 61,502,426 Management fees............................. 6,161,558 3,998,259 3,663,561 Loss (gain) on disposal of assets........... 8,135,954 6,420,250 (1,229,272) Other (income) expense, net................. (340,049) 313,693 232,102 ------------ ------------ ------------ Net income before tax expense............... 24,284,394 21,508,997 4,663,205 Income tax expense.......................... 197,334 286,451 2,260,369 ------------ ------------ ------------ Net income.................................... $ 24,087,060 $ 21,222,546 $ 2,402,836 ============ ============ ============
See accompanying notes. F-326 538 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. COMBINED STATEMENTS OF NET ASSETS
PERIOD FROM JANUARY 1 TO YEAR ENDED DECEMBER 31, NOVEMBER 11, --------------------------- 1999 1998 1997 ------------ ------------ ------------ Net assets at beginning of period............. $443,384,710 $455,085,231 $481,540,621 Net income.................................... 24,087,060 21,222,546 2,402,836 Contributions from (payments to) owners....... 389,867,031 (32,923,067) (28,858,226) ------------ ------------ ------------ Net assets at end of period................... $857,338,801 $443,384,710 $455,085,231 ============ ============ ============
See accompanying notes. F-327 539 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. COMBINED STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1 TO YEAR ENDED DECEMBER 31, NOVEMBER 11, --------------------------- 1999 1998 1997 ------------- ------------ ------------ OPERATING ACTIVITIES Net income................................... $ 24,087,060 $ 21,222,546 $ 2,402,836 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 62,097,138 45,885,038 61,502,426 Loss (gain) on disposal of assets....... 8,135,954 6,420,250 (1,229,272) (Increase) decrease in accounts receivable, prepaid expenses and other current assets........................ (3,020,601) (2,053,483) 2,067,370 (Decrease) increase in accounts payable and other accrued liabilities and subscriber advances and deposits...... (3,105,892) 1,434,091 (4,676,441) ------------- ------------ ------------ Net cash provided by operating activities.... 88,193,659 72,908,442 60,066,919 INVESTING ACTIVITIES Acquisition of systems....................... (413,345,351) -- (18,243,593) Purchases of property, plant and equipment... (64,956,476) (39,343,681) (17,213,637) Additions to intangibles, net................ -- (909,674) (1,116,251) Proceeds from sale of equipment.............. -- 103,028 5,337,321 ------------- ------------ ------------ Net cash used in investing activities........ (478,301,827) (40,150,327) (31,236,160) FINANCING ACTIVITIES Contributions from (payments to) owners...... 389,867,031 (32,923,067) (28,858,226) ------------- ------------ ------------ Net cash provided by (used in) financing activities................................. 389,867,031 (32,923,067) (28,858,226) Net change in cash and cash equivalents...... (241,137) (164,952) (27,467) Cash and cash equivalents at beginning of year....................................... 809,720 974,672 1,002,139 ------------- ------------ ------------ Cash and cash equivalents at end of year..... $ 568,583 $ 809,720 $ 974,672 ============= ============ ============
See accompanying notes. F-328 540 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS NOVEMBER 11, 1999 1. BASIS OF PRESENTATION ACQUISITION BY CHARTER COMMUNICATIONS, INC. AND BASIS OF PRESENTATION The Fanch Cable Systems Sold to Charter Communications, Inc. are comprised of the following entities: components of TWFanch-one Co., components of TWFanch-two Co., Mark Twain Cablevision, North Texas Cablevision LTD., Post Cablevision of Texas L.P., Spring Green Communications L.P., Fanch Narragansett CSI L.P., Cable Systems Inc., ARH, and Tioga (the "Combined Systems"). The Combined Systems were managed by Fanch Communications, Inc. (the "Management Company"). Pursuant to a purchase agreement, dated May 12, 1999 between certain partners ("Partners") of the Combined Systems and Charter Communications, Inc. ("Charter"), the Partners of the Combined Systems entered into a distribution agreement whereby the Partners will distribute and/or sell certain of their cable systems to certain of their respective Partners. These Partners will then sell the Combined Systems through a combination of asset sales and the sale of equity and partnership interests to Charter. Accordingly, these combined financial statements of the Combined Systems reflect the "carved out" financial position, results of operations, cash flows and changes in net assets of the operations of the Combined Systems as if they had been operating as a separate company. For purposes of determining the financial statement amounts of the Combined Systems, management excluded certain systems (the "Excluded Systems"). In order to exclude the results of operations and financial position of the Excluded Systems from the combined financial statements, management has estimated certain revenues, expenses, assets and liabilities that are not specifically identified to systems based on the ratio of each Excluded System's basic subscribers to the total basic subscribers served by the respective partnerships. Management believes the basis used for these allocations is reasonable. The Combined Systems' results of operations are not necessarily indicative of future operating results or the results that would have occurred if the Combined Systems were a separate legal entity. DESCRIPTION OF BUSINESS The Combined Systems, operating in various states throughout the United States, are principally engaged in operating cable television systems and related activities under non-exclusive franchise agreements. PRINCIPLES OF COMBINATION The accompanying combined financial statements include the accounts of the Combined Systems, as if the Combined Systems were a single company. All material intercompany balances and transactions have been eliminated. CASH, INTERCOMPANY ACCOUNTS AND DEBT Under the Combined Systems' centralized cash management system, the cash requirements of its individual operating units were generally subsidized by the Management Company and the cash generated or used by the individual operating units was transferred to/from the Management Company, as appropriate, through the use of intercompany accounts. The resulting intercompany account balances are included in net assets and all the net cash generated from (used in) operations, investing activities and financing activities has been included in the F-329 541 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) Combined Systems' net contributions by (payments to) the Management Company in the combined statements of cash flows. The Management Company maintains external debt to fund and manage operations on a centralized basis. Debt, unamortized loan costs and interest expense of the Management Company have not been allocated to the Combined Systems. As such, the debt, unamortized loan costs, and related interest are not representative of the debt that would be required or interest expense incurred if the Combined Systems were a separate legal entity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTY, PLANT AND EQUIPMENT The Combined Systems record additions to property, plant and equipment at cost, which in the case of assets constructed includes amounts for material, labor and overhead. Maintenance and repairs are charged to expense as incurred. For financial reporting purposes, the Combined Systems use the straight-line method of depreciation over the estimated useful lives of the assets as follows:
LIVES ----- Transmission and distribution systems and related equipment 3 to 20 years Furniture and equipment 4 to 8 1/2 years
INCOME TAXES The Combined Systems pay an immaterial amount of income taxes. Taxes are paid for Cable Systems, Inc., Hornell, ARH, Tioga, and systems operating in the State of Michigan. The majority of the Combined Systems are various partnerships and, as such, the tax effects of the Combined Systems' results of operations accrue to the partners. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates. REVENUE RECOGNITION The Combined Systems recognize revenue when services have been delivered. Revenues on long-term contracts are recognized over the term of the contract using the straight-line method. F-330 542 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLES Intangibles are recorded at cost and are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives are as follows:
LIVES ----- Goodwill 7 to 20 years (7 to 10 in 1997) Subscriber list 3 to 7 years Other, including franchise costs 2 to 13 years
Amortization expense was $38,229,923, $25,955,253, and $44,595,992 for the period from January 1, 1999 to November 11, 1999 and for the years ended December 31, 1998 and 1997, respectively. Certain of the Combined Systems changed the estimated useful life of goodwill from 7 and 10 years in 1997 to 20 years effective January 1, 1998 to better match the amortization period to anticipated economic lives of the franchises and to better reflect industry practice. This change in estimate resulted in an increase in net income of approximately $20 million for the year ended December 31, 1998. 3. DISPOSAL OF ASSETS During the periods presented, various upgrades were performed on certain plant locations. The cost and accumulated depreciation applicable to the plant replaced has been estimated and recorded as a loss on disposal, which is summarized as follows:
PERIOD FROM JANUARY 1 TO YEAR ENDED DECEMBER 31 NOVEMBER 11 ------------------------- 1999 1998 1997 ------------ ---- ---- Cost................................................ $12,238,388 $8,606,851 $ 5,529,505 Accumulated depreciation.......................... (4,102,434) (2,083,573) (2,003,191) Proceeds.......................................... -- (103,028) (5,337,321) Disposal of intangible assets..................... -- -- 2,978,143 Accumulated amortization.......................... -- -- (2,396,408) ----------- ---------- ----------- Loss (gain) on disposal........................... $ 8,135,954 $6,420,250 $(1,229,272) =========== ========== ===========
4. PURCHASE AND SALE OF SYSTEMS On March 30, 1997, the Combined Systems acquired cable television systems, including plant and franchise and business licenses, serving communities in the states of Pennsylvania and Virginia. The purchase price was $1.4 million, of which $765,000 was allocated to property, plant and equipment and $635,000 was allocated to intangible assets. Concurrent with the purchase of the systems in Pennsylvania on March 30, 1997, the Combined Systems sold certain of these assets, including plant and franchise and business licenses, for $340,000. No gain or loss on this transaction was recorded. On June 30, 1997, the Combined Systems acquired cable television systems, including plant and franchise and business licenses, serving communities in the State of Indiana. The purchase price was $6,345,408, of which $2,822,260 was allocated to property, plant and equipment and $3,523,148 was allocated to intangible assets. F-331 543 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. PURCHASE AND SALE OF SYSTEMS (CONTINUED) On November 3, 1997, the Combined Systems acquired substantially all of the assets, including franchise and business licenses, for cable systems serving various communities in Wisconsin. The purchase price was $8.7 million, of which $3.9 million was allocated to property, plant and equipment and $4.8 million was allocated to intangible assets. On June 12, 1998, the Combined Systems entered into an agreement to acquire cable television systems, including plant and franchise and business licenses, serving communities in the State of Michigan. The purchase price was $42 million, subject to purchase price adjustments. In connection with the agreement, the Combined Systems received an additional $8.76 million in capital contributions. The agreement was completed and the assets were transferred to the Combined Systems on February 1, 1999. The Combined Systems recorded approximately $11.7 million in property, plant and equipment and approximately $30.3 million in intangible assets. On July 8, 1998, the Combined Systems entered into an Asset Purchase Agreement to acquire cable television systems, including plant and franchise and business licenses, serving communities in the states of Maryland, Ohio and West Virginia. The purchase price was $248 million, subject to purchase price adjustments. The transaction was completed and the assets were transferred to the Combined Systems on February 24, 1999. The Combined Systems recorded approximately $39 million to property, plant and equipment and approximately $209 million to intangible assets. On January 15, 1999, the Combined Systems entered into an agreement to acquire cable television systems, including plant and franchise and business licenses, serving communities in the State of Michigan from a related party. The purchase price was $70 million, subject to purchase price adjustments. The agreement was completed and the assets were transferred to the Combined Systems on March 31, 1999. In connection with the agreement, the Combined Systems received an additional $25 million in capital contributions. The Combined Systems recorded approximately $14.4 million to property, plant and equipment and approximately $55.6 million to intangible assets. On May 12, 1999, the Combined Systems entered into an agreement to acquire the stock of ARH, Ltd. ARH, Ltd. is engaged in the business of owning and operating cable television systems in Texas and West Virginia. The purchase price was $50 million subject to purchase price adjustments. The transaction was completed and the assets were transferred to the Combined Systems on June 22, 1999. The Combined Systems recorded approximately $3.9 million to property, plant and equipment and approximately $46.1 million to intangible assets. Unaudited pro forma operating results as though the acquisitions discussed above had occurred at the beginning of the periods, with adjustments to give effect to amortization of franchises and certain other adjustments for the period, are as follows:
PERIOD FROM JANUARY 1 TO YEAR ENDED NOVEMBER 11 DECEMBER 31 1999 1998 ------------ ----------- Revenues........................................ $202,259,532 $197,803,975 Income from operations.......................... 92,986,581 107,053,905 Net income...................................... 27,704,095 32,130,293
F-332 544 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. PURCHASE AND SALE OF SYSTEMS (CONTINUED) The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been complete as of the assumed date or which may be obtained in the future. 5. RELATED PARTIES The Combined Systems have entered into management agreements with the Management Company whose sole stockholder is affiliated with several of the Combined Systems. The Combined Systems have also entered into a management agreement with an entity (the "Affiliated Company") that has ownership interest in certain of the Combined Systems. The agreements provide that the Management Company and the Affiliated Company will manage their respective systems and receive annual compensation equal to 2.5% to 5% of the gross revenues from operations from their respective systems. Management fees were $6,161,558, $4,072,179, and $3,663,560 for the period from January 1, 1999 to November 11, 1999 and the years ended December 31, 1998 and 1997, respectively. A company affiliated with the Management Company provides subscriber billing services for a portion of the Combined Systems' subscribers. The Combined Systems incurred fees for monthly billing and related services in the approximate amounts of $362,000, $507,000, and $535,000 for the period from January 1, 1999 to November 11, 1999 and the years ended December 31, 1998 and 1997, respectively. The Combined Systems purchase the majority of their programming through the Affiliated Company. Fees incurred for programming were approximately $38,356,000, $24,600,000, and $22,200,000 for the period from January 1, 1999 to November 11, 1999 and the years ended December 31, 1998 and 1997, respectively. The Management Company pays amounts on behalf of and receives amounts from the Combined Systems in the ordinary course of business. Accounts receivable and payable of the Combined Systems include amounts due from and due to the Management Company. 6. COMMITMENTS The Combined Systems, as an integral part of their cable operations, have entered into lease contracts for certain items including tower rental, microwave service and office space. Rent expense, including office, tower and pole rent, for the period from January 1, 1999 to November 11, 1999 and the years ended December 31, 1998 and 1997 was approximately $3,110,000, $2,462,866, and $2,238,394, respectively. The majority of these agreements are on month-to-month arrangements and, accordingly, the Combined Systems have no material future minimum commitments related to these leases. 7. EMPLOYEE BENEFIT PLAN The Combined Systems each have a defined contribution plan (the "Plan") which qualifies under section 401(k) of the Internal Revenue Code. Therefore, each system of the Combined Systems participates in the respective plan. Combined Systems contributions were approximately $497,000, $354,000, and $297,000 for the period from January 1, 1999 to November 11, 1999 and the years ended December 31, 1998 and 1997, respectively. F-333 545 REPORT OF INDEPENDENT AUDITORS Partners Falcon Communications, L.P. We have audited the accompanying consolidated balance sheets of Falcon Communications, L.P. as of December 31, 1998 and November 12, 1999, and the related consolidated statements of operations, partners' equity (deficit) and cash flows for each of the two years in the period ended December 31, 1998 and for the period from January 1, 1999 to November 12, 1999 (date of disposition). These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Falcon Communications, L.P. at December 31, 1998 and November 12, 1999 and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1998 and for the period from January 1, 1999 to November 12, 1999 (date of disposition), in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Los Angeles, California March 2, 2000 F-334 546 FALCON COMMUNICATIONS, L.P. CONSOLIDATED BALANCE SHEETS
NOVEMBER 12, 1999 DECEMBER 31, (DATE OF 1998 DISPOSITION) ------------ ------------ (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents................................. $ 14,284 $ 9,995 Receivables: Trade, less allowance of $670,000 and $1,074,000 for possible losses...................................... 15,760 18,946 Affiliates............................................. 2,322 3,511 Other assets.............................................. 16,779 33,456 Property, plant and equipment, less accumulated depreciation and amortization.......................... 505,894 553,851 Franchise cost, less accumulated amortization of $226,526,000 and $269,752,000.......................... 397,727 370,461 Goodwill, less accumulated amortization of $25,646,000 and $31,636,000............................................ 135,308 130,581 Customer lists and other intangible costs, less accumulated amortization of $59,422,000 and $127,314,000........................................... 333,017 273,851 Deferred loan costs, less accumulated amortization of $2,014,000 and $3,137,000.............................. 24,331 22,623 ---------- ---------- $1,445,422 $1,417,275 ========== ========== LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable............................................. $1,611,353 $1,711,835 Accounts payable.......................................... 10,341 16,790 Due to affiliate.......................................... -- 15,202 Accrued expenses.......................................... 83,077 56,160 Customer deposits and prepayments......................... 2,257 8,070 Deferred income taxes..................................... 8,664 8,393 Minority interest......................................... 403 541 ---------- ---------- TOTAL LIABILITIES........................................... 1,716,095 1,816,991 ---------- ---------- COMMITMENTS AND CONTINGENCIES REDEEMABLE PARTNERS' EQUITY................................. 133,023 424,280 ---------- ---------- PARTNERS' EQUITY (DEFICIT): General partners.......................................... (408,369) (826,681) Limited partners.......................................... 4,673 2,685 ---------- ---------- TOTAL PARTNERS' DEFICIT..................................... (403,696) (823,996) ---------- ---------- $1,445,422 $1,417,275 ========== ==========
See accompanying notes to consolidated financial statements. F-335 547 FALCON COMMUNICATIONS, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO ------------------------ NOVEMBER 12, 1999 1997 1998 (DATE OF DISPOSITION) ---------- ----------- --------------------- (DOLLARS IN THOUSANDS) REVENUES........................................ $255,886 $ 307,558 $ 371,617 -------- --------- --------- EXPENSES: Service costs................................... 75,643 97,832 125,246 General and administrative expenses............. 46,437 63,401 139,462 Depreciation and amortization................... 118,856 152,585 196,260 -------- --------- --------- Total expenses.................................. 240,936 313,818 460,968 -------- --------- --------- Operating income (loss)......................... 14,950 (6,260) (89,351) -------- --------- --------- OTHER INCOME (EXPENSE): Interest expense, net........................... (79,137) (102,591) (114,993) Equity in net income (loss) of investee partnerships.................................. 443 (176) (41) Other income (expense), net..................... 885 (2,917) 8,062 Income tax benefit (expense).................... 2,021 (1,897) (2,509) -------- --------- --------- Net loss before extraordinary item.............. (60,838) (113,841) (198,832) Extraordinary item, retirement of debt.......... -- (30,642) -- -------- --------- --------- NET LOSS........................................ $(60,838) $(144,483) $(198,832) ======== ========= =========
See accompanying notes to consolidated financial statements. F-336 548 FALCON COMMUNICATIONS, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
GENERAL LIMITED PARTNERS PARTNERS TOTAL ---------- ---------- ---------- (DOLLARS IN THOUSANDS) PARTNERS' DEFICIT, January 1, 1997.................................. $ (12,591) $ (443,908) $ (456,499) Reclassification from redeemable partners' equity...................................... -- 100,529 100,529 Capital contribution.......................... -- 53 53 Net loss for year............................. (609) (60,229) (60,838) ---------- ---------- ---------- PARTNERS' DEFICIT, December 31, 1997................................ (13,200) (403,555) (416,755) Reclassification of partners' deficit......... (408,603) 408,603 -- Redemption of partners' interests............. (155,908) -- (155,908) Net assets retained by the managing general partner..................................... (5,392) -- (5,392) Reclassification from redeemable partners' equity...................................... 38,350 -- 38,350 Acquisition of Falcon Video and TCI net assets...................................... 280,409 -- 280,409 Capital contributions......................... 83 -- 83 Net loss for year............................. (144,108) (375) (144,483) ---------- ---------- ---------- PARTNERS' EQUITY (DEFICIT) December 31, 1998................................ (408,369) 4,673 (403,696) Reclassification to redeemable partners' equity...................................... (291,257) -- (291,257) Capital contributions......................... 70,723 -- 70,723 Acquisition of TCI net assets adjustment...... (934) -- (934) Net loss for period........................... (196,844) (1,988) (198,832) ---------- ---------- ---------- PARTNERS' EQUITY (DEFICIT) November 12, 1999................................ $ (826,681) $ 2,685 $ (823,996) ========== ========== ==========
See accompanying notes to consolidated financial statements. F-337 549 FALCON COMMUNICATIONS, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO ------------------------ NOVEMBER 12, 1999 1997 1998 (DATE OF DISPOSITION) --------- ------------ --------------------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss..................................... $(60,838) $ (144,483) $ (198,832) Adjustments to reconcile net loss to net cash provided by operating activities: Payment-in-kind interest expense.......... 20,444 -- -- Amortization of debt discount............. -- 19,342 24,103 Depreciation and amortization............. 118,856 152,585 196,260 Amortization of deferred loan costs....... 2,192 2,526 1,782 Compensation funded by Managing General Partner................................. -- -- 70,723 Write-off deferred loan costs............. -- 10,961 (4) Gain on sale of cable system.............. -- -- (11,069) Casualty (gain) loss...................... (3,476) (314) 69 Equity in net (income) loss of investee partnerships............................ (443) 176 41 Provision for losses on receivables, net of recoveries........................... 5,714 4,775 4,510 Deferred income taxes..................... (2,748) 1,111 (271) Other..................................... 1,319 278 348 Increase (decrease) from changes in: Receivables............................... (9,703) (1,524) (6,114) Other assets.............................. (4,021) 906 (7,194) Accounts payable.......................... (1,357) 337 6,450 Accrued expenses and due to affiliate..... 13,773 24,302 (11,634) Customer deposits and prepayments......... (175) 633 5,813 -------- ----------- ----------- Net cash provided by operating activities.............................. 79,537 71,611 74,981 -------- ----------- ----------- Cash flows from investing activities: Capital expenditures......................... (76,323) (96,367) (126,548) Increase in intangible assets................ (1,770) (7,124) (3,344) Acquisitions of cable television systems..... -- (83,391) (27,161) Cash acquired in connection with the acquisition of TCI and Falcon Video Communications, L.P....................... -- 317 -- Proceeds from sale of cable system........... -- -- 3,178 Assets retained by the Managing General Partner................................... -- (3,656) -- Other........................................ 1,806 1,893 (1,871) -------- ----------- ----------- Net cash used in investing activities..... (76,287) (188,328) (155,746) -------- ----------- ----------- Cash flows from financing activities: Borrowings from notes payable................ 37,500 2,388,607 1,153,250 Repayment of debt............................ (40,722) (2,244,752) (1,076,871) Deferred loan costs.......................... (29) (25,684) (70) Capital contributions........................ 93 -- -- Redemption of partners' interests............ -- (1,170) -- Minority interest capital contributions...... 192 83 167 -------- ----------- ----------- Net cash provided by (used in) financing activities.............................. (2,966) 117,084 76,476 -------- ----------- -----------
F-338 550
PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO ------------------------ NOVEMBER 12, 1999 1997 1998 (DATE OF DISPOSITION) --------- ------------ --------------------- (DOLLARS IN THOUSANDS) Increase (decrease) in cash and cash equivalents.................................. 284 367 (4,289) Cash and cash equivalents, at beginning of period....................................... 13,633 13,917 14,284 -------- ----------- ----------- Cash and cash equivalents, at end of period.... $ 13,917 $ 14,284 $ 9,995 ======== =========== ===========
See accompanying notes to consolidated financial statements. F-339 551 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES FORM OF PRESENTATION Falcon Communications, L.P. ("FCLP"), a California limited partnership (the "Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"), owned and operated cable television systems serving small to medium-sized communities and the suburbs of certain cities in 23 states through November 12, 1999. On September 30, 1998, pursuant to a Contribution and Purchase Agreement dated as of December 30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired the assets and liabilities of Falcon Video Communications, L.P. ("Falcon Video"), in exchange for ownership interests in FHGLP. Simultaneously with the closing of that transaction, in accordance with the Contribution Agreement, FHGLP contributed substantially all of the existing cable television system operations owned by FHGLP and its subsidiaries (including the Falcon Video Systems) to the Partnership and TCI Falcon Holdings, LLC ("TCI") contributed certain cable television systems owned and operated by affiliates of TCI (the "TCI Systems") to the Partnership (the "TCI Transaction"). As a result, Tele- Communications, Inc. held approximately 46% of the equity interest of the Partnership and FHGLP owned the remaining 54% and served as the managing general partner of the Partnership. The TCI Transaction has been accounted for as a recapitalization of FHGLP into the Partnership and the concurrent acquisition by the Partnership of the TCI systems. In March 1999, AT&T and Tele-Communications, Inc. completed a merger under which Tele-Communications, Inc. became a unit of AT&T called AT&T Broadband & Internet Services, which became a general partner of FCLP as a result of a merger. On November 12, 1999, Charter Communications Holding Company, LLC ("Charter") acquired the Partnership in a cash and stock transaction valued at approximately $3.6 billion, including assumption of liabilities. Upon closing of the transaction, the Partnership was merged with CC VII Holdings, LLC, a Delaware limited liability company and successor to FCLP. The consolidated financial statements include the accounts of the Partnership and its subsidiary holding companies and cable television operating partnerships and corporations, which include Falcon Cable Communications LLC ("Falcon LLC"), a Delaware limited liability company that serves as the general manager of the cable television subsidiaries. Such statements reflect balances immediately prior to the acquisition transaction. The assets contributed by FHGLP in 1998 to the Partnership excluded certain immaterial investments, principally FHGLP's ownership of 100% of the outstanding stock of Enstar Communications Corporation ("ECC"), which is the general partner and manager of fifteen limited partnerships operating under the name "Enstar." ECC's ownership interest in the Enstar partnerships ranges from 0.5% to 5%. Upon the consummation of the TCI Transaction, the management of the Enstar partnerships was assigned to the Partnership by FHGLP. The consolidated statements of operations and statements of cash flows for the year ended December 31, 1998 include FHGLP's interest in ECC for the nine months ended September 30, 1998. The effects of ECC's operations on all previous periods presented are immaterial. On November 12, 1999, Charter acquired ECC. FHGLP also controlled, held varying equity interests in and managed certain other cable television partnerships (the "Affiliated Partnerships") for a fee. FHGLP is a limited partnership, the sole general partner of which is Falcon Holding Group, Inc., a California corporation ("FHGI"). FHGI also holds a 1% interest in certain of the subsidiaries of the Partnership. At the beginning of 1998, the Affiliated Partnerships were comprised of Falcon Classic Cable Income Properties, L.P. ("Falcon Classic") whose cable television systems are referred to as the "Falcon Classic Systems," Falcon Video and the Enstar partnerships. As discussed in Note 3, F-340 552 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) the Falcon Classic Systems were acquired by FHGLP during 1998. The Falcon Video Systems were acquired on September 30, 1998 in connection with the TCI Transaction. As a result of these transactions, the Affiliated Partnerships consist solely of the Enstar partnerships from October 1, 1998 forward. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements do not give effect to any assets that the partners may have outside their interests in the Partnership, nor to any obligations, including income taxes, of the partners. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Partnership considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 1997 and 1998 included $4.5 million and $345,000 of investments in commercial paper and short-term investment funds of major financial institutions. There were no such cash equivalents at November 12, 1999. INVESTMENTS IN AFFILIATED PARTNERSHIPS Prior to closing the TCI Transaction, the Partnership was the general partner of certain entities, which in turn acted as general partner of the Affiliated Partnerships. The Partnership's effective ownership interests in the Affiliated Partnerships were less than one percent. The Affiliated Partnerships were accounted for using the equity method of accounting. Equity in net losses were recorded to the extent of the investments in and advances to the partnerships plus obligations for which the Partnership, as general partner, was responsible. The liabilities of the Affiliated Partnerships, other than amounts due the Partnership, principally consisted of debt for borrowed money and related accrued interest. The Partnership's ownership interests in the Affiliated Partnerships were eliminated in 1998 with the acquisition of Falcon Video and Falcon Classic and the retention by FHGLP of its interests in the Enstar partnerships. PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION Property, plant and equipment are stated at cost. Direct costs associated with installations in homes not previously served by cable are capitalized as part of the distribution system, and reconnects are expensed as incurred. For financial reporting, depreciation and amortization is computed using the straight-line method over the following estimated useful lives. CABLE TELEVISION SYSTEMS: Headend buildings and equipment........................... 10-16 years Trunk and distribution.................................... 5-15 years Microwave equipment....................................... 10-15 years OTHER: Furniture and equipment................................... 3-7 years Vehicles.................................................. 3-10 years Leasehold improvements.................................... Life of lease
F-341 553 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) FRANCHISE COST AND GOODWILL The excess of cost over the fair values of tangible assets and customer lists of cable television systems acquired represents the cost of franchises and goodwill. In addition, franchise cost includes capitalized costs incurred in obtaining new franchises and in the renewal of existing franchises. These costs are amortized using the straight-line method over the lives of the franchises, ranging up to 28 years (composite 15 year average). Goodwill is amortized over 20 years. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. CUSTOMER LISTS AND OTHER INTANGIBLE COSTS Customer lists and other intangible costs include customer lists, covenants not to compete and organization costs which are amortized using the straight-line method over two to five years. DEFERRED LOAN COSTS Costs related to borrowings are capitalized and amortized to interest expense over the life of the related loan. RECOVERABILITY OF ASSETS The Partnership assesses on an ongoing basis the recoverability of intangible assets (including goodwill) and capitalized plant assets based on estimates of future undiscounted cash flows compared to net book value. If the future undiscounted cash flow estimates were less than net book value, net book value would then be reduced to estimated fair value, which generally approximates discounted cash flows. The Partnership also evaluates the amortization periods of assets, including goodwill and other intangible assets, to determine whether events or circumstances warrant revised estimates of useful lives. REVENUE RECOGNITION Revenues from customer fees, equipment rental and advertising are recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable television system. Management fees are recognized on the accrual basis based on a percentage of gross revenues of the respective cable television systems managed. Effective October 1, 1998, 20% of the management fees from the Enstar partnerships was retained by FHGLP. DERIVATIVE FINANCIAL INSTRUMENTS As part of the Partnership's management of financial market risk and as required by certain covenants in its New Credit Agreement, the Partnership enters into various transactions that involve contracts and financial instruments with off-balance-sheet risk, principally interest rate swap and interest rate cap agreements. The Partnership enters into these agreements in order to manage the interest-rate sensitivity associated with its variable-rate indebtedness. The differential to be paid or received in connection with interest rate swap and interest rate cap agreements is recognized as interest rates change and is charged or credited to interest expense over the life F-342 554 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) of the agreements. Gains or losses for early termination of those contracts are recognized as an adjustment to interest expense over the remaining portion of the original life of the terminated contract. INCOME TAXES The Partnership and its subsidiaries, except for Falcon First, Inc., are limited partnerships or limited liability companies and pay no income taxes as entities except for nominal taxes assessed by certain state jurisdictions. All of the income, gains, losses, deductions and credits of the Partnership are passed through to its partners. The basis in the Partnership's assets and liabilities differs for financial and tax reporting purposes. At November 12, 1999, the book basis of the Partnership's net assets exceeded its tax basis by $623 million. ADVERTISING COSTS All advertising costs are expensed as incurred. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 -- PARTNERSHIP MATTERS The Amended and Restated Agreement of Limited Partnership of FCLP ("FCLP Partnership Agreement") provided that profits and losses will be allocated, and distributions will be made, in proportion to the partners' percentage interests. Prior to November 13, 1999, FHGLP was the managing general partner and a limited partner and owned a 54% interest in FCLP, and Tele-Communications, Inc. was a general partner and owned a 46% interest. The partners' percentage interests were based on the relative net fair market values of the assets contributed to FCLP under the Contribution Agreement, as estimated at the closing. The percentage interests were subsequently adjusted to reflect the December 1998 redemption of a small part of FHGLP's partnership interest. Through the closing of the sale to Charter, FCLP was required, under certain circumstances, on or after April 1, 2006, to purchase the interests of the non-management limited partners of FHGLP at their then fair value. The estimated redemption value at December 31, 1998 was $133 million and was reflected in the consolidated financial statements as redeemable partners' equity. Such amount was determined based on management's estimate of the relative fair value of such interests under then current market conditions. These limited partners were redeemed from their portion of the Charter sale proceeds as of November 12, 1999 for $424 million, which amount is shown as redeemable partners' equity at that date. The Partnership assumed the obligations of FHGLP under the 1993 Incentive Performance Plan (the "Incentive Performance Plan"), but FHGLP funded this obligation from its portion of the Charter sale proceeds. See Note 8. F-343 555 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- ACQUISITIONS AND SALES In March and July 1998, FHGLP acquired the Falcon Classic Systems for an aggregate purchase price of $83.4 million. Falcon Classic had revenue of approximately $20.3 million for the year ended December 31, 1997. As discussed in Note 1, on September 30, 1998 the Partnership acquired the TCI Systems and the Falcon Video Systems in accordance with the Contribution Agreement. Sources and uses of funds for each of the transactions were as follows:
FALCON CLASSIC FALCON VIDEO TCI SYSTEMS SYSTEMS SYSTEMS ----------- ------------ -------------- (DOLLARS IN THOUSANDS) Sources of Funds: Cash on hand................................ $ 11,429 $ 59,038 $ 6,591 Advance under bank credit facilities........ 429,739 56,467 76,800 -------- -------- ------- Total sources of funds.................... $441,168 $115,505 $83,391 ======== ======== ======= Uses of Funds: Repay debt assumed from TCI and existing debt of Falcon Video, including accrued interest.................................. $429,739 $115,505 $ -- Purchase price of assets.................... -- -- 83,391 Payment of assumed obligations at closing... 6,495 -- -- Transaction fees and expenses............... 2,879 -- -- Available funds............................. 2,055 -- -- -------- -------- ------- Total uses of funds....................... $441,168 $115,505 $83,391 ======== ======== =======
The following unaudited condensed consolidated statements of operations present the consolidated results of operations of the Partnership as if the acquisitions referred to above had occurred at the beginning of the periods presented and are not necessarily indicative of what would have occurred had the acquisitions been made as of such dates or of results which may occur in the future.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1998 ---------- ---------- (DOLLARS IN THOUSANDS) Revenues................................................... $ 424,994 $ 426,827 Expenses................................................... (438,623) (444,886) --------- --------- Operating loss........................................... (13,629) (18,059) Interest and other expenses................................ (115,507) (130,632) --------- --------- Loss before extraordinary item............................. $(129,136) $(148,691) ========= =========
F-344 556 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- ACQUISITIONS AND SALES -- (CONTINUED) The acquisitions of the TCI Systems, the Falcon Video Systems and the Falcon Classic Systems were accounted for by the purchase method of accounting, whereby the purchase prices were allocated to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, as follows:
TCI FALCON FALCON SYSTEMS VIDEO SYSTEMS CLASSIC SYSTEMS -------- ------------- --------------- (DOLLARS IN THOUSANDS) Purchase Price: General partnership interests issued.............. $234,457 $ 43,073 $ -- Debt assumed...................................... 275,000 112,196 -- Debt incurred..................................... -- -- 83,391 Other liabilities assumed......................... 955 3,315 2,804 Transaction costs................................. 2,879 -- -- -------- -------- ------- 513,291 158,584 86,195 -------- -------- ------- Fair Market Value of Net Assets Acquired: Property, plant and equipment..................... 77,992 41,889 33,539 Franchise costs................................... 170,799 36,374 7,847 Customer lists and other intangible assets........ 217,443 53,602 34,992 Other assets...................................... 4,165 2,381 3,164 -------- -------- ------- 470,399 134,246 79,542 -------- -------- ------- Excess of purchase price over fair value of assets acquired and liabilities assumed...... $ 42,892 $ 24,338 $ 6,653 ======== ======== =======
The excess of purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized using the straight-line method over 20 years. The general partnership interests issued in the TCI Transaction were valued in proportion to the estimated fair value of the TCI Systems and the Falcon Video Systems as compared to the estimated fair value of the Partnership's assets, which was agreed upon in the Contribution Agreement by all holders of Partnership interests. In January 1999, the Partnership acquired the assets of certain cable systems serving approximately 591 customers in Oregon for $801,000. On March 15, 1999, the Partnership acquired the assets of certain cable systems serving approximately 7,928 customers in Utah for $6.8 million. On March 22, 1999, the Partnership acquired the assets of the Franklin, Virginia system in exchange for the assets of its Scottsburg, Indiana systems and $8 million in cash and recognized a gain of $8.5 million. The Franklin system serves approximately 9,042 customers and the Scottsburg systems served approximately 4,507 customers. On July 30, 1999, the Partnership acquired the assets of certain cable systems serving approximately 6,500 customers in Oregon for $9.5 million. On March 1, 1999, the Partnership contributed $2.4 million cash and certain systems located in Oregon with a net book value of $5.6 million to a joint venture with Bend Cable Communications, Inc., which manages the joint venture. The Partnership owns 17% of the joint venture. These systems had been acquired from Falcon Classic in March 1998, and served approximately 3,471 subscribers at March 1, 1999. On March 26, 1999, the Partnership sold certain systems serving approximately 2,550 subscribers in Kansas for $3.0 million and F-345 557 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- ACQUISITIONS AND SALES -- (CONTINUED) recognized a gain of $2.4 million. The effects of these transactions on results of operations are not material. NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents The carrying amount approximates fair value due to the short maturity of those instruments. Notes Payable The fair value of the Partnership's 8.375% Senior Debentures and 9.285% Senior Discount Debentures is based on quoted market prices for those issues of debt as of December 31, 1998. The fair value at December 31, 1999 is based on the redemption amounts paid by Charter to retire the obligations after the acquisition by Charter. The fair value of the Partnership's other subordinated notes is based on quoted market prices for similar issues of debt with similar maturities. The carrying amount of the Partnership's remaining debt outstanding approximates fair value due to its variable rate nature. Interest Rate Hedging Agreements The fair value of interest rate hedging agreements is estimated by obtaining quotes from brokers as to the amount either party would be required to pay or receive in order to terminate the agreements. The following table depicts the fair value of each class of financial instruments for which it is practicable to estimate that value as of December 31:
DECEMBER 31, 1998 NOVEMBER 12, 1999 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Cash and cash equivalents.............. $ 14,284 $ 14,284 $ 9,995 $ 9,995 Notes payable (Note 6): 8.375% Senior Debentures............. 375,000 382,500 375,000 378,750 9.285% Senior Discount Debentures.... 294,982 289,275 319,085 321,459 Bank credit facilities............... 926,000 926,000 1,017,750 1,017,750 Other Subordinated Notes............. 15,000 16,426 -- -- Other................................ 371 371 -- --
NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Interest Rate Hedging Agreements (Note 6): Interest rate swaps.................... $1,534,713 $ (22,013) $1,279,713 $ 22,518
F-346 558 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) The carrying value of interest rate swaps was a net obligation of $9.3 million at December 31, 1998 and $9 million at November 12, 1999. See Note 6(e). The amount of debt on which current interest expense has been affected is $960 million and $745 million for swaps at December 31, 1998 and November 12, 1999, respectively. The balance of the contract totals presented above reflects contracts entered into as of November 12, 1999 which do not become effective until existing contracts expire. NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of:
DECEMBER 31, NOVEMBER 12, 1998 1999 ------------ ------------ (DOLLARS IN THOUSANDS) Cable television systems.................................... $765,641 $862,889 Furniture and equipment..................................... 25,576 29,514 Vehicles.................................................... 18,381 19,835 Land, buildings and improvements............................ 16,505 16,568 -------- -------- 826,103 928,806 Less accumulated depreciation and amortization.............. (320,209) (374,955) -------- -------- $505,894 $553,851 ======== ========
NOTE 6 -- NOTES PAYABLE Notes payable consist of:
DECEMBER 31, NOVEMBER 12, 1998 1999 ------------ ------------ (DOLLARS IN THOUSANDS) FCLP Only: 8.375% Senior Debentures(a)............................... $ 375,000 $ 375,000 9.285% Senior Discount Debentures, less unamortized discount(a)............................................ 294,982 319,085 Owned Subsidiaries: Credit Facility(b)........................................ 926,000 -- Amended and Restated Credit Agreement(c).................. -- 1,017,750 Other subordinated notes(d)............................... 15,000 -- Other..................................................... 371 -- ---------- ---------- $1,611,353 $1,711,835 ========== ==========
(a) 8.375% SENIOR DEBENTURES AND 9.285% SENIOR DISCOUNT DEBENTURES On April 3, 1998, FHGLP and its wholly-owned subsidiary, Falcon Funding Corporation ("FFC" and, collectively with FHGLP, the "Issuers"), sold $375,000,000 aggregate principal amount of 8.375% Senior Debentures due 2010 (the "Senior Debentures") and $435,250,000 aggregate principal amount at maturity of 9.285% Senior Discount Debentures due 2010 (the "Senior Discount Debentures" and, collectively with the Senior Debentures, the "Debentures") in a private placement. The Debentures were exchanged for debentures with the same form and terms, but registered under the Securities Act of 1933, as amended, in August 1998. F-347 559 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- NOTES PAYABLE -- (CONTINUED) In connection with consummation of the TCI Transaction, the Partnership was substituted for FHGLP as an obligor under the Debentures and thereupon FHGLP was released and discharged from any further obligation with respect to the Debentures and the related Indenture. FFC remains as an obligor under the Debentures and is now a wholly owned subsidiary of the Partnership. FFC was incorporated solely for the purpose of serving as a co-issuer of the Debentures and does not have any material operations or assets and will not have any revenues. The Senior Discount Debentures were issued at a price of 63.329% per $1,000 aggregate principal amount at maturity, for total gross proceeds of approximately $275.6 million, and will accrete to stated value at an annual rate of 9.285% until April 15, 2003. The unamortized discount amounted to $140.3 million at December 31, 1998 and $116.2 at November 12, 1999, respectively. After giving effect to offering discounts, commissions and estimated expenses of the offering, the sale of the Debentures (representing aggregate indebtedness of approximately $650.6 million as of the date of issuance) generated net proceeds of approximately $631 million. The Partnership used substantially all the net proceeds from the sale of the Debentures to repay outstanding bank indebtedness. (b) CREDIT FACILITY On June 30, 1998, the Partnership entered into a $1.5 billion senior credit facility (the "Credit Facility") which replaced its earlier credit facility and provided funds for the closing of the TCI Transaction. See Note 1. The borrowers under the Credit Facility were the operating subsidiaries prior to consummation of the TCI Transaction and, following the TCI Transaction, the borrower is Falcon LLC. The restricted companies, as defined under the Credit Facility, are Falcon LLC and each of its subsidiaries (excluding certain subsidiaries designated as excluded companies from time to time) and each restricted company (other than Falcon LLC) is also a guarantor of the Credit Facility. The Credit Facility consisted of three committed facilities (one revolver and two term loans) and one uncommitted $350 million supplemental credit facility (the terms of which will be negotiated at the time the Partnership makes a request to draw on such facility). Facility A is a $650 million revolving credit facility maturing December 29, 2006; Facility B is a $200 million term loan maturing June 29, 2007; and Facility C is a $300 million term loan maturing December 31, 2007. All of Facility C and approximately $126 million of Facility B were funded on June 30, 1998, and the debt outstanding under the Partnership's earlier credit facility of approximately $329 million was repaid. As a result, from June 30, 1998 until September 29, 1998, FHGLP had an excess cash balance of approximately $90 million. Immediately prior to closing the TCI Transaction, approximately $39 million was borrowed under Facility A to discharge certain indebtedness of Falcon Video. In connection with consummation of the TCI Transaction, Falcon LLC assumed the approximately $433 million of indebtedness outstanding under the Credit Facility. In addition to utilizing cash on hand of approximately $63 million, Falcon LLC borrowed the approximately $74 million remaining under Facility B and approximately $366 million under Facility A to discharge approximately $73 million of Falcon Video indebtedness and to retire approximately $430 million of TCI indebtedness assumed as part of the contribution of the TCI Systems. As a result of these borrowings, the amount outstanding under the Credit Facility at December 31, 1998 was $926 million. Subject to covenant limitations, the Partnership had available to it additional borrowing capacity thereunder of $224 million at December 31, 1998. However, limitations imposed by the Partnership's partnership agreement, as amended, would limit available borrowings at December 31, 1998 to $23.1 million. F-348 560 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- NOTES PAYABLE -- (CONTINUED) (c) AMENDED AND RESTATED CREDIT AGREEMENT On November 12, 1999, the Partnership amended the Credit Facility with the Amended and Restated Credit Agreement (the "Amended Agreement") providing for a $1.85 billion senior credit facility. The Amended Agreement consists of four committed facilities (two revolvers and two term loans) and one uncommitted $590 million supplemental credit facility (the terms of which will be negotiated at the time the Partnership makes a request to draw on such facility). Facility A is a $646 million revolving credit facility maturing December 29, 2006; Facility B is a $200 million term loan maturing June 29, 2007; Facility C is a $300 million term loan maturing December 31, 2007; and Facility D is a $110 million supplemental revolving credit facility maturing on December 31, 2007. As a result of borrowings, the amount outstanding under the Amended Agreement at November 12, 1999 was $1.018 billion. The Partnership had available to it additional borrowing capacity thereunder of $235 million. However debt covenants limit the amount that can be borrowed to $205 million at November 12, 1999, which was subject to limitations imposed by the Partnership's partnership agreement. Charter paid the lenders a fee of $2 million to obtain the Amended Agreement. (d) OTHER SUBORDINATED NOTES Other subordinated notes consisted of 11.56% Subordinated Notes due March 2001. The subordinated notes were repaid by Charter on November 12, 1999 with accrued interest of $202,000 and a prepayment premium of $1,143,000. (e) INTEREST RATE HEDGING AGREEMENTS The Partnership utilizes interest rate hedging agreements to establish long-term fixed interest rates on a portion of its variable-rate debt. The Amended Agreement requires that interest be tied to the ratio of consolidated total debt to consolidated annualized cash flow (in each case, as defined therein), and further requires that the Partnership maintain hedging arrangements with respect to at least 50% of the outstanding borrowings thereunder plus any additional borrowings of the Partnership, including the Debentures, for a two year period. As of November 12, 1999, borrowings under the Amended Agreement bore interest at an average rate of 7.51% (including the effect of interest rate hedging agreements). The Partnership has entered into fixed interest rate hedging agreements with an aggregate notional amount at November 12, 1999 of $1.28 billion. Agreements in effect at November 12, 1999 totaled $745 million, with the remaining $535 million to become effective as certain of the existing contracts mature from 2000 through October 2004. These agreements expire at various times through October 2006. The hedging agreements resulted in additional interest expense of $350,000, $1.2 million and $3.9 million for the years ended December 31, 1997 and 1998 and for the period from January 1, 1999 to November 12, 1999, respectively. The Partnership does not believe that it has any significant risk of exposure to non-performance by any of its counterparties. F-349 561 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 -- NOTES PAYABLE -- (CONTINUED) (f) DEBT MATURITIES The Partnership's notes payable outstanding at November 12, 1999 mature as follows:
8.375% 9.285% SENIOR SENIOR NOTES TO YEAR DEBENTURES DEBENTURES BANKS TOTAL - - - ---- ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) 2000................................ $ -- $ -- $ 5,000 $ 5,000 2001................................ -- -- 5,000 5,000 2002................................ -- -- 5,000 5,000 2003................................ -- -- 5,000 5,000 2004................................ -- -- 5,000 5,000 Thereafter.......................... $375,000 $435,250 $992,750 $1,803,000
(G) EXTRAORDINARY ITEM Fees and expenses incurred in connection with the repurchase of the Partnership's 11% Notes (the "Notes") on May 19, 1998 and the retirement of the remaining Notes on September 15, 1998 were $19.7 million in the aggregate. In addition, the unamortized portion of deferred loan costs related to the Notes and a previous credit facility, which amounted to $10.9 million in the aggregate, were written off as an extraordinary charge upon the extinguishment of the related debt in 1998. NOTE 7 -- COMMITMENTS AND CONTINGENCIES The Partnership leases land, office space and equipment under operating leases expiring at various dates through the year 2039. See Note 9. Future minimum rentals for operating leases at November 12, 1999 are as follows:
YEAR TOTAL - - - ---- ---------------------- (DOLLARS IN THOUSANDS) 1999........................................................ $ 353 2000........................................................ 2,904 2001........................................................ 2,527 2002........................................................ 2,132 2003........................................................ 1,232 Thereafter.................................................. 4,612 ------- $13,760 =======
In most cases, management expects that, in the normal course of business, these leases will be renewed or replaced by other leases. Rent expense amounted to $2.4 million in 1997, $3.1 million in 1998 and $3.6 million for the period from January 1, 1999 to November 12, 1999. In addition, the Partnership rents line space on utility poles in some of the franchise areas it serves. These rentals amounted to $3.1 million for 1997, $3.9 million for 1998 and $4.5 million for the period from January 1, 1999 to November 12, 1999. Generally, such pole rental agreements are short-term; however, the Partnership anticipates such rentals will continue in the future. F-350 562 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Beginning in August 1997, the Partnership elected to self-insure its cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to significant increases in the cost of insurance coverage and decreases in the amount of insurance coverage available. In October 1998, the Partnership reinstated third party insurance coverage against damage to its cable distribution plant and subscriber connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible and is intended to limit the Partnership's exposure to catastrophic losses, if any, in future periods. Management believes that the relatively small size of the Partnership's markets in any one geographic area, coupled with their geographic separation, will mitigate the risk that the Partnership could sustain losses due to seasonal weather conditions or other events that, in the aggregate, could have a material adverse effect on the Partnership's liquidity and cash flows. The Partnership continues to purchase insurance coverage in amounts management views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. The Partnership is required under various franchise agreements at November 12, 1999 to rebuild certain existing cable systems at a cost of approximately $125.4 million. The Partnership is regulated by various federal, state and local government entities. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), provides for among other things, federal and local regulation of rates charged for basic cable service, cable programming service tiers ("CPSTs") and equipment and installation services. Regulations issued in 1993 and significantly amended in 1994 by the Federal Communications Commission (the "FCC") have resulted in changes in the rates charged for the Partnership's cable services. The Partnership believes that compliance with the 1992 Cable Act has had a negative impact on its operations and cash flow. It also presently believes that any potential future liabilities for refund claims or other related actions would not be material. The Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As it pertains to cable television, the 1996 Telecom Act, among other things, (i) ends the regulation of certain CPSTs in 1999; (ii) expands the definition of effective competition, the existence of which displaces rate regulation; (iii) eliminates the restriction against the ownership and operation of cable systems by telephone companies within their local exchange service areas; and (iv) liberalizes certain of the FCC's cross-ownership restrictions. The Partnership has various contracts to obtain basic and premium programming from program suppliers whose compensation is generally based on a fixed fee per customer or a percentage of the gross receipts for the particular service. Some program suppliers provide volume discount pricing structures or offer marketing support to the Partnership. The Partnership's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. The Partnership does not have long-term programming contracts for the supply of a substantial amount of its programming. Accordingly, no assurances can be given that the Partnership's programming costs will not continue to increase substantially or that other materially adverse terms will not be added to the Partnership's programming contracts. Management believes, however, that the Partnership's relations with its programming suppliers generally are good. Effective December 1, 1998, the Partnership elected to obtain certain of its programming services through an affiliate of TCI. This election resulted in a reduction in the Partnership's programming costs, the majority of which will be passed on to its customers in the form of F-351 563 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) reduced rates in compliance with FCC rules. The Partnership has elected to continue to acquire its remaining programming services under its existing programming contracts. The Partnership, in the normal course of business, purchases cable programming services from certain program suppliers owned in whole or in part by an affiliate of TCI. The Partnership is periodically a party to various legal proceedings. Such legal proceedings are ordinary and routine litigation proceedings that are incidental to the Partnership's business, and management presently believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the financial condition of the Partnership. The Partnership, certain of its affiliates, and certain third parties were named as defendants in an action entitled Frank O'Shea I.R.A. et al. v. Falcon Cable Systems Company, et al., Case No. BC 147386, in the Superior Court of the State of California, County of Los Angeles (the "Action"). Plaintiffs in the Action were certain former unitholders of Falcon Cable Systems Company ("FCSC") purporting to represent a class consisting of former unitholders of FCSC other than those affiliated with FCSC and/or its controlling persons. The complaint in the Action alleged, among other things, that defendants breached their fiduciary and contractual duties to unitholders, and acted negligently, with respect to the purchase from former unitholders of their interests in FCSC in 1996. A settlement of the action was approved by the court in May 1999 and has become effective. The terms of the settlement did not have a material adverse effect on the financial condition of the Partnership. Net of insurance proceeds, the settlement's cost to the Partnership amounted to approximately $2.9 million. The Partnership recognized expenses related to the settlement of $145,000, $2.5 million and $166,000 in 1997, 1998, and for the period from January 1, 1999 to November 12, 1999, respectively. In various states, customers have filed punitive class action lawsuits on behalf of all persons residing in those states who are or were customers of the Partnership's cable television service, and who have been charged a fee for delinquent payment of their cable bill. The actions challenge the legality of the processing fee and seek declaratory judgment, injunctive relief and unspecified damages. At this stage, the Partnership is not able to project the outcome of the actions. NOTE 8 -- EMPLOYEE BENEFIT PLANS The subsidiaries of the Partnership have a cash or deferred profit sharing plan (the "Profit Sharing Plan") covering substantially all of their employees. FHGLP joined in the adoption of the FHGI cash or deferred profit sharing plan as of March 31, 1993. The provisions of this plan were amended to be substantially identical to the provisions of the Profit Sharing Plan. The Profit Sharing Plan provides that each participant may elect to make a contribution in an amount up to 20% of the participant's annual compensation which otherwise would have been payable to the participant as salary. The Partnership's contribution to the Profit Sharing Plan, as determined by management, is discretionary but may not exceed 15% of the annual aggregate compensation (as defined) paid to all participating employees. Effective January 1, 1999 the Profit Sharing Plan was amended, whereby the Partnership would make an employer contribution equal to 100% of the first 3% and 50% of the next 2% of the participant's contributions, respectively. There were no contributions for the Profit Sharing Plan in 1997 or 1998. The partnership contributed $1.0 million during the period from January 1, 1999 to November 12, 1999. F-352 564 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED) On September 30 1998, the Partnership assumed the obligations of FHGLP for its 1993 Incentive Performance Plan (the "Incentive Plan"). The value of the interests in the Incentive Plan was tied to the equity value of certain partnership units in FHGLP held by FHGI. In connection with the assumption by the Partnership, FHGLP agreed to fund any benefits payable under the Incentive Plan through additional capital contributions to the Partnership, the waiver of its rights to receive all or part of certain distributions from the Partnership and/or a contribution of a portion of its partnership units to the Partnership. The benefits which were payable under the Incentive Plan are equal to the amount of distributions which FHGI would have otherwise received with respect to 1,932.67 of the units of FHGLP held by FHGI and a portion of FHGI's interest in certain of the partnerships that are the general partners of the Partnership's operating subsidiaries. Benefits were payable under the Incentive Plan only when distributions would otherwise be paid to FHGI with respect to the above-described units and interests. In 1999, the Partnership adopted a Restricted Unit Plan (the "New FCLP Incentive Plan" or "Plan") for the benefit of certain employees. Grants of restricted units are provided at the discretion of the Advisory Committee. The value of the units in the New FCLP Incentive Plan is tied to the equity value of FCLP above a base equity as determined initially in 1999 by the partners, and for grants in subsequent years by an appraisal. Benefits are payable under the New FCLP Incentive Plan only when distributions would otherwise be payable to equity holders of FCLP. An initial grant of 100,000 units representing 2.75% of the equity of FCLP in excess of the equity base was approved and will be allocated to the participants in the Plan. There is a five-year vesting requirement for all participants. In connection with the sale of the Partnership to Charter discussed in Note 1, the Partnership recorded compensation expense in the amount of approximately $46.4 million related to both the Incentive Plan ($21 million) and the New FCLP Incentive Plan ($25.4 million). The amount was determined based on the value of the underlying ownership units, as established by the sale of the Partnership to Charter, and on estimated closing working capital and debt balances of the Partnership. The Partnership paid $33 million on November 12, 1999 to certain employees. The payments were funded by net proceeds of the sale. The Partnership transferred its remaining liability approximating $13.4 million to FHGLP who will make the final payments under the plans. The participants in the Incentive Plan were present and former employees of the Partnership, FHGLP and its operating affiliates, all of whom were 100% vested. Prior to the closing of the TCI Transaction, FHGLP amended the Incentive Plan to provide for payments by FHGLP at the closing of the TCI Transaction to participants in an aggregate amount of approximately $6.5 million and to reduce by such amount FHGLP's obligations to make future payments to participants under the Incentive Plan. In addition to the amounts expensed pursuant to the equity plans, the Partnership recorded bonuses to certain employees in the aggregate amount of $20 million upon the closing of the sale to Charter. The Partnership also recorded employee severance and other compensation aggregating $4.2 million. The Partnership paid $11.8 million on November 12, 1999 to certain employees. The payments were funded by net proceeds of the sale. The Partnership transferred its remaining liability approximating $12.4 million to FHGLP who will make the final payment. The aggregate amount of expenses recorded under benefit plans and severance and other compensation of $70.7 million was recorded as a capital contribution, as FHGLP's share of the proceeds from the sale have been, or will be, used to fund such obligations. F-353 565 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9 -- RELATED PARTY TRANSACTIONS The Partnership is a separate, stand-alone holding company which employs all of the management personnel. The Partnership is financially dependent on the receipt of permitted payments from its operating subsidiaries, management and consulting fees from domestic cable ventures, and the reimbursement of specified expenses by certain of the Affiliated Partnerships to fund its operations. Expected increases in the funding requirements of the Partnership combined with limitations on its sources of cash may create liquidity issues for the Partnership in the future. Specifically, the Credit Facility permitted the subsidiaries of the Partnership to remit to the Partnership no more than 4.25% of their net cable revenues, as defined, in any year. Beginning on January 1, 1999, this limitation was increased to 4.5% of net cable revenues in any year. As a result of the 1998 acquisition by the Partnership of the Falcon Classic and Falcon Video Systems, the Partnership will no longer receive management fees and reimbursed expenses from Falcon Classic or receive management fees from Falcon Video. Commencing on October 1, 1998, FHGLP retains 20% of the management fees paid by the Enstar partnerships. The management fees earned from the Enstar partnerships were $2 million, $1.9 million and $1.4 million for the years ended December 31, 1997 and 1998 and for the period from January 1, 1999 to November 12, 1999, respectively. The management and consulting fees and expense reimbursements earned from the Affiliated Partnerships amounted to approximately $5.2 million and $2.1 million, $3.7 million and $1.5 million and $1.4 million and $1.4 million for the years ended December 31, 1997 and 1998 and for the period ended November 12, 1999, respectively. The fees and expense reimbursements of $3.7 million and $1.5 million earned in 1998 included $191,000 and $128,000 earned from Falcon Classic from January 1, 1998 through July 16, 1998, and $1.2 million in management fees from Falcon Video from January 1, 1998 through September 30, 1998. Subsequent to these acquisitions, the amounts payable to the Partnership in respect of its management of the former Falcon Classic and Falcon Video systems became subject to the limitations contained in the Credit Facility. Included in Commitments and Contingencies (Note 7) is a facility lease agreement with the Partnership's Chief Executive Officer and his wife, or entities owned by them, requiring annual future minimum rental payments aggregating $2.5 million through 2005. During the years ended December 31, 1997 and 1998 and for the period ended November 12, 1999, rent expense on the facility amounted to $383,000, $416,000 and $369,000, respectively. FCLP purchased a facility owned by the Partnership's Chief Executive Officer and his wife in February 1999 for $283,000 which was previously leased by FCLP. In addition, the Partnership provides certain accounting, bookkeeping and clerical services to the Partnership's Chief Executive Officer. The costs of services provided were determined based on allocations of time plus overhead costs (rent, parking, supplies, telephone, etc.). Such services amounted to $163,000, $212,000 and $256,000 for the years ended December 31, 1997 and 1998 and for the period from January 1, 1999 to November 12, 1999, respectively. These costs were net of amounts reimbursed to the Partnership by the Chief Executive Officer amounting to $55,000, $72,000 and $77,000 for the years ended December 31, 1997 and 1998 and for the period from January 1, 1999 to November 12, 1999, respectively. F-354 566 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- OTHER INCOME (EXPENSE) Other income (expense) is comprised of the following:
YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1999 ----------------- TO NOVEMBER 12, 1997 1998 1999 ------- ------- --------------- (DOLLARS IN THOUSANDS) Gain (loss) on insured casualty losses.................. $ 3,476 $ 314 $ (69) Gain on sale of system.................................. -- -- 10,671 Sale of system -- Falcon................................ -- -- (2,427) Gain (loss) on sale of investment....................... (1,360) 174 -- Net lawsuit settlement costs............................ (1,030) (2,614) (166) Other, net.............................................. (201) (791) 53 ------- ------- ------- $ 885 $(2,917) $ 8,062 ======= ======= =======
NOTE 11 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Operating activities During the years ended December 31, 1997 and 1998 and the period from January 1, 1999 to November 12, 1999, FCLP paid cash interest amounting to approximately $48.1 million, $84.9 million and $93.9 million, respectively. Investing activities See Note 3 regarding the non-cash investing activities related to the acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems and the Falcon Classic Systems. Also included in Note 3 are the non-cash investing activities related to the exchange of the Partnership's Scottsburg, Indiana system for a system in Franklin, Virginia. Financing activities See Note 3 regarding the non-cash financing activities relating to the acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems and the Falcon Classic Systems. See Note 2 regarding the reclassification to redeemable partners' equity. NOTE 12 -- FCLP (PARENT COMPANY ONLY) The following parent-only condensed financial information presents Falcon Communications, L.P.'s balance sheets and related statements of operations and cash flows by accounting for the investments in its subsidiaries on the equity method of accounting. The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto. F-355 567 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 -- FCLP (PARENT COMPANY ONLY) -- (CONTINUED) CONDENSED BALANCE SHEET INFORMATION
NOVEMBER 12, DECEMBER 31, 1999 1998 (DATE OF DISPOSITION) ------------ --------------------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents................................ $ 1,605 $ 3,363 Receivables: Intercompany notes and accrued interest receivable.... 655,128 674,409 Due from affiliates and other entities................ 2,129 108 Prepaid expenses and other............................... 236 305 Property, plant and equipment, less accumulated depreciation and amortization......................... 3,599 4,572 Deferred loan costs, less accumulated amortization....... 20,044 18,718 ---------- ---------- $ 682,741 $ 701,475 ========== ========== LIABILITIES: Senior notes payable..................................... $ 669,982 $ 694,085 Notes payable to affiliates.............................. 70,805 71,801 Accounts payable......................................... 135 340 Accrued expenses......................................... 14,000 10,432 Equity in net losses of subsidiaries in excess of investment............................................ 198,492 324,533 ---------- ---------- TOTAL LIABILITIES..................................... 953,414 1,101,191 REDEEMABLE PARTNERS' EQUITY................................ 133,023 424,280 PARTNERS' DEFICIT.......................................... (403,696) (823,996) ---------- ---------- $ 682,741 $ 701,475 ========== ==========
F-356 568 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 -- FCLP (PARENT COMPANY ONLY) -- (CONTINUED) CONDENSED STATEMENT OF OPERATIONS INFORMATION
PERIOD FROM YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO ------------------------ NOVEMBER 12, 1999 1997 1998 (DATE OF DISPOSITION) ---------- ----------- --------------------- (DOLLARS IN THOUSANDS) REVENUES: Management fees: Affiliated Partnerships.................... $ 2,873 $ 2,120 $ 1,372 Subsidiaries............................... 13,979 14,010 16,530 International and other.................... 281 33 29 -------- --------- --------- Total revenues........................... 17,133 16,163 17,931 -------- --------- --------- EXPENSES: General and administrative expenses........... 11,328 21,134 83,180 Depreciation and amortization................. 274 559 1,242 -------- --------- --------- Total expenses........................... 11,602 21,693 84,422 -------- --------- --------- Operating income (loss).................. 5,531 (5,530) (66,491) OTHER INCOME (EXPENSE): Interest income............................... 22,997 50,562 49,731 Interest expense.............................. (30,485) (59,629) (56,861) Equity in net losses of subsidiaries.......... (56,422) (105,659) (126,041) Equity in net losses of investee partnerships............................... (4) (31) -- Other, net.................................... (2,455) -- 830 -------- --------- --------- Net loss before extraordinary item.............. (60,838) (120,287) (198,832) Extraordinary item, retirement of debt.......... -- (24,196) -- -------- --------- --------- NET LOSS........................................ $(60,838) $(144,483) $(198,832) ======== ========= =========
F-357 569 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 -- FCLP (PARENT COMPANY ONLY) -- (CONTINUED) CONDENSED STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED PERIOD FROM DECEMBER 31, JANUARY 1, 1999 TO ------------------ NOVEMBER 12, 1999 1997 1998 (DATE OF DISPOSITION) ------ --------- --------------------- (DOLLARS IN THOUSANDS) Net cash provided by (used in) Operating activities...................................... $1,478 $(418,226) $2,982 ------ --------- ------ Cash flows from investing activities: Distributions from affiliated partnerships...... -- 1,820 -- Capital expenditures............................ (417) (2,836) (2,218) Investments in affiliated partnerships and other investments.................................. (254) (2,998) -- Proceeds from sale of investments and other assets....................................... 702 1,694 4 Assets retained by Falcon Holding Group, L.P.... -- (2,893) -- ------ --------- ------ Net cash provided by (used in) investing activities...................................... 31 (5,213) (2,214) ------ --------- ------ Cash flows from financing activities: Repayment of debt............................... (131) (282,203) -- Borrowings from notes payable................... -- 650,639 -- Borrowings from subsidiaries.................... -- 70,805 996 Capital contributions........................... 93 -- -- Redemption of partners' equity.................. -- (1,170) -- Deferred loan costs............................. -- (21,204) (7) ------ --------- ------ Net cash provided by (used in) financing activities...................................... (38) 416,867 989 ------ --------- ------ Net increase (decrease) in cash and cash equivalents..................................... 1,471 (6,572) 1,757 Cash and cash equivalents, at beginning of period.......................................... 6,706 8,177 1,605 ------ --------- ------ Cash and cash equivalents, at end of period....... $8,177 $ 1,605 $3,362 ====== ========= ======
NOTE 13 -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COST AND END OF OF PERIOD EXPENSES(A) DEDUCTIONS(B) OTHER(C) PERIOD ---------- ----------- ------------- -------- ---------- (DOLLARS IN THOUSANDS) Allowance for possible losses on receivables Year ended December 31, 1997.......................... $907 $5,714 $(5,796) -- $ 825 1998.......................... $825 $4,775 $(5,299) $369 $ 670 Period from January 1, 1999 to November 12, 1999............. $670 $4,510 $(4,106) -- $1,074
- - - --------------- (a) Provision for losses, net of recoveries. (b) Write-off uncollectible accounts. F-358 570 FALCON COMMUNICATIONS, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) Allowance for losses on receivables acquired in connection with the acquisition of Falcon Classic, Falcon Video and the TCI Systems. NOTE 14 -- YEAR 2000 (UNAUDITED) In the prior years, the Partnership discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Partnership completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Partnership experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Partnership expensed approximately $4.7 million during the period from January 1, 1999 to November 12, 1999 in connection with remediating its systems. The Partnership is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. F-359 571 INDEPENDENT AUDITORS' REPORT The Board of Directors Tele-Communications, Inc.: We have audited the accompanying combined balance sheets of the TCI Falcon Systems (as defined in Note 1 to the combined financial statements) as of September 30, 1998 and December 31, 1997, and the related combined statements of operations and parent's investment, and cash flows for the nine-month period ended September 30, 1998 and for each of the years in the two-year period ended December 31, 1997. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the TCI Falcon Systems as of September 30, 1998 and December 31, 1997, and the results of their operations and their cash flows for the nine-month period ended September 30, 1998 and for each of the years in the two-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG LLP Denver, Colorado June 21, 1999 F-360 572 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (AMOUNTS IN THOUSANDS) ASSETS Trade and other receivables, net............................ $ 2,452 $ 4,665 Property and equipment, at cost: Land...................................................... 1,289 1,232 Distribution systems...................................... 151,017 137,767 Support equipment and buildings........................... 20,687 18,354 -------- -------- 172,993 157,353 Less accumulated depreciation............................. 80,404 69,857 -------- -------- 92,589 87,496 -------- -------- Franchise costs............................................. 399,258 393,540 Less accumulated amortization............................. 70,045 62,849 -------- -------- 329,213 330,691 -------- -------- Other assets, net of accumulated amortization............... 630 714 -------- -------- $424,884 $423,566 ======== ======== LIABILITIES AND PARENT'S INVESTMENT Accounts payable............................................ $ 729 $ 350 Accrued expenses............................................ 5,267 3,487 Deferred income taxes (note 4).............................. 124,586 121,183 -------- -------- Total liabilities................................. 130,582 125,020 Parent's investment (note 5)................................ 294,302 298,546 -------- -------- Commitments and contingencies (note 6)...................... $424,884 $423,566 ======== ========
See accompanying notes to combined financial statements. F-361 573 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, -------------------- 1998 1997 1996 --------------- -------- -------- (AMOUNTS IN THOUSANDS) Revenue.............................................. $ 86,476 $113,897 $102,155 Operating costs and expenses: Operating (note 5)................................. 31,154 39,392 33,521 Selling, general and administrative................ 17,234 19,687 21,695 Administrative fees (note 5)....................... 2,853 5,034 5,768 Depreciation....................................... 10,317 12,724 12,077 Amortization....................................... 7,440 9,785 8,184 -------- -------- -------- 68,998 86,622 81,245 -------- -------- -------- Operating income................................ 17,478 27,275 20,910 Other income (expense): Intercompany interest expense (note 5)............. (4,343) (5,832) (4,701) Other, net......................................... 28 (84) (44) -------- -------- -------- (4,315) (5,916) (4,745) -------- -------- -------- Earnings before income taxes.................... 13,163 21,359 16,165 Income tax expense................................... (5,228) (8,808) (6,239) -------- -------- -------- Net earnings.................................... 7,935 12,551 9,926 Parent's investment: Beginning of period................................ 298,546 319,520 262,752 Change in due to Tele-Communications, Inc. ("TCI") (note 5)........................................ (12,179) (33,525) 46,842 -------- -------- -------- End of period...................................... $294,302 $298,546 $319,520 ======== ======== ========
See accompanying notes to combined financial statements. F-362 574 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED STATEMENTS OF CASH FLOWS
JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, -------------------- 1998 1997 1996 --------------- -------- -------- (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net earnings....................................... $ 7,935 $ 12,551 $ 9,926 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................... 17,757 22,509 20,261 Deferred income tax expense..................... 3,403 7,181 4,533 Changes in operating assets and liabilities, net of effects of acquisitions: Change in receivables......................... 2,213 (1,644) (55) Change in other assets........................ 84 (125) (248) Change in accounts payable and accrued expenses................................... 2,159 418 (473) -------- -------- -------- Net cash provided by operating activities............................... 33,551 40,890 33,944 -------- -------- -------- Cash flows from investing activities: Capital expended for property and equipment........ (13,540) (7,586) (13,278) Cash paid for acquisitions......................... -- -- (68,240) Other investing activities......................... (809) 221 732 -------- -------- -------- Net cash used in investing activities...... (14,349) (7,365) (80,786) -------- -------- -------- Cash flows from financing activities: Change in due to TCI............................... (19,202) (33,525) 46,842 -------- -------- -------- Net cash provided by (used in) financing activities............................... (19,202) (33,525) 46,842 -------- -------- -------- Net change in cash......................... -- -- -- Cash: Beginning of period...................... -- -- -- -------- -------- -------- End of period............................ $ -- $ -- $ -- ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest........... $ 4,343 $ 5,832 $ 4,701 ======== ======== ======== Cash paid during the period for income taxes....... $ -- $ 140 $ 86 ======== ======== ========
See accompanying notes to combined financial statements. F-363 575 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1998 TO SEPTEMBER 30, 1998, AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (1) BASIS OF PRESENTATION The combined financial statements include the accounts of thirteen of TCI's cable television systems serving certain subscribers within Oregon, Washington, Alabama, Missouri and California (collectively, the "TCI Falcon Systems"). This combination was created in connection with the Partnership formation discussed below. The TCI Falcon Systems were indirectly wholly-owned by TCI in all periods presented herein up to the date of the Contribution, as defined below. All significant inter-entity accounts and transactions have been eliminated in combination. The combined net assets of the TCI Falcon Systems including amounts due to TCI are referred to as "Parent's Investment". TCI's ownership interests in the TCI Falcon Systems, as described above, were acquired through transactions wherein TCI acquired various larger cable entities (the "Original Systems"). The TCI Falcon System's combined financial statements include an allocation of the purchase price and certain purchase accounting adjustments, including the related deferred tax effects, from TCI's acquisition of the Original Systems. Such allocation and the related franchise cost amortization was based on the relative fair market value of the systems acquired. In addition, certain costs of TCI are charged to the TCI Falcon Systems based on their number of customers (see note 5). Although such allocations are not necessarily indicative of the costs that would have been incurred by the TCI Falcon Systems on a stand alone basis, management believes that the resulting allocated amounts are reasonable. Partnership Formation On September 30, 1998, TCI and Falcon Holding Group, LP ("Falcon") closed a transaction under a Contribution and Purchase Agreement (the "Contribution"), whereby TCI contributed the TCI Falcon Systems to a newly formed partnership (the "Partnership") between TCI and Falcon in exchange for an approximate 46% ownership interest in the Partnership. The accompanying combined financial statements reflect the position, results of operations and cash flows of the TCI Falcon Systems immediately prior to the Contribution, and, therefore, do not include the effects of such Contribution. (2) ACQUISITION On January 1, 1998, a subsidiary of TCI acquired certain cable television assets in and around Ellensburg, WA from King Videocable Company. On the same date, these assets were transferred to the TCI Falcon Systems. As a result of these transactions, the TCI Falcon Systems recorded non-cash increases in property and equipment of $2,100,000, in franchise costs of $4,923,000, and in parent's investment of $7,023,000. Assuming the acquisition had occurred on January 1, 1997, the TCI Falcon Systems' pro forma results of operations would not have been materially different from the results of operations for the year ended December 31, 1997. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at September 30, 1998 and December 31, 1997 was not significant. F-364 576 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment Property and equipment are stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, labor and applicable overhead related to installations, and interest during construction are capitalized. During the nine-month period ended September 30, 1998 and for the years ended December 31, 1997 and 1996, interest capitalized was not significant. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts assigned to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the TCI Falcon Systems in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. Impairment of Long-Lived Assets Management periodically reviews the carrying amounts of property, plant and equipment and its intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary based on an analysis of undiscounted cash flows, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. Revenue Recognition Cable revenue for customer fees, equipment rental, advertising, and pay-per-view programming is recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable television system. Combined Statements of Cash Flows Transactions effected through the intercompany account with TCI (except for the acquisition and dividend discussed in notes 2 and 5, respectively) have been considered constructive cash receipts and payments for purposes of the combined statements of cash flows. F-365 577 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Estimates The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the combined financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified for comparability with the 1998 presentation. (4) INCOME TAXES The TCI Falcon Systems were included in the consolidated federal income tax return of TCI. Income tax expense for the TCI Falcon Systems is based on those items in the consolidated calculation applicable to the TCI Falcon Systems. Intercompany tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) among subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The payable or receivable arising from the intercompany tax allocation is recorded as an increase or decrease in amounts due to TCI. Deferred income taxes are based on the book and tax basis differences of the assets and liabilities within the TCI Falcon Systems. The income tax amounts included in the accompanying combined financial statements approximate the amounts that would have been reported if the TCI Falcon Systems had filed a separate income tax return. Income tax expense for the nine-month period ended September 30, 1998 and for the years ended December 31, 1997 and 1996 consists of:
CURRENT DEFERRED TOTAL ------- -------- ------- (AMOUNTS IN THOUSANDS) Nine-month period ended September 30, 1998: Intercompany allocation........................... $(1,825) $ -- $(1,825) Federal........................................... -- (2,778) (2,778) State and local................................... -- (625) (625) ------- ------- ------- $(1,825) $(3,403) $(5,228) ======= ======= ======= Year ended December 31, 1997: Intercompany allocation........................... $(1,487) $ -- $(1,487) Federal........................................... -- (5,862) (5,862) State and local................................... (140) (1,319) (1,459) ------- ------- ------- $(1,627) $(7,181) $(8,808) ======= ======= ======= Year ended December 31, 1996: Intercompany allocation........................... $(1,620) $ -- $(1,620) Federal........................................... -- (4,032) (4,032) State and local................................... (86) (501) (587) ------- ------- ------- $(1,706) $(4,533) $(6,239) ======= ======= =======
F-366 578 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense differs from the amounts computed by applying the federal income tax rate of 35% as a result of the following:
JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, ------------------ 1998 1997 1996 --------------- ------- ------- (AMOUNTS IN THOUSANDS) Computed "expected" tax expense................ $(4,607) $(7,476) $(5,658) Amortization not deductible for tax purposes... (198) (265) (178) State and local income taxes, net of federal income tax benefit........................... (406) (948) (382) Other.......................................... (17) (119) (21) ------- ------- ------- $(5,228) $(8,808) $(6,239) ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liabilities at September 30, 1998 and December 31, 1997 are presented below:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (AMOUNTS IN THOUSANDS) Deferred tax asset -- principally due to non- deductible accruals........................... $ 146 $ 128 -------- -------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation................ 24,246 20,985 Franchise costs, principally due to differences in amortization and initial basis...................................... 100,486 100,326 -------- -------- Total gross deferred tax liabilities......................... 124,732 121,311 -------- -------- Net deferred tax liability............ $124,586 $121,183 ======== ========
(5) PARENT'S INVESTMENT Parent's investment in the TCI Falcon Systems at September 30, 1998 and December 31, 1997 is summarized as follows:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (AMOUNTS IN THOUSANDS) Due to TCI...................................... $ 642,228 $224,668 Retained earnings (deficit)..................... (347,926) 73,878 --------- -------- $ 294,302 $298,546 ========= ========
The amount due to TCI represents advances for operations, acquisitions and construction costs, as well as, the amounts owed as a result of the allocation of certain costs from TCI. TCI charges intercompany interest expense at variable rates to cable systems within the TCI Falcon Systems based upon amounts due to TCI from the cable systems. Such amounts are due on demand. F-367 579 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) On August 15, 1998, TCI caused the TCI Falcon Systems to effect distributions from the TCI Falcon Systems to TCI aggregating $429,739,000 (the "Dividend"). The Dividend resulted in a non-cash increase to the intercompany amounts owed to TCI and a corresponding non-cash decrease to retained earnings. As a result of TCI's ownership of 100% of the TCI Falcon Systems prior to the Contribution, the amounts due to TCI have been classified as a component of parent's investment in the accompanying combined financial statements. The TCI Falcon Systems purchase, at TCI's cost, substantially all of their pay television and other programming from affiliates of TCI. Charges for such programming were $21,479,000, $25,500,000 and $20,248,000 for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996, respectively, and are included in operating expenses in the accompanying combined financial statements. Certain subsidiaries of TCI provide administrative services to the TCI Falcon Systems and have assumed managerial responsibility of the TCI Falcon Systems' cable television system operations and construction. As compensation for these services, the TCI Falcon Systems pay a monthly fee calculated on a per-customer basis. The intercompany advances and expense allocation activity in amounts due to TCI consists of the following:
JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, -------------------- 1998 1997 1996 --------------- -------- -------- (AMOUNTS IN THOUSANDS) Beginning of period.......................... $224,668 $258,193 $211,351 Transfer of cable system acquisition purchase price.......................... 7,023 -- 68,240 Programming charges........................ 21,479 25,500 20,248 Administrative fees........................ 2,853 5,034 5,768 Intercompany interest expense.............. 4,343 5,832 4,701 Tax allocations............................ 1,825 1,487 1,620 Distribution to TCI........................ 429,739 -- -- Cash transfer.............................. (49,702) (71,378) (53,735) -------- -------- -------- End of period................................ $642,228 $224,668 $258,193 ======== ======== ========
(6) COMMITMENTS AND CONTINGENCIES The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed certain rate regulations on the cable television industry. Under the 1992 Cable Act, all cable systems are subject to rate regulation, unless they face "effective competition," as defined by the 1992 Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"), in their local franchise area. Although the Federal Communications Commission (the "FCC") has established regulations required by the 1992 Cable Act, local government units (commonly referred to as local franchising authorities) are primarily responsible for administering the regulation of a cable system's basic service tier ("BST"). The FCC itself directly administered rate regulation of any F-368 580 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) cable programming service tier ("CPST"). The FCC's authority to regulate CPST rates expired on March 31, 1999. The FCC has taken the position that it will still adjudicate CPST complaints filed after this sunset date (but no later than 180 days after the last CPST rate increase imposed prior to March 31, 1999), and will strictly limit its review (and possible refund orders) to the time period predating the sunset date. Under the FCC's rate regulations, most cable systems were required to reduce their BST and CPST rates in 1993 and 1994, and have since had their rate increases governed by a complicated price structure that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. Operators also have the opportunity to bypass this "benchmark" regulatory structure in favor of the traditional "cost-of- service" regulation in cases where the latter methodology appears favorable. Premium cable services offered on a per-channel or per-program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. The management of the TCI Falcon Systems believes that it has complied in all material respects with the provisions of the 1992 Cable Act and the 1996 Act, including its rate setting provisions. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of CPST rates would be retroactive to the date of complaint. Any refunds of the excess portion of BST or equipment rates would be retroactive to one year prior to the implementation of the rate reductions. Certain plaintiffs have filed or threatened separate class action complaints against certain of the systems of TCI Falcon Systems, alleging that the systems' practice of assessing an administrative fee to customers whose payments are delinquent constitutes an invalid liquidated damage provision, a breach of contract, and violates local consumer protection statutes. Plaintiffs seek recovery of all late fees paid to the subject systems as a class purporting to consist of all customers who were assessed such fees during the applicable limitation period, plus attorney fees and costs. The TCI Falcon Systems have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is possible the TCI Falcon Systems may incur losses upon conclusion of the matters referred to above, an estimate of any loss or range of loss cannot presently be made. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of these actions, the ultimate disposition should not have a material adverse effect upon the combined financial condition of the TCI Falcon Systems. The TCI Falcon Systems lease business offices, have entered into pole rental agreements and use certain equipment under lease arrangements. Rental expense under such arrangements amounted to $1,268,000, $1,868,000 and $1,370,000 for the nine-month period ended September 30, 1998, and the years ended December 31, 1997 and 1996, respectively. F-369 581 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in thousands):
YEARS ENDING SEPTEMBER 30, - - - ------------- 1999........................................................ $ 762 2000........................................................ 667 2001........................................................ 533 2002........................................................ 469 2003........................................................ 414 Thereafter.................................................. 2,768 ------ $5,613 ======
TCI formed a year 2000 Program Management Office (the "PMO") to organize and manage its year 2000 remediation efforts. The PMO is responsible for overseeing, coordinating and reporting on TCI's year 2000 remediation efforts, including the year 2000 remediation efforts of the TCI Falcon Systems prior to the Contribution. Subsequent to the date of the Contribution, the year 2000 remediation efforts of the TCI Falcon Systems are no longer the responsibility of TCI or the PMO. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that the TCI Falcon Systems or the systems of other companies on which the TCI Falcon Systems relies will be converted in time or that any such failure to convert by the TCI Falcon Systems or other companies will not have a material adverse effect on its financial position, results of operations or cash flows. F-370 582 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO CC V HOLDINGS, LLC: We have audited the accompanying consolidated balance sheet of CC V Holdings, LLC and subsidiaries as of December 31, 1999, and the related consolidated statements of operations and cash flows for the period from November 15, 1999, through December 31, 1999, and the consolidated statements of operations, changes in shareholders' equity and cash flows for the period from January 1, 1999, through November 14, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CC V Holdings, LLC and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the period from November 15, 1999, through December 31, 1999, and for the period from January 1, 1999, through November 14, 1999, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, substantially all of CC V Holdings, LLC was acquired by Charter Communications Holding Company, LLC as of November 15, 1999, in a business combination accounted for as a purchase. As a result of the application of purchase accounting, the consolidated financial statements of CC V Holdings, LLC and subsidiaries as of December 31, 1999, and for the Successor Period (November 15, 1999, through December 31, 1999), are presented on a different cost basis than financial statements presented for the Predecessor Period (January 1, 1999, through November 14, 1999), and accordingly, are not directly comparable. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 16, 2000 F-371 583 CC V HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
SUCCESSOR ------------ DECEMBER 31, 1999 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 6,806 Accounts receivable, net of allowance for doubtful accounts of $1,143..................................... 1,920 Prepaid expenses and other................................ 663 -------- Total current assets................................. 9,389 -------- INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment............................. 121,285 Franchises................................................ 721,744 -------- Total investment in cable properties................. 843,029 -------- DEFERRED FINANCING COSTS.................................... 1,983 -------- $854,401 ======== LIABILITIES AND MEMBER'S EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $ 25,132 Payables to manager of cable systems--related parties..... 4,971 -------- Total current liabilities............................ 30,103 -------- LONG-TERM DEBT.............................................. 451,212 DEFERRED MANAGEMENT FEES--RELATED PARTIES................... 262 MEMBER'S EQUITY--100 units issued and outstanding........... 372,824 -------- $854,401 ========
The accompanying notes are an integral part of this consolidated statement. F-372 584 CC V HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR ------------- ------------- PERIOD FROM PERIOD FROM NOVEMBER 15, JANUARY 1, 1999, THROUGH 1999, THROUGH DECEMBER 31, NOVEMBER 14, 1999 1999 ------------- ------------- REVENUES: Basic services............................................ $ 11,281 $ 76,721 Premium services.......................................... 1,008 7,088 Other..................................................... 1,641 10,574 -------- -------- 13,930 94,383 -------- -------- OPERATING EXPENSES: Programming............................................... 3,597 24,927 General and administrative................................ 1,991 10,968 Service................................................... 2,377 16,311 Marketing................................................. 316 883 Depreciation and amortization............................. 7,822 39,943 Corporate expense charges--related parties................ 501 -- -------- -------- 16,604 93,032 -------- -------- (Loss) income from operations.......................... (2,674) 1,351 -------- -------- OTHER INCOME (EXPENSE): Interest income........................................... -- 764 Interest expense.......................................... (7,537) (40,162) -------- -------- (7,537) (39,398) -------- -------- Loss before income taxes............................... (10,211) (38,047) BENEFIT FROM INCOME TAXES................................... -- (13,936) -------- -------- Loss before minority interest.......................... (10,211) (24,111) MINORITY INTEREST IN LOSS OF SUBSIDIARY..................... -- 4,499 -------- -------- Net loss............................................... $(10,211) $(19,612) ======== ========
The accompanying notes are an integral part of these consolidated statements. F-373 585 CC V HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ADDITIONAL TOTAL COMMON PAID-IN ACCUMULATED SHAREHOLDERS' STOCK CAPITAL DEFICIT EQUITY ------ ---------- ----------- ------------- BALANCE, January 1, 1999........................ $ -- $35,000 $ (8,918) $ 26,082 Net loss...................................... -- -- (19,612) (19,612) ------- ------- -------- -------- BALANCE, November 14, 1999...................... $ -- $35,000 $(28,530) $ 6,470 ======= ======= ======== ========
The accompanying notes are an integral part of this consolidated statement. F-374 586 CC V HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR ------------- ------------- PERIOD FROM PERIOD FROM NOVEMBER 15, JANUARY 1, 1999, THROUGH 1999, THROUGH DECEMBER 31, NOVEMBER 14, 1999 1999 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(10,211) $(19,612) Adjustments to reconcile net loss to net cash provided by operating activities-- Depreciation and amortization.......................... 7,822 39,943 Deferred income taxes.................................. -- (16,969) Minority interest in loss of subsidiary................ -- 4,499 Noncash interest expense............................... 1,855 11,764 Net change in certain assets and liabilities, net of effects from acquisitions-- Accounts receivable.................................. 782 (1,182) Prepaid expenses and other........................... 76 (409) Receivable from affiliate............................ -- 124 Accounts payable and accrued expenses................ (3,399) 15,285 Payables to manager of cable systems--related parties............................................. 4,971 -- Payable to affiliate................................. -- (2,206) Other operating activities........................... (469) (2,905) -------- -------- Net cash provided by operating activities.............. 1,427 28,332 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment................ (2,042) (13,683) Payments for acquisitions, net of cash acquired........... -- (47,237) Other investing activities................................ -- (11,414) -------- -------- Net cash used in investing activities.................. (2,042) (72,334) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 5,000 39,428 Repayments of long-term debt.............................. -- (20) Payment of deferred financing costs....................... (2,000) -- Distributions............................................. (273) -- -------- -------- Net cash provided by financing activities.............. 2,727 39,408 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,112 (4,594) -------- -------- CASH AND CASH EQUIVALENTS, beginning of period.............. 4,694 9,288 -------- -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 6,806 $ 4,694 ======== ======== CASH PAID FOR INTEREST...................................... $ 2,551 $ 30,429 ======== ======== CASH PAID FOR TAXES......................................... $ -- $ 283 ======== ======== NONCASH TRANSACTION--Increase in franchises and member's equity resulting from the application of purchase accounting................................................ $383,308 $ -- ======== ========
The accompanying notes are an integral part of these consolidated statements. F-375 587 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Basis of Presentation The accompanying consolidated financial statements include the accounts of CC V Holdings, LLC (CC V Holdings), (formerly known as Avalon Cable LLC (Avalon Cable)), and its wholly owned subsidiaries (collectively, the "Company"). CC V Holdings is a Delaware limited liability company. The Company derives its primary source of revenues by providing various levels of cable programming and services to residential and business customers. The Company operates primarily in the state of Michigan and in the New England area. The Company also owns and operates various Internet service providers, which provide dial-up telephone access to the Internet via a modem. All significant intercompany accounts and transactions have been eliminated in consolidation. Acquisition On November 15, 1999, Charter Communications Holding Company, LLC (Charter Holdco) purchased directly and indirectly all of the equity interests of Avalon Cable of Michigan Holdings, Inc. (Avalon Michigan Holdings) for an aggregate purchase price of $832,000, including assumed debt of $273,400 (the "Charter Acquisition"). In connection with a multistep restructuring following the acquisition of Avalon Michigan Holdings, Avalon Michigan Holdings was merged with and into CC V Holdings. Effective January 1, 2000, these interests acquired were transferred to Charter Communications Holdings, LLC, a wholly owned subsidiary of Charter Holdco. As a result of the Charter Acquisition, the Company has applied purchase accounting in the preparation of the accompanying consolidated financial statements. Accordingly, CC V Holdings' increased its member's equity to $383,308 to reflect the amount paid in the Charter Acquisition and has allocated that amount to assets acquired and liabilities assumed based on their relative fair values including amounts assigned to franchises of $727,720. The allocation of the purchase price is based, in part, on preliminary information, which is subject to adjustment upon completion of certain appraisal and valuation information. Management believes that finalization of the purchase price and allocation will not have a material impact on the consolidated results of operations or financial position of the Company. As a result of the Charter Acquisition and the application of purchase accounting, financial information in the accompanying consolidated financial statements and notes thereto as of December 31, 1999, and for the period from November 15, 1999, through December 31, 1999 (the "Successor Period") are presented on a different cost basis than the financial information for the period from January 1, 1999, through November 14, 1999, (the "Predecessor Period") and therefore, such information is not comparable. Prior to the Charter Acquisition, Avalon Michigan Holdings had a majority interest in CC V Holdings. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost that approximates market value. F-376 588 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property, Plant and Equipment Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installations. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, while equipment replacement and betterments are capitalized. Depreciation for the Successor Period is provided on the straight-line method over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years
Depreciation for the Predecessor Period was provided on the straight-line method over the estimated useful lives of the related assets as follows: Buildings and improvement................................... 10-25 years Cable plant and equipment................................... 5-12 years Vehicles.................................................... 5 years Office furniture and equipment.............................. 5-10 years
Franchises Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable systems, including the Charter Acquisition, represent the excess of the cost of properties acquired over the amounts assigned to net tangible assets and identifiable intangible assets at the date of acquisition and are amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Accumulated amortization was $5,976 at December 31, 1999. Amortization expense for the period from January 1, 1999 through November 14, 1999 and for the period from November 15, 1999, through December 31, 1999, was $29,679 and $5,976, respectively. Deferred Financing Costs Costs related to the Senior Credit Facilities (as defined below) are deferred and amortized to interest expense using the effective interest rate method over the term of the related borrowing. As of December 31, 1999, accumulated amortization of deferred financing costs is $17. Impairment of Assets If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. F-377 589 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 31, 1999, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Company ranging up to a federally mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly basis from the Company's customers and are periodically remitted to local franchises. Franchise fees collected and paid are reported as revenues and expenses. Interest Rate Hedge Agreements The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain of its debt agreements. Interest rate caps are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. Interest rate caps are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designated for hedging purposes and are not held or issued for speculative purposes. Income Taxes Prior to the Charter Acquisition, the Company filed a consolidated income tax return. The tax benefit of $13,936 in the accompanying consolidated statement of operations for the period from January 1, 1999, through November 14, 1999, is recorded at 37%. This approximates the statutory tax rate of the Company. Beginning November 15, 1999, the Company and all subsidiaries are limited liability companies such that all income taxes are the responsibility of the equity member of the Company and are not provided for in the accompanying consolidated financial statements. In addition, certain subsidiaries or corporations are subject to income taxes but have no operations and, therefore, no material income tax liabilities or assets. Segments Segments have been identified based upon management responsibility. The Company operates in one segment, cable services. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-378 590 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk Financial instruments which potentially expose the Company to a concentration of credit risk include cash and subscriber and other receivables. The Company had cash in excess of federally insured deposits at financial institutions at December 31, 1999. The Company does not believe that such deposits are subject to any unusual credit risk beyond the normal credit risk associated with operating its business. The Company extends credit to customers on an unsecured basis in the normal course of business. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not historically exceeded management's expectations. The Company's trade receivables reflect a customer base centered in Michigan and New England. The Company routinely assesses the financial strength of its customers; as a result, concentrations of credit risk are limited. 2. MEMBER'S EQUITY: For the period from November 15, 1999, through December 31, 1999, successor member's equity consisted of the following: BALANCE, November 15, 1999.................................. $383,308 Net loss.................................................. (10,211) Distributions to Charter Communications, Inc. and Charter Investment, Inc................................ (273) -------- BALANCE, December 31, 1999.................................. $372,824 ========
3. ACQUISITIONS: On March 26, 1999, Avalon Michigan Holdings acquired the minority interest of Mercom Inc. (Mercom) for $21,875. In addition, the Company acquired eight cable systems for an aggregate purchase price of $25,362 in 1999. These eight acquisitions, which were completed during the Predecessor Period, were accounted for using the purchase method of accounting and, accordingly, results of operations of the acquired systems have been included in the accompanying consolidated financial statements from the dates of acquisition. The purchase prices were allocated to tangible and intangible assets based on estimated fair market values at the dates of acquisition. The excess of the consideration paid over the estimated fair market values of the net assets acquired was $12,940 and was amortized using the straight-line method over 15 years during the Predecessor Period. All goodwill was eliminated as a result of the Charter Acquisition. F-379 591 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited pro forma operating results as though the 1999 acquisitions discussed above, including the Charter Acquisition, had occurred on January 1, 1999, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows:
YEAR ENDED DECEMBER 31, 1999 ------------ (UNAUDITED) Revenues.................................................... $110,308 Loss from operations........................................ (17,580) Net loss.................................................... (59,668)
The unaudited pro forma financial information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1999: Cable distribution systems.................................. $101,675 Buildings and leasehold improvements........................ 16,636 Vehicles and equipment...................................... 4,776 -------- 123,087 Less--Accumulated depreciation.............................. (1,802) -------- $121,285 ========
Depreciation expense for assets owned by the Company for the period from January 1, 1999, through November 14, 1999, and for the period from November 15, 1999, through December 31, 1999, was $10,264 and $1,802, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1999: Accrued litigation costs--see Note 10....................... $ 9,435 Accrued interest............................................ 5,417 Accounts payable............................................ 3,427 Accrued programming......................................... 3,047 Accrued franchises.......................................... 1,578 Other....................................................... 2,228 ------- $25,132 =======
F-380 592 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM DEBT: The Company has outstanding the following borrowings on long-term debt arrangements at December 31, 1999: Senior Credit Facility...................................... $170,000 Senior Subordinated Notes................................... 150,000 Senior Discount Notes....................................... 196,000 7.0% Note Payable, due May 2003............................. 500 -------- 516,500 Less--Unamortized net discount.............................. (65,288) -------- $451,212 ========
Credit Facilities On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon Cable of New England LLC (Avalon New England) and Avalon Cable Finance, Inc. (Avalon Finance), affiliated companies on the $320,888 senior credit facilities, which included term loan facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000 and a revolving credit facility of $30,000 (collectively, the "Old Credit Facilities"). In connection with the Senior Subordinated Notes (as defined below) and Senior Discount Notes (as defined below) offerings, Avalon Michigan repaid $125,013 of the Old Credit Facilities, and the availability under the Old Credit Facilities was reduced to $195,875 prior to the Charter Acquisition. The interest rate under the Old Credit Facilities was a rate based on either (i) the base rate (a rate per annum equal to the greater of the Prime Rate and the Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the Eurocurrency Reserve Requirements) plus, in either case, an applicable margin. In connection with the Charter Acquisition, the Old Credit Facilities were terminated. Effective November 15, 1999, the Company became a borrower on $300,000 senior credit facilities, which includes term loan facilities consisting of (i) a Term B Loan of $125,000 that matures on November 15, 2008, and (ii) a revolving credit facility of $175,000 that matures on May 15, 2008 (collectively, the "Senior Credit Facilities"). The Senior Credit Facilities also provide for, at the option of the lenders, supplemental credit facilities in the amounts of $75,000, available until December 31, 2003. The interest rate under the Senior Credit Facilities is a rate based on either (i) the base rate (a rate per annum equal to the greater of the Prime Rate and the Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the Eurocurrency Reserve Requirements) plus, in either case, an applicable margin. The variable interest rate as of December 31, 1999, ranged from 7.995% to 8.870%. A quarterly commitment fee of between 0.250% to 0.375% per annum is payable on the unborrowed balance of the revolving credit facility. Commencing March 31, 2003, and at the end of each quarter thereafter through September 30, 2008, the Term B Loan is payable in installments of 0.25% of the outstanding balance, and the remaining 94.25% unpaid outstanding balance is due on November 15, 2008. F-381 593 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Commencing March 31, 2003, and at the end of each quarter thereafter, available borrowings under the revolving credit facility shall be reduced on an annual basis by 5.0% in 2003, 15.0% in 2004, 20.0% in 2005, 22.0% in 2006, 24.0% in 2007 and 14.0% in 2008. The Senior Credit Facilities contain restrictive covenants which, among other things, require the Company to maintain certain ratios including consolidated leverage ratios and the interest coverage ratio, fixed charge ratio and debt service coverage. The obligations of the Company under the Senior Credit Facilities agreement are secured by substantially all of the assets of the Company. Senior Subordinated Notes In December 1998, Avalon Michigan became a co-issuer of a $150,000 principal amount of 9.375% Senior Subordinated Notes (the "Senior Subordinated Notes"). The indenture governing the Senior Subordinated Notes provides that upon the occurrence of a change of control each holder of the Senior Subordinated Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Senior Subordinated Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon plus accrued and unpaid interest and Liquidated Damages (as defined in the indentures) thereof, if any, to the date of purchase. The Charter Acquisition constituted a change of control. Pursuant to a change of control offer dated December 3, 1999, 134,050 of the Company's 9.375% Senior Subordinated Notes due December 1, 2008 were validly tendered. The aggregate repurchase price was $137,400, including accrued and unpaid interest through January 28, 2000, and was funded with equity contributions from Charter Communications Holdings, LLC (Charter Holdings), a wholly owned subsidiary of Charter Holdco and parent of CC V Holdings, which made the cash available from the proceeds of its sale of $1.5 billion of high yield notes in January 2000 (the "January 2000 Charter Holdings Notes"). In addition to the above change of control repurchase, the Company repurchased the remaining 15,950 notes (including accrued and unpaid interest) in the open market for $16,300, also using cash received from equity contributions ultimately from Charter Holdings, which made the cash available from the sale proceeds of the January 2000 Charter Holdings Notes. Senior Discount Notes On December 10, 1998, Avalon Michigan Holdings and Avalon Cable Holdings Finance, Inc. (collectively, the "Holdings Co-Issuers") issued $196,000 aggregate principal amount at maturity of 11.875% Senior Discount Notes (the "Senior Discount Notes") due 2008. The Senior Discount Notes were issued at a substantial discount from their principal amount at maturity, for proceeds of approximately $110,400. Interest on the Senior Discount Notes will accrue but not be payable before December 1, 2003. Thereafter, interest on the Senior Discount Notes will accrue on the principal amount at maturity at a rate of 11.875% per annum commencing December 1, 2003, and will be payable semiannually in arrears on June 1 and December 1 of each year. Prior to December 1, 2003, the accreted value of the Senior Discount Notes will increase, representing amortization of original issue discount, between the date of original issuance and December 1, 2003, on a semiannual basis using a 360-day year comprised of twelve 30-day months, such that the accreted value shall be equal to the full principal amount at maturity of the Senior Discount Notes on December 1, 2003. F-382 594 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 1, 2003, the Holdings Co-Issuers will be required to redeem an amount equal to $369.79 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding on a pro rata basis at a redemption price of 100% of the principal amount at maturity. On or after December 1, 2003, the Senior Discount Notes will be subject to redemption at any time at the option of the Holdings Co-Issuers, in whole or in part, at the redemption prices, which are expressed as percentages of principal amount, shown below plus accrued and unpaid interest, if any, and liquidated damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2003........................................................ 105.938% 2004........................................................ 103.958% 2005........................................................ 101.979% 2006 and thereafter......................................... 100.000%
Notwithstanding the foregoing, at any time before December 1, 2001, the holding companies may on any one or more occasions redeem up to 35% of the aggregate principal amount at maturity of senior discount notes originally issued under the Senior Discount Note indenture at a redemption price equal to 111.875% of the accreted value at the date of redemption, plus liquidated damages, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment. Upon the occurrence of a change of control, each holder of Senior Discount Notes will have the right to require the Holdings Co-Issuers to repurchase all or any part of such holder's Senior Discount Notes pursuant to a change of control offer at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages thereon, if any, to the date of purchase. The Charter Acquisition constituted a change of control. Upon expiration of the change of control offer (January 26, 2000), 16,250 of the Senior Discount Notes due were validly tendered. The Senior Discount Notes were repurchased for $10,500 using cash received from equity contributions from Charter Holdings. As of February 29, 2000, 179,750 Senior Discount Notes remain outstanding with an accreted value of $116,400. Based upon outstanding indebtedness at December 31, 1999, and the amortization of term, and scheduled reductions in available borrowings of the revolving credit facility, aggregate future principal payments on the total borrowings under all debt agreements at December 31, 1999, are as follows:
YEAR AMOUNT ---- -------- 2000........................................................ $ -- 2001........................................................ -- 2002........................................................ -- 2003........................................................ 74,229 2004........................................................ 1,250 Thereafter.................................................. 441,021 -------- $516,500 ========
F-383 595 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying and fair values of the Company's significant financial instruments as of December 31, 1999, are as follows:
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- Debt: Senior Credit Facilities.................................. $170,000 $ -- $170,000 Senior Subordinated Notes................................. 151,500 -- 151,500 Senior Discount Notes..................................... 129,212 -- 129,212 7.0% Note payable, due May 2003........................... 500 -- 500 Interest Rate Hedge Agreement: Cap....................................................... -- 15,000 16
The carrying amount of the Senior Credit Facilities approximates fair value as the outstanding borrowings bear interest at market rates. The fair values of the Senior Subordinated Notes and Senior Discount Notes are based on quoted market prices. The interest pay rate for the interest rate cap agreement was 9.0% at December 31, 1999. The notional amount of the interest rate hedge agreement does not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of the interest rate hedge agreement. The amounts exchanged are determined by reference to the notional amount and the other terms of the contract. The fair value of the interest rate hedge agreement generally reflects the estimated amount that the Company would receive (excluding accrued interest) to terminate the contract on the reporting date, thereby taking into account the current unrealized gains or losses of the open contract. Dealer quotations are available for the Company's interest rate hedge agreement. Management believes that the seller of the interest rate hedge agreement will be able to meet their obligations under the agreement. In addition, the interest rate hedge agreement is with certain of the participating banks under the Company's Senior Credit Facilities thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of the major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's consolidated financial position or results of operations. 8. RELATED-PARTY TRANSACTIONS: Charter Investment, Inc. (Charter Investment) provides management services to the Company including centralized customer billing services, and data processing and related support. Costs for these services are charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are determined based on the number of basic customers. Charter Investment utilizes a combination of excess insurance coverage and self- insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. Depreciation and amortization incurred by Charter Investment and Charter have been allocated to the Company based on the number of the basic customers. Such costs totaled $44 for the period from November 15, 1999, through December 31, 1999, are reflected as a capital contribution. Management believes that costs incurred by Charter Investment on the Company's behalf and included in the accompanying F-384 596 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) financial statements are not materially different than costs the Company would have incurred as a stand-alone entity. Charter, an entity controlled by Paul G. Allen, was named manager of CC V Holdings pursuant to the terms of the limited liability company agreement for CC V Holdings dated as of November 15, 1999. Furthermore, Charter now manages and operates the Company's cable systems pursuant to a Management Agreement entered into with certain subsidiaries of CC V Holdings. The term of the management agreement is 10 years, commencing on November 15, 1999. Charter is entitled to reimbursement for all expenses, costs, losses and liabilities or damages incurred by Charter in connection with the performance of its services. Payment of the management fee is permitted under the Company's credit agreement, but ranks below the Company's senior debt and shall not be paid except to the extent permitted under the Senior Credit Facilities. Such costs totaled $501 for the period from November 15, 1999, through December 31, 1999, and are recorded in corporate expense charges-related parties in the accompanying consolidated financial statements. Deferred management fees at December 31, 1999, are $262. 9. EMPLOYEE BENEFIT PLAN: Avalon Michigan had a qualified savings plan under Section 401(k) of the Internal Revenue Code (the "Plan"). In connection with the Charter Acquisition, the Plan's assets were frozen as of November 14, 1999, and employees became fully vested. Effective January 1, 2000, the Company's employees with two months of service are eligible to participate in the Charter Communications, Inc. 401(k) Plan (the "Charter Plan"). Employees that qualify for participation in the Charter Plan can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. 10. COMMITMENTS AND CONTINGENCIES: Leases The Company rents poles from utility companies for use in its operations. While rental agreements are generally short-term, the Company anticipates such rentals will continue in the future. The Company also leases office facilities and various equipment under month-to-month operating leases. Rent expense was $1,506 and $212 for the periods from January 1, 1999, through November 14, 1999, and from November 15, 1999, through December 31, 1999, respectively. Rental commitments are expected to continue at approximately the same level for the foreseeable future, including pole rental commitments which are cancelable. Regulation in the Cable Television Industry The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. F-385 597 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. As of December 31, 1999, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. As of December 31, 1999, approximately 26% of the Company's local franchising authorities are certified to regulate basic tier rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the consolidated financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Company does not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Company's consolidated financial position or results of operations. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. Litigation In connection with the Company's acquisition of Mercom, former Mercom shareholders holding approximately 731,894 Mercom common shares (approximately 15.3% of all outstanding Mercom common shares) gave notice of their election to exercise appraisal rights as provided by Delaware law. On July 2, 1999, former Mercom shareholders holding 535,501 shares of Mercom common stock filed a petition for appraisal of stock in the Delaware Chancery Court. With respect to 209,893 of the total number of shares for which the Company received notice, the notice provided to the Company was received from beneficial holders of Mercom shares who were not holders of record. The Company believes that the notice with respect to these shares did not comply with Delaware law and is ineffective. The Company cannot predict at this time the effect of the elections to exercise appraisal rights on the Company since the Company does not know the extent to which these former Mercom shareholders will continue to pursue appraisal rights under Delaware law or choose to abandon these efforts and seek to accept the consideration payable in the Mercom merger. If F-386 598 CC V HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) these former Mercom shareholders continue to pursue their appraisal rights and if a Delaware court were to find that the fair value of the Mercom common shares, exclusive of any element of value arising from our acquisition of Mercom, exceeded $12.00 per share, the Company would have to pay the additional amount for each Mercom common share subject to the appraisal proceedings together with a fair rate of interest. The Company could be ordered by the Delaware court also to pay reasonable attorney's fees and the fees and expenses of experts for the shareholders. In addition, the Company would have to pay their own litigation costs. The Company has already provided for the consideration of $12.00 per Mercom common share due under the terms of the merger with Mercom with respect to these shares but has not provided for any additional amounts or costs. The Company can provide no assurance as to what a Delaware court would find in any appraisal proceeding or when this matter will be resolved. Accordingly, the Company cannot assure you that the ultimate outcome would have no material adverse impact on the Company. 11. ACCOUNTING STANDARDS NOT YET IMPLEMENTED: The Company is required to adopt Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) in 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the consolidated balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The adoption of SFAS No. 133 is not expected to have a material impact on the consolidated financial statements. F-387 599 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable LLC In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in members' interest and cash flows present fairly, in all material respects, the financial position of Avalon Cable LLC and its subsidiaries (the "Company") at December 31, 1997 and 1998 and the results of their operations, changes in members' interest and their cash flows for the period from September 4, 1997 (inception), through December 31, 1997 and for the year ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York March 30, 1999, except for Note 12, as to which the date is May 13, 1999 F-388 600 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, ---------------------- 1998 1997 ---------- ------ (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash........................................................ $ 9,288 $ -- Subscriber receivables, less allowance for doubtful accounts of $943................................................... 5,862 -- Accounts receivable-affiliate............................... 124 -- Deferred income taxes....................................... 479 -- Prepaid expenses and other current assets................... 580 504 -------- ---- Total current assets........................................ 16,333 504 Property, plant and equipment, net.......................... 111,421 -- Intangible assets, net...................................... 462,117 -- Other assets................................................ 227 -- -------- ---- Total assets................................................ $590,098 $504 ======== ==== LIABILITIES AND MEMBERS' INTEREST CURRENT LIABILITIES: Current portion of notes payable............................ $ 20 $ -- Accounts payable and accrued expenses....................... 11,646 -- Accounts payable, net-affiliate............................. 2,023 500 Advance billings and customer deposits...................... 3,171 -- -------- ---- Total current liabilities................................... 16,860 500 Note payable, net of current portion........................ 402,949 -- Note payable-affiliate...................................... 3,341 -- Deferred income taxes....................................... 1,841 -- -------- ---- Total liabilities........................................... 424,991 500 -------- ---- Minority interest........................................... 13,855 -- Commitments and contingencies (Note 10) MEMBERS' INTEREST: Members' capital............................................ 166,630 -- Accumulated earnings (deficit).............................. (15,378) 4 -------- ---- Total member's interest..................................... 151,252 4 -------- ---- Total liabilities and member's interest..................... $590,098 $504 ======== ====
The accompanying notes are an integral part of these consolidated financial statements. F-389 601 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FOR THE YEAR SEPTEMBER 4, 1997 ENDED (INCEPTION) THROUGH DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ------------------- (DOLLARS IN THOUSANDS) REVENUE: Basic services.......................................... $ 14,976 $ -- Premium services........................................ 1,468 -- Other................................................... 1,743 -- -------- ------- Total revenues.......................................... 18,187 -- Operating expenses: Selling, general and administrative..................... 4,207 -- Programming............................................. 4,564 -- Technical and operations................................ 1,951 -- Depreciation and amortization........................... 8,183 -- -------- ------- Loss from operations.................................... (718) -- Other income (expense): Interest income......................................... 173 4 Interest expense........................................ (8,223) -- Other expense, net...................................... (65) -- -------- ------- Income (loss) before income taxes....................... (8,833) 4 Provision for income taxes.............................. (186) -- -------- ------- Income (loss) before minority interest and extraordinary item.................................................. (9,019) 4 Minority interest in consolidated entity................ (398) -- -------- ------- Income (loss) before the extraordinary loss on early extinguishment of debt................................ (9,417) 4 Extraordinary loss on early extinguishment of debt...... (5,965) -- -------- ------- Net income (loss)....................................... $(15,382) $ 4 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-390 602 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST FROM THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998
CLASS A CLASS B-1 ACCUMULATED TOTAL -------------------- ------------------ EARNINGS MEMBERS' UNITS $ UNITS $ (DEFICIT) INTEREST --------- -------- ------- -------- ----------- -------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Net income for the period from September 4, 1997 through December 31, 1997............. -- $ -- -- $ -- $ 4 $ 4 Issuance of Class A units....... 45,000 45,000 -- -- -- 45,000 Issuance of Class B-1 units in consideration for Avalon Cable of New England LLC............ -- -- 64,696 4,345 -- 4,345 Contribution of assets and liabilities of Avalon Cable of Michigan Inc.................. -- -- 510,994 117,285 -- 117,285 Net loss for the year ended December 31, 1998............. -- -- -- -- (15,382) (15,382) ------ ------- ------- -------- -------- -------- Balance at December 31, 1998.... 45,000 $45,000 575,690 $121,630 $(15,378) $151,252 ====== ======= ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-391 603 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD SEPTEMBER 4, 1997 FOR THE YEAR (INCEPTION) ENDED THROUGH DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ------------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ (15,382) $ 4 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization........................... 8,183 -- Deferred income taxes, net.............................. 1,010 -- Extraordinary loss on extinguishment of debt............ 5,965 -- Provision for loss on accounts receivable............... 75 -- Minority interest in consolidated entity................ 398 -- Accretion of senior discount notes...................... 1,083 -- Changes in operating assets and liabilities Increase in subscriber receivables................................ (1,679) -- Increase in accounts receivable-affiliates.............. (124) -- Increase in prepaid expenses and other current assets... (76) (4) Increase in accounts payable and accrued expenses....... 4,863 -- Increase in accounts payable-affiliates................. 1,523 -- Increase in advance billings and customer deposits...... 1,684 -- Change in Other, net.................................... (227) -- --------- --- Net cash provided by operating activities............... 7,296 -- --------- --- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................................... (11,468) -- Acquisitions, net of cash acquired...................... (554,402) -- --------- --- Net cash used in investing activities................... (565,870) -- --------- --- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of credit facility............... 265,888 -- Principal payment on credit facility.................... (125,013) -- Proceeds from issuance of senior subordinated debt...... 150,000 -- Proceeds from issuance of note payable-affiliate........ 3,341 -- Proceeds from issuance of senior discount notes......... 110,411 -- Proceeds from other notes payable....................... 600 -- Payments for debt issuance costs........................ (3,995) -- Contribution by members................................. 166,630 -- --------- --- Net cash provided by financing activities............... 567,862 -- Increase in cash........................................ 9,288 -- Cash, beginning of period............................... -- -- --------- --- Cash, end of period..................................... $ 9,288 $-- ========= === SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest................ $ 3,480 $-- ========= ===
The accompanying notes are an integral part of these consolidated financial statements. F-392 604 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Avalon Cable LLC ("Avalon"), and its wholly owned subsidiaries Avalon Cable Holdings Finance, Inc. ("Avalon Holdings Finance") and Avalon Cable of Michigan LLC ("Avalon Michigan"), were formed in October 1998, pursuant to the laws of the State of Delaware, as a wholly owned subsidiary of Avalon Cable of New England Holdings, Inc. ("Avalon New England Holdings"). On November 6, 1998, Avalon New England Holdings contributed its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon in exchange for a membership interest in Avalon. This contribution was between entities under common control and was accounted for similar to a pooling-of-interests. Under this pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (September 4, 1997) of Avalon New England. On that same date, Avalon received $63,000 from affiliated entities, which was comprised of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) a $18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash contribution to Avalon New England. The cash contribution received by Avalon New England was used to (i) extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to Avalon Holdings Finance which matures on December 31, 2001. On December 10, 1998, Avalon received a dividend distribution from Avalon New England in the amount of $18,206, which was used by Avalon to pay off the promissory note payable to Avalon Holdings, plus accrued interest. Avalon Cable of Michigan, Inc. was formed in June 1998, pursuant to the laws of the state of Delaware, as a wholly owned subsidiary of Avalon Cable of Michigan Holdings, Inc. ("Michigan Holdings".) On June 3, 1998, Avalon Cable of Michigan, Inc. entered into an Agreement and Plan of Merger (the "Agreement") among Avalon Cable of Michigan, Inc., Michigan Holdings and Cable Michigan, Inc. ("Cable Michigan"), pursuant to which Avalon Cable of Michigan, Inc. will merge into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of Michigan Holdings (the "Merger"). As part of the Merger, the name of the company was changed to Avalon Cable of Michigan, Inc. In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior to the effective time of the Merger (other than treasury stock shares owned by Michigan Holdings or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. In conjunction with the acquisition of Cable Michigan, Avalon Cable of Michigan, Inc. acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom"). On November 6, 1998, Avalon Cable of Michigan, Inc. completed its Merger. The total consideration payable in conjunction with the Merger, including fees and expenses is $431,629, including repayment of all existing Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the Merger, the arrangements with RCN and CTE for certain support F-393 605 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services were terminated. The Agreement also permitted Avalon Cable of Michigan, Inc. to agree to acquire the remaining shares of Mercom that it did not own. Michigan Holdings contributed $137,375 in cash to Avalon Cable of Michigan, Inc., which was used to consummate the Merger. On November 5, 1998, Michigan Holdings received $105,000 in cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On November 6, 1998, Michigan Holdings contributed the proceeds received from the Bridge Agreement and an additional $35,000 in cash to Avalon Cable of Michigan Inc. in exchange for 100 shares of common stock. On March 26, 1999, Avalon completed a series of transactions to facilitate certain aspects of its financing between affiliated entities under common control. As a result of these transactions: - Avalon Cable of Michigan Inc. contributed its assets and liabilities excluding deferred tax liabilities, net to Avalon in exchange for an approximate 88% voting interest in Avalon. Avalon contributed these assets and liabilities to its wholly-owned subsidiary, Avalon Cable of Michigan. - Avalon Michigan has become the operator of the Michigan cluster replacing Avalon Cable of Michigan, Inc. - Avalon Michigan is an obligor on the Senior Subordinated Notes replacing Avalon Cable of Michigan, Inc., and - Avalon Cable of Michigan, Inc. is a guarantor of the obligations of Avalon Michigan under the Senior Subordinated Notes. Avalon Cable of Michigan, Inc. does not have significant assets, other than its investment in Avalon. - Avalon is an obligor on the Senior Discount Notes replacing Avalon Cable of Michigan Holdings, Inc. As a result of the reorganization between entities under common control, Avalon accounted for the reorganization similar to a pooling-of-interests. Under the pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (June 2, 1998) inception of Avalon Cable of Michigan, Inc. and the date of acquisition of the completed acquisitions. Avalon New England and Avalon Michigan provide cable service to the western New England area and the state of Michigan, respectively. Avalon cable systems offer customer packages of basic and premium cable programming services which are offered at a per channel charge or are packaged together to form a tier of services offered at a discount from the combined channel rate. Avalon cable systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principal sources of revenue for Avalon. Avalon Holdings Finance was formed for the sole purpose of facilitating financings associated with the acquisitions of various cable operating companies. Avalon Holdings Finance conducts no other activities. F-394 606 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements of Avalon and its subsidiaries, include the accounts of Avalon and its wholly owned subsidiaries, Avalon New England, Avalon Michigan and Avalon Holdings Finance (collectively, the "Company"). All significant transactions between Avalon and its subsidiaries have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and the disclosure for contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reported period. Actual results may vary from estimates used. Revenue recognition Revenue is recognized as cable services are provided. Installation fee revenue is recognized in the period in which the installation occurs to the extent that direct selling costs meet or exceed installation revenues. Advertising costs Advertising costs are charged to operations as incurred. Advertising costs were $82 for the year ended December 31, 1998. Concentration of credit risk Financial instruments which potentially expose the Company to a concentration of credit risk include cash and subscriber and other receivables. The Company had cash in excess of federally insured deposits at financial institutions at December 31, 1998. The Company does not believe that such deposits are subject to any unusual credit risk beyond the normal credit risk associated with operating its business. The Company extends credit to customers on an unsecured basis in the normal course of business. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not historically exceeded management's expectations. The Company's trade receivables reflect a customer base centered in the state of Michigan and New England. The Company routinely assesses the financial strength of its customers; as a result, concentrations of credit risk are limited. Property, plant and equipment Property, plant and equipment is stated at its fair value for items acquired from Cable Michigan, historical cost for the minority interests share of Mercom property, plant and equipment and cost for additions subsequent to the merger. Initial subscribers installation costs, including materials, labor and overhead costs, are capitalized as a component of cable plant and equipment. The cost of disconnection and reconnection are charged to expense when incurred. F-395 607 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation is computed for financial statement purposes using the straight-line method based upon the following lives: Vehicles.................................................... 5 years Cable plant and equipment................................... 5-12 years Office furniture and equipment.............................. 5-10 years Buildings and improvements.................................. 10-25 years
Intangible assets Intangible assets represent the estimated fair value of cable franchises and goodwill resulting from acquisitions. Goodwill is the excess of the purchase price over the fair value of the net assets acquired, determined through an independent appraisal. Deferred financing costs represent direct costs incurred to obtain long-term financing and are amortized to interest expense over the term of the underlying debt utilizing the effective interest method. Amortization is computed for financial statement purposes using the straight-line method based upon the anticipated economic lives: Cable franchises............................................ 13-15 years Goodwill.................................................... 15 years Non-compete agreement....................................... 5 years
Accounting for impairments The Company follows the provisions of Statement of Financial Accounting Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the net future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles expected to be held and used is based on the fair value of the asset. No impairment losses have been recognized by the Company pursuant to SFAS 121. Financial instruments The Company estimates that the fair value of all financial instruments at December 31, 1998 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The fair value of the notes payable-affiliate are considered to be equal to carrying values since the Company believes that its credit risk has not changed from the time this debt instrument was executed and therefore, would obtain a similar rate in the current market. Income taxes The Company is not subject to federal and state income taxes since the income or loss of the Company is included in the tax returns of Avalon Cable of Michigan, Inc. and the Company's F-396 608 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) minority partners. However, Mercom, its majority-owned subsidiary is subject to taxes that are accounted for using Statement of Financial Accounting Standards No. 109 -- "Accounting for Income Taxes". The statement requires the use of an asset and liability approach for financial reporting purposes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. 3. MEMBERS' CAPITAL Avalon has authorized two classes of equity units; class A units ("Class A Units") and class B units ("Class B Units") (collectively, the "Units"). Each class of the Units represents a fractional part of the membership interests in Avalon and has the rights and obligations specified in Avalon's Limited Liability Company Agreement. Each Class B Unit is entitled to voting rights equal to the percentage such units represents of the aggregate number of outstanding Class B Units. The Class A Units are not entitled to voting rights. Class A Units The Class A Units are participating preferred equity interests. A preferred return accrues annually (the Company's "Preferred Return") on the initial purchase price (the Company's "Capital Value") of each Class A Unit at a rate of 15, or 17% under certain circumstances, per annum. The Company cannot pay distributions in respect of other classes of securities including distributions made in connection with a liquidation until the Company's Capital Value and accrued Preferred Return in respect of each Class A Unit is paid to the holders thereof (such distributions being the Company's "Priority Distributions"). So long as any portion of the Company's Priority Distributions remains unpaid, the holders of a majority of the Class A Units are entitled to block certain actions by the Company including the payment of certain distributions, the issuance of senior or certain types of pari passu equity securities or the entering into or amending of certain related-party agreements. In addition to the Company's Priority Distributions, each Class A Unit is also entitled to participate in common distributions, pro rata according to the percentage such unit represents of the aggregate number of the Company's units then outstanding. Class B Units The Class B Units are junior equity securities which are divided into two identical subclasses, Class B-1 Units and Class B-2 Units. After the payment in full of Avalon's Priority Distributions, each Class B Unit is entitled to participate in distributions pro rata according to the percentage such unit represents of the aggregate number of the Avalon units then outstanding. 4. MERGER AND ACQUISITIONS The Merger was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on their fair market values at the date of the Merger. The purchase price was allocated as follows: current assets and liabilities at fair values of $470, approximately $94,000 to property, plant and equipment, $315,000 to cable franchises and the excess of consideration paid over the fair market value of the net assets acquired, or goodwill, of $81,705, offset by deferred taxes net of $60,000. F-397 609 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Merger agreement between Michigan Holdings and Avalon Cable of Michigan, Inc. permitted Avalon Cable of Michigan, Inc. to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Cable of Michigan, Inc. and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by Avalon Cable of Michigan, Inc. of all of such shares at a price of $12.00 per share. Avalon Cable of Michigan, Inc. completed this acquisition in March 1999. The total estimated consideration payable in conjunction with the Mercom Acquisition, excluding fees and expenses was $21,900. In March 1999, Avalon Michigan acquired the cable television systems of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for approximately $7,800, excluding transaction fees. On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A Limited Partnership ("Amrac") for consideration of $8,124, including acquisition costs of $589. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through the use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $256. On July 21, 1998, the Company acquired certain assets and liabilities from Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (collectively, "Pegasus") for consideration of $30,467, including acquisition costs of $175. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $977. Unaudited pro forma results of operations of the Company for the year ended December 31, 1998, as if the Merger and acquisitions occurred on January 1, 1998.
DECEMBER 31, 1998 ------------ (UNAUDITED) Revenues.................................................... $ 96,751 ======== Loss from operations........................................ $ (5,292) ======== Net loss.................................................... $(22,365) ========
In September 1998, the Company entered into a definitive agreement to purchase all of the cable systems of Taconic Technology Corporation ("Taconic") for approximately $8,525 (excluding transaction fees). As of December 31, 1998, the Company incurred $41 of transaction costs related to the acquisition of Taconic. This merger is expected to close in the second quarter of 1999. F-398 610 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT At December 31, 1998, property, plant and equipment consists of the following: Cable plant and equipment................................... $106,602 Vehicles.................................................... 2,572 Office furniture and fixtures............................... 1,026 Buildings and improvements.................................. 2,234 Construction in process..................................... 768 -------- 113,202 Less: accumulated depreciation.............................. (1,781) -------- $111,421 ========
Depreciation expense charged to operations was $1,781 for the year ended December 31, 1998. 6. INTANGIBLE ASSETS At December 31, 1998, intangible assets consist of the following:
1998 -------- Cable franchises............................................ $374,773 Goodwill.................................................... 82,928 Deferred financing costs.................................... 10,658 Non-compete agreement....................................... 100 -------- 468,459 Less: accumulated amortization.............................. (6,342) -------- $462,117 ========
Amortization expense was $6,342 for the year ended December 31, 1998. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES At December 31, 1998, accounts payable and accrued expenses consist of the following: Accounts payable............................................ $ 5,321 Accrued corporate expenses.................................. 404 Accrued programming costs................................... 2,388 Taxes payable............................................... 1,383 Other....................................................... 2,150 ------- $11,646 =======
F-399 611 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. DEBT At December 31, 1998, Long-term debt consists of the following: Senior Credit Facility...................................... $140,875 Senior Subordinated Notes................................... 150,000 Senior Discount Notes....................................... 111,494 Other Note Payable.......................................... 600 -------- 402,969 Less: current portion of notes payable...................... 20 -------- $402,949 ========
Credit Facilities On May 28, 1998, Avalon New England entered into a term loan and revolving credit agreement with a major commercial lending institution (the "Credit Agreement"). The Credit Agreement allowed for aggregate borrowings under Term Loans A and B (collectively, the "Term Loans") and a revolving credit facility of $30,000 and $5,000, respectively. The proceeds from the Term Loans and revolving credit facility were used to fund the acquisitions made by Avalon New England and to provide for Avalon New England's working capital requirements. In December 1998, Avalon New England retired the Term Loans and revolving credit agreement through the proceeds of a capital contribution from Avalon. The fees and associated costs relating to the early retirement of this debt was $1,110. On November 6, 1998, Avalon New England became a co-borrower along with Avalon Michigan and Avalon Cable Finance, Inc. ("Avalon Finance"), affiliated companies (collectively referred to as the "Co-Borrowers"), on a $320,888 senior credit facility, which includes term loan facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000, and a revolving credit facility of $30,000 (collectively, the "Credit Facility"). Subject to compliance with the terms of the Credit Facility, borrowings under the Credit Facility will be available for working capital purposes, capital expenditures and pending and future acquisitions. The ability to advance funds under the tranche A term loan facility terminated on March 31, 1999. The tranche A term loans are subject to minimum quarterly amortization payments commencing on January 31, 2001 and maturing on October 31, 2005. The tranche B term loans are subject to minimum quarterly payments commencing on January 31, 2001 with substantially all of tranche B term loans scheduled to be repaid in two equal installments on July 31, 2006 and October 31, 2006. The revolving credit facility borrowings are scheduled to be repaid on October 31, 2005. On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit Facility. In connection with the Senior Subordinated Notes and Senior Discount Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and the availability under the Credit Facility was reduced to $195,000. Avalon Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A and tranche B term note facilities, respectively, and had available $30,000 for borrowings under the revolving credit facility. Avalon New England and Avalon Finance had no borrowings outstanding under the Credit Facility at December 31, 1998. The interest rate under the Credit Facility is a rate based on either (i) the Base Rate (a rate per annum equal to the greater of the prime rate and the federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency reserve requirement plus, in either case, the applicable margin). As of F-400 612 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1998, the applicable margin was (a) with respect to the tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for Eurodollar loans and (b) with respect to tranche A term loans and the revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for Eurodollar loans. The applicable margin for the tranche A term loans and the revolving credit facility are subject to performance based grid pricing which is determined based upon the consolidated leverage ratio of the Co-Borrowers. The interest rate for the tranche A and tranche B term loans outstanding at December 31, 1998 was 8.58% and 9.33%, respectively. Interest is payable on a quarterly basis. Accrued interest on the borrowings incurred by Avalon Cable of Michigan Inc. under the credit facility was $1,389 at December 31, 1998. The Credit Facility contains restrictive covenants which among other things require the Co-Borrowers to maintain certain ratios including consolidated leverage ratios and the interest coverage ratio, fixed charge ratio and debt service coverage ratio. The obligations of the Co-Borrowers under the Credit Facility are secured by substantially all of the assets of the Co-Borrowers. In addition, the obligations of the Co-Borrowers under the Credit Facility are guaranteed by affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Cable Finance Holdings, Inc., Avalon New England Holdings, Inc., Avalon Cable Holdings, LLC and the Company. A Change of Control as defined under the Credit Facility agreement would constitute an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Subordinated Debt In December 1998, Avalon New England and Avalon Michigan became co-issuers of a $150,000 principal balance, Senior Subordinated Notes ("Subordinated Notes") offering. In conjunction with this financing, Avalon New England received $18,130 from Avalon Michigan as a partial payment against the Company's note receivable-affiliate from Avalon Michigan. Avalon Michigan paid $75 in interest during the period from October 21, 1998 (inception) through December 31, 1998. The cash proceeds received by Avalon New England of $18,206 was paid to Avalon as a dividend. The Subordinated Notes mature on December 1, 2008, and interest accrued at a rate of 9.375% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December 31, 1998. The Senior Subordinated Notes will not be redeemable at the Co-Borrowers' option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will be subject to redemption at any time at the option of the Co-Borrowers, in whole or in part at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
YEAR PERCENTAGE - - - ---- ---------- 2003..................................................... 104.688% 2004..................................................... 103.125% 2005..................................................... 101.563% 2006 and thereafter...................................... 100.000%
F-401 613 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in 2002, $7,000 in 2003, and the remainder thereafter. At any time prior to December 1, 2001, the Co-Borrowers may on any one or more occasions redeem up to 35% of the aggregate principal amount of Senior Subordinate Notes originally issued under the Indenture at a redemption price equal to 109.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Subordinated Notes originally issued remain outstanding immediately after each such redemption. As used in the preceding paragraph, "Equity Offering and Strategic Equity Investment" means any public or private sale of Capital Stock of any of the Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of at least $25 million, other than issuances of Capital Stock pursuant to employee benefit plans or as compensation to employees; provided that to the extent such Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall have been contributed to one or more of the Co-Borrowers in the form of an equity contribution. The Indentures provide that upon the occurrence of a change of control (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon plus accrued and unpaid interest and Liquidated Damages (as defined in the Indentures) thereof, if any, to the date of purchase. The Senior Discount Notes On December 3, 1998, the Company, Avalon Michigan and Avalon Cable Holdings Finance, Inc. (the "Holding Co-Borrowers") issued $196.0 million aggregate principal amount at maturity of 117/8% Senior Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes were issued at a substantial discount from their principal amount at maturity, to generate gross proceeds of approximately $110.4 million. Interest on the Senior Discount Notes will accrue but not be payable before December 1, 2003. Thereafter, interest on the Senior Discount Notes will accrue on the principal amount at maturity at a rate of 11.875% per annum, and will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2003. Prior to December 1, 2003, the accreted value of the Senior Discount Notes will increase, representing amortization of original issue discount, between the date of original issuance and December 1, 2003 on a semi-annual basis using a 360-day year comprised of twelve 30-day months, such that the accreted value shall be equal to the full principal amount at maturity of the Senior Discount Notes on December 1, 2003. Original issue discount accretion on the Senior Discount Notes was $1,083 at December 31, 1998. On December 1, 2003, the Holding Co-Borrowers will be required to redeem an amount equal to $369.79 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding on a pro rata basis at a redemption price of 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. On or after December 1, 2003, the Senior Discount Notes will be subject to redemption at any time at the option of the Holding Co-borrowers, in whole or in part, at the redemption prices, which are expressed as percentages of principal amount, shown below plus accrued and unpaid F-402 614 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest, if any, and liquidated damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
YEAR PERCENTAGE - - - ---- ---------- 2003................................................... 105.938% 2004................................................... 103.958% 2005................................................... 101.979% 2006 and thereafter.................................... 100.000%
Notwithstanding the foregoing, at any time before December 1, 2001, the holding companies may on any one or more occasions redeem up to 35% of the aggregate principal amount at maturity of senior discount notes originally issued under the Senior Discount Note indenture at a redemption price equal to 111.875% of the accreted value at the date of redemption, plus liquidated damages, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Discount Notes originally issued remain outstanding immediately after each occurrence of such redemption. Upon the occurrence of a Change of Control, each holder of Senior Discount Notes will have the right to require the Holding Co-Borrowers to repurchase all or any part of such holder's Senior Discount Notes pursuant to a Change of Control offer at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages thereon, if any, to the date of purchase. Mercom debt In August 1997, the Mercom revolving credit agreement for $2,000 expired. Mercom had no borrowings under the revolving credit agreement in 1996 or 1997. On September 29, 1997, Cable Michigan, Inc. purchased and assumed all of the bank's interest in the term credit agreement and the note issued thereunder. Immediately after the purchase, the term credit agreement was amended in order to, among other things, provide for less restrictive financial covenants, eliminate mandatory amortization of principal and provide for a bullet maturity of principal on December 31, 2002, and remove the change of control event of default. Mercom's borrowings under the term credit agreement contain pricing and security provisions substantially the same as those in place prior to the purchase of the loan. The borrowings are secured by a pledge of the stock of Mercom's subsidiaries and a first lien on certain of the assets of Mercom and its subsidiaries, including inventory, equipment and receivables. At December 31, 1998, $14,151 of principal was outstanding. The borrowings under the term credit agreement are eliminated in the Company's consolidated balance sheet. Note payable Avalon New England issued a note payable for $500 which is due on May 29, 2003, and bears interest at a rate of 7% per annum (which approximates Avalon New England's incremental borrowing rate) payable annually. Additionally, Avalon New England has a $100 non-compete agreement. The agreement calls for five annual payments of $20, commencing on May 29, 1999. F-403 615 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES The income tax provision in the accompanying consolidated financial statements of operations relating to Mercom, Inc., a majority-owned subsidiary, is comprised of the following:
1998 ---- CURRENT Federal..................................................... $ -- State....................................................... -- ---- Total Current............................................... -- ---- DEFERRED Federal..................................................... 171 State....................................................... 15 ---- Total Deferred.............................................. 186 ---- Total provision for income taxes............................ $186 ====
The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1998. The differences are as follows:
1998 ------- Loss before provision for income taxes...................... $(8,833) ======= Federal tax provision at statutory rates.................... $(3,092) State income taxes.......................................... (182) Allocated to members........................................ 3,082 Goodwill.................................................... 6 ------- Provision for income taxes.................................. $ 186 =======
TAX NET OPERATING EXPIRATION YEAR LOSSES DATE - - - ---- --------- ---------- 1998................................................... $922 2018
Temporary differences that give rise to significant portion of deferred tax assets and liabilities at December 31 are as follows:
1998 ------- NOL carryforwards........................................... $ 922 Reserves.................................................... 459 Other, net.................................................. 20 ------- Total deferred assets....................................... 1,401 ------- Property, plant and equipment............................... (2,725) Intangible assets........................................... (38) ------- Total deferred liabilities.................................. (2,763) ------- Subtotal.................................................... (1,362) ------- Valuation allowance......................................... -- ------- Total deferred taxes........................................ $(1,362) =======
F-404 616 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES Leases Avalon New England and Avalon Michigan rent poles from utility companies for use in their operations. While rental agreements are generally short-term, Avalon New England and Avalon Michigan anticipate such rentals will continue in the future. Avalon New England and Avalon Michigan also lease office facilities and various items of equipment under month-to-month operating leases. Rent expense was $58 for the year ended December 31, 1998. Rental commitments are expected to continue at approximately $1 million a year for the foreseeable future, including pole rental commitments which are cancelable. Legal matters Avalon and its subsidiaries are subject to regulation by the Federal Communications Commission ("FCC") and other franchising authorities. Avalon and its subsidiaries are subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. Avalon and its Subsidiaries have either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of Avalon and its subsidiaries. 11. RELATED PARTY TRANSACTIONS AND BALANCES During 1998, Avalon New England received $3,341 from Avalon Holdings. In consideration for this amount, Avalon New England executed a note payable to Avalon Holdings. This note is recorded as note payable-affiliate on the balance sheet at December 31, 1998. Interest accrues at a rate of 5.57% per year and Avalon New England has recorded accrued interest on this note of $100 at December 31, 1998. 12. SUBSEQUENT EVENT In May 1999, the Company signed an agreement with Charter Communications, Inc. ("Charter Communications") under which Charter Communications agreed to purchase Avalon Cable LLC's cable television systems and assume some of their debt. The acquisition by Charter Communications is subject to regulatory approvals. The Company expects to consummate this transaction in the fourth quarter of 1999. This agreement, if closed, would constitute a change in control under the Indenture pursuant to which the Senior Subordinated Notes and the Senior Discount Notes (collectively, the "Notes") were issued. The Indenture provides that upon the occurrence of a change of control of the Company (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon (or 101% of the accreted value for the Senior Discount Notes as of the date of purchase if prior to the full accretion date) plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereof, if any, to the date of purchase. F-405 617 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) This agreement, if closed, would represent a Change of Control which, on the closing date, constitutes an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Charter Communications has agreed to repay all amounts due under the Credit Facility or cause all events of default under the Credit Facility arising from the Change of Control to be waived. F-406 618 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable of Michigan Holdings, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Avalon Cable of Michigan Holdings, Inc. and subsidiaries (collectively, the "Company") at December 31, 1997 and 1998, and the results of their operations, changes in shareholders' equity and their cash flows for the period from September 4, 1997 (inception) through December 31, 1997, and for the year ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York March 30, 1999, except for Note 13, as to which the date is May 13, 1999 F-407 619 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, ---------------------- 1998 1997 ---------- ------ (DOLLARS IN THOUSANDS) ASSETS Cash........................................................ $ 9,288 $ -- Accounts receivable, net of allowance for doubtful accounts of $943................................................... 5,862 -- Prepayments and other current assets........................ 1,388 504 Accounts receivable from related parties.................... 124 -- Deferred income taxes....................................... 377 -- -------- ---- Current assets.............................................. 17,039 504 Property, plant and equipment, net.......................... 111,421 -- Intangible assets, net...................................... 462,117 -- Deferred charges and other assets........................... 1,302 -- -------- ---- Total assets................................................ $591,879 $504 ======== ==== LIABILITIES AND SHAREHOLDERS' EQUITY Current portion of notes payable............................ $ 20 $ -- Accounts payable and accrued expenses....................... 11,646 -- Advance billings and customer deposits...................... 3,171 -- Accounts payable-affiliate.................................. 2,023 500 -------- ---- Current liabilities......................................... 16,860 500 Long-term debt.............................................. 402,949 -- Notes payable-affiliate..................................... 3,341 -- Deferred income taxes....................................... 80,811 -- -------- ---- Total liabilities........................................... 503,961 500 -------- ---- Commitments and contingencies (Note 11)..................... -- -- Minority interest........................................... 61,836 4 -------- ---- Stockholders equity: Common stock................................................ -- -- Additional paid-in capital.................................. 35,000 -- Accumulated deficit......................................... (8,918) -- -------- ---- Total shareholders' equity.................................. 26,082 -- -------- ---- Total liabilities and shareholders' equity.................. $591,879 $504 ======== ====
The accompanying notes are an integral part of these consolidated financial statements. F-408 620 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FOR THE YEAR SEPTEMBER 4, 1997 ENDED (INCEPTION) THROUGH DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ------------------- (DOLLARS IN THOUSANDS) REVENUE: Basic services.......................................... $14,976 $ -- Premium services........................................ 1,468 -- Other................................................... 1,743 -- ------- ------- 18,187 -- OPERATING EXPENSES: Selling, general and administrative..................... 4,207 -- Programming............................................. 4,564 -- Technical and operations................................ 1,951 -- Depreciation and amortization........................... 8,183 -- ------- ------- Loss from operations.................................... (718) -- Interest income......................................... 173 4 Interest expense........................................ (8,223) -- Other expense, net...................................... (65) -- ------- ------- Income (loss) before income taxes....................... (8,833) 4 (Benefit) from income taxes............................. (2,754) -- ------- ------- Income (loss) before minority interest and extraordinary item.................................................. (6,079) 4 Minority interest in income of consolidated entity...... 1,331 (4) ------- ------- Income (loss) before extraordinary item................. (4,748) -- Extraordinary loss on extinguishment of debt (net of tax of $1,743)............................................ (4,170) -- ------- ------- Net income (loss)....................................... $(8,918) $ -- ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-409 621 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998
COMMON ADDITIONAL TOTAL SHARES COMMON PAID-IN ACCUMULATED SHAREHOLDERS' OUTSTANDING STOCK CAPITAL DEFICIT EQUITY ----------- ------ ---------- ----------- ------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net income from date of inception through December 31, 1997.................... -- $-- $ -- $ -- $ -- Balance, January 1, 1998...... 100 -- -- -- -- Net loss...................... -- -- -- (8,918) (8,918) Contributions by parent....... -- -- 35,000 -- 35,000 --- -- ------- ------- ------- Balance, December 31, 1998.... 100 $-- $35,000 $(8,918) $26,082 === == ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-410 622 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 4, 1997 FOR THE YEAR ENDED (INCEPTION) THROUGH DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------ ------------------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ (8,918) $ 4 Extraordinary loss on extinguishment of debt............ 4,170 -- Depreciation and amortization........................... 8,183 -- Deferred income taxes, net.............................. 82,370 -- Provision for loss on accounts receivable............... 75 -- Increase in minority interest........................... 1,331 -- Accretion on senior discount notes...................... 1,083 -- Net change in certain assets and liabilities, net of business acquisitions Increase in accounts receivable............................................ (1,679) -- Increase in accounts receivable from related parties.... (124) -- Increase in prepayment and other current assets......... (884) (4) Increase in accounts payable and accrued expenses....... 4,863 -- Increase in accounts payable to related parties......... 1,523 -- Increase in deferred revenue............................ 1,684 -- Change in Other, net.................................... 1,339 -- --------- --------- Net cash provided by operating activities............... 92,338 -- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.............. (11,468) -- Payment for acquisition................................. (554,402) -- --------- --------- Net cash used in investing activities................... 565,870 -- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of the Credit Facility....... 265,888 -- Principal payment on debt............................... (125,013) -- Proceeds from the issuance of senior subordinated notes................................................. 150,000 -- Payments made on bridge loan............................ (105,000) -- Proceeds from bridge loan............................... 105,000 -- Proceeds from the senior discount notes................. 110,411 -- Proceeds from sale to minority interest................. 46,588 -- Proceeds from other notes payable....................... 600 -- Proceeds from the issuance of note payable affiliate.... 3,341 -- Payments made for debt financing costs.................. (3,995) -- Proceeds from the issuance of common stock.............. 35,000 -- --------- --------- Net cash provided by financing activities............... 482,820 -- --------- --------- Net increase in cash.................................... 9,288 -- Cash at beginning of the period......................... -- -- --------- --------- Cash at end of the period............................... $ 9,288 $ -- ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for Interest.................. $ 3,480 $ -- Income taxes............................................ -- --
The accompanying notes are an integral part of these consolidated financial statements. F-411 623 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Avalon Cable of Michigan Holdings, Inc. ("the Company") was formed in June 1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998, Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement") among the Company, Cable Michigan, Inc. ("Cable Michigan") and Avalon Michigan, pursuant to which Avalon Michigan will merge into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of the Company (the "Merger"). In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior to the effective time of the Merger (other than treasury stock shares owned by the Company or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. In conjunction with the acquisition of Cable Michigan, Avalon Michigan acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom"). On November 6, 1998, Avalon Michigan completed its merger into and with Cable Michigan. The total consideration paid in conjunction with the merger, including fees and expenses was $431,629, including repayment of all existing Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the merger, the arrangements with RCN and CTE for certain support services were terminated. The Agreement also permitted Avalon Michigan to agree to acquire the remaining shares of Mercom that it did not own. The Company contributed $137,375 in cash to Avalon Michigan, which was used to consummate the Merger. On November 5, 1998, the Company received $105,000 in cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On November 6, 1998, the Company contributed the proceeds received from the Bridge Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for 100 shares of common stock. On November 6, 1998, Avalon Cable of New England Holdings, Inc. contributed its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon Cable LLC in exchange for a membership interest in Avalon Cable LLC. This contribution was between entities under common control and was accounted for similar to a pooling-of-interests. Under this pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (September 4, 1997) of Avalon New England. On that same date, Avalon Cable LLC received $63,000 from affiliated entities, which was comprised of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) a $18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash contribution to Avalon New England. The cash contribution received by Avalon New England was used to (i) extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to Avalon Holdings Finance which matures on December 31, 2001. F-412 624 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 On December 10, 1998, Avalon Cable LLC received a dividend distribution from Avalon New England in the amount of $18,206, which was used by Avalon Cable LLC to pay off the promissory note payable to Avalon Holdings, plus accrued interest. On March 26, 1999, after the acquisition of Mercom, Inc., the Company completed a series of transactions to facilitate certain aspects of its financing between affiliated entities under common control. As a result of these transactions: - Avalon Michigan contributed its assets and liabilities excluding deferred tax liabilities, net to Avalon Cable LLC in exchange for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable LLC contributed these assets and liabilities to its wholly-owned subsidiary, Avalon Cable of Michigan LLC ("Avalon Michigan LLC"); - Avalon Michigan LLC has become the operator of the Michigan cluster replacing Avalon Michigan; - Avalon Michigan LLC is an obligor on the Senior Subordinated Notes replacing Avalon Michigan; and - Avalon Michigan is a guarantor of the obligations of Avalon Michigan LLC under the Senior Subordinated Notes. Avalon Michigan does not have significant assets, other than its investment in Avalon Cable LLC. - The Company contributed the Senior Discount Notes to Avalon Cable LLC and became a guarantor of the Senior Discount Notes. The Company does not have significant assets, other than its 88% investment in Avalon Cable LLC. As a result of this reorganization between entities under common control, the Company accounted for the reorganization similar to a pooling-of-interests. Under the pooling-of-interests method, the results of operations include the results of operations from the earliest date that a member became a part of the control group by inception or acquisition. For the Company, the results of operations are from the date of inception (September 4, 1997) for Avalon New England, a wholly-owned subsidiary of Avalon Cable LLC. Avalon Michigan has a majority-interest in Avalon Cable LLC. Avalon Cable LLC wholly-owns Avalon Cable Holdings Finance, Avalon New England, and Avalon Michigan LLC. Avalon New England and Avalon Michigan provide cable service to the western New England area and the state of Michigan, respectively. Avalon New England and Avalon Michigan LLC's cable systems offer customer packages for basic cable programming services which are offered at a per channel charge or packaged together to form a tier of services offered at a discount from the combined channel rate. Avalon New England and Avalon Michigan LLC's cable systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principle sources of revenue for the Company. Avalon Holdings Finance was formed for the sole purpose of facilitating financings associated with the acquisitions of various cable operating companies. Avalon Holdings Finance conducts no other activities. F-413 625 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements of the Company include the accounts of the Company and of all its wholly and majority owned subsidiaries. All significant transactions between the Company and its subsidiaries have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition Revenues from cable services are recorded in the month the service is provided. Installation fee revenue is recognized in the period in which the installation occurs to the extent that direct selling costs meet or exceed installation revenues. Advertising expense Advertising costs are expensed as incurred. Advertising expense charged to operations was $82 for the year ended December 31, 1998. Concentration of credit risk Financial instruments which potentially expose the Company to a concentration of credit risk include cash and subscriber and other receivables. The Company had cash in excess of federally insured deposits at financial institutions at December 31, 1998. The Company does not believe that such deposits are subject to any unusual credit risk beyond the normal credit risk associated with operating its business. The Company extends credit to customers on an unsecured basis in the normal course of business. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not historically exceeded management's expectations. The Company's trade receivables reflect a customer base centered in Michigan and New England. The Company routinely assesses the financial strength of its customers; as a result, concentrations of credit risk are limited. Property, plant and equipment Property, plant and equipment is stated at its fair value for items acquired from Cable Michigan, historical cost for the minority interests' share of Mercom property, plant and equipment and cost for additions subsequent to the merger. Initial subscribers installation costs, including materials, labor and overhead costs, are capitalized as a component of cable plant and equipment. The cost of disconnection and reconnection are charged to expense when incurred. F-414 626 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Depreciation is computed for financial statement purposes using the straight-line method based on the following lives: Buildings and improvements.................................. 10-25 years Cable plant and equipment................................... 5-12 years Vehicles.................................................... 5 years Office furniture and equipment.............................. 5-10 years
Intangible assets Intangible assets represent the estimated fair value of cable franchises and goodwill resulting from acquisitions. Cable franchises are amortized over a period ranging from 13 to 15 years on a straight-line basis. Goodwill is the excess of the purchase price over the fair value of the net assets acquired, determined through an independent appraisal, and is amortized over 15 years using the straight-line method. Deferred financing costs represent direct costs incurred to obtain long-term financing and are amortized to interest expense over the term of the underlying debt utilizing the effective interest method. Accounting for impairments The Company follows the provisions of Statement of Financial Accounting Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the net future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles expected to be held and used is based on the fair value of the asset. No impairment losses have been recognized by the Company pursuant to SFAS 121. Fair value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: a. The Company estimates that the fair value of all financial instruments at December 31, 1998 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The fair value of the notes payable-affiliate are considered to be equal to carrying values since the Company believes that its credit risk has not changed from the time this debt instrument was executed and therefore, would obtain a similar rate in the current market. b. The fair value of the cash and temporary cash investments approximates fair value because of the short maturity of these instruments. F-415 627 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Income taxes The Company and Mercom file separate consolidated federal income tax returns. The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting for Income Taxes". The statement requires the use of an asset and liability approach for financial reporting purposes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. 3. MERGER AND ACQUISITIONS The Merger was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on their fair market values at the date of the Merger. The purchase price was allocated as follows: current assets and liabilities at fair values of $470, approximately $94,000 to property, plant and equipment, $315,000 to cable franchises and the excess of consideration paid over the fair market value of the net assets acquired, or goodwill, of $81,705, offset by deferred taxes, net of $60,000. The Merger agreement between the Company and Avalon Michigan permitted Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Michigan and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by Avalon Michigan of all of such shares at a price of $12.00 per share. Avalon Michigan completed this acquisition in March 1999. The total estimated consideration payable in conjunction with the Mercom Acquisition, excluding fees and expenses was $21,900. On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A Limited Partnership ("Amrac") for consideration of $8,124, including acquisition costs of $589. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through the use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $256. On July 21, 1998, the Company acquired certain assets and liabilities from Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (collectively, "Pegasus") for consideration of $30,467, including acquisition costs of $175. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $977. F-416 628 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Following is the unaudited pro forma results of operations for the year ended December 31, 1998, as if the Merger and acquisitions occurred on January 1, 1998:
DECEMBER 31, 1998 ------------ (UNAUDITED) Revenue..................................................... $ 96,751 ======== Loss from operations........................................ $ (5,292) ======== Net loss.................................................... $(22,365) ========
In March 1999, Avalon Michigan acquired the cable television systems of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for approximately $7,800, excluding transaction fees. In September 1998, the Company entered into a definitive agreement to purchase all of the cable systems of Taconic Technology Corporation ("Taconic") for approximately $8,525 (excluding transaction fees). As of December 31, 1998, the Company incurred $41 of transaction costs related to the acquisition of Taconic. This merger is expected to close in the second quarter of 1999. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: Cable plant and equipment................................... $106,602 Vehicles.................................................... 2,572 Buildings and improvements.................................. 1,026 Office furniture and equipment.............................. 2,234 Construction in process..................................... 768 -------- Total property, plant and equipment......................... 113,202 Less-accumulated depreciation............................... (1,781) -------- Property, plant and equipment, net.......................... $111,421 ========
Depreciation expense was $1,781 for the year ended December 31, 1998. 5. INTANGIBLE ASSETS Intangible assets consist of the following: Cable Franchise............................................. $374,773 Goodwill.................................................... 82,928 Deferred Financing Costs.................................... 10,658 Non-compete agreement....................................... 100 -------- Total....................................................... 468,459 Less-accumulated amortization............................... (6,342) -------- Intangible assets, net...................................... $462,117 ========
F-417 629 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Amortization expense for the year ended December 31, 1998 was $6,342. 6. ACCOUNT PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: Accounts payable............................................ $ 5,321 Accrued corporate expenses.................................. 404 Accrued cable programming costs............................. 2,388 Accrued taxes............................................... 1,383 Other....................................................... 2,150 ------- $11,646 =======
7. INCOME TAXES The income tax provision (benefit) in the accompanying consolidated financial statements of operations is comprised of the following:
1998 ------- CURRENT Federal..................................................... $ 243 State....................................................... -- ------- Total Current............................................... 243 ------- DEFERRED Federal..................................................... (2,757) State....................................................... (240) ------- Total Deferred.............................................. (2,997) ------- Total (benefit) for income taxes............................ $(2,754) =======
The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1998. The differences are as follows:
1998 ------- (Loss) before (benefit) for income taxes.................... $(8,833) ======= Federal tax (benefit) at statutory rates.................... $(3,092) State income taxes.......................................... (177) Goodwill.................................................... 77 Benefit for taxes allocated to minority partners............ 84 ------- (Benefit) for income taxes.................................. $(3,108) =======
TAX NET OPERATING EXPIRATION YEAR LOSSES DATE - - - ---- --------- ---------- 1998................................................... $10,360 2018
F-418 630 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Temporary differences that give rise to significant portion of deferred tax assets and liabilities at December 31 are as follows:
1998 -------- NOL carryforwards........................................... $ 5,363 Alternative minimum tax credits............................. 141 Reserves.................................................... 210 Other, net.................................................. 309 -------- Total deferred assets....................................... 6,023 -------- Property, plant and equipment............................... (10,635) Intangible assets........................................... (76,199) -------- Total deferred liabilities.................................. (86,834) -------- Subtotal.................................................... (80,811) -------- Valuation allowance......................................... -- -------- Total deferred taxes........................................ $(80,811) ========
The tax benefit related to the loss on extinguishment of debt results in deferred tax, and it approximates the statutory U.S. tax rate. The tax benefit of $2,036 related to the exercise of certain stock options of Cable Michigan Inc. was charged directly to goodwill in conjunction with the closing of the merger. 8. DEBT At December 31, 1998, long-term debt consists of the following: Senior Credit Facility...................................... $140,875 Senior Subordinated Notes................................... 150,000 Senior Discount Notes....................................... 111,494 Other Note Payable.......................................... 600 -------- 402,969 Current portion............................................. 20 -------- $402,949 ========
Credit Facilities On May 28, 1998, Avalon New England entered into a term loan and revolving credit agreement with a major commercial lending institution (the "Credit Agreement"). The Credit Agreement allowed for aggregate borrowings under Term Loans A and B (collectively, the "Term Loans") and a revolving credit facility of $30,000 and $5,000, respectively. The proceeds from the Term Loans and revolving credit facility were used to fund the acquisitions made by Avalon New England and to provide for Avalon New England's working capital requirements. In December 1998, Avalon New England retired the Term Loans and revolving credit agreement through the proceeds of a capital contribution from Avalon Cable LLC. The fees and associated costs relating to the early retirement of this debt was $1,110. F-419 631 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon New England and Avalon Cable Finance, Inc. (Avalon Finance), affiliated companies, collectively referred to as the ("Co-Borrowers") on a $320,888 senior credit facility, which includes term loan facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000 and a revolving credit facility of $30,000 (collectively, the "Credit Facility"). Subject to compliance with the terms of the Credit Facility, borrowings under the Credit Facility will be available for working capital purposes, capital expenditures and pending and future acquisitions. The ability to advance funds under the tranche A term loan facility terminated on March 31, 1999. The tranche A term loans are subject to minimum quarterly amortization payments commencing on January 31, 2001 and maturing on October 31, 2005. The tranche B term loans are scheduled to be repaid in two equal installments on July 31, 2006 and October 31, 2006. The revolving credit facility borrowings are scheduled to be repaid on October 31, 2005. On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit Facility in order to consummate the Merger. In connection with the Senior Subordinated Notes (as defined below) and Senior Discount Notes (as defined below) offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and the availability under the Credit Facility was reduced to $195,000. Avalon Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A and tranche B term note facilities, and had available $30,000 for borrowings under the revolving credit facility. Avalon New England and Avalon Finance had no borrowings outstanding under the Credit Facility at December 31, 1998. The interest rate under the Credit Facility is a rate based on either (i) the base rate (a rate per annum equal to the greater of the Prime Rate and the Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the Eurocurrency Reserve Requirements) plus, in either case, the applicable margin. As of December 31, 1998, the applicable margin was (a) with respect to the tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for Eurodollar loans and (b) with respect to tranche A term loans and the revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for Eurodollar loans. The applicable margin for the tranche A term loans and the revolving credit facility are subject to performance based grid pricing which is determined based on upon the consolidated leverage ratio of the Co-Borrowers. The interest rate for the tranche B term loans outstanding at December 31, 1998 was 9.19%. Interest is payable on a quarterly basis. Accrued interest on the borrowings under the credit facility was $1,389 at December 31, 1998. The Credit Facility contains restrictive covenants which among other things require the Co-Borrowers to maintain certain ratios including consolidated leverage ratios and the interest coverage ratio, fixed charge ratio and debt service coverage ratio. The obligations of the Co-Borrowers under the Credit Facility are secured by substantially all of the assets of the Co-Borrowers. In addition, the obligations of the Co-Borrowers under the Credit Facility are guaranteed by the Company, Avalon Cable LLC, Avalon Cable Finance Holdings, Inc., Avalon Cable of New England Holdings, Inc. and Avalon Cable Holdings, LLC. A Change of Control as defined under the Credit Facility agreement would constitute an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. F-420 632 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Subordinated Debt In December 1998, Avalon Michigan became a co-issuer of a $150,000 principal balance, Senior Subordinated Notes ("Subordinated Notes") offering and Michigan Holdings became a co-issuer of a $196,000, gross proceeds, Senior Discount Notes (defined below) offering. In conjunction with these financings, Avalon Michigan paid $18,130 to Avalon Finance as a partial payment against Avalon Michigan's note payable-affiliate. Avalon Michigan paid $76 in interest on this note payable-affiliate during the period from inception (June 2, 1998) through December 31, 1998. The Subordinated Notes mature on December 1, 2008, and interest accrued at a rate of 9.375% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December 31, 1998. The Senior Subordinated Notes will not be redeemable at the Co-Borrowers' option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will be subject to redemption at any time at the option of the Co-Borrowers, in whole or in part at the redemption prices (expressed as percentages of principal amount) plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
YEAR PERCENTAGE - - - ---- ---------- 2003..................................................... 104.688% 2004..................................................... 103.125% 2005..................................................... 101.563% 2006 and thereafter...................................... 100.000%
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in 2002, $72,479 in 2003, and the remainder thereafter. At any time prior to December 1, 2001, the Co-Borrowers may on any one or more occasions redeem up to 35% of the aggregate principal amount of Senior Subordinate Notes originally issued under the Indenture at a redemption price equal to 109.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Subordinated Notes originally issued remain outstanding immediately after each such redemption. As used in the preceding paragraph, "Equity Offering and Strategic Equity Investment" means any public or private sale of Capital Stock of any of the Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of at least $25 million, other than issuances of Capital Stock pursuant to employee benefit plans or as compensation to employees; provided that to the extent such Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall have been contributed to one or more of the Co-Borrowers in the form of an equity contribution. The Indentures provide that upon the occurrence of a change of control (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash to 101% of the aggregate principal amount thereon plus accrued and unpaid interest and Liquidated Damages (as defined in the Indentures) thereof, if any, to the date of purchase. F-421 633 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 The Senior Discount Notes On December 3, 1998, the Company, Avalon Cable LLC and Avalon Cable Holdings Finance, Inc. ("Holdings Co-Borrowers") issued $196.0 million aggregate principal amount at maturity of 11 7/8% Senior Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes were issued at a substantial discount from their principal amount at maturity, to generate gross proceeds of approximately $110.4 million. Interest on the Senior Discount Notes will accrue but not be payable before December 1, 2003. Thereafter, interest on the Senior Discount Notes will accrue on the principal amount at maturity at a rate of 11.875% per annum, and will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2003. Prior to December 1, 2003, the accreted value of the Senior Discount Notes will increase, representing amortization of original issue discount, between the date of original issuance and December 1, 2003 on a semi-annual basis using a 360-day year comprised of twelve 30-day months, such that the accreted value shall be equal to the full principal amount at maturity of the Senior Discount Notes on December 1, 2003. Original issue discount accretion on the Senior Discount Notes was $1,083 at December 31, 1998. On December 1, 2003, the Holding Co-borrowers will be required to redeem an amount equal to $369.79 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding on a pro rata basis at a redemption price of 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. On or after December 1, 2003, the Senior Discount Notes will be subject to redemption at any time at the option of the Holding Co-borrowers, in whole or in part, at the redemption prices, which are expressed as percentages of principal amount, shown below plus accrued and unpaid interest, if any, and liquidated damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below:
YEAR PERCENTAGE - - - ---- ---------- 2003..................................................... 105.938% 2004..................................................... 103.958% 2005..................................................... 101.979% 2006 and thereafter...................................... 100.000%
Notwithstanding the foregoing, at any time before December 1, 2001, the holding companies may on any one or more occasions redeem up to 35% of the aggregate principal amount at maturity of senior discount notes originally issued under the Senior Discount Note indenture at a redemption price equal to 111.875% of the accreted value at the date of redemption, plus liquidated damages, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Discount Notes originally issued remain outstanding immediately after each occurrence of such redemption. Upon the occurrence of a Change of Control, each holder of Senior Discount Notes will have the right to require the Holding Co-borrowers to repurchase all or any part of such holder's Senior Discount Notes pursuant to a Change of Control offer at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages thereon, if any, to the date of purchase. F-422 634 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Note Payable Avalon New England issued a note payable for $500 which is due on May 29, 2003, and bears interest at a rate of 7% per annum (which approximates Avalon New England's incremental borrowing rate) payable annually. Additionally, Avalon New England has a $100 non-compete agreement. The agreement calls for five annual payments of $20, commencing on May 29, 1999. Mercom debt In August 1997, the Mercom revolving credit agreement for $2,000 expired. Mercom had no borrowings under the revolving credit agreement in 1996 or 1997. On September 29, 1997, Avalon Michigan purchased and assumed all of the bank's interest in the term credit agreement and the note issued thereunder. Immediately after the purchase, the term credit agreement was amended in order to, among other things, provide for less restrictive financial covenants, eliminate mandatory amortization of principal and provide for a bullet maturity of principal on December 31, 2002, and remove the change of control event of default. Mercom's borrowings under the term credit agreement contain pricing and security provisions substantially the same as those in place prior to the purchase of the loan. The borrowings are secured by a pledge of the stock of Mercom's subsidiaries and a first lien on certain of the assets of Mercom and its subsidiaries, including inventory, equipment and receivables at December 31, 1998, $14,151 of principal was outstanding. The borrowings under the term credit agreement are eliminated in the Company's consolidated balance sheet. 9. MINORITY INTEREST The activity in minority interest for the year ended December 31, 1998 is as follows:
AVALON CABLE MERCOM LLC TOTAL ------- ------- ------- Issuance of Class A units by Avalon Cable LLC....... $ -- $45,000 $45,000 Issuance of Class B-1 units by Avalon Cable LLC..... -- 4,345 4,345 Allocated to minority interest prior to restructuring..................................... -- 365 365 Purchase of Cable Michigan, Inc..................... 13,457 -- 13,457 Income (loss) allocated to minority interest........ 398 (1,729) (1,331) ------- ------- ------- Balance at December 31, 1998........................ $13,855 $47,981 $61,836 ======= ======= =======
10. EMPLOYEE BENEFIT PLANS Avalon Michigan has a qualified savings plan under Section 401(K) of the Internal Revenue Code. Contributions charged to expense for the period from November 5, 1998 to December 31, 1998 was $30. 11. COMMITMENTS AND CONTINGENCIES Leases Avalon New England and Avalon Michigan rent poles from utility companies for use in their operations. While rental agreements are generally short-term, Avalon New England and Avalon F-423 635 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Michigan anticipate such rentals will continue in the future. Avalon New England and Avalon Michigan also lease office facilities and various items of equipment under month-to-month operating leases. Rent expense was $58 for the year ended December 31, 1998. Rental commitments are expected to continue at approximately $1 million a year for the foreseeable future, including pole rental commitments which are cancelable. Legal Matters The Company and its subsidiaries are subject to regulation by the Federal Communications Commission ("FCC") and other franchising authorities. The Company and its subsidiaries are subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. The Company and its subsidiaries have either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries. 12. RELATED PARTY TRANSACTIONS AND BALANCES During 1998, Avalon New England received $3,341 from Avalon Holdings. In consideration for this amount, Avalon New England executed a note payable to Avalon Holdings. This note is recorded as note payable-affiliate on the balance sheet at December 31, 1998. Interest accrues at the rate of 5.57% per year and Avalon New England has recorded accrued interest on this note of $100 at December 31, 1998. 13. SUBSEQUENT EVENT In May 1999, the Company signed an agreement with Charter Communications, Inc. ("Charter Communications") under which Charter Communications agreed to purchase Avalon Cable LLC's cable television systems and assume some of their debt. The acquisition by Charter Communications is subject to regulatory approvals. The Company expects to consummate this transaction in the fourth quarter of 1999. This agreement, if closed, would constitute a change in control under the Indenture pursuant to which the Senior Subordinated Notes and the Senior Discount Notes (collectively, the "Notes") were issued. The Indenture provides that upon the occurrence of a change of control of the Company (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon (or 101% of the accreted value for the Senior Discount Notes as of the date of purchase if prior to the full accretion date) plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereof, if any, to the date of purchase. This agreement, if closed, would represent a Change of Control which, on the closing date, constitutes an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Charter Communications has agreed to repay all amounts due under the Credit Facility or cause all events of default under the Credit Facility arising from the Change of Control to be waived. F-424 636 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Avalon Cable of Michigan, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and changes in shareholders' deficit and of cash flows present fairly, in all material respects, the financial position of Cable Michigan, Inc. and subsidiaries (collectively, the "Company") at December 31, 1996 and 1997 and November 5, 1998, and the results of their operations and their cash flows for each of the two years ended December 31, 1996 and 1997 and the period from January 1, 1998 to November 5, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York March 30, 1999 F-425 637 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and temporary cash investments......................... $ 17,219 $ 6,093 Accounts receivable, net of reserve for doubtful accounts of $541 at December 31, 1997 and $873 at November 5, 1998.... 3,644 4,232 Prepayments and other....................................... 663 821 Accounts receivable from related parties.................... 166 396 Deferred income taxes....................................... 1,006 541 -------- -------- Total current assets........................................ 22,698 12,083 Property, plant and equipment, net.......................... 73,836 77,565 Intangible assets, net...................................... 45,260 32,130 Deferred charges and other assets........................... 803 9,442 -------- -------- Total assets................................................ $142,597 $131,220 ======== ======== LIABILITIES AND SHAREHOLDERS' DEFICIT Current portion of long-term debt........................... $ -- $ 15,000 Accounts payable............................................ 5,564 8,370 Advance billings and customer deposits...................... 2,242 1,486 Accrued taxes............................................... 167 1,035 Accrued cable programming expense........................... 2,720 5,098 Accrued expenses............................................ 4,378 2,052 Accounts payable to related parties......................... 1,560 343 -------- -------- Total current liabilities................................... 16,631 33,384 Long-term debt.............................................. 143,000 120,000 Deferred income taxes....................................... 22,197 27,011 -------- -------- Total liabilities........................................... 181,828 180,395 -------- -------- Minority interest........................................... 14,643 14,690 -------- -------- Commitments and contingencies (Note 11)..................... -- -- Preferred Stock............................................. -- -- Common stock................................................ -- -- Common shareholders' deficit................................ (53,874) (63,865) -------- -------- Total Liabilities and Shareholders' Deficit................. $142,597 $131,220 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-426 638 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FOR THE DECEMBER 31, PERIOD FROM ------------------------ JANUARY 1, 1998 TO 1996 1997 NOVEMBER 5, 1998 ---------- ---------- ------------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS) Revenues....................................... $ 76,187 $ 81,299 $ 74,521 Costs and expenses, excluding management fees and depreciation and amortization............ 40,593 44,467 41,552 Management fees................................ 3,498 3,715 3,156 Depreciation and amortization.................. 31,427 32,082 28,098 Merger related expenses........................ -- -- 5,764 ---------- ---------- ---------- Operating income............................... 669 1,035 (4,049) Interest income................................ 127 358 652 Interest expense............................... (15,179) (11,751) (8,034) Gain on sale of Florida cable system........... -- 2,571 -- Other (expense), net........................... (736) (738) (937) ---------- ---------- ---------- (Loss) before income taxes..................... (15,119) (8,525) (12,368) (Benefit) from income taxes.................... (5,712) (4,114) (1,909) ---------- ---------- ---------- (Loss) before minority interest and equity in unconsolidated entities...................... (9,407) (4,411) (10,459) Minority interest in loss (income) of consolidated entity.......................... 1,151 53 (75) ---------- ---------- ---------- Net (Loss)..................................... $ (8,256) $ (4,358) $ (10,534) ========== ========== ========== Basic and diluted earnings per average common share Net (loss) to shareholders............. $ (1.20) $ (.63) $ (1.53) Average common shares and common stock equivalents outstanding...................... 6,864,799 6,870,528 6,891,932
The accompanying notes are an integral part of these consolidated financial statements. F-427 639 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE PERIOD FROM JANUARY 1, 1998 TO NOVEMBER 5, 1998 ---------------------------------------------------------------------------- COMMON ADDITIONAL SHAREHOLDER'S TOTAL SHARES COMMON PAID-IN NET SHAREHOLDERS' OUTSTANDING STOCK CAPITAL DEFICIT INVESTMENT DEFICIT ----------- ------ ---------- -------- ------------- ------------- (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) Balance, December 31, 1995..... 1,000 $ 1 $ -- $ -- $(73,758) $(73,757) Net loss....................... -- -- -- -- (8,256) (8,256) Transfers from CTE............. -- -- -- -- 2,272 2,272 --------- ------ ---- -------- -------- -------- Balance, December 31, 1996..... 1,000 1 -- -- (79,742) (79,741) Net loss from 1/1/97 through 9/30/97...................... -- -- -- -- (3,251) (3,251) Net loss from 10/1/97 through 12/31/97..................... -- -- -- (1,107) -- (1,107) Transfers from RCN Corporation.................. -- -- -- -- 30,225 30,225 Common stock issued in connection with the Distribution................. 6,870,165 6,870 -- (59,638) 52,768 -- --------- ------ ---- -------- -------- -------- Balance, December 31, 1997..... 6,871,165 6,871 -- (60,745) -- (53,874) Net loss from January 1, 1998 to November 5, 1998.......... -- -- -- (10,534) -- (10,534) Exercise of stock options...... 30,267 30 351 -- -- 381 Tax benefits of stock option exercises.................... -- -- 162 -- -- 162 --------- ------ ---- -------- -------- -------- Balance, November 5, 1998...... 6,901,432 $6,901 $513 $(71,279) $ -- $(63,865) ========= ====== ==== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-428 640 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, FOR THE PERIOD FROM -------------------- JANUARY 1, 1998 TO 1996 1997 NOVEMBER 5, 1998 -------- --------- ------------------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss).................................................. $ (8,256) $ (4,358) $(10,534) Gain on pension curtailment/settlement...................... (855) -- -- Depreciation and amortization............................... 31,427 32,082 28,098 Deferred income taxes, net.................................. 988 (4,359) (3,360) Provision for losses on accounts receivable................. 843 826 710 Gain on sale of Florida cable systems....................... -- (2,571) -- Increase (decrease) in minority interest.................... (1,151) (53) 47 Other non-cash items........................................ 2,274 1,914 -- Net change in certain assets and liabilities, net of business acquisitions Accounts receivable and customer deposits................... (1,226) (617) (2,054) Accounts payable............................................ 1,365 2,234 2,806 Accrued expenses............................................ 125 580 52 Accrued taxes............................................... (99) 61 868 Accounts receivable from related parties.................... 567 1,549 (230) Accounts payable to related parties......................... 1,314 (8,300) (1,217) Other, net.................................................. 501 (644) (158) -------- --------- -------- Net cash provided by operating activities................... 27,817 18,344 15,028 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment.................. (9,605) (14,041) (18,697) Acquisitions, net of cash acquired.......................... -- (24) -- Proceeds from sale of Florida cable systems................. -- 3,496 -- Other....................................................... 390 560 -- -------- --------- -------- Net cash used in investing activities....................... (9,215) (10,009) (18,697) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt.................................. -- 128,000 -- Redemption of long-term debt................................ (1,500) (17,430) (8,000) Proceeds from the issuance of common stock.................. -- -- 543 Transfers from CTE.......................................... -- 12,500 -- Change in affiliate notes, net.............................. (16,834) (116,836) -- Payments made for debt financing costs...................... -- (647) -- -------- --------- -------- Net cash provided by (used in) financing activities......... (18,334) 5,587 (7,457) Net increase/(decrease) in cash and temporary cash investments............................................... 268 13,922 (11,126) Cash and temporary cash investments at beginning of year.... 3,029 3,297 17,219 -------- --------- -------- Cash and temporary cash investments at end of year.......... $ 3,297 $ 17,219 $ 6,093 ======== ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for Interest...................... $ 15,199 $ 11,400 $ 7,777 Income taxes................................................ 29 370 315
Supplemental Schedule of Non-cash Investing and Financing Activities: In September 1997, in connection with the transfer of CTE's investment in Mercom to the Company, the Company assumed CTE's $15,000 Term Credit Facility. Certain intercompany accounts receivable and payable and intercompany note balances were transferred to shareholders' net investment in connection with the Distribution described in note 1. The accompanying notes are an integral part of these consolidated financial statements. F-429 641 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 1. BACKGROUND AND BASIS OF PRESENTATION Prior to September 30, 1997, Cable Michigan, Inc. and subsidiaries (the "Company") was operated as part of C-TEC Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100 percent of the outstanding shares of common stock of its wholly owned subsidiaries, RCN Corporation ("RCN") and the Company to holders of record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close of business on September 19, 1997 (the "Distribution") in accordance with the terms of the Distribution Agreement dated September 5, 1997 among C-TEC, RCN and the Company. The Company consists of C-TEC's Michigan cable operations, including its 62% ownership in Mercom, Inc. ("Mercom"). In connection with the Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc. ("CTE"). RCN consists primarily of C-TEC's bundled residential voice, video and Internet access operations in the Boston to Washington, D.C. corridor, its existing New York, New Jersey and Pennsylvania cable television operations, a portion of its long distance operations and its international investment in Megacable, S.A. de C.V. C-TEC, RCN, and the Company continue as entities under common control until the Company completes the Merger (as described below). On June 3, 1998, the Company entered into an Agreement and Plan of Merger (the "Agreement") among the Company, Avalon Cable of Michigan Holdings Inc. ("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant to which Avalon Sub will merge into the Company and the Company will become a wholly owned subsidiary of Avalon Holdings (the "Merger"). In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of the Company outstanding prior to the effective time of the Merger (other than treasury stock, shares owned by Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. On November 6, 1998, the Company completed its merger into and with Avalon Cable Michigan, Inc. The total consideration payable in conjunction with the merger, including fees and expenses is approximately 431,600. Subsequent to the merger, the arrangements with RCN and CTE (as described below) were terminated. The Merger agreement also permitted the Company to agree to acquire the remaining shares of Mercom that it did not own. Cable Michigan provides cable services to various areas in the state of Michigan. Cable Michigan's cable television systems offer customer packages for basic cable programming services which are offered at a per channel charge or packaged together to form a tier of services offered at a discount from the combined channel rate. Cable Michigan's cable television systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principle sources of revenue for the Company. The consolidated financial statements have been prepared using the historical basis of assets and liabilities and historical results of operations of all wholly and majority owned subsidiaries. However, the historical financial information presented herein reflects periods during which the Company did not operate as an independent company and accordingly, certain assumptions were made in preparing such financial information. Such information, therefore, may not necessarily reflect the results of operations, financial condition or cash flows of the Company F-430 642 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in the future or what they would have been had the Company been an independent, public company during the reporting periods. All material intercompany transactions and balances have been eliminated. RCN's corporate services group has historically provided substantial support services such as finance, cash management, legal, human resources, insurance and risk management. Prior to the Distribution, the corporate office of C-TEC allocated the cost for these services pro rata among the business units supported primarily based on assets; contribution to consolidated earnings before interest, depreciation, amortization, and income taxes; and number of employees. In the opinion of management, the method of allocating these costs is reasonable; however, such costs are not necessarily indicative of the costs that would have been incurred by the Company on a stand-alone basis. CTE, RCN and the Company have entered into certain agreements subsequent to the Distribution, and governing various ongoing relationships, including the provision of support services between the three companies, including a distribution agreement and a tax-sharing agreement. The fee per year for support services from RCN will be 4.0% of the revenues of the Company plus a direct allocation of certain consolidated cable administration functions of RCN. The direct charge for customer service along with the billing service and the cable guide service will be a pro rata share (based on subscribers) of the expenses incurred by RCN to provide such customer service and to provide such billing and cable guide service for RCN and the Company. CTE has agreed to provide or cause to be provided to RCN and the Company certain financial data processing services for a transitional period after the Distribution. The fees for such services will be an allocated portion (based on relative usage) of the cost incurred by CTE to provide such financial data processing services to all three groups. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and temporary cash investments For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be temporary cash investments. Temporary cash investments are stated at cost, which approximates market. Property, plant and equipment and depreciation Property, plant and equipment reflects the original cost of acquisition or construction, including payroll and related costs such as taxes, pensions and other fringe benefits, and certain general administrative costs. F-431 643 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation is provided on the straight-line method based on the useful lives of the various classes of depreciable property. The average estimated lives of depreciable cable property, plant and equipment are: Buildings................................................... 12-25 years Cable television distribution equipment..................... 8.5-12 years Vehicles.................................................... 5 years Other equipment............................................. 12 years
Maintenance and repair costs are charged to expense as incurred. Major replacements and betterments are capitalized. Gain or loss is recognized on retirements and dispositions. Intangible assets Intangible assets are amortized on a straight-line basis over the expected period of benefit ranging from 5 to 19.3 years. Intangible assets include cable franchises. The cable systems owned or managed by the Company are constructed and operated under fixed-term franchises or other types of operating authorities (referred to collectively herein as "franchises") that are generally nonexclusive and are granted by local governmental authorities. The provisions of these local franchises are subject to federal regulation. Costs incurred to obtain or renew franchises are capitalized and amortized over the term of the applicable franchise agreement. Accounting for impairments The Company follows the provisions of Statement of Financial Accounting Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the net future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles expected to be held and used is based on the fair value of the asset. No impairment losses have been recognized by the Company pursuant to SFAS 121. Revenue recognition Revenues from cable programming services are recorded in the month the service is provided. Installation fee revenue is recognized in the period in which the installation occurs. Advertising expense Advertising costs are expensed as incurred. Advertising expense charged to operations was $514, $560, and $505 in 1996, 1997, and for the period from January 1, 1998 to November 5, 1998 respectively. F-432 644 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock-based compensation The Company applies Accounting Principles Board Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its stock plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 -- "Accounting for Stock-Based Compensation" ("SFAS 123"). Earnings (loss) per share The Company has adopted statement of Financial Accounting Standards No. 128 -- "Earnings Per Share" ("SFAS 128"). Basic earnings (loss) per share is computed based on net income (loss) divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed based on net income (loss) divided by the weighted average number of shares of common stock outstanding during the period after giving effect to convertible securities considered to be dilutive common stock equivalents. The conversions of stock options during periods in which the Company incurs a loss from continuing operations is not assumed since the effect is anti-dilutive. The number of stock options which would have been converted in 1997 and in 1998 and had a dilutive effect if the Company had income from continuing operations are 55,602 and 45,531, respectively. For periods prior to October 1, 1997, during which the Company was a wholly owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing net income (loss) by one-fourth the average common shares of C-TEC outstanding, based upon a distribution ratio of one share of Company common stock for each four shares of C-TEC common equity owned. Income taxes The Company and Mercom file separate consolidated federal income tax returns. Prior to the Distribution, income tax expense was allocated to C-TEC's subsidiaries on a separate return basis except that C-TEC's subsidiaries receive benefit for the utilization of net operating losses and investment tax credits included in the consolidated tax return even if such losses and credits could not have been used on a separate return basis. The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting for Income Taxes". The statement requires the use of an asset and liability approach for financial reporting purposes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Reclassification Certain amounts have been reclassified to conform with the current year's presentation. 3. BUSINESS COMBINATION AND DISPOSITIONS The Agreement between Avalon Cable of Michigan Holdings, Inc. and the Company permitted the Company to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by the Company of all of such shares at a price of $12.00 per share. The Company completed this acquisition in March 1999. F-433 645 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The total estimated consideration payable in conjunction with the Mercom Acquisition, excluding fees and expenses was $21,900. In March 1999, Avalon Michigan Inc. acquired the cable television systems of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for approximately $7,800, excluding transaction fees. In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for cash of approximately $3,500. The Company realized a pretax gain of $2,571 on the transaction. 4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- Cable plant....................................... $158,655 $ 174,532 Buildings and land................................ 2,837 2,917 Furniture, fixtures and vehicles.................. 5,528 6,433 Construction in process........................... 990 401 -------- --------- Total property, plant and equipment............... 168,010 184,283 Less accumulated depreciation..................... (94,174) (106,718) -------- --------- Property, plant and equipment, net................ $ 73,836 $ 77,565 ======== =========
Depreciation expense was $15,728, $16,431 and $14,968 for the years ended December 31, 1996 and 1997, and the period from January 1, 1998 to November 5, 1998, respectively. 5. INTANGIBLE ASSETS Intangible assets consist of the following at:
DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- Cable Franchises.................................. $134,889 $ 134,889 Noncompete agreements............................. 473 473 Goodwill.......................................... 3,990 3,990 Other............................................. 1,729 1,729 -------- --------- Total............................................. 141,081 141,081 Less accumulated amortization..................... (95,821) (108,951) -------- --------- Intangible assets, net............................ $ 45,260 $ 32,130 ======== =========
Amortization expense charged to operations for the years ended December 31, 1996 and 1997 was $15,699 and $15,651, respectively, and $13,130 for the period from January 1, 1998 to November 5, 1998. F-434 646 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES The income tax provision (benefit) in the accompanying consolidated financial statements of operations is comprised of the following:
1996 1997 1998 ------- ------- ------- CURRENT: Federal............................................. $(6,700) $ 245 $ 320 State............................................... -- -- 28 ------- ------- ------- Total Current....................................... (6,700) 245 348 ------- ------- ------- DEFERRED: Federal............................................. 988 (4,359) (2,074) State............................................... -- -- (183) ------- ------- ------- Total Deferred...................................... 988 (4,359) (2,257) ------- ------- ------- Total (benefit) for income taxes.................... $(5,712) $(4,114) $(1,909) ======= ======= =======
The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1996, 34% for 1997 and 35% for the period from January 1, 1998 to November 5, 1998. The differences are as follows:
YEAR ENDED DECEMBER 31, PERIOD FROM ------------------- JANUARY 1, 1998 TO 1996 1997 NOVEMBER 11, 1998 -------- ------- ------------------ (Loss) before (benefit) for income taxes.................................. $(15,119) $(8,525) $(12,368) ======== ======= ======== Federal tax (benefit) at statutory rates.................................. $ (5,307) $(2,899) $ (4,329) State income taxes....................... -- -- (101) Goodwill................................. 175 171 492 Increase (decrease) in valuation allowance.............................. (518) (1,190) -- Nondeductible expenses................... -- 147 2,029 Benefit of rate differential applied to reversing timing differences........... -- (424) -- Other, net............................... (62) 81 -- -------- ------- -------- (Benefit) for income taxes............... $ (5,712) $(4,114) $ (1,909) ======== ======= ========
Mercom, which files a separate consolidated income tax return, has the following net operating losses available:
TAX NET OPERATING EXPIRATION YEAR LOSSES DATE - - - ---- --------- ---------- 1992..................................................... $ 435 2007 1995..................................................... $2,713 2010
In 1997, Mercom was liable for Federal Alternative Minimum Tax (AMT). At December 31, 1997 and at November 5, 1998, the cumulative minimum tax credits are $141 and $141, respectively. This amount can be carried forward indefinitely to reduce regular tax liabilities that exceed AMT in future years. F-435 647 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences that give rise to a significant portion of deferred tax assets and liabilities are as follows:
DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- NOL carryforwards................................... $ 1,588 $ 1,132 Alternative minimum tax credits..................... 141 141 Reserves............................................ 753 210 Other, net.......................................... 230 309 -------- -------- Total deferred assets............................... 2,712 1,792 -------- -------- Property, plant and equipment....................... (11,940) (10,515) Intangible assets................................... (11,963) (10,042) -------- -------- Total deferred liabilities.......................... (23,903) (20,557) -------- -------- Subtotal............................................ (21,191) (18,765) Valuation allowance................................. -- -- -------- -------- Total deferred taxes................................ $(21,191) $(18,765) ======== ========
In the opinion of management, based on the future reversal of taxable temporary differences, primarily depreciation and amortization, the Company will more likely than not be able to realize all of its deferred tax assets. As a result, the net change in the valuation allowance for deferred tax assets during 1997 was a decrease of $1,262, which $72 related to Mercom of Florida. Due to the sale of Mercom of Florida, the Company's deferred tax liabilities decreased by $132. 7. DEBT Long-term debt outstanding at November 5, 1998 is as follows:
DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- Term Credit Facility................................ $100,000 $100,000 Revolving Credit Facility........................... 28,000 20,000 Term Loan........................................... 15,000 15,000 -------- -------- Total............................................... 143,000 135,000 Current portion of long-term debt................... -- 15,000 -------- -------- Total Long-Term Debt................................ $143,000 $120,000 ======== ========
Credit Facility The Company had an outstanding line of credit with a banking institution for $3 million. No amounts were outstanding under this facility. The Company has in place two secured credit facilities (the "Credit Facilities") pursuant to a single credit agreement with a group of lenders for which First Union National Bank acts as agent (the "Credit Agreement"), which was effective as of July 1, 1997. The first is a five-year revolving credit facility in the amount of $65,000 (the "Revolving Credit Facility"). The second is an eight-year term credit facility in the amount of $100,000 (the "Term Credit Facility"). F-436 648 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The interest rate on the Credit Facilities will be, at the election of the Company, based on either a LIBOR or a Base Rate option (6.25% at November 5, 1998) (each as defined in the Credit Agreement). The entire amount of the Term Credit Facility has been drawn and as of November 5, 1998, $100,000 of the principal was outstanding thereunder. The entire amount of the Revolving Credit Facility is available to the Company until June 30, 2002. As of November 5, 1998, $20,000 of principal was outstanding thereunder. Revolving loans may be repaid and reborrowed from time to time. The Term Credit Facility is payable over six years in quarterly installments, from September 30, 1999 through June 30, 2005. Interest only is due through June 1999. The Credit Agreement is currently unsecured. The Credit Agreement contains restrictive covenants which, among other things, require the Company to maintain certain debt to cash flow, interest coverage and fixed charge coverage ratios and place certain limitations on additional debt and investments. The Company does not believe that these covenants will materially restrict its activities. Term Loan On September 30, 1997, the Company assumed all obligations of CTE under a $15 million credit facility extended by a separate group of lenders for which First Union National Bank also acts as agent (the "$15 Million Facility"). The $15 Million Facility matures in a single installment on June 30, 1999 and is collateralized by a first priority pledge of all shares of Mercom owned by the Company. The $15 Million Facility has interest rate provisions (6.25% at November 5, 1998), covenants and events of default substantially the same as the Credit Facilities. On November 6, 1998, the long-term debt of the Company was paid off in conjunction with the closing of the merger. Mercom debt In August 1997, the Mercom revolving credit agreement for $2,000 expired. Mercom had no borrowings under the revolving credit agreement in 1996 or 1997. On September 29, 1997, the Company purchased and assumed all of the bank's interest in the term credit agreement and the note issued thereunder. Immediately after the purchase, the term credit agreement was amended in order to, among other things, provide for less restrictive financial covenants, eliminate mandatory amortization of principal and provide for a bullet maturity of principal on December 31, 2002, and remove the change of control event of default. Mercom's borrowings under the term credit agreement contain pricing and security provisions substantially the same as those in place prior to the purchase of the loan. The borrowings are secured by a pledge of the stock of Mercom's subsidiaries and a first lien on certain of the assets of Mercom and its subsidiaries, including inventory, equipment and receivables. At November 5, 1998, $14,151 of principal was outstanding. The borrowings under the term credit agreement are eliminated in the Company's consolidated balance sheet. 8. COMMON STOCK AND STOCK PLANS The Company has authorized 25,000,000 shares of $1 par value common stock, and 50,000,000 shares of $1 par value Class B common stock. The Company also has authorized 10,000,000 shares of $1 par value preferred stock. At November 5, 1998, 6,901,432 common shares are issued and outstanding. F-437 649 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the Distribution, the Company Board of Directors (the "Board") adopted the Cable Michigan, Inc. 1997 Equity Incentive Plan (the "1997 Plan"), designed to provide equity-based compensation opportunities to key employees when shareholders of the Company have received a corresponding benefit through appreciation in the value of Cable Michigan Common Stock. The 1997 Plan contemplates the issuance of incentive stock options, as well as stock options that are not designated as incentive stock options, performance-based stock options, stock appreciation rights, performance share units, restricted stock, phantom stock units and other stock-based awards (collectively, "Awards"). Up to 300,000 shares of Common Stock, plus shares of Common Stock issuable in connection with the Distribution related option adjustments, may be issued pursuant to Awards granted under the 1997 Plan. All employees and outside consultants to the Company and any of its subsidiaries and all Directors of the Company who are not also employees of the Company are eligible to receive discretionary Awards under the 1997 Plan. Unless earlier terminated by the Board, the 1997 Plan will expire on the 10th anniversary of the Distribution. The Board or the Compensation Committee may, at any time, or from time to time, amend or suspend and, if suspended, reinstate, the 1997 Plan in whole or in part. Prior to the Distribution, certain employees of the Company were granted stock option awards under C-TEC's stock option plans. In connection with the Distribution, 380,013 options covering Common Stock were issued. Each C-Tec option was adjusted so that each holder would hold options to purchase shares of Commonwealth Telephone Enterprise Common Stock, RCN Common Stock and Cable Michigan Common Stock. The number of shares subject to, and the exercise price of, such options were adjusted to take into account the Distribution and to ensure that the aggregate intrinsic value of the resulting RCN, the Company and Commonwealth Telephone Enterprises options immediately after the Distribution was equal to the aggregate intrinsic value of the C-TEC options immediately prior to the Distribution. Information relating to the Company stock options is as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- Outstanding December 31, 1995............................... 301,000 Granted..................................................... 33,750 $ 8.82 Exercised................................................... (7,250) -- Canceled.................................................... (35,500) 10.01 ------- ------ Outstanding December 31, 1996............................... 292,000 8.46 Granted..................................................... 88,013 8.82 Exercised................................................... -- -- Canceled.................................................... (375) 10.01 ------- ------ Outstanding December 31, 1997............................... 379,638 8.82 Granted..................................................... 47,500 31.25 Exercised................................................... (26,075) 26.21 Canceled.................................................... (10,250) -- ------- ------ Outstanding November 5, 1998................................ 390,813 $11.52 ======= ====== Shares exercisable November 5, 1998......................... 155,125 $ 8.45
F-438 650 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The range of exercise prices for options outstanding at November 5, 1998 was $8.46 to $31.25. No compensation expense related to stock option grants was recorded in 1997. For the period ended November 5, 1998 compensation expense in the amount of $161 was recorded relating to services rendered by the Board. Under the term of the Merger Agreement the options under the 1997 Plan vest upon the closing of the merger and each option holder will receive $40.50 per option. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using a Black Scholes option pricing model with the following weighted average assumptions for the period ended November 5, 1998. The fair value of these options was estimated at the date of grant using a Black Scholes option pricing model with weighted average assumptions for dividend yield of 0% for 1996, 1997 and 1998; expected volatility of 39.5% for 1996, 38.6% prior to the Distribution and 49.8% subsequent to the Distribution for 1997 and 40% for 1998; risk-free interest rate of 5.95%, 6.52% and 5.68% for 1996, 1997 and 1998 respectively, and expected lives of 5 years for 1996 and 1997 and 6 years for 1998. The weighted-average fair value of options granted during 1997 and 1998 was $4.19 and $14.97, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and earnings per share were as follows:
FOR THE YEARS FOR THE PERIOD ENDED DECEMBER 31, FROM JANUARY 1, ------------------ TO NOVEMBER 5, 1996 1997 1998 ------- ------- --------------- Net (Loss) as reported........................... $(8,256) $(4,358) $(10,534) Net (Loss) pro forma............................. (8,256) (4,373) (10,174) Basic (Loss) per share-as reported............... (1.20) (0.63) (1.45) Basic (Loss) per share-pro forma................. (1.20) (0.64) (1.48) Diluted (Loss) per share-as reported............. (1.20) (0.63) (1.45) Diluted (Loss) per share-pro forma............... (1.20) (0.64) (1.48)
In November 1996, the C-TEC shareholders approved a stock purchase plan for certain key executives (the "Executive Stock Purchase Plan" or "C-TEC ESPP"). Under the C-TEC ESPP, participants may purchase shares of C-TEC Common Stock in an amount of between 1% and 20% of their annual base compensation and between 1% and 100% of their annual bonus compensation and provided, however, that in no event shall the participant's total contribution exceed 20% of the sum of their annual compensation, as defined by the C-TEC ESPP. Participant's accounts are credited with the number of share units derived by dividing the amount of the participant's contribution by the average price of a share of C-TEC Common Stock at approximately the time such contribution is made. The share units credited to participant's account do not give such participant any rights as a shareholder with respect to, or any rights as a holder or record owner of, any shares of C-TEC Common Stock. Amounts representing share units that have been credited to a participant's account will be distributed, either in a lump sum or in installments, as elected by the participant, following the earlier of the participant's termination of employment with the Company or three calendar years following the date on which F-439 651 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the share units were initially credited to the participant's account. It is anticipated that, at the time of distribution, a participant will receive one share of C-TEC Common Stock for each share unit being distributed. Following the crediting of each share unit to a participant's account, a matching share of Common Stock is issued in the participant's name. Each matching share is subject to forfeiture as provided in the C-TEC ESPP. The issuance of matching shares will be subject to the participant's execution of an escrow agreement. A participant will be deemed to be the holder of, and may exercise all the rights of a record owner of, the matching shares issued to such participant while such matching shares are held in escrow. Shares of restricted C-TEC Common Stock awarded under the C-TEC ESPP and share units awarded under the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so that following the Distribution, each such participant was credited with an aggregate equivalent value of restricted shares of common stock of CTE, the Company and RCN. In September 1997, the Board approved the Cable Michigan, Inc. Executive Stock Purchase Plan, ("the "Cable Michigan ESPP"), with terms substantially the same as the C-TEC ESPP. The number of shares which may be distributed under the Cable Michigan ESPP as matching shares or in payment of share units is 30,000. 9. PENSIONS AND EMPLOYEE BENEFITS Prior to the Distribution, the Company's financial statements reflect the costs experienced for its employees and retirees while included in the C-TEC plans. Through December 31, 1996, substantially all employees of the Company were included in a trusteed noncontributory defined benefit pension plan, maintained by C-TEC. Upon retirement, employees are provided a monthly pension based on length of service and compensation. C-TEC funds pension costs to the extent necessary to meet the minimum funding requirements of ERISA. Substantially, all employees of C-TEC's Pennsylvania cable television operations (formerly Twin Country Trans Video, Inc.) were covered by an underfunded plan which was merged into C-TEC's overfunded plan on February 28, 1996. The information that follows relates to the entire C-TEC noncontributory defined benefit plan. The components of C-TEC's pension cost are as follows for 1996: Benefits earned during the year (service costs)............. $ 2,365 Interest cost on projected benefit obligation............... 3,412 Actual return on plan assets................................ (3,880) Other components -- net..................................... (1,456) ------- Net periodic pension cost................................... $ 441 =======
The following assumptions were used in the determination of the consolidated projected benefit obligation and net periodic pension cost (credit) for December 31, 1996: Discount Rate............................................... 7.5% Expected long-term rate of return on plan assets............ 8.0% Weighted average long-term rate of compensation increases... 6.0%
The Company's allocable share of the consolidated net periodic pension costs (credit), based on the Company's proportionate share of consolidated annualized salaries as of the valuation date, was approximately $10 for 1996. These amounts are reflected in operating expenses. As discussed below, no pension cost (credit) was recognized in 1997. F-440 652 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the restructuring, C-TEC completed a comprehensive study of its employee benefit plans in 1996. As a result of this study, effective December 31, 1996, in general, employees of the Company no longer accrue benefits under the defined benefit pension plans and became fully vested in their benefit accrued through that date. C-TEC notified affected participants in December 1996. In December 1996, C-TEC allocated pension plan assets of $6,984 and the related liabilities to a separate plan for employees who no longer accrue benefits after sum distributions. The allocation of assets and liabilities resulted in a curtailment/settlement gain of $4,292. The Company's allocable share of this gain was $855. This gain results primarily from the reduction of the related projected benefit obligation. The curtailed plan has assets in excess of the projected benefit obligation. C-TEC sponsors a 401(k) savings plan covering substantially all employees of the Company who are not covered by collective bargaining agreements. Contributions made by the Company to the 401(k) plan are based on a specific percentage of employee contributions. Contributions charged to expense were $128 in 1996. Contributions charged to expense in 1997 prior to the Distribution were $107. In connection with the Distribution, the Company established a qualified saving plan under Section 401(k) of the Code. Contributions charged to expense in 1997 were $53. Contributions charged to expense for the period from January 1, 1998 to November 5, 1998 were $164. 10. COMMITMENTS AND CONTINGENCIES Total rental expense, primarily for office space and pole rental, was $984, $908 and $1,077 for the year ended December 31, 1996, 1997 and for the period from January 1, 1998 to November 5, 1998, respectively. Rental commitments are expected to continue to approximate $1 million a year for the foreseeable future, including pole rental commitments which are cancelable. The Company is subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. The Company has either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. The 1996 statements of operations include charges aggregating approximately $833 relating to cable rate regulation liabilities. No additional charges were incurred in the year ended December 31, 1997 and for the period from January 1, 1998 to November 5, 1998. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company. The Company has agreed to indemnify RCN and C-TEC and their respective subsidiaries against any and all liabilities which arise primarily from or relate primarily to the management or conduct of the business of the Company prior to the effective time of the Distribution. The Company has also agreed to indemnify RCN and C-TEC and their respective subsidiaries against 20% of any liability which arises from or relates to the management or conduct prior to the effective time of the Distribution of the businesses of C-TEC and its subsidiaries and which is not a true C-TEC liability, a true RCN liability or a true Company liability. The Tax Sharing Agreement, by and among the Company, RCN and C-TEC (the "Tax Sharing Agreement"), governs contingent tax liabilities and benefits, tax contests and other tax matters with respect to tax returns filed with respect to tax periods, in the case of the Company, ending or deemed to end on or before the Distribution date. Under the Tax Sharing Agreement, F-441 653 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) adjustments to taxes that are clearly attributable to the Company group, the RCN group, or the C-TEC group will be borne solely by such group. Adjustments to all other tax liabilities will be borne 50% by C-TEC, 20% by the Company and 30% by RCN. Notwithstanding the above, if as a result of the acquisition of all or a portion of the capital stock or assets of the Company, the Distribution fails to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, then the Company will be liable for any and all increases in tax attributable thereto. 11. AFFILIATE AND RELATED PARTY TRANSACTIONS The Company has the following transactions with affiliates:
FOR THE YEAR FOR THE ENDED PERIOD ENDED ----------------- NOVEMBER 5, 1996 1997 1998 ------- ------ ------------ Corporate office costs allocated to the Company... $ 3,498 $3,715 $1,866 Cable staff and customer service costs allocated from RCN Cable.................................. 3,577 3,489 3,640 Interest expense on affiliate notes............... 13,952 8,447 795 Royalty fees charged by CTE....................... 585 465 -- Charges for engineering services.................. 296 -- -- Other affiliate expenses.......................... 189 171 157
In addition, RCN has agreed to obtain programming from third party suppliers for Cable Michigan, the costs of which will be reimbursed to RCN by Cable Michigan. In those circumstances where RCN purchases third party programming on behalf of both RCN and the Company, such costs will be shared by each company, on a pro rata basis, based on each company's number of subscribers. At December 31, 1997 and November 5, 1998, the Company has accounts receivable from related parties of $166 and $396 respectively, for these transactions. At December 31, 1997 and November 5, 1998, the Company has accounts payable to related parties of $1,560 and $343 respectively, for these transactions. The Company had a note payable to RCN Corporation of $147,567 at December 31, 1996 primarily related to the acquisition of the Michigan cable operations and its subsequent operations. The Company repaid approximately $110,000 of this note payable in 1997. The remaining balance was transferred to shareholder's net investment in connection with the Distribution. 12. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK The Company places its cash and temporary investments with high credit quality financial institutions. The Company also periodically evaluates the creditworthiness of the institutions with which it invests. The Company does, however, maintain unsecured cash and temporary cash investment balances in excess of federally insured limits. The Company's trade receivables reflect a customer base centered in the state of Michigan. The Company routinely assesses the financial strength of its customers; as a result, concentrations of credit risk are limited. F-442 654 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: a. The fair value of the revolving credit agreement is considered to be equal to carrying value since the debt re-prices at least every six months and the Company believes that its credit risk has not changed from the time the floating rate debt was borrowed and therefore, would obtain similar rates in the current market. b. The fair value of the cash and temporary cash investments approximates fair value because of the short maturity of these instruments. 14. QUARTERLY INFORMATION (UNAUDITED) The Company estimated the following quarterly data based on assumptions which it believes are reasonable. The quarterly data may differ from quarterly data subsequently presented in interim financial statements.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 Revenue.................................. $20,734 $22,311 $22,735 $ 8,741 Operating income before depreciation, amortization, and management fees...... 9,043 10,047 10,185 12,277 Operating income (loss).................. 7,000 (3,324) (674) (7,051) Net (loss)............................... (1,401) (5,143) (2,375) (1,615) Net (loss) per average Common Share...... (0.20) (0.75) (0.34) (0.23) 1997 Revenue.................................. $19,557 $20,673 $20,682 $20,387 Operating income before depreciation, amortization, and management fees...... 8,940 9,592 9,287 9,013 Operating income (loss).................. 275 809 (118) 69 Net (loss)............................... N/A N/A N/A (1,107) Net (loss) per average Common Share...... N/A N/A N/A (0.16)
The fourth quarter information for the quarter ended December 31, 1998 includes the results of operations of the Company for the period from October 1, 1998 through November 5, 1998. F-443 655 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable of New England LLC In our opinion, the accompanying balance sheet and the related statements of operations, partners' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Amrac Clear View, a Limited Partnership, (the "Partnership"), as of May 28, 1998 and the results of its operations and its cash flows for the period ended May 28, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts September 11, 1998 F-444 656 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP BALANCE SHEET MAY 28, 1998 ASSETS Current Assets Cash and cash equivalents................................... $ 415,844 Subscribers and other receivables, net of allowance for doubtful accounts of $16,445.............................. 45,359 Prepaid expenses and other current assets................... 129,004 ---------- Total current assets........................................ 590,207 Property, plant and equipment, net.......................... 483,134 ---------- $1,073,341 ==========
LIABILITIES AND PARTNERS' EQUITY Accounts payable............................................ $ 57,815 Accrued expenses............................................ 84,395 ---------- Total current liabilities................................... 142,210 ---------- Commitments and contingencies (Note 7) Partners' equity............................................ 931,131 ---------- $1,073,341 ==========
The accompanying notes are an integral part of these financial statements. F-445 657 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998 REVENUE: Basic services.............................................. $651,878 Premium services............................................ 78,365 Other....................................................... 49,067 -------- 779,310 -------- OPERATING EXPENSES: Programming................................................. 193,093 Selling, general and administrative......................... 151,914 Technical and operations.................................... 98,628 Depreciation and amortization............................... 47,268 Management fees............................................. 41,674 -------- Income from operations...................................... 246,733 Interest income............................................. 2,319 Interest (expense).......................................... (1,871) -------- Net income.................................................. $247,181 ========
The accompanying notes are an integral part of these financial statements. F-446 658 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998
CLASS A CLASS B INVESTOR GENERAL LIMITED LIMITED LIMITED PARTNER PARTNER PARTNER PARTNERS TOTAL ------- ------- ------- -------- -------- Partners' (deficit) equity at December 31, 1997................ $(6,756) $(6,756) $(2,703) $700,165 $683,950 Net income......................... 6,180 6,180 2,472 232,349 247,181 ------- ------- ------- -------- -------- Partners' equity at May 28, 1998............................. $ (576) $ (576) $ (231) $932,514 $931,131 ======= ======= ======= ======== ========
The accompanying notes are an integral part of these financial statements. F-447 659 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $247,181 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................... 47,268 CHANGES IN OPERATING ASSETS AND LIABILITIES: Decrease in subscribers and other receivables............... 21,038 Increase in prepaid expenses and other current assets....... (52,746) Increase in accounts payable................................ 9,866 Increase in accrued expenses................................ 3,127 -------- Net cash provided by operating activities................... 275,734 -------- CASH FLOWS FOR INVESTING ACTIVITIES Capital expenditures........................................ (61,308) -------- Cash flows for financing activities Repayment of long-term debt...................................................... (560,500) -------- Net increase in cash and cash equivalents................... (346,074) -------- Cash and cash equivalents, beginning of the period.......... 761,918 -------- Cash and cash equivalents, end of the period................ $415,844 ======== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest.................................................... $ 6,939 ========
The accompanying notes are an integral part of these financial statements. F-448 660 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF BUSINESS The Partnership is a Massachusetts limited partnership created pursuant to a Limited Partnership Agreement, dated as of October 1, 1986, as amended (the "Partnership Agreement"), by and among (1) Amrac Telecommunications as the general partner (the "General Partner"), (2) Clear View Cablevision, Inc. as the class A limited partner (the "Class A Limited Partner"), (3) Schuparra Properties, Inc., as the class B limited partner (the "Class B Limited Partner"), and (4) those persons admitted to the Partnership from time to time as investor limited partners (the "Investor Limited Partner"). The Partnership provides cable television service to the towns of Hadley and Belchertown located in western Massachusetts. At May 28, 1998, the Partnership provided services to approximately 5,100 customers residing in those towns. The Partnership's cable television systems offer customer packages of basic and cable programming services which are offered at a per channel charge or are packaged together to form a tier of services offered at a discount from the combined channel rate. The Partnership's cable television systems also provide premium television services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium television services, which constitute the principal sources of revenue for the Partnership. On October 7, 1997, the Partnership entered into a definitive agreement with Avalon Cable of New England LLC ("Avalon New England") whereby Avalon New England would purchase the assets and operations of the Partnership for $7,500,000. This transaction was consummated and became effective on May 29, 1998. The assets and liabilities at May 28, 1998, have not been adjusted or reclassified to reflect this transaction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and the disclosure for contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reported period. Actual results may vary from estimates used. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments purchased with an initial maturity of three months or less. Revenue Recognition Revenue is recognized as cable television services are provided. Concentration of Credit Risk Financial instruments which potentially expose the Partnership to a concentration of credit risk include cash, cash equivalents and subscriber and other receivables. The Partnership does not believe that such deposits are subject to any unusual credit risk beyond the normal credit risk associated with operating its business. The Partnership extends credit to customers on an unsecured basis in the normal course of business. The Partnership maintains reserves for potential credit losses and such losses, in the aggregate, have not historically exceeded management's expectations. F-449 661 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment Property and equipment is stated at cost. Initial subscriber installation costs, including material, labor and overhead costs, are capitalized as a component of cable plant and equipment. Depreciation is computed for financial statement purposes using the straight-line method based upon the following lives: Cable plant and equipment................................... 10 years Office furniture and equipment.............................. 5 to 10 years Vehicles.................................................... 6 years
Financial Instruments The Partnership estimates that the fair value of all financial instruments at May 28, 1998 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. Income Taxes The Partnership is not subject to federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. Allocation of Profits and Losses and Distributions of Cash Flow Partnership profits and losses (other than those arising from capital transactions, described below) and distributions of cash flow are allocated 94% to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to the Class B Limited Partner and 2.5% to the General Partner until Payout (as defined in the Partnership Agreement) and after Payout, 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner and 15% to the General Partner. Partnership profits and capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and second, in proportion to any distributed cash proceeds resulting from the capital transaction and third, any remaining profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. Partnership losses from capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and, second, any remaining loss, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 states that comprehensive income includes reported net income of a company, adjusted for items that are currently accounted for as direct entries to equity, such as the net unrealized gain or loss on securities available for sale. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. Management does not anticipate that adoption of SFAS No. 130 will have a material effect on the financial statements. F-450 662 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which establishes standards for reporting by public companies about operating segments of their business. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for periods beginning after December 15, 1997. Management does not anticipate that the adoption of SFAS No. 131 will have a material effect on the financial statements. 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS At May 28, 1998, prepaid expenses and other current assets consist of the following: Deferred transaction costs.................................. $ 91,024 Other....................................................... 37,980 -------- $129,004 ========
Deferred transaction costs consist primarily of attorney fees related to the sale of assets of the Partnership (Note 1). 4. PROPERTY, PLANT AND EQUIPMENT At May 28, 1998, property, plant and equipment consists of the following: Cable plant and equipment................................... $ 3,460,234 Office furniture and equipment.............................. 52,531 Vehicles.................................................... 32,468 ----------- 3,545,233 Accumulated depreciation.................................... (3,062,099) ----------- $ 483,134 ===========
Depreciation expense was $47,018 for the period from January 1, 1998 through May 28, 1998. 5. ACCRUED EXPENSES At May 28, 1998, accrued expenses consist of the following: Accrued compensation and benefits........................... $17,004 Accrued programming costs................................... 24,883 Accrued legal costs......................................... 25,372 Other....................................................... 17,136 ------- $84,395 =======
6. LONG-TERM DEBT The Partnership repaid its term loan, due to a bank, on January 15, 1998. Interest on the loan was paid monthly and accrued at the bank's prime rate plus 2% (10.5% at December 31, 1997). The loan was collateralized by substantially all of the assets of the Partnership and a pledge of all partnership interests. The total principal outstanding at December 31, 1997 was $560,500. F-451 663 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES The Partnership rents poles from utility companies for use in its operations. These rentals amounted to approximately $15,918 of rent expense during the period. While rental agreements are generally short-term, the Partnership anticipates such rentals will continue in the future. The Partnership leases office facilities and various items of equipment under month-to-month operating leases. Rental expense under operating leases amounted to $8,171 during the period. The operations of the Partnership are subject to regulation by the Federal Communications Commission and various franchising authorities. From time to time the Partnership is also involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the operations, cash flows or financial position of the Partnership. 8. RELATED PARTY TRANSACTIONS The General Partner provides management services to the Partnership for which it receives a management fee of 5% of revenue. The General Partner also allocates, in accordance with a management agreement, certain general, administrative and payroll costs to the Partnership. For the period from January 1, 1998 through May 28, 1998, management fees totaled $41,674 and allocated general, administrative and payroll costs totaled $3,625, which are included in selling general and administrative expenses. The Partnership believes that these fees and allocations were made on a reasonable basis. However, the amounts paid are not necessarily indicative of the level of expenses that might have been incurred had the Partnership contracted directly with third parties. The Partnership has not attempted to obtain quotes from third parties to determine what the cost of obtaining such services from third parties would have been. F-452 664 INDEPENDENT AUDITORS' REPORT To the Partners of AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP We have audited the accompanying balance sheets of Amrac Clear View, a Limited Partnership as of December 31, 1996 and 1997, and the related statements of net earnings, changes in partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Amrac Clear View, a Limited Partnership as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ GREENFIELD, ALTMAN, BROWN, BERGER & KATZ, P.C. Canton, Massachusetts February 13, 1998 F-453 665 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP BALANCE SHEETS AT DECEMBER 31, 1996 AND 1997
1996 1997 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 475,297 $ 761,918 Subscribers and other receivables, net of allowance for doubtful accounts of $2,500 in 1996 and $3,000 in 1997.... 49,868 66,397 Prepaid expenses: Legal....................................................... -- 53,402 Miscellaneous............................................... 28,016 20,633 ---------- ---------- Total current assets........................................ 553,181 902,350 ---------- ---------- Property and equipment, net of accumulated depreciation $2,892,444 in 1996 and $3,015,081 in 1997................. 473,438 468,844 ---------- ---------- OTHER ASSETS: Franchise cost, net of accumulated amortization of $6,757 in 1996 and $7,417 in 1997................................... 3,133 2,473 Deferred financing costs, net of accumulated amortization of $60,247 in 1996 and $73,447 in 1997....................... 13,200 -- ---------- ---------- 16,333 2,473 ---------- ---------- $1,042,952 $1,373,667 ========== ========== LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt........................ $ 356,500 $ 397,500 Accounts payable-trade...................................... 34,592 47,949 Accrued expenses: Utilities................................................... 59,668 -- Miscellaneous............................................... 50,074 81,268 ---------- ---------- Total current liabilities................................... 500,834 526,717 ---------- ---------- Long-term debt, net of current maturities................... 488,000 163,000 ---------- ---------- Commitments and contingencies (Note 4) Partners' equity............................................ 54,118 683,950 ---------- ---------- $1,042,952 $1,373,667 ========== ==========
See notes to financial statements F-454 666 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENTS OF NET EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ---------- ---------- ---------- Revenues........................................... $1,701,322 $1,807,181 $1,902,080 Less cost of service............................... 644,736 656,881 687,433 ---------- ---------- ---------- Net revenues....................................... 1,056,586 1,150,300 1,214,647 ---------- ---------- ---------- Operating expenses excluding management fees and depreciation and amortization.................... 330,574 388,284 351,031 Management fees.................................... 94,317 96,742 101,540 Depreciation and amortization...................... 330,913 340,166 136,497 ---------- ---------- ---------- 755,804 825,192 589,068 ---------- ---------- ---------- Earnings from operations........................... 300,782 325,108 625,579 ---------- ---------- ---------- OTHER EXPENSES (INCOME): Interest income.................................... -- (7,250) (23,996) Interest expense................................... 130,255 98,603 70,738 Utility refunds.................................... -- -- (50,995) ---------- ---------- ---------- 130,255 91,353 (4,253) ---------- ---------- ---------- Net earnings....................................... $ 170,527 $ 233,755 $ 629,832 ========== ========== ==========
See notes to financial statements F-455 667 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
CLASS A CLASS B INVESTOR GENERAL LIMITED LIMITED LIMITED PARTNER PARTNER PARTNER PARTNERS TOTAL -------- -------- -------- --------- --------- Partners' deficit at December 31, 1994............................ $(31,012) $(31,012) $(12,405) $(211,905) $(286,334) Net earnings for the year......... 4,263 4,263 1,705 160,296 170,527 Partners' distributions during the year............................ (1,596) (1,596) (638) (60,000) (63,830) -------- -------- -------- --------- --------- Partners' deficit at December 31, 1995............................ (28,345) (28,345) (11,338) (111,609) (179,637) Net earnings for the year......... 5,844 5,844 2,337 219,730 233,755 -------- -------- -------- --------- --------- Partners' equity (deficit) at December 31, 1996............... (22,501) (22,501) (9,001) 108,121 54,118 Net earnings for the year......... 15,745 15,745 6,298 592,044 629,832 -------- -------- -------- --------- --------- Partners' equity (deficit) at December 31, 1997............... $ (6,756) $ (6,756) $ (2,703) $ 700,165 $ 683,950 ======== ======== ======== ========= =========
See notes to financial statements F-456 668 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings......................................... $ 170,527 $ 233,755 $ 629,832 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................ 330,913 340,166 136,497 Changes in assets and liabilities: (Increase) decrease in: Subscribers and other receivables.................... 4,573 (12,093) (16,529) Prepaid expenses..................................... (3,378) (9,468) (46,019) Increase (decrease) in accounts payable and accrued expenses........................................... (66,424) 69,262 (15,117) --------- --------- --------- Net cash provided by operating activities............ 436,211 621,622 688,664 --------- --------- --------- CASH FLOWS FOR INVESTING ACTIVITIES Purchases of equipment............................... (116,794) (74,879) (118,043) --------- --------- --------- CASH FLOWS FOR FINANCING ACTIVITIES Repayment of long-term debt.......................... (239,250) (260,750) (284,000) Distributions to partners............................ (63,830) --------- --------- --------- Net cash used by financing activities................ (303,080) (260,750) (284,000) --------- --------- --------- Net increase in cash and cash equivalents............ 16,337 285,993 286,621 Cash and cash equivalents, beginning of year......... 172,967 189,304 475,297 --------- --------- --------- Cash and cash equivalents, end of year............... $ 189,304 $ 475,297 $ 761,918 ========= ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest............................................. $ 133,540 $ 94,038 $ 73,124 ========= ========= =========
See notes to financial statements F-457 669 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 1. SUMMARY OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES: This summary of significant accounting policies of Amrac Clear View, a Limited Partnership (the "Partnership"), is presented to assist in understanding the Partnership's financial statements. The financial statements and notes are representations of the Partnership's management, which is responsible for their integrity and objectivity. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Operations: The Partnership provides cable television service to the residents of the towns of Hadley and Belchertown in western Massachusetts. Credit concentrations: The Partnership maintains cash balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At various times during the year the Partnership's cash balances exceeded the federally insured limits. Concentration of credit risk with respect to subscriber receivables are limited due to the large number of subscribers comprising the Partnership's customer base. Property and equipment/depreciation: Property and equipment are carried at cost. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Total depreciation for the years ended December 31, 1995, 1996 and 1997 was $321,872, $331,707 and $122,637, respectively. Other assets/amortization: Amortizable assets are recorded at cost. The Partnership amortizes intangible assets using the straight-line method over the useful lives of the various items. Total amortization for the years ended December 31, 1995, 1996 and 1997 was $9,041, $8,459 and $13,860, respectively. Cash equivalents: For purposes of the statements of cash flows, the Partnership considers all short-term instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at December 31, 1995 and 1997. Cash equivalents at December 31, 1996, amounted to $300,000. Advertising: The Partnership follows the policy of charging the costs of advertising to expense as incurred. Advertising expense was $1,681, $1,781 and $2,865 for the years ended December 31, 1995, 1996 and 1997, respectively. F-458 670 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 Income taxes: The Partnership does not incur a liability for federal or state income taxes. The current income or loss of the Partnership is included in the taxable income of the partners, and therefore, no provision for income taxes is reflected in the financial statements. Revenues: The principal sources of revenues are the monthly charges for basic and premium cable television services and installation charges in connection therewith. Allocation of profits and losses and distributions of cash flow: Partnership profits and losses, (other than those arising from capital transactions, described below), and distributions of cash flow are allocated 94% to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to the Class B Limited Partner and 2.5% to the General Partner until Payout (as defined in the Partnership Agreement) and after Payout, 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner and 15% to the General Partner. Partnership profits from capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and second, in proportion to any distributed cash proceeds resulting from the capital transaction and third, any remaining profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. Partnership losses from capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and, second, any remaining loss, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31:
1996 1997 ---------- ---------- Cable plant and equipment......................... $3,274,684 $3,391,750 Office furniture and equipment.................... 63,373 64,350 Vehicles.......................................... 27,825 27,825 ---------- ---------- $3,365,882 $3,483,925 ========== ==========
Depreciation is provided over the estimated useful lives of the above items as follows: Cable plant and equipment................................... 10 years Office furniture and equipment.............................. 5-10 years Vehicles.................................................... 6 years
3. LONG-TERM DEBT: The Partnership's term loan, due to a bank, is payable in increasing quarterly installments through June 30, 1999. Interest on the loan is paid monthly and accrues at the bank's prime rate plus 2% (10.5% at December 31, 1997). The loan is collateralized by substantially all of the assets of the Partnership and a pledge of all partnership interests. The total principal outstanding at December 31, 1997 was $560,500. F-459 671 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 Annual maturities are as follows: 1998........................................................ $397,500 1999........................................................ 163,000 -------- $560,500 ========
The loan agreement contains covenants including, but not limited to, maintenance of certain debt ratios as well as restrictions on capital expenditures and investments, additional indebtedness, partner distributions and payment of management fees. The Partnership was in compliance with all covenants at December 31, 1996 and 1997. In 1995, the Partnership obtained, from the bank, unconditional waivers of the following covenant violations: (1) to make a one- time cash distribution of $63,830, (2) to increase the capital expenditure limit to $125,000, and (3) to waive certain other debt ratio and investment restrictions, which were violated during the year. 4. COMMITMENTS AND CONTINGENCIES: The Partnership rents poles from utility companies in its operations. These rentals amounted to approximately $31,000, $39,500 and $49,000 for the years ended December 31, 1995, 1996 and 1997, respectively. While rental agreements are generally short-term, the Partnership anticipates such rentals will continue in the future. The Partnership leases a motor vehicle under an operating lease that expires in December 1998. The minimum lease cost for 1998 is approximately $6,000. 5. RELATED-PARTY TRANSACTIONS: The General Partner provides management services to the Partnership for which it receives a management fee of 5% of revenue. The General Partner also allocates, in accordance with a management agreement, certain general, administrative and payroll costs to the Partnership. For the years ended December 31, 1995, 1996 and 1997, management fees totaled $87,800, $90,242 and $95,040, respectively and allocated general, administrative and payroll costs totaled $7,200, $7,450 and $8,700, respectively. During each year the Partnership also incurred tap audit fees payable to the General Partner totaling $4,000. At December 31, 1996, the balance due from the General Partner was $12,263. The balance due to Amrac Telecommunications at December 31, 1997 was $4,795. 6. SUBSEQUENT EVENTS: On October 7, 1997, the Partnership entered into an agreement with another cable television service provider to sell all of its assets for $7,500,000. The Partnership received, in escrow, $250,000, which shall be released as liquidating damages if the closing fails to occur solely as a result of a breach of the agreement. As of December 31, 1997, the Partnership incurred $53,402 in legal costs associated with the sale which are included in prepaid expenses. Subject to certain regulatory approvals, it is anticipated that the transaction will be consummated in the Spring of 1998. On January 15, 1998, the Partnership paid, prior to the maturity date, its outstanding term loan due to a bank as described in Note 3. F-460 672 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable of New England LLC In our opinion, the accompanying combined balance sheets and the related combined statements of operations, changes in stockholder's deficit and cash flows present fairly, in all material respects, the financial position of the Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus Cable Television, Inc. at December 31, 1996 and 1997 and June 30, 1998, and the results of their operations, changes in stockholder's deficit and their cash flows for each of the three years in the period ended December 31, 1997 and for the six months ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Philadelphia, Pennsylvania March 30, 1999 F-461 673 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED BALANCE SHEETS
DECEMBER 31, -------------------------- JUNE 30, 1996 1997 1998 ----------- ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents....................... $ 389,097 $ 1,092,084 $ 1,708,549 Accounts receivable, less allowance for doubtful accounts at December 31, 1996 and 1997 and June 30, 1998 of $11,174, $3,072 and $0, respectively.................................. 140,603 116,112 144,653 Prepaid expenses and other...................... 62,556 90,500 92,648 ----------- ----------- ----------- Total current assets............................ 592,256 1,298,696 1,945,850 Property and equipment, net..................... 4,164,545 3,565,597 3,005,045 Intangible assets, net.......................... 2,174,084 2,096,773 1,939,904 Accounts receivable, affiliates................. 4,216,682 5,243,384 5,692,013 Deposits and other.............................. 436,382 456,135 406,135 ----------- ----------- ----------- Total assets.................................... $11,583,949 $12,660,585 $12,988,947 =========== =========== =========== LIABILITIES AND STOCKHOLDER'S DEFICIT CURRENT LIABILITIES: Current portion of long-term debt............... $ 71,744 $ 34,272 $14,993,581 Accounts payable................................ 786,284 803,573 764,588 Accrued incentive compensation.................. 117,692 149,823 220,724 Accrued franchise fees.......................... 193,369 173,735 86,332 Accrued pole rental............................. 83,910 78,345 52,954 Accrued expenses................................ 383,572 203,561 42,038 ----------- ----------- ----------- Total current liabilities....................... 1,636,571 1,443,309 16,160,217 Long-term debt, net............................. 15,043,763 15,018,099 -- Accrued interest................................ 2,811,297 4,685,494 5,622,593 Other........................................... 299,030 299,030 299,030 ----------- ----------- ----------- Total liabilities............................... 19,790,661 21,445,932 22,081,840 Commitments and contingent liabilities.......... -- -- -- STOCKHOLDER'S DEFICIT: Common stock-par value $1 per share; 10,000 shares authorized; 7,673 shares issued and outstanding................................... 7,673 7,673 7,673 Accumulated deficit............................. (8,214,385) (8,793,020) (9,100,566) ----------- ----------- ----------- Total stockholder's deficit..................... (8,206,712) (8,785,347) (9,092,893) ----------- ----------- ----------- Total liabilities and stockholder's deficit..... $11,583,949 $12,660,585 $12,988,947 =========== =========== ===========
See accompanying notes to combined financial statements F-462 674 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, SIX MONTHS ----------------------------------------- ENDED 1995 1996 1997 JUNE 30, 1998 ----------- ----------- ----------- ------------- REVENUES: Basic and satellite service...... $ 4,371,736 $ 4,965,377 $ 5,353,735 $2,841,711 Premium services................. 619,035 640,641 686,513 348,628 Other............................ 144,300 169,125 150,714 86,659 ----------- ----------- ----------- ---------- Total revenues................... 5,135,071 5,775,143 6,190,962 3,276,998 OPERATING EXPENSES: Programming...................... 1,119,540 1,392,247 1,612,458 876,588 General and administrative....... 701,420 811,795 829,977 391,278 Technical and operations......... 713,239 702,375 633,384 341,249 Marketing and selling............ 20,825 15,345 19,532 12,041 Incentive compensation........... 48,794 101,945 94,600 70,900 Management fees.................. 368,085 348,912 242,267 97,714 Depreciation and amortization.... 1,658,455 1,669,107 1,565,068 834,913 ----------- ----------- ----------- ---------- Income from operations........... 504,713 733,417 1,193,676 652,315 Interest expense................. (1,745,635) (1,888,976) (1,884,039) (937,662) Interest income.................. 956 2,067 93,060 29 Other income (expense), net...... 794 (2,645) (27,800) (17,228) ----------- ----------- ----------- ---------- Loss before state income taxes... (1,239,172) (1,156,137) (625,103) (302,546) Provision for state income taxes.......................... 20,000 25,000 16,000 5,000 ----------- ----------- ----------- ---------- Net loss......................... $(1,259,172) $(1,181,137) $ (641,103) $ (307,546) =========== =========== =========== ==========
See accompanying notes to combined financial statements F-463 675 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
COMMON STOCK ------------------- TOTAL NUMBER OF PAR ACCUMULATED STOCKHOLDER'S SHARES VALUE DEFICIT DEFICIT --------- ------ ----------- ------------- Balances at January 1, 1995.............. 7,673 $7,673 $(5,774,076) $(5,766,403) Net loss................................. -- -- (1,259,172) (1,259,172) ----- ------ ----------- ----------- Balances at December 31, 1995............ 7,673 7,673 (7,033,248) (7,025,575) Net loss................................. -- -- (1,181,137) (1,181,137) ----- ------ ----------- ----------- Balances at December 31, 1996............ 7,673 7,673 (8,214,385) (8,206,712) Net loss................................. -- -- (641,103) (641,103) Stock incentive compensation............. -- -- 62,468 62,468 ----- ------ ----------- ----------- Balances at December 31, 1997............ 7,673 7,673 (8,793,020) (8,785,347) Net loss................................. -- -- (307,546) (307,546) ----- ------ ----------- ----------- Balances at June 30, 1998................ 7,673 $7,673 $(9,100,566) $(9,092,893) ===== ====== =========== ===========
See accompanying notes to combined financial statements F-464 676 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS --------------------------------------- ENDED 1995 1996 1997 JUNE 30, 1998 ----------- ----------- ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................... $(1,259,172) $(1,181,137) $ (641,103) $ (307,546) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......... 1,658,455 1,669,107 1,565,068 834,913 Bad debt expense....................... 26,558 48,566 45,839 36,074 Change in assets and liabilities: Accounts receivable.................... (75,263) (88,379) (21,348) (64,615) Prepaid expenses and other............. (403,212) 75,208 (27,944) (2,148) Accounts payable and accrued expenses............................. 239,207 981,496 (93,322) 221,219 Accrued interest....................... 902,006 1,874,198 1,874,197 937,099 Deposits and other..................... 83,431 -- (19,753) 50,000 ----------- ----------- ----------- ---------- Net cash provided by operating activities........................... 1,172,010 3,379,059 2,681,634 1,704,996 ----------- ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................... (163,588) (1,174,562) (691,269) (114,221) Purchase of intangible assets.......... (127,340) (72,753) (197,540) (3,271) ----------- ----------- ----------- ---------- Net cash used for investing activities........................... (290,928) (1,247,315) (888,809) (117,492) ----------- ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt........... 37,331 -- -- -- Repayments of long-term debt........... (13,764) -- -- (10,837) Capital lease repayments............... (19,764) (52,721) (63,136) (47,952) Advances to affiliates, net............ (404,576) (2,562,295) (1,026,702) (912,250) ----------- ----------- ----------- ---------- Net cash used by financing activities........................... (400,773) (2,615,016) (1,089,838) (971,039) ----------- ----------- ----------- ---------- Net increase in cash and cash equivalents.......................... 480,309 (483,272) 702,987 616,465 Cash and cash equivalents, beginning of year................................. 392,060 872,369 389,097 1,092,084 ----------- ----------- ----------- ---------- Cash and cash equivalents, end of year................................. $ 872,369 $ 389,097 $ 1,092,084 $1,708,549 =========== =========== =========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for interest............................. $ 843,629 $ 14,778 $ 9,842 $ 563 Cash paid during the year for income taxes................................ -- -- $ 9,796 $ 25,600 Supplemental Non-Cash Investing and Financing Activities: Capital contribution and related accrued incentive compensation....... -- -- $ 62,468 -- Acquisition of plant under capital leases............................... $ 298,250 $ 48,438 -- --
See accompanying notes to combined financial statements F-465 677 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: These financial statements reflect the results of operations and financial position of Pegasus Cable Television of Connecticut, Inc. ("PCT-CT"), a wholly owned subsidiary of Pegasus Cable Television, Inc. ("PCT"), and the Massachusetts Operations of Pegasus Cable Television, Inc. ("PCT-MA" or the "Massachusetts Operations") (referred herein as the "Combined Operations"). PCT is a wholly owned subsidiary of Pegasus Media & Communications, Inc. ("PM&C"). PM&C is a wholly owned subsidiary of Pegasus Communications Corporation ("PCC"). On July 21, 1998, PCT sold the assets of its Combined Operations to Avalon Cable of New England, LLC. for $30.1 million. In January 1997, PCT sold the assets of its only other operating division, a cable television system that provided service to individual and commercial subscribers in New Hampshire (the "New Hampshire Operations") for $7.1 million. In presenting the historical financial position, results of operations and cash flows of the Combined Operations, it has been necessary to eliminate the results and financial position of the New Hampshire Operations. Many items are identifiable as relating to the New Hampshire or Massachusetts divisions as PCT has historically separated results of operations as well as billing and collection activity. However, in certain areas, assumptions and estimates have been required in order to eliminate the New Hampshire Operations for periods prior to its sale. For purposes of eliminating the following balances: Prepaid expenses and other; Deposits and other; Accounts payable; and Accrued expenses, balances have been apportioned between the New Hampshire Operations and the Massachusetts Operations on the basis of subscriber counts. Amounts due to and due from affiliates have been allocated to PCT-MA and are included in these financial statements. Prior to October 1996, BDI Associates, L.P. provided substantial support services such as finance, accounting and human resources to PCT. Since October 1996, these services have been provided by PCC. All non-accounting costs of PCC are allocated on the basis of average time spent servicing the divisions, while the costs of the accounting function are allocated on the basis of revenue. In the opinion of management, the methods used in allocating costs from PCC are reasonable; however, the costs of these services as allocated are not necessarily indicative of the costs that would have been incurred by the Combined Operations on a stand-alone basis. The financial information included herein may not necessarily reflect the results of operations, financial position and cash flows of the Combined Operations in the future or what they would have been had it been a separate, stand-alone entity during the periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingencies. Actual results could differ from those estimates. Property and Equipment: Property and equipment are stated at cost. The cost and related accumulated depreciation of assets sold, retired, or otherwise disposed of are removed from the respective accounts, and any F-466 678 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) resulting gains or losses are included in the statement of operations. Initial subscriber installation costs, including material, labor and overhead costs of the hookup, are capitalized as part of the distribution facilities. The costs of disconnection and reconnection are charged to expense. Depreciation is computed for financial reporting purposes using the straight-line method based upon the following lives: Reception and distribution facilities....................... 7 to 11 years Building and improvements................................... 12 to 39 years Equipment, furniture and fixtures........................... 5 to 10 years Vehicles.................................................... 3 to 5 years
Intangible Assets: Intangible assets are stated at cost and amortized by the straight-line method. Costs of successful franchise applications are capitalized and amortized over the lives of the related franchise agreements, while unsuccessful franchise applications and abandoned franchises are charged to expense. Financing costs incurred in obtaining long-term financing are amortized over the term of the applicable loan. Intangible assets are reviewed periodically for impairment or whenever events or circumstances provide evidence that suggest that the carrying amounts may not be recoverable. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the respective intangible asset balance can be recovered through projected undiscounted future cash flows. Amortization of intangible assets is computed for financial reporting purposes using the straight-line method based upon the following lives: Organization costs.......................................... 5 years Other intangibles........................................... 5 years Deferred franchise costs.................................... 15 years
Revenue: The Combined Operations recognize revenue when video and audio services are provided. Advertising Costs: Advertising costs are charged to operations as incurred and totaled $20,998, $12,768, $14,706 and $8,460 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, respectively. Cash and Cash Equivalents: Cash and cash equivalents include highly liquid investments purchased with an initial maturity of three months or less. The Combined Operations have cash balances in excess of the federally insured limits at various banks. Income Taxes: The Combined Operations is not a separate tax paying entity. Accordingly, its results of operations have been included in the tax returns filed by PCC. The accompanying financial statements include tax computations assuming the Combined Operations filed separate returns and reflect the application of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). F-467 679 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Concentration of Credit Risk: Financial instruments which potentially subject the Combined Operations to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Combined Operation's customer base. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ----------- Land.................................... $ 8,000 $ 8,000 $ 8,000 Reception and distribution facilities... 8,233,341 9,009,179 9,123,402 Building and improvements............... 242,369 250,891 250,891 Equipment, furniture and fixtures....... 307,844 312,143 312,143 Vehicles................................ 259,503 287,504 287,504 Other equipment......................... 139,408 79,004 79,004 ----------- ----------- ----------- 9,190,465 9,946,721 10,060,944 Accumulated depreciation................ (5,025,920) (6,381,124) (7,055,899) ----------- ----------- ----------- Net property and equipment.............. $ 4,164,545 $ 3,565,597 $ 3,005,045 =========== =========== ===========
Depreciation expense amounted to $1,059,260, $1,267,831, $1,290,217 and $674,775 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, respectively. 4. INTANGIBLES: Intangible assets consist of the following:
DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ---------- Deferred franchise costs.................. $4,367,594 $ 4,486,016 $4,486,333 Deferred financing costs.................. 1,042,079 1,156,075 1,159,027 Organization and other costs.............. 439,188 389,187 389,187 ---------- ------------ ---------- 5,848,861 6,031,278 6,034,547 ---------- ------------ ---------- Accumulated amortization.................. (3,674,777) (3,934,505) (4,094,643) ---------- ------------ ---------- Net intangible assets..................... $2,174,084 $ 2,096,773 $1,939,904 ========== ============ ==========
Amortization expense amounted to $599,195, $401,276, $274,851 and $160,138 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, respectively. F-468 680 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT: Long-term debt consists of the following at:
DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ----------- Note payable to PM&C, payable by PCT, interest is payable quarterly at an annual rate of 12.5%. Principal is due on July 1, 2005. The note is collateralized by substantially all of the assets of the Combined Operations and imposes certain restrictive covenants..................... $14,993,581 $14,993,581 $14,993,581 Capital lease obligations................... 121,926 58,790 -- ----------- ----------- ----------- 15,115,507 15,052,371 14,993,581 Less current maturities..................... 71,744 34,272 14,993,581 ----------- ----------- ----------- Long-term debt.............................. $15,043,763 $15,018,099 $ -- =========== =========== ===========
6. LEASES: The Combined Operations lease utility pole attachments and occupancy of underground conduits. Rent expense for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998 was $184,386, $185,638, $173,930 and $90,471, respectively. The Combined Operations lease equipment under long-term leases and have the option to purchase the equipment for a nominal cost at the termination of the leases. The related obligations are included in long-term debt. There are no future minimum lease payments on capital leases at June 30, 1998. Property and equipment that was leased include the following amounts that have been capitalized:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Billing and phone systems........................ $ 56,675 $ 56,675 Vehicles......................................... 166,801 129,227 -------- --------- 223,476 185,902 Accumulated depreciation......................... (69,638) (101,397) -------- --------- Total............................................ $153,838 $ 84,505 ======== =========
7. RELATED PARTY TRANSACTIONS: The Combined Operations pay management fees to various related parties. The management fees are for certain administrative and accounting services, billing and programming services, and the reimbursement of expenses incurred therewith. For the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, the fees and expenses were $368,085, $348,912, $242,267 and $97,714, respectively. As described in Note 5, PCT has an outstanding loan from its parent company. This loan has been allocated to PCT-MA and is included in these financial statements. Interest expense on that loan was $916,274, $1,874,198, $1,874,195 and $937,098 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998 respectively. Other related party transaction balances at December 31, 1996 and 1997 and June 30, 1998 included F-469 681 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) $4,216,682, $5,243,384 and $5,692,013 in accounts receivable, affiliates; $581,632, $6,433 and $331,374 in accounts payable; and $299,030, $299,030 and $299,030 in other liabilities, respectively. These related party balances arose primarily as a result of financing capital expenditures, interest payments, programming and other operating expenses. 8. INCOME TAXES: The deferred income tax assets and liabilities recorded in the balance sheet are as follows:
DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ----------- ASSETS: Excess of tax basis over book basis from tax gain recognized upon incorporation of PCT And PCT-CT........................................ $ 707,546 $ 707,546 $ 707,546 Loss carryforwards.............................. 1,324,236 1,039,849 957,318 Other........................................... 6,997 11,856 11,856 ----------- ----------- ----------- Total deferred tax assets....................... 2,038,779 1,759,251 1,676,720 ----------- ----------- ----------- LIABILITIES: Excess of book basis over tax basis of property, plant and equipment and intangible asset...... (258,311) (294,934) (335,014) Other........................................... (118,086) (134,859) (135,267) ----------- ----------- ----------- Total deferred tax liabilities.................. (376,397) (429,793) (470,281) ----------- ----------- ----------- Net deferred tax assets......................... 1,662,382 1,329,458 1,206,439 Valuation allowance............................. (1,662,382) (1,329,458) (1,206,439) ----------- ----------- ----------- Net deferred tax liabilities.................... $ -- $ -- $ -- =========== =========== ===========
The Combined Operations have recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of deferred tax assets related to the incorporation of PCT and PCT-CT and the expiration of net operating loss carryforwards. 9. EMPLOYEE BENEFIT PLANS: The Company employees participate in PCC's stock option plan that awards restricted stock (the "Restricted Stock Plan") to eligible employees of the Company. Restricted Stock Plan The Restricted Stock Plan provides for the granting of restricted stock awards representing a maximum of 270,000 shares (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of PCC) of Class A Common Stock of the Company to eligible employees who have completed at least one year of service. Restricted stock received under the Restricted Stock Plan vests over four years. The Plan terminates in September 2006. The expense for this plan amounted to $82,425, $80,154 and $63,533 in 1996 and 1997 and for the six months ended June 30, 1998, respectively. F-470 682 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 401(k) Plans Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic subsidiaries. Substantially all Company employees who, as of the enrollment date under the 401(k) Plans, have completed at least one year of service with the Company are eligible to participate in one of the 401(k) Plans. Participants may make salary deferral contributions of 2% to 6% of their salary to the 401(k) Plans. The expense for this plan amounted to $19,520, $14,446 and $7,367 in 1996 and 1997 and for the six months ended June 30, 1998, respectively. All employee contributions to the 401(k) Plans are fully vested at all times and all Company contributions, if any, vest 34% after two years of service with the Company (including years before the 401(k) Plans were established), 67% after three years of service and 100% after four years of service. A participant also becomes fully vested in Company contributions to the 401(k) Plans upon attaining age 65 or upon his or her death or disability. 10. COMMITMENTS AND CONTINGENT LIABILITIES: Legal Matters: The operations of PCT-CT and PCT-MA are subject to regulation by the Federal Communications Commission ("FCC") and other franchising authorities. From time to time the Combined Operations are also involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the operations, cash flows or financial position of the Combined Operations. F-471 683 INDEPENDENT AUDITORS' REPORT The Common Member and Manager BRESNAN COMMUNICATIONS GROUP LLC: We have audited the accompanying consolidated balance sheets of Bresnan Communications Group LLC and its subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations and members' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Bresnan Communications Group LLC's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bresnan Communications Group LLC, as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Denver, Colorado January 28, 2000, except as to Note 8, which is as of February 14, 2000 F-472 684 BRESNAN COMMUNICATIONS GROUP LLC CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999
1998 1999 --------- --------- (AMOUNTS IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 6,636 $ 5,995 Restricted cash (note 3).................................... 47,199 290 Trade and other receivables, net............................ 8,874 9,006 Property and equipment, at cost: Land and buildings........................................ 4,123 6,879 Distribution systems...................................... 443,114 534,812 Support equipment......................................... 50,178 62,283 -------- -------- 497,415 603,974 Less accumulated depreciation............................. 190,752 228,868 -------- -------- 306,663 375,106 Franchise costs, net........................................ 291,103 328,068 Other assets, net of amortization........................... 3,961 19,038 -------- -------- Total assets........................................... $664,436 $737,503 ======== ======== LIABILITIES AND MEMBERS' EQUITY (DEFICIT) Accounts payable............................................ $ 3,193 $ 18,900 Accrued expenses............................................ 13,395 35,613 Accrued interest............................................ 21,835 11,748 Debt........................................................ 232,617 895,607 Other liabilities........................................... 11,648 10,020 -------- -------- Total Liabilities...................................... 282,688 971,888 Members' equity (deficit)................................... 381,748 (234,385) -------- -------- Commitments and contingencies Total liabilities and members' equity (deficit)........ $664,436 $737,503 ======== ========
See accompanying notes to consolidated financial statements. F-473 685 BRESNAN COMMUNICATIONS GROUP LLC CONSOLIDATED STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 -------- --------- --------- (AMOUNTS IN THOUSANDS) REVENUE............................................. $247,108 $ 261,964 $ 283,574 Operating costs and expenses: Programming (note 6).............................. 53,857 63,686 72,355 Operating......................................... 31,906 28,496 31,624 Selling, general and administrative (note 6)...... 50,572 56,634 67,351 Organizational and divestiture costs.............. -- 1,934 5,281 Depreciation and amortization..................... 53,249 54,308 59,752 -------- --------- --------- 189,584 205,058 236,363 -------- --------- --------- Operating income............................. 57,524 56,906 47,211 OTHER INCOME (EXPENSE): Interest expense: Related party (note 4)......................... (1,892) (1,872) (152) Other.......................................... (16,823) (16,424) (67,139) Gain on sale of cable television systems.......... -- 27,027 556 Other, net........................................ (978) (273) (900) -------- --------- --------- (19,693) 8,458 (67,635) -------- --------- --------- Net earnings (loss).......................... 37,831 65,364 (20,424) MEMBERS' EQUITY (DEFICIT): Beginning of year................................. 347,188 359,098 381,748 Operating expense allocations and charges (notes 4 and 6)......................................... 60,389 71,648 -- Net assets of acquired system (note 3)............ 33,635 -- -- Capital contributions by members.................. -- -- 136,500 Capital distributions to members.................. -- -- (732,209) Cash transfers, net............................... (119,945) (114,362) -- -------- --------- --------- End of year....................................... $359,098 $ 381,748 $(234,385) ======== ========= =========
See accompanying notes to consolidated financial statements. F-474 686 BRESNAN COMMUNICATIONS GROUP LLC CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 -------- -------- --------- (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)................................... $ 37,831 $ 65,364 $ (20,424) Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization...................... 53,249 54,308 59,752 Amortization of debt discount and deferred financing costs.................................. 1,629 534 18,683 Gain on sale of cable television systems........... -- (27,027) (556) Other noncash charges.............................. 2,141 452 -- Changes in operating assets and liabilities, net of effects of acquisitions: Change in receivables............................ (3,413) 2,826 621 Change in other assets........................... 164 -- 429 Change in accounts payable, accrued expenses, accrued interest and other liabilities........ 2,305 6,141 25,457 Other, net....................................... (1,358) (237) -- -------- -------- --------- Net cash provided by operating Activities..... 92,548 102,361 83,962 -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expended for property and equipment and for franchise costs.................................... (35,282) (58,728) (90,879) Cash paid in acquisitions............................. -- (30,298) (78,680) Cash received in disposals............................ 1,179 58,949 4,956 Change in restricted cash............................... -- (47,199) 46,999 -------- -------- --------- Net cash used in investing activities......... (34,103) (77,276) (117,604) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under note agreement....................... 31,300 49,400 597,530 Proceeds from Senior Notes............................ -- -- 170,000 Proceeds from Senior Discount Notes................... -- -- 175,021 Repayments under note agreement....................... (24,364) (30,953) (294,672) Deferred finance costs paid........................... (2,121) (1,139) (19,169) Contributions by members.............................. -- -- 136,500 Distributions to members.............................. (59,556) (42,714) (732,209) -------- -------- --------- Net cash provided by (used in) financing activities.................................. (54,741) (25,406) 33,001 -------- -------- --------- Net increase (decrease) in cash............... 3,704 (321) (641) CASH AND CASH EQUIVALENTS: Beginning of year..................................... 3,253 6,957 6,636 -------- -------- --------- End of year........................................... $ 6,957 $ 6,636 $ 5,995 ======== ======== ========= Supplemental disclosure of cash flow information -- Cash paid during the year for interest................ $ 16,971 $ 16,792 $ 58,695 ======== ======== =========
See accompanying notes to consolidated financial statements. F-475 687 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1998 AND 1999 (AMOUNTS IN THOUSANDS) (1) BASIS OF PRESENTATION Bresnan Communications Group LLC and its subsidiaries ("BCG" or the "Company") are wholly owned by Bresnan Communications Company Limited Partnership, a Michigan limited partnership ("BCCLP"). BCG is a Delaware limited liability corporation formed on August 5, 1998 for the purpose of acting as co-issuer with its wholly-owned subsidiary, Bresnan Capital Corporation ("BCC"), of $170,000 aggregate principal amount at maturity of 8% Senior Notes and $275,000 aggregate principal amount at maturity of 9.25% Senior Discount Notes, both due in 2009 (collectively the "Notes"). Also, at this time, BTC borrowed approximately $508,000 of $650,000 available under a new credit facility (the "Senior Credit Facility"). (See Note 4, Debt.) Prior to the issuance of the Notes on February 2, 1999, BCCLP completed the terms of a contribution agreement dated June 3, 1998, as amended, whereby certain affiliates of AT&T Broadband and Internet Services, formerly Tele-Communications, Inc. ("TCI"), contributed certain cable television systems along with assumed TCI debt of approximately $708,854 to BCCLP which was repaid with the proceeds of the Notes and the Senior Credit Facility. In addition, Blackstone BC Capital Partners L.P. ("Blackstone") and affiliates contributed $136,500 to BCCLP. Upon completion of the Notes offering on February 2, 1999 BCCLP contributed all of its assets and liabilities to BCG, which formed a wholly owned subsidiary, Bresnan Telecommunications Company LLC ("BTC"), into which it contributed all of its assets and certain liabilities. The above noted contributed assets and liabilities were accounted for at predecessor cost because of the common ownership and control of TCI and have been reflected in the accompanying financial statements in a manner similar to a pooling of interests. The consolidated financial statements include the accounts of BCG and those of its wholly owned subsidiary, BTC, subsequent to the aforementioned formation transaction. The Company owns and operates cable television systems in small- and medium-sized communities in the midwestern United States. Prior to the transactions noted above, TCI and William J. Bresnan and certain entities which he controls (collectively, the "Bresnan Entities"), held 78.4% and 21.6% interests, respectively, in BCCLP. As of February 2, 1999, TCI, Blackstone and the Bresnan Entities held 50.00%, 39.79% and 10.21% interests, respectively. Subsequent to December 31, 1999, these interests were sold to Charter Communications Holding Company, LLC. (See Note 8, Sale of the Company.) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) CASH EQUIVALENTS Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. (B) TRADE AND OTHER RECEIVABLES Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1998 and 1999 was not significant. F-476 688 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (C) PROPERTY AND EQUIPMENT Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1997, 1998 and 1999, interest capitalized was $324,000, $47,000 and $1,027,000 respectively. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. (D) FRANCHISE COSTS Franchise costs represent the difference between the cost of acquiring cable television systems and amounts allocated to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. (E) IMPAIRMENT OF LONG-LIVED ASSETS Management periodically reviews the carrying amounts of property and equipment and identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets. Accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. (F) FINANCIAL INSTRUMENTS The Company has entered into fixed interest rate exchange agreements ("Interest Rate Swaps") which are used to manage interest rate risk arising from its financial liabilities. Such Interest Rate Swaps are accounted for as a hedge; accordingly, amounts receivable or payable under the Interest Rate Swaps are recognized as adjustments to interest expense. These instruments are not used for trading purposes. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective for all fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that all derivative instruments be reported as assets or liabilities and measured at their fair values. Under SFAS 133, changes in the fair values of derivative instruments are recognized immediately in earnings unless those instruments qualify as hedges of the (1) fair values of existing assets, liabilities, or firm commitments, (2) variability of cash flows of forecasted transactions, or (3) foreign currency exposures of net investments in foreign operations. F-477 689 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Although management has not completed its assessment of the impact of SFAS 133 on its combined results of operations and financial position, management estimates that the impact of SFAS 133 will not be material. (G) INCOME TAXES The majority of BCG's net assets were historically held in partnerships. In addition, BCG has been formed as a limited liability company, to be treated for tax purposes as a flow-through entity. Accordingly, no provision has been made for income tax expense or benefit in the accompanying combined financial statements as the earnings or losses of Bresnan Communications Group LLC will be reported in the respective tax returns of BCG's members. (See Note 5, Income Taxes). (H) REVENUE RECOGNITION Cable revenue for customer fees, equipment rental, advertising, pay-per-view programming and revenue sharing agreements is recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling and installation costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. (I) STATEMENT OF CASH FLOWS Except for acquisition transactions described in Note 3, transactions effected through Members' equity (deficit) have been considered constructive cash receipts and payments for purposes of the statement of cash flows. (J) ADVERTISING COSTS All advertising costs are expensed as incurred. (K) RECLASSIFICATIONS Certain of the prior year comparative figures have been reclassified to conform to the presentation adopted in the current year. (L) ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (3) ACQUISITIONS AND SYSTEM DISPOSITIONS In 1998, the Company acquired two cable systems which were accounted for under the purchase method. The purchase prices were allocated to the assets acquired in relation to their fair values as increases in property and equipment of $7,099 and franchise costs of $21,651. During 1998, the Company also disposed of two cable systems for gross proceeds of $58,949, which resulted in gain on sale of cable television systems of $27,027. In connection with F-478 690 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) one of the dispositions, a third party intermediary received $47,199 of cash that was designated to be reinvested in certain identified assets for income tax purposes and accordingly recognized as restricted cash on the Company's Consolidated Balance Sheet at December 31, 1998 and 1999. In 1999, BCG acquired three cable systems that were accounted for under the purchase method. The purchase prices were allocated to the assets acquired in relation to their fair values as increases to property and equipment of $24,098 and franchise costs of $54,582. In connection with two of the acquisitions, the aforementioned third party intermediary disbursed $46,999 of cash to complete the reinvestment in certain identified assets for income tax purposes. Finally, in 1999, BCG disposed of cable systems for gross proceeds of $4,956, which resulted in a gain of $556. The results of operations of these cable television systems have been included in the accompanying combined statements of operations from their dates of acquisition or their disposition, as applicable. Pro forma information on the acquisitions and dispositions has not been presented because the effects were not significant. (4) DEBT Debt is summarized as follows:
DECEMBER 31, ---------------------- 1998 1999 --------- --------- (AMOUNTS IN THOUSANDS) Senior Credit Facility(a)................................... $ -- $534,200 Senior Notes Payable(b)..................................... -- 170,000 Senior Discount Notes Payable(b)............................ -- 190,132 Notes payable to banks(c)................................... 209,000 -- Note payable to partner(d).................................. 22,100 -- Other debt.................................................. 1,517 1,275 -------- -------- $232,617 $895,607 ======== ========
- - - --------------- (a) The Senior Credit Facility represents borrowings under a $650,000 senior reducing revolving credit and term loan facility as documented in the loan agreement as of February 2, 1999. The Senior Credit Facility has a current available commitment of $650,000 of which $534,200 is outstanding at December 31, 1999. The Senior Credit Facility provides for three tranches, a revolving loan tranche for $150,000 (the "Revolving Loan"), a term loan tranche of $328,000 (the "A Term Loan" and together with the Revolving Loan, "Facility A") and a term loan tranche of $172,000 (the "Facility B"). The commitments under the Senior Credit Facility will reduce commencing with the quarter ending March 31, 2002. Facility A permanently reduces in quarterly amounts ranging from 2.5% to 7.5% of the Facility A amount starting March 31, 2002 and matures approximately eight and one half years after February 2, 1999. Facility B is also to be repaid in quarterly installments of .25% of the Facility B amount beginning in March 2002 and matures approximately nine years after February 2, 1999, on which date all remaining amounts of Facility B will be due and payable. Additional reductions of the Senior Credit Facility will also be required upon certain asset sales, subject to the right of the Company and its subsidiaries to reinvest asset sale proceeds under certain circumstances. The interest rate options F-479 691 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) include a LIBOR option and a Prime Rate option plus applicable margin rates based on the Company's total leverage ratio, as defined. The rate applicable to balances outstanding at December 31, 1999 ranged from 7.57% to 9.00%. Covenants of the Senior Credit Facility require, among other conditions, the maintenance of specific levels of the ratio of cash flows to future debt and interest expense and certain limitations on additional investments, indebtedness, capital expenditures, asset sales and affiliate transactions. In addition, the Company is required to pay a commitment fee on the unused revolver portion of Facility A which will accrue at a rate ranging from .25% to .375% per annum, depending on the Company's total leverage ratio, as defined. (b) On February 2, 1999, the Company issued $170,000 aggregate principal amount senior notes payable (the "Senior Notes"). In addition, on the same date, the Company issued $275,000 aggregate principal amount at maturity of senior discount notes, (the "Senior Discount Notes") for approximately $175,021 gross proceeds (collectively the "Notes"). The Senior Notes are unsecured and will mature on February 1, 2009. The Senior Notes bear interest at 8% per annum payable semi-annually on February 1 and August 1 of each year, commencing August 1, 1999. The Senior Discount Notes are unsecured and will mature on February 1, 2009. The Senior Discount Notes were issued at a discount to their aggregate principal amount at maturity and will accrete at a rate of approximately 9.25% per annum, compounded semi-annually, to an aggregate principal amount of $275,000 on February 1, 2004. Subsequent to February 1, 2004, the Senior Discount Notes will bear interest at a rate of 9.25% per annum payable semi-annually in arrears on February 1 and August 1 of each year, commencing August 1, 2004. The Company may elect, upon not less than 60 days prior notice, to commence the accrual of interest on all outstanding Senior Discount Notes on or after February 1, 2002, in which case the outstanding principal amount at maturity of each Senior Discount Note will on such commencement date be reduced to the accreted value of such Senior Discount Note as of such date and interest shall be payable with respect to the Senior Discount Notes on each February and August 1 thereafter. The Company may not redeem the Notes prior to February 1, 2004 except that prior to February 1, 2002, the Company may redeem up to 35% of the Senior Notes and Senior Discount Notes at redemption prices equal to 108% and 109.25% of the applicable principal amount and accreted value, respectively, with proceeds of an equity offering. Subsequent to February 1, 2004, the Company may redeem the Notes at redemption prices declining annually from approximately 104% of the principal amount or accreted value. Bresnan Communications Group LLC and its wholly owned subsidiary Bresnan Capital Corporation are the sole obligors of the Senior Notes and Senior Discount Notes. Bresnan Communications Group LLC has no other assets or liabilities other than its investment in its wholly owned subsidiary Bresnan Telecommunications Company LLC. Bresnan Capital Corporation has no other assets or liabilities. Upon change of control of the Company, the holders of the notes have the right to require the Company to purchase the outstanding notes at a price equal to 101% of the principal amount or accreted value plus accrued and unpaid interest. (See Note 8 "Sale of the Company"). F-480 692 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) The notes payable to banks represented borrowings under a $250,000 senior unsecured reducing revolving credit and term loan facility (the "Bank Facility") as documented in the loan agreement as amended and restated as of August 5, 1998. The Bank Facility called for a current available commitment of $250,000 of which $209,000 was outstanding at December 31, 1998. The rates applicable to balances outstanding at December 31, 1998 ranged from 6.815% to 8.000%. The Bank Facility was repaid on February 2, 1999. (See Note 1, Basis of Presentation.) (d) The note payable to a partner was comprised of a $25,000 subordinated note of which $22,100 was outstanding at December 31, 1998. The note, dated May 12, 1988, was junior and subordinate to the Bank Facility. Interest was provided for at the prime rate (as defined) and was payable quarterly, to the extent allowed under the bank subordination agreement, or at the maturity date of the note, which was the earlier of April 30, 2001 or the first business day following the full repayment of the entire amount due under the notes payable to banks. The interest rate at December 31, 1998 was 7.75%. This note was repaid on February 2, 1999. (See Note 1, Basis of Presentation.) The Company entered into interest rate swap agreements to effectively fix or set maximum interest rates on a portion of its floating rate long-term debt. The Company is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate swap agreements. At December 31, 1999, such interest rate swap agreements effectively fixed or set a maximum LIBOR base interest rates between 8.0% and 8.02% on an aggregate notional principal amount of $50,000, which rates would become effective upon the occurrence of certain events. The effect of the interest rate swap on interest expense for the twelve months ended December 31, 1999 was not significant. The expiration dates of the interest rate swaps ranges from April 1, 2000 to April 3, 2000. The difference between the fair market value and book value of long-term debt and the interest rate swaps at December 31, 1998 and 1999 is not significant. (5) INCOME TAXES Taxable earnings differ from those reported in the accompanying consolidated statements of operations due primarily to differences in depreciation and amortization methods and estimated useful lives under regulations prescribed by the Internal Revenue Service. At December 31, 1999, the financial statement carrying amount of the Company's assets exceeded its tax basis by approximately $431 million. (6) TRANSACTIONS WITH RELATED PARTIES BCG and its predecessor purchased, at TCI's cost, substantially all of its pay television and other programming from affiliates of TCI. Charges for such programming were $48,588, $58,562 and $62,502 for the years ended December 31, 1997, 1998 and 1999, respectively, and are included in programming expenses in the accompanying consolidated financial statements. Prior to February 2, 1999, certain affiliates of the partners of BCCLP provided administrative services to BCG and assumed managerial responsibility of BCG's cable television system operations and construction. As compensation for these services, BCG paid a monthly fee calculated pursuant to certain agreed upon formulas. Subsequent to the TCI Transaction on February 2, 1999, certain affiliates of a partner of BCCLP provide administrative services and have assumed managerial responsibilities of BCG. As compensation for these services BCG pays F-481 693 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) a quarterly fee equal to approximately 3% of gross revenues. Such aggregate charges totaled $11,801, $13,086 and $10,498 and have been included in selling, general and administrative expenses for years ended December 31, 1997, 1998 and 1999, respectively. (7) COMMITMENTS AND CONTINGENCIES The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed certain rate regulations on the cable television industry. Under the 1992 Cable Act, all cable systems are subject to rate regulation, unless they face "effective competition," as defined by the 1992 Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"), in their local franchise area. Although the Federal Communications Commission (the "FCC") has established regulations required by the 1992 Cable Act, local government units (commonly referred to as local franchising authorities) are primarily responsible for administering the regulation of a cable system's basic service tier ("BST"). The FCC itself directly administered rate regulation of any cable programming service tier ("CPST"). The FCC's authority to regulate CPST rates expired on March 31, 1999. The FCC has taken the position that it will still adjudicate CPST complaints filed after this sunset date (but no later than 180 days after the last CPST rate increase imposed prior to March 31, 1999), and will strictly limit its review (and possible refund orders) to the time period predating the sunset date. Under the FCC's rate regulations, most cable systems were required to reduce their BST and CPST rates in 1993 and 1994, and have since had their rate increases governed by a complicated price structure that allows for the recovery of inflation and certain associated costs, as well as providing some incentive for expanding channel carriage. Operators also have the opportunity to bypass this "benchmark" regulatory structure in favor of the traditional "cost-of- service" regulation in cases where the latter methodology appears favorable. Premium cable service offered on a per-channel or per-program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. The management of BCG believes that it has complied in all material respects with the provisions of the 1992 Cable Act and the 1996 Act, including its rate setting provisions. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of CPST rates would be retroactive to the date of complaint. Any refunds of the excess portion of BST or equipment rates would be retroactive to one year prior to the implementation of the rate reductions. Certain plaintiffs have filed or threatened separate class action complaints against certain of the systems of BCG, alleging that the systems' practice of assessing an administrative fee to the subscribers whose payments are delinquent constitutes an invalid liquidated damage provision and a breach of contract, and violates local consumer protection statutes. Plaintiffs seek recovery of all late fees paid to the subject systems as a class purporting to consist of all subscribers who were assessed such fees during the applicable limitation period, plus attorney fees and costs. BCG has additional contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is possible that BCG may incur losses upon conclusion of these matters and the matters referred to above, an estimate of any loss or range of loss cannot presently be made. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of these actions, the ultimate disposition should not have material adverse effect upon the combined financial condition of BCG. F-482 694 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On January 12, 2000, the Company also purchased two cable systems from one operator. The system in Wisconsin was a stock purchase and the system in Minnesota was an asset purchase. The total purchase price of these transactions was approximately $36,232, funded by cash flow from operations and additional borrowings. The Company also entered into a letter of intent with a cable operator pursuant to which the Company acquires a small cable television system in Minnesota. The transaction would result in a net cost of approximately $13,000 and will be funded by cash flow from operations and additional borrowings. BCG leases business offices, has entered into pole attachment agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $3,221, $2,833 and $3,547 during the years ended December 31, 1997, 1998 and 1999, respectively. Future minimum lease payments under noncancelable operating leases are estimated to approximate $2,240 per year for each of the next five years. It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on the same or similar properties. (8) SALE OF THE COMPANY In June 1999, the Partners of BCCLP entered into an agreement to sell all of their partnership interests in BCCLP to Charter Communications Holding Company, LLC for a purchase price of approximately $3.1 billion in cash and equity instruments of Charter and its subsidiaries (including the Company) which will be reduced by the assumption of BCCLP's debt at closing. In conjunction with the sale of the partnership interests, Charter assumed the Company's outstanding indebtedness under the Senior Credit Facility (See Note 4, Debt.) The accompanying financial statements do not reflect the effect of the adjustments, if any, resulting from the sale of the partnership's interests. F-483 695 INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-485 Report of Independent Auditors............................ F-486 Report of Independent Auditors............................ F-487 Supplemental Consolidated Balance Sheets as of December 31, 1999 and 1998....................................... F-488 Supplemental Consolidated Statements of Operations for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998............ F-489 Supplemental Consolidated Statements of Changes in Member's Equity for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998....................................... F-490 Supplemental Consolidated Statements of Cash Flows for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998............ F-491 Notes to Supplemental Consolidated Financial Statements... F-492
F-484 696 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Holdings, LLC: We have audited the accompanying supplemental consolidated balance sheets of Charter Communications Holdings, LLC and subsidiaries (collectively, "the Company") as of December 31, 1999 and 1998, and the related supplemental consolidated statements of operations, changes in member's equity and cash flows for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998. The supplemental consolidated statements give retroactive effect to the transfer of certain cable systems from Charter Communications Holding Company, LLC to the Company on January 1, 2000, which has been accounted for as a reorganization of entities under common control as described in Note 1. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We did not audit the financial statements of Charter Communications VI Operating Company, LLC and subsidiaries, and CC VII -- Falcon Systems, included in the supplemental consolidated financial statements of the Company, as of December 31, 1999, and for the periods from the dates of acquisition through December 31, 1999, which statements on a combined basis reflect total assets and total revenues of 31 percent and 6 percent, respectively, of the related consolidated totals of the Company. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based upon our audit and the reports of other auditors, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of Charter Communications Holdings, LLC and subsidiaries as of December 31, 1999 and 1998, and results of their operations and their cash flows for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, after giving retroactive effect to the transfer of certain cable systems described in Note 1, all in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, March 2, 2000 F-485 697 REPORT OF INDEPENDENT AUDITORS Charter Communications VI Operating Company, LLC We have audited the consolidated balance sheet of Charter Communications VI Operating Company, LLC and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, member's equity and cash flows for the period from inception (November 9, 1999) to December 31, 1999 (not presented separately herein). These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Charter Communications VI Operating Company, LLC and subsidiaries at December 31, 1999, and the consolidated results of its operations and its cash flows for the period from November 9, 1999 to December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Denver, Colorado February 11, 2000 F-486 698 REPORT OF INDEPENDENT AUDITORS Sole Member CC VII Holdings, LLC We have audited the combined balance sheet of the CC VII -- Falcon Systems as of December 31, 1999, and the related combined statements of operations and parent's investment and cash flows for the period from November 13, 1999 (commencement date) to December 31, 1999 (not presented separately herein). These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the CC VII -- Falcon Systems at December 31, 1999 and the results of its operations and its cash flows for the period from November 13, 1999 (commencement date) to December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Los Angeles, California March 2, 2000 F-487 699 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
DECEMBER 31, ------------------------- 1999 1998 ----------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 114,096 $ 9,573 Accounts receivable, net of allowance for doubtful accounts of $11,471 and $1,728, respectively........... 93,743 15,108 Prepaid expenses and other................................ 34,513 2,519 ----------- ---------- Total current assets................................... 242,352 27,200 ----------- ---------- INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment............................. 3,490,573 716,242 Franchises................................................ 14,985,793 3,590,054 ----------- ---------- 18,476,366 4,306,296 ----------- ---------- OTHER ASSETS................................................ 220,759 2,031 ----------- ---------- $18,939,477 $4,335,527 =========== ========== LIABILITIES AND MEMBER'S EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...................... $ -- $ 10,450 Accounts payable and accrued expenses..................... 704,734 127,586 Payables to manager of cable systems -- related parties... 6,713 4,334 ----------- ---------- Total current liabilities.............................. 711,447 142,370 ----------- ---------- LONG-TERM DEBT, less current maturities..................... 8,936,455 1,991,756 ----------- ---------- LOANS PAYABLE -- RELATED PARTIES............................ 1,079,163 -- ----------- ---------- DEFERRED MANAGEMENT FEES -- RELATED PARTIES................. 21,623 15,561 ----------- ---------- OTHER LONG-TERM LIABILITIES................................. 142,836 38,461 ----------- ---------- MEMBER'S EQUITY Member's equity (217,585,246 and 100 units issued and outstanding at December 31, 1999 and 1998, respectively).......................................... 8,045,737 2,147,379 Accumulated other comprehensive income.................... 2,216 -- ----------- ---------- Total member's equity.................................. 8,047,953 2,147,379 ----------- ---------- $18,939,477 $4,335,527 =========== ==========
The accompanying notes are an integral part of these supplemental consolidated statements. F-488 700 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- REVENUES.................................................... $1,428,090 $13,713 ---------- ------- OPERATING EXPENSES: Operating, general and administrative..................... 737,957 7,134 Depreciation and amortization............................. 745,315 8,318 Option compensation expense............................... 79,979 845 Corporate expense charges -- related parties.............. 51,428 473 ---------- ------- 1,614,679 16,770 ---------- ------- Loss from operations................................... (186,589) (3,057) ---------- ------- OTHER INCOME (EXPENSE): Interest expense.......................................... (471,871) (2,353) Interest income........................................... 18,821 133 Other, net................................................ (245) -- ---------- ------- (453,295) (2,220) Loss before income tax expense......................... (639,884) (5,277) INCOME TAX EXPENSE.......................................... (1,030) -- ---------- ------- Loss before extraordinary item......................... (640,914) (5,277) EXTRAORDINARY ITEM -- Loss from early extinguishment of debt...................................................... (7,794) -- ---------- ------- Net loss............................................... $ (648,708) $(5,277) ========== =======
The accompanying notes are an integral part of these supplemental consolidated statements. F-489 701 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY (DOLLARS IN THOUSANDS)
ACCUMULATED OTHER TOTAL MEMBER'S COMPREHENSIVE MEMBER'S EQUITY INCOME EQUITY ---------- ------------- ---------- BALANCE, December 24, 1998........................ $2,151,811 $ -- $2,151,811 Option compensation expense..................... 845 -- 845 Net loss........................................ (5,277) -- (5,277) ---------- ------ ---------- BALANCE, December 31, 1998........................ 2,147,379 -- 2,147,379 Capital contributions........................... 6,477,363 -- 6,477,363 Distributions to Charter Investment and Charter...................................... (10,276) -- (10,276) Option compensation expense..................... 79,979 -- 79,979 Net loss........................................ (648,708) -- (648,708) Unrealized gain on marketable securities available for sale........................... -- 2,216 2,216 ---------- ------ ---------- BALANCE, December 31, 1999........................ $8,045,737 $2,216 $8,047,953 ========== ====== ==========
The accompanying notes are an integral part of these supplemental consolidated statements. F-490 702 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (648,708) $ (5,277) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization.......................... 745,315 8,318 Option compensation expense............................ 79,979 845 Noncash interest expense............................... 98,920 -- Loss from early extinguishment of debt................. 7,794 -- Changes in assets and liabilities, net of effects from acquisitions -- Accounts receivable.................................... (32,366) (8,753) Prepaid expenses and other............................. 14,256 (211) Accounts payable and accrued expenses.................. 175,280 10,227 Receivables from and payables to manager of cable systems, including deferred management fees.......... 21,183 473 Other operating activities................................ (1,245) 2,022 ------------ -------- Net cash provided by operating activities............ 460,408 7,644 ------------ -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (741,508) (13,672) Payments for acquisitions, net of cash acquired........... (7,629,564) -- Loan to Marcus Cable Holdings............................. (1,680,142) -- Other investing activities................................ (22,198) -- ------------ -------- Net cash used in investing activities................ (10,073,412) (13,672) ------------ -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt, including proceeds from Charter Holdings Notes................................. 10,114,188 14,200 Repayments of long-term debt.............................. (5,694,375) -- Borrowings from related parties........................... 1,079,163 -- Payments for debt issuance costs.......................... (113,481) -- Capital contributions..................................... 4,360,971 -- Distributions to Charter Investment and Charter........... (10,276) -- Other financing activities................................ (18,663) -- ------------ -------- Net cash provided by financing activities............ 9,717,527 14,200 ------------ -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 104,523 8,172 CASH AND CASH EQUIVALENTS, beginning of period.............. 9,573 1,401 ------------ -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 114,096 $ 9,573 ============ ======== CASH PAID FOR INTEREST...................................... $ 314,606 $ 5,538 ============ ======== NONCASH TRANSACTIONS: Transfer of operating subsidiaries to the Company......... $ 1,252,370 $ -- Transfer of equity interests to the Company............... 864,022 --
The accompanying notes are an integral part of these supplemental consolidated statements. F-491 703 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION: General Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited liability company, owns and operates cable systems serving approximately 6.1 million (unaudited) customers, including cable systems acquired, in February 2000 (see Note 17). Charter Holdings offers a full range of traditional cable television services and has begun to offer digital cable television services, interactive video programming and high-speed Internet access. Charter Holdings is a subsidiary of Charter Communications Holding Company, LLC (Charter Holdco), which is a subsidiary of Charter Communications, Inc. (Charter). In November 1999, Charter completed an initial public offering of the sale of 195.5 million shares of Class A common stock. Proceeds from the offering were used by Charter to purchase membership units in Charter Holdco, which used the funds received from Charter for the acquisition of additional cable television systems. Organization and Basis of Presentation Charter Holdings was formed in February 1999 as a wholly owned subsidiary of Charter Investment, Inc. (Charter Investment). Charter Investment, through its wholly owned subsidiary, Charter Communications Properties Holdings, LLC (CCPH), commenced operations with the acquisition of a cable system on September 30, 1995. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter Investment for an aggregate purchase price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction, Charter Investment acquired, for fair value from unrelated third parties, all of the interests it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.), all cable operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment previously managed and owned minority interests in these companies. These acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of CharterComm Holdings and CCA Group are included in the supplemental consolidated financial statements from the date of acquisition. In February 1999, Charter Investment transferred all of its cable operating subsidiaries to Charter Communications Operating, LLC (Charter Operating), a wholly owned subsidiary of Charter Holdings. This transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. As a result of the change in ownership of CCPH, CharterComm Holdings and CCA Group, Charter Holdings has applied push-down accounting in the preparation of its supplemental consolidated financial statements. Accordingly, on December 23, 1998, Charter Holdings increased its member's equity by $2.2 billion to reflect the amounts paid by Mr. Allen and Charter Investment. The purchase price was allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $3.6 billion. On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen, (collectively, the "Mr. Allen Companies") purchased substantially all of the outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable) for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of the remaining partnership interest retained voting control of Marcus Cable. In February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and F-492 704 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership interests in Marcus Cable, including voting control. On April 7, 1999, Marcus Holdings was merged into Charter Holdings and Marcus Cable was transferred to Charter Holdings. For financial reporting purposes, the merger was accounted for as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen obtained voting control of Marcus Cable. Accordingly, the results of operations of Marcus Cable have been included in the supplemental consolidated financial statements from April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in the supplemental consolidated financial statements using historical carrying values reflected in the accounts of the Mr. Allen Companies. Total member's equity increased by $1.3 billion as a result of the Marcus Cable acquisition. Previously, on April 23, 1998, the Mr. Allen Companies recorded the assets acquired and liabilities assumed of Marcus Cable based on their relative fair values. On January 1, 2000, Charter Holdco and Charter Holdings effected a number of transactions in which cable systems acquired by Charter Holdco in November 1999 were contributed to Charter Holdings (the "Transferred Systems"). As a result of these transactions, Charter Holdings became the indirect parent of the CC VI Holdings, LLC ("Fanch"), CC VII Holdings, LLC ("Falcon") and CC V Holdings, LLC ("Avalon") cable systems. Effective January 1, 2000 the Company accounted for the contribution of the Transferred Systems to Charter Holdings as a reorganization of entities under common control in a manner similar to a pooling of interests. These supplemental consolidated financial statements present this reorganization. The accounts of the Transferred Systems are included in these supplemental consolidated financial statements from the date the Transferred Systems were acquired by Charter Holdco. Although these supplemental financial statements do not extend through the date of the transfer, they will become the historical consolidated financial statements of Charter Holdings after the consolidated financial statements covering the date of the transfer are issued. The supplemental consolidated financial statements of Charter Holdings include the accounts of Charter Operating and CCPH, the accounts of CharterComm Holdings and CCA Group and their subsidiaries since December 23, 1998 (date acquired by Charter Investment), the accounts of Marcus Cable since March 31, 1999, and the accounts of the Transferred Systems since November 12, 1999 (the date acquired by Charter Holdco), and are collectively referred to as the "Company" herein. All subsidiaries are, directly or indirectly, wholly owned by Charter Holdings. All material intercompany transactions and balances have been eliminated. Pursuant to a membership interests purchase agreement, as amended, Vulcan Cable III Inc. (Vulcan), a company controlled by Mr. Allen, contributed $500 million in cash in August 1999 to Charter Holdco, contributed an additional $180.7 million in certain equity interests acquired in connection with Charter Holdings' acquisition of Rifkin Acquisitions Partners, L.L.L.P. and InterLink Communications Partners, LLLP (collectively, "Rifkin") in September 1999, and contributed $644.3 million in cash in September 1999 to Charter Holdco. All funds and equity interests were contributed by Charter Holdco to Charter Holdings to finance certain acquisitions. In addition, certain Rifkin sellers received $133.3 million of the purchase price in the form of preferred equity in Charter Holdco. Also, certain Falcon sellers received $550.0 million of the purchase price in the form of membership units of Charter Holdco. F-493 705 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost that approximates market value. Property, Plant and Equipment Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installations. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, while equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years
Franchises Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Accumulated amortization related to franchises was $650.5 million and $5.3 million, as of December 31, 1999 and 1998, respectively. Amortization expense related to franchises for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, was $520.0 million and $5.3 million, respectively. Deferred Financing Costs Costs related to borrowings are deferred and amortized to interest expense using the effective interest method over the terms of the related borrowings. As of December 31, 1999, other assets include $120.7 million of deferred financing costs, net of accumulated amortization of $10.3 million. Impairment of Assets If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted net cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. F-494 706 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenues Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 31, 1999 and 1998, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Local governmental authorities impose franchise fees on the Company ranging up to a federally mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly basis from the Company's customers and are periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses. Channel Launch Payments The Company receives upfront payments from certain programmers to launch and promote new cable television channels. A portion of these payments represents reimbursement of advertising costs paid by the Company to promote the new channels. These reimbursements have been immaterial. The remaining portion is being amortized as an offset to programming expense over the respective terms of the program agreements, which range from one to 20 years. For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, the Company amortized and recorded as a reduction of programming costs $3.4 million and $12, respectively. As of December 31, 1999, the unamortized portion of payments received totaled $13.4 million and is included in other long-term liabilities. Direct Response Advertising The Company expenses the production costs of advertising as incurred, except for direct response advertising, which is deferred and amortized over its expected period of future benefits. Direct response advertising consists primarily of direct mailings and radio, newspaper and cross-channel television advertisements that include a phone number for use in ordering the Company's products and services. The deferred advertising costs are amortized to advertising expense over the periods during which the future benefits are expected to be received. These periods range from two to four years depending on the type of service the customer subscribes to and represents the period the customer is expected to remain connected to the cable system. As of December 31, 1999, $700 of deferred advertising costs is included in other assets. Advertising expense was $30.0 million for the year ended December 31, 1999, including amortization of deferred advertising costs totaling $87. Investments and Other Comprehensive Income Investments in equity securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company owns common stock of WorldGate Communications, Inc. (WorldGate) that is classified as "available for sale" and reported at market value with unrealized gains and losses recorded as accumulated other comprehensive income. Based on quoted market prices, the investment was valued at $3.2 million as of December 31, 1999 and is included in other assets. Comprehensive loss for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, is $646.5 million and $5.3 million, respectively. F-495 707 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest Rate Hedge Agreements The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designated for hedging purposes and are not held or issued for speculative purposes. Income Taxes Certain indirect subsidiaries of Charter Holdings are Corporations and file separate federal and state income tax returns. Results of operations from these subsidiaries are not material to the consolidated results of operations of the Company. Income tax expense for the year ended December 31, 1999, represents taxes assessed by certain state jurisdictions. Deferred income tax assets and liabilities are not material. Segments In 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. Segments have been identified based upon management responsibility. The individual segments have been aggregated into one segment, cable services. Use of Estimates The preparation of supplemental 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 supplemental financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITIONS: During 1999, the Company acquired cable systems in eight separate transactions for an aggregate purchase price of $3.6 billion, net of cash acquired, excluding debt assumed of $354.0 million and equity issued of $314.0 million. In connection with the Rifkin acquisition, Charter Holdco issued equity interests totaling $133.3 million to certain sellers. In addition, Vulcan purchased $180.7 million of equity interests Rifkin and then contributed the equity interests to Charter Holdings. The purchase prices were allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $3.9 billion. The allocation of the purchase prices for these acquisitions are based, in part, on preliminary information, which is subject to adjustment upon obtaining complete valuation information. Management believes that finalization of the purchase prices and allocations will not have a material impact on the consolidated financial position or results of operations of the Company. F-496 708 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1999, Charter Holdco acquired the cable systems of Fanch, Falcon and Avalon and on January 1, 2000, Charter Holdco transferred its equity these cable systems to Charter Holdings (see Note 1). Charter Holdco acquired these cable systems for an aggregate purchase price $4.0 billion, net of cash acquired, excluding debt assumed of $2.2 billion and equity issued by Charter Holdco of $550 million. The purchase prices were allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $5.8 billion. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the supplemental financial statements from the dates of acquisition, including the Transferred Systems. Unaudited pro forma operating results as though the acquisitions discussed above, including the Paul Allen Transaction, the acquisition of Marcus Holdings, the March 1999 refinancing discussed herein, had occurred on January 1, 1998, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- (UNAUDITED) Revenues............................................... $ 2,624,394 $ 2,412,252 Loss from operations................................... (355,030) (333,595) Net Loss............................................... (1,181,635) (1,165,806)
The unaudited pro forma financial information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows:
PERIOD FROM FOR THE YEAR DECEMBER 24, ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Balance, beginning of period............................. $ 1,728 $1,702 Acquisitions of cable systems............................ 5,860 -- Charged to expense....................................... 20,872 26 Uncollected balances written off, net of recoveries...... (16,989) -- -------- ------ Balance, end of period................................... $ 11,471 $1,728 ======== ======
F-497 709 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31:
1999 1998 ---------- -------- Cable distribution systems................................. $3,523,217 $661,749 Land, buildings and leasehold improvements................. 108,214 26,670 Vehicles and equipment..................................... 176,221 30,590 ---------- -------- 3,807,652 719,009 Less -- Accumulated depreciation........................... (317,079) (2,767) ---------- -------- $3,490,573 $716,242 ========== ========
For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, depreciation expense was $225.0 million and $2.8 million, respectively. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31:
1999 1998 -------- -------- Accounts payable............................................ $112,233 $ 7,439 Liability for pending transfer of cable system.............. 88,200 -- Accrued interest............................................ 99,946 30,809 Capital expenditures........................................ 66,713 15,560 Programming costs........................................... 72,245 11,856 Accrued general and administrative.......................... 39,648 6,688 Franchise fees.............................................. 46,524 12,534 Accrued income taxes........................................ 4,188 15,205 Other accrued liabilities................................... 175,037 27,495 -------- -------- $704,734 $127,586 ======== ========
The liability for pending transfer of cable system represents the fair value of a cable system to be transferred upon obtaining necessary regulatory approvals in connection with the transaction with InterMedia Capital Partners IV L. P., InterMedia Partners and their affiliates. Such approvals were subsequently obtained and the system assets were transferred subsequent to December 31, 1999. F-498 710 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT: Long-term debt consists of the following at December 31:
1999 1998 ---------- ---------- Charter Holdings: 14.000% Senior Secured Discount Debentures.............. $ -- $ 109,152 11.250% Senior Notes.................................... -- 125,000 8.250% Senior Notes..................................... 600,000 -- 8.625% Senior Notes..................................... 1,500,000 -- 9.920% Senior Discount Notes............................ 1,475,000 -- Renaissance: 10.000% Senior Discount Notes........................... 114,413 -- Rifkin: 11.125% Senior Subordinated Notes....................... 900 -- Avalon: 9.375% Senior Subordinated Notes........................ 150,000 -- 11.875% Senior Discount Notes........................... 196,000 -- 7.000% Note payable, due 2003........................... 500 -- CC VII Holdings, LLC (Falcon): 8.375% Senior Debentures................................ 375,000 -- 9.285% Senior Discount Debentures....................... 435,250 -- Credit Facilities: Credit Agreements (including CCPH, CCA Group and CharterComm Holdings)................................ -- 1,726,500 Charter Operating....................................... 2,906,000 -- CC Michigan, LLC and CC New England, LLC (Avalon)....... 170,000 -- CC VI Operating Company, LLC (Fanch).................... 850,000 -- Falcon Cable Communications, LLC........................ 865,500 -- ---------- ---------- 9,638,563 1,960,652 Current maturities...................................... -- (10,450) Unamortized net (discount) premium...................... (702,108) 41,554 ---------- ---------- $8,936,455 $1,991,756 ========== ==========
In March 1999, the Company extinguished substantially all existing long-term debt, excluding borrowings of the Company under its credit agreements, and refinanced substantially all existing credit agreements at various subsidiaries with a new credit agreement entered into by Charter Operating (the "Charter Operating Credit Facilities"). The excess of the amount paid over the carrying value, net of deferred financing costs, of the Company's long-term debt of $7.8 million was recovered as an extraordinary item-loss from early extinguishment of debt in the accompanying supplemental consolidated statements of operations. Charter Holdings Notes In March 1999, Charter Holdings and Charter Communications Holdings Capital Corporation, a wholly owned subsidiary of Charter Holdings, (collectively, the "Issuers") issued $600.0 million 8.250% Senior Notes due 2007 (the "8.250% Senior Notes") for net proceeds of $598.4 million, $1.5 billion 8.625% Senior Notes due 2009 (the "8.625% Senior Notes") for net proceeds of F-499 711 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes due 2011 (the "9.920% Senior Discount Notes") for net proceeds of $905.5 million, (collectively with the 8.250% Senior Notes and the 8.625% Senior Notes, referred to as the "Charter Holdings Notes"). The 8.250% Senior Notes are not redeemable prior to maturity. Interest is payable semi-annually in arrears on April 1 and October 1, beginning October 1, 1999 until maturity. The 8.625% Senior Notes are redeemable at the option of the Issuers at amounts decreasing from 104.313% to 100% of par value beginning on April 1, 2004, plus accrued and unpaid interest, to the date of redemption. At any time prior to April 1, 2002, the Company may redeem up to 35% of the aggregate principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of the principal amount under certain conditions. Interest is payable semi-annually in arrears on April 1 and October 1, beginning October 1, 1999, until maturity. The 9.920% Senior Discount Notes are redeemable at the option of the Issuers at amounts decreasing from 104.960% to 100% of accreted value beginning April 1, 2004. At any time prior to April 1, 2002, the Issuers may redeem up to 35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a redemption price of 109.920% of the accreted value under certain conditions. Thereafter, cash interest is payable semi-annually in arrears on April 1 and October 1 beginning April 1, 2004, until maturity. The discount on the 9.920% Senior Discount Notes is being accreted using the effective interest method. The unamortized discount was $497.2 million at December 31, 1999. The Charter Holdings Notes rank equally with current and future unsecured and unsubordinated indebtedness (including accounts payables of the Company). The Issuers are required to make an offer to repurchase all of the Charter Holdings Notes, at a price equal to 101% of the aggregate principal or 101% of the accreted value, together with accrued and unpaid interest, upon a change of control of the Company. Renaissance Notes In connection with the acquisition of Renaissance Media Group LLC (Renaissance) during the second quarter of 1999, the Company assumed $163.2 million principal amount at maturity of senior discount notes due April 2008 (the "Renaissance Notes"). As a result of the change in control of Renaissance, the Company was required to make an offer to repurchase the Renaissance Notes at 101% of their accreted value. In May 1999, the Company made an offer to repurchase the Renaissance Notes pursuant to this requirement, and the holders of the Renaissance Notes tendered an amount representing 30% of the total outstanding principal amount at maturity for repurchase. These notes were repurchased using a portion of the proceeds from the Charter Holdings Notes. As of December 31, 1999, $114.4 million aggregate principal amount at maturity of Renaissance Notes with an accreted value of $83.0 million remain outstanding. Interest on the Renaissance Notes shall be paid semi-annually at a rate of 10% per annum beginning on October 15, 2003. The Renaissance Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003, initially at 105% of their principal amount at maturity, plus accrued and unpaid interest, declining to 100% of the principal amount at maturity, plus accrued and unpaid interest, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the Company may redeem up to 35% of the original principal amount at maturity with the proceeds of one or more sales of membership units at 110% of their accreted value, plus accrued and unpaid F-500 712 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest on the redemption date, provided that after any such redemption, at least $106 million aggregate principal amount at maturity remains outstanding. Rifkin Notes The Company acquired Rifkin Acquisition Partners L.L.L.P. and InterLink Communications, Partners, LLLP (collectively, "Rifkin") in September 1999 and assumed Rifkin's 11.125% senior subordinated notes due 2006 (the "Rifkin Notes") together with a $3.0 million promissory note payable to Monroe Rifkin. Interest on the Rifkin Notes is payable semi-annually on January 15 and July 15 of each year. In September 1999, the Company commenced an offer to repurchase any and all of the outstanding Rifkin Notes, for cash at a premium over the principal amounts. In conjunction with this tender offer, the Company sought and obtained the consent of a majority in principal amount of the note holders of the outstanding Rifkin Notes to proposed amendments to the indenture governing the Rifkin Notes, which eliminated substantially all of the restrictive covenants. In October 1999, the Company repurchased a portion of the Rifkin Notes with a total outstanding principal amount of $124.1 million for a total of $140.6 million, including a consent fee to the holders who delivered timely consents amending the indenture, and repurchased the promissory note issued to Monroe Rifkin for $3.4 million. These notes were paid using borrowings from the Charter Operating Credit Facilities. At December 31, 1999, $900 aggregate principal of Rifkin Notes remain outstanding. Avalon Notes The Company acquired CC V Holdings, LLC (Avalon) (formerly known as Avalon Cable LLC) in November 1999 and assumed Avalon's 11.875% Senior Discount Notes Due 2008 (the "Avalon 11.875% Notes") and 9.375% Subordinated Notes Due 2008 (the "Avalon 9.375% Notes"). As of December 31, 1999, $196.0 million aggregate principal amount of the Avalon 11.875% Notes with an accreted value of $124.8 million and $150.0 million principal amount of the Avalon 9.375% Notes were outstanding. After December 1, 2003, cash interest on the Avalon 11.875% Notes will be payable semi-annually on June 1 and December 1 of each year, commencing June 1, 2004. On December 3, 1999, the Company commenced a change of control offer with respect to the Avalon 9.375% Notes and a change of control offer with respect to the Avalon 11.875% Notes at purchase prices of 101% of principal amount or accreted value, as applicable. In January 2000, the Company completed the repurchase of the Avalon 9.375% Notes with a total outstanding principal amount of $134.0 million for a total of $137.4 million. In addition to the change of control repurchase, the Company repurchased the remaining outstanding principal amount of $16.0 million in the open market for $16.3 million. Also in January 2000, the Company repurchased a portion of the Avalon 11.875% Notes with a total outstanding principal amount of $16.3 million for a total of $10.5 million. The repurchase of the Avalon 9.375% Notes and the Avalon 11.875% Notes was funded by a portion of the cash proceeds from the issuance of additional notes by Charter Holdings in January 2000 (the "January 2000 Charter Holdings Notes"). Avalon 11.875% Notes with a total principal amount at maturity of $179.8 million and an accreted value of $116.4 million remain outstanding after the repurchases. Falcon Debentures The Company acquired CC VII Holdings, LLC (Falcon) (formerly known as Falcon Communications, L.P.) in November 1999 and assumed Falcon's 8.375% Senior Debentures Due 2010 (the "Falcon 8.375% Debentures") and 9.285% Senior Discount Debentures Due 2010 (the F-501 713 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) "Falcon 9.285% Debentures", collectively, with the Falcon 8.375% Debentures, the "Falcon Debentures"). As of December 31, 1999, $375.0 million aggregate principal amount of the Falcon 8.375% Debentures and $435.3 million aggregate principal amount of the Falcon 9.285% Debentures, with an accreted value of $323.0 million were outstanding. On December 10, 1999, the Company commenced change of control offers and offered to repurchase the Falcon Debentures at purchase prices of 101% of principal amount, plus unpaid and accrued interest, or accreted value, as applicable. In February 2000, the Company completed the repurchase of the Falcon 8.375% Debentures with a total outstanding principal amount of $317.4 million for a total of $328.6 million. In addition to the change of control repurchase, the Company repurchased the Falcon 8.375% Debentures with a total outstanding principal amount of $57.6 million in the open market for $59.4 million. Also, in February 2000, the Company repurchased the Falcon 9.285% Debentures with an aggregate principal amount of $230.0 million for a total of $173.8 million. In addition to the change of control repurchase, the Company repurchased the Falcon 9.285% Debentures with an aggregate principal amount of $205.3 million in the open market for $154.3 million. The repurchase of all the Falcon Debentures was funded by a portion of the proceeds from the January 2000 Charter Holdings Notes. Helicon Notes The Company acquired Helicon I, L.P. and affiliates (Helicon) in July 1999 and assumed Helicon's 11% Senior Secured Notes due 2003 (the "Helicon Notes"). On November 1, 1999, the Company redeemed all of the Helicon Notes at a purchase price equal to 103% of their principal amount, plus accrued interest, for $124.8 million using borrowings from the Charter Operating Credit Facilities. Charter Operating Credit Facilities The Charter Operating Credit Facilities provide for two term facilities, one with a principal amount of $1.0 billion that matures September 2007 (Term A), and the other with the principal amount of $1.85 billion that matures March 2008 (Term B). The Charter Operating Credit Facilities also provide for a $1.25 billion revolving credit facility with a maturity date of September 2007 and at the options of the lenders, supplemental credit facilities, in the amount of $500.0 million available until March 18, 2002. Amounts under the Charter Operating Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.22% to 8.97% as of December 31, 1999). A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. As of December 31, 1999, the unused availability was $1.2 billion. In March 2000, the credit agreement was amended to increase the amount of the supplemental credit facility to $1.0 billion. In connection with this amendment, $600.0 million of the supplemental credit facility (the "Incremental Term Loan") was drawn down. The Incremental Term Loan maturity date is September 18, 2008. Avalon Credit Facilities In connection with the Avalon acquisition, the Company entered into a new credit agreement (the "Avalon Credit Facilities"). The Avalon Credit Facilities have maximum borrowings of $300.0 million, consisting of a revolving facility in the amount of $175.0 million that matures May 15, 2008, and a Term B loan in the amount of $125.0 million that matures on November 15, 2008. The Avalon Credit Facilities also provide for, at the options of the lenders, supplemental credit facilities in the amounts of $75 million available until December 31, 2003. All amounts mature in F-502 714 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) June 2008. Amounts under the Avalon Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin up to 2.75% (7.995% to 8.870% as of December 31, 1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. The Company borrowed $170.0 million under the Avalon Credit Facilities to fund a portion of the Avalon purchase price. As of December 31, 1999, unused availability was $ 130.0 million. Fanch Credit Facilities In connection with the acquisition of cable systems of Fanch Cablevision L.P. and affiliates (Fanch), the Company entered into a new credit agreement (the "Fanch Credit Facilities"). The Fanch Credit Facilities provide for two term facilities, one with a principal amount of $450.0 million that matures May 2008 (Term A), and the other with the principal amount of $400.0 million that matures November 2008 (Term B). The Fanch Credit Facilities also provide for a $350.0 million revolving credit facility with a maturity date of May 2008 and at the options of the lenders, supplemental credit facilities, in the amount of $300.0 million available until December 31, 2004. Amounts under the Fanch Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.12% to 8.87% as of December 31, 1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. The Company used $850.0 million of the credit facilities to fund a portion of the Fanch purchase price. As of December 31, 1999, unused availability was $ 350.0 million. Falcon Credit Facilities In connection with the Falcon acquisition, the existing Falcon credit agreement (the "Falcon Credit Facilities") was amended to provide for two term facilities, one with a principal amount of $200.0 million that matures June 2007 (Term B), and the other with the principal amount of $300.0 million that matures December 2007 (Term C). The Falcon Credit Facilities also provide for a $646.0 million revolving credit facility with a maturity date of December 2006 and at the options of the lenders, supplemental credit facilities in the amounts of $700.0 million with a maturity date of December 2007. At December 31, 1999, $110.0 million was outstanding under the supplemental credit facilities. Amounts under the Falcon Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.5% (7.57% to 8.73% as of December 31, 1999). A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance. As of December 31, 1999, unused availability was $390.5 million. However, debt covenants limit the amount that can be borrowed to $342.0 million at December 31, 1999. The indentures governing the debt agreements require issuers of the debt and/or its subsidiaries to comply with various financial and other covenants, including the maintenance of certain operating and financial ratios. These debt instruments also contain substantial limitations on, or prohibitions of distributions, additional indebtedness, liens, asset sales and certain other items. As a result of limitations and prohibitions of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to Charter Holdings, Charter Holdco and Charter. Based upon outstanding indebtedness at December 31, 1999, the amortization of term loans, scheduled reductions in available borrowings of the revolving credit facilities, and the maturity F-503 715 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) dates for all senior and subordinated notes and debentures, aggregate future principal payments on the total borrowings under all debt agreements at December 31, 1999, are as follows:
YEAR AMOUNT - - - ---- ---------- 2000........................................................ $ -- 2001........................................................ 5,000 2002........................................................ 93,875 2003........................................................ 284,229 2004........................................................ 261,423 Thereafter.................................................. 8,994,036 ---------- $9,638,563 ==========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1999, is as follows:
CARRYING NOTIONAL FAIR DEBT VALUE AMOUNT VALUE - - - ---- ---------- -------- ---------- Charter Holdings: 8.250% Senior Notes.......................... $ 598,557 $-- $ 558,000 8.625% Senior Notes.......................... 1,495,787 -- 1,395,000 9.920% Senior Discount Notes................. 977,807 -- 881,313 Renaissance: 10.000% Senior Discount Notes................ 86,507 -- 79,517 Rifkin: 11.125% Senior Subordinated Notes............ 954 -- 990 Avalon: 9.375% Senior Subordinated Notes............. 151,500 -- 151,500 11.875% Senior Discount Notes................ 129,212 -- 129,212 7.000% Note payable, due 2003................ 500 -- 500 CC VII Holdings, LLC (Falcon): 8.375% Senior Debentures..................... 378,750 -- 378,750 9.285% Senior Discount Debentures............ 325,381 -- 325,381 Credit Facilities: Charter Operating............................ 2,906,000 -- 2,906,000 CC Michigan LLC and CC New England LLC (Avalon).................................. 170,000 -- 170,000 CC VI Operating, LLC (Fanch)................. 850,000 -- 850,000 Falcon Cable Communications, LLC............. 865,500 -- 865,500 Loans payable -- related parties............. 1,079,163 1,079,163
CARRYING NOTIONAL FAIR INTEREST RATE HEDGE AGREEMENTS VALUE AMOUNT VALUE - - - ------------------------------ -------- ---------- -------- Swaps........................................... $(6,827) $4,542,713 $(47,220) Caps............................................ -- 15,000 16 Collars......................................... 1,361 240,000 (199)
F-504 716 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of debt and the related interest rate hedge agreements at December 31, 1998, is as follows:
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE ---------- ---------- ---------- DEBT Credit Agreements (including CCPH, CCA Group and CharterComm Holdings).......... $1,726,500 $ -- $1,726,500 14.000% Senior Secured Discount Debentures............................... 138,102 -- 138,102 11.250% Senior Notes....................... 137,604 -- 137,604 INTEREST RATE HEDGE AGREEMENTS Swaps...................................... $ 23,216 $1,105,000 $ 23,216 Caps....................................... -- 15,000 -- Collars.................................... 4,174 310,000 4,174
As the long-term debt under the credit agreements bears interest at current market rates, their carrying amount approximates market value at December 31, 1999 and 1998. The fair values of the notes and the debentures are based on quoted market prices. The weighted average interest pay rate for the Company's interest rate swap agreements was 8.06% and 7.66% at December 31, 1999 and 1998, respectively. The weighted average interest rate for the Company's interest rate cap agreements was 9.0% and 8.55% at December 31, 1999 and 1998, respectively. The weighted average interest rate for the Company's interest rate collar agreements were 9.13% and 7.74% for the cap and floor components, respectively, at December 31, 1999, and 8.61% and 7.31%, respectively, at December 31, 1998. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would (receive) or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's credit facilities, thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's consolidated financial position or results of operations. F-505 717 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. REVENUES: Revenues consist of the following:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Basic.................................................... $1,002,954 $ 9,347 Premium.................................................. 124,788 1,415 Pay-per-view............................................. 27,537 260 Digital video............................................ 8,299 10 Advertising sales........................................ 71,997 493 Cable modem.............................................. 10,107 55 Other.................................................... 182,408 2,133 ---------- ------- $1,428,090 $13,713 ========== =======
10. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating, general and administrative expenses consist of the following:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Programming.............................................. $330,754 $3,137 General and administrative............................... 237,480 2,377 Service.................................................. 99,486 847 Advertising.............................................. 31,281 344 Marketing................................................ 23,447 225 Other.................................................... 15,509 204 -------- ------ $737,957 $7,134 ======== ======
11. RELATED PARTY TRANSACTIONS: Charter Investment and Charter provide management services to the Company including centralized customer billing services, data processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Certain costs for services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are allocated based on the number of basic customers. Such costs totaled $16.5 million and $128 for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively. All other costs incurred by Charter Investment and Charter on behalf of the Company are recorded as expenses in the accompanying supplemental consolidated financial statements and are included in corporate expense charges -- related parties. Management believes that costs incurred by Charter Investment and Charter on the Company's behalf and included in the accompanying supplemental financial statements are not materially different than costs the Company would have incurred as a stand-alone entity. F-506 718 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company pays certain costs on behalf of Charter Investment and Charter. These costs are reimbursed by Charter Investment and Charter and are recorded as receivables from manager of cable systems-related parties in the accompanying supplemental consolidated financial statements. Charter Investment utilizes a combination of excess insurance coverage and self-insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. Medical coverage provides for $1.0 million aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $1.0 million aggregate stop loss protection and a loss limitation of $250 per person per year. The Company is charged a management fee as stipulated in the management agreements between Charter Investment, Charter and the Company. As of December 31, 1999 and 1998, management fees currently payable of $9.2 million and $473, respectively, are included in payables to manager of cable television systems-related parties. To the extent management fees charged to the Company are greater (less) than the corporate expenses incurred by Charter Investment and Charter, the Company will record distributions to (capital contributions from) Charter Investment and Charter. For the year ended December 31, 1999, the Company recorded distributions of $10.3 million. For the period from December 24, 1998, through December 31, 1998, the management fee charged to the Company approximated the corporate expenses incurred by Charter Investment and Charter on behalf of the Company. The Charter Operating Credit Facilities and notes outstanding prohibit payments of management fees in excess of 3.5% of revenues until repayment of the outstanding indebtedness. Any amount in excess of 3.5% of revenues owed to Charter Investment or Charter based on the management agreement is recorded as deferred management fees -- related parties. Charter, Mr. Allen and certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interests in various entities that provide services or programming to the Company, including High Speed Access Corp. (High Speed Access), WorldGate, Wink Communications, Inc. (Wink), ZDTV, LLC (ZDTV), USA Networks, Inc. (USA Networks) and Oxygen Media Inc. (Oxygen Media). In addition, certain officers of the Company or directors of Charter also serve as directors of High Speed Access and USA Networks. The Company and its affiliates do not hold controlling interests in any of these companies. Certain of the Company's cable customers receive cable modem-based Internet access through High Speed Access and TV-based Internet access through WorldGate. For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, revenues attributable to these services were less than 1% of total revenues. The Company receives or will receive programming and certain interactive features embedded into the programming for broadcast via its cable systems from Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee for the programming service generally based on the number of subscribers receiving the service. Such fees for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were approximately 1% of total operating costs. In addition, the Company receives commissions from USA Networks for home shopping sales generated by its customers. Such revenues for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were less than 1% of total revenues. F-507 719 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In the second quarter of 1999, Charter Holdings loaned $50 million to Charter Holdco. The promissory note bears interest at 7.5% compounded annually. For the year ended December 31, 1999, Charter Holdings recognized $1.2 million of interest income pertaining to this promissory note. This note was repaid in November 1999. In connection with the issuance of the Charter Holdings Notes in March 1999, the Company extinguished substantially all existing long-term debt including debt at Marcus Cable. Prior to the merger with Marcus Cable in March 1999, the Company loaned Marcus Cable $1.7 billion. In April 1999, the loan was repaid. During November 1999, the Company received $1.1 billion from Charter and Charter Holdco that was used to pay down the Credit Facilities. The Company recorded the funds as loans payable-related parties. The loans will be repaid with additional long-term borrowings made in connection with the Bresnan acquisition (see Note 17) and accordingly, the loans have been classified as long-term. The loans carry interest rates from 7.82% to 7.91%. Interest expense on the loans totaled $10.4 million for the year ended December 31, 1999. 12. OPTION PLAN: In accordance with an employment agreement between Charter Investment and the President and Chief Executive Officer of Charter and a related option agreement with the President and Chief Executive Officer, an option to purchase 7,044,127 Charter Holdco membership interests, was issued to the President and Chief Executive Officer. The option vests over a four year period from the date of grant and expires ten years from the date of grant. In February 1999, Charter Holdings adopted an option plan providing for the grant of options. The plan was assumed by Charter Holdco. The option plan provides for grants of options to employees, officers and directors of Charter Holdco and its affiliates and consultants who provide services to Charter Holdco. Options granted vest over five years from the grant date, commencing 15 months after the date of grant. Options not exercised accumulate and are exercisable, in whole or in part, in any subsequent period, but not later than ten years from the date of grant. Membership units received upon exercise of the options are automatically exchanged for shares of Class A common stock of Charter on a one-for-one basis. F-508 720 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the activity for the Company's option plan for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998 is as follows:
1999 1998 ---------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ----------- -------- ----------- -------- Options outstanding, beginning of period..... 7,044,127 $20.00 -- $ -- Granted: December 23, 1998.......................... -- -- 7,044,127 20.00 February 9, 1999........................... 9,111,681 20.00 -- -- April 5, 1999.............................. 473,000 20.73 -- -- November 8, 1999........................... 4,741,400 19.00 -- -- Cancelled.................................... (612,600) 19.95 -- -- ----------- ------ ----------- ------ Options outstanding, end of period........... 20,757,608 $19.79 7,044,127 $20.00 =========== ====== =========== ====== Weighted Average Remaining Contractual Life.. 9.2 years 10.0 years =========== =========== Options Exercisable, end of period........... 2,091,032 $19.90 1,761,032 $20.00 =========== ====== =========== ====== Weighted average fair value of options granted.................................... $ 12.59 $ 12.50 =========== ===========
In February 2000, the Company granted 5.7 million options at $19.47 per share. The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for the option plans. Option compensation expense of $80.0 million and $845 for the year ended December 31, 1999, and for the period from December 24, 1998, to December 31, 1998, respectively, has been recorded in the supplemental consolidated financial statements since the exercise prices were less than the estimated fair values of the underlying membership interests on the date of grant. Estimated fair values were determined by the Company using the valuation inherent in the Paul Allen Transaction and valuations of public companies in the cable television industry adjusted for factors specific to the Company. Compensation expense is being recorded over the vesting period of each grant that varies from four to five years. As of December 31, 1999, deferred compensation remaining to be recognized in future periods totaled $79.4 million. No option compensation expense was recorded for the options granted on November 8, 1999, since the exercise price is equal to the estimated fair value of the underlying membership interests on the date of grant. Since the membership units are exchangeable into Class A common stock of Charter on a one-for-one basis, the estimated fair value was equal to the initial offering price of Class A common stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires pro forma disclosure of the impact on earnings as if the compensation costs for these plans had been determined consistent with the fair value F-509 721 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) methodology of this statement. The Company's net loss would have been increased to the following unaudited pro forma amounts under SFAS 123:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Net loss: As reported............................................ $(648,708) $(5,277) Pro forma (unaudited).................................. (673,042) (5,495)
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants during the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively: risk-free interest rates of 5.5% and 4.8%; expected volatility of 43.8% and 43.7%; and expected lives of 10 years. The valuations assume no dividends are paid. 13. COMMITMENTS AND CONTINGENCIES: Leases The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were $11.2 million and $70, respectively. As of December 31, 1999, future minimum lease payments are as follows: 2000........................................................ $9,036 2001........................................................ 7,141 2002........................................................ 4,645 2003........................................................ 3,153 2004........................................................ 2,588 Thereafter.................................................. 8,845
The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, was $14.3 million and $137, respectively. Litigation The Company is a party to lawsuits and claims that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits and claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. Regulation in the Cable Television Industry The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has F-510 722 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. During 1999, the amounts refunded by the Company have been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. As of December 31, 1999, approximately 18% of the Company's local franchising authorities are certified to regulate basic tier rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the consolidated financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Company does not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Company's consolidated financial position or results of operations. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. 14. EMPLOYEE BENEFIT PLANS: The Company's employees may participate in 401(k) plans (the "401(k) Plans"). Employees that qualify for participation can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company matches 50% of the first 5% of participant contributions. The Company made contributions to the 401(k) Plans totaling $2.9 million and $20 for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively. F-511 723 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. ACCOUNTING STANDARD NOT YET IMPLEMENTED: The Company is required to adopt Statement of Financial Accounting Standards Board No. 133, Accounting for Derivative Instruments and Hedging Activities(SFAS No. 133) on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133 on the supplemental consolidated financial statements nor has the Company determined the timing of the adoption of SFAS No. 133. However, SFAS No. 133 could increase the volatility in earnings (losses). 16. PARENT COMPANY ONLY SUPPLEMENTAL FINANCIAL STATEMENTS: As the result of limitations on and prohibition of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to Charter Holdings, the parent company. The following parent company only supplemental financial statements of Charter Holdings account for the investment in Charter Operating, Fanch, Falcon and Avalon under the equity method of accounting. The supplemental financial statements should be read in conjunction with the supplemental consolidated financial statements of the Company and notes thereto. CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY) SUPPLEMENTAL CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------------- 1999 1998 ----------- ---------- ASSETS Cash and cash equivalents............................... $ 9,762 $ -- Investment in subsidiaries.............................. 11,090,874 2,147,379 Other assets............................................ 69,793 -- ----------- ---------- $11,170,429 $2,147,379 =========== ========== LIABILITIES AND MEMBER'S EQUITY Current liabilities..................................... $ 47,365 $ -- Payables to manager of cable systems -- related parties............................................... 2,960 -- Long-term debt.......................................... 3,072,151 -- Member's equity......................................... 8,047,953 2,147,379 ----------- ---------- $11,170,429 $2,147,379 =========== ==========
F-512 724 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY) SUPPLEMENTAL CONDENSED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1998 1998 ------------ ------------- Interest expense......................................... $(221,925) $ -- Interest income.......................................... 11,833 -- Equity in loss of subsidiaries........................... (438,616) (5,277) --------- ------- Net loss............................................... $(648,708) $(5,277) ========= =======
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY) SUPPLEMENTAL CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (648,708) $(5,277) Noncash interest expense.................................. 78,473 -- Equity in losses of subsidiaries.......................... 438,616 5,277 Changes in assets and liabilities......................... 48,825 -- ----------- ------- Net cash used in operating activities.................. (82,794) -- ----------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Charter Operating........................... (1,730,466) -- Loans to Marcus Cable Holdings, LLC....................... (1,680,142) Repayment of debt on behalf of Charter Operating.......... (663,259) Distributions received from Charter Operating............. 96,748 -- ----------- ------- Net cash used in investing activities.................. (3,977,119) -- ----------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from debt offering........................... 2,999,385 -- Payments for debt issuance costs.......................... (74,000) -- Capital contributions..................................... 1,144,290 -- ----------- ------- Net cash used in financing activities.................. 4,069,675 -- ----------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 9,762 -- CASH AND CASH EQUIVALENTS, beginning of period.............. -- -- ----------- ------- CASH AND CASH EQUIVALENTS, end of period.................... $ 9,762 $ -- =========== =======
F-513 725 CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 17. SUBSEQUENT EVENTS: On January 6, 2000, Charter Holdings issued notes with a principal amount of $1.5 billion (January 2000 Charter Holdings Notes). The January 2000 Charter Holdings Notes are comprised of $675.0 million 10.00% Senior Notes due 2009, $325.0 million 10.25% Senior Notes due 2010, and $532.0 million 11.75% Senior Discount Notes due 2010. The net proceeds were approximately $1.3 billion, after giving effect to discounts, commissions and expenses. The proceeds from the January 2000 Charter Holdings Notes were used to finance the repurchases of debt assumed in the acquisitions of Fanch, Falcon and Avalon, and the Bresnan acquisition (as defined below). On February 14, 2000, Charter Holdco and Charter Holdings completed the acquisition of Bresnan Communications Company Limited Partnership (Bresnan). Prior to the acquisition, Charter Holdco assigned a portion of its rights to purchase Bresnan to Charter Holdings. Charter Holdco and Charter Holdings purchased 52% of Bresnan from certain sellers for cash and certain sellers contributed 18% of Bresnan to Charter Holdco for 14.8 million Class C common membership units of Charter Holdco, an approximate 2.6% equity interest in Charter Holdco. Charter Holdco then transferred its ownership interest to Charter Holdings. Thereafter, Charter Holdings and certain sellers contributed all of the outstanding interests in Bresnan to CC VIII, LLC (CC VIII), a subsidiary of Charter Holdings and Bresnan was dissolved. In exchange for the contribution of their interests in Bresnan, the sellers received approximately 24.2 million Class A preferred membership units in CC VIII representing 30% of the equity of CC VIII and are entitled to a 2% annual return on their preferred membership units. The purchase price for Bresnan was approximately $3.1 billion subject to adjustment and was comprised of $1.1 billion in cash, $384.6 million and $629.5 million in equity in Charter Holdco and CC VIII, respectively, and approximately $1.0 billion in assumed debt. All the membership units received by the sellers are exchangeable on a one-for-one basis for Class A common stock of Charter. The Bresnan cable systems acquired are located in Michigan, Minnesota, Wisconsin and Nebraska, and serve approximately 686,000 (unaudited) customers. Subsequent to the completion of the Bresnan acquisition, Charter repurchased all of the outstanding Bresnan 9.25% Senior Discount Notes Due 2009 with an accreted value of $192.1 million and Bresnan 8.00% Senior Notes Due 2009 with a principal amount of $170.0 million for a total of $369.7 million. The notes were repurchased using a portion of the proceeds of the January 2000 Charter Holdings Notes. F-514 726 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS INDEMNIFICATION UNDER THE LIMITED LIABILITY COMPANY AGREEMENT OF CHARTER HOLDINGS. The limited liability company agreement of Charter Holdings, entered into as of February 9, 1999, by Charter Investment, as the initial member, provides that the members, the manager, the directors, their affiliates or any person who at any time serves or has served as a director, officer, employee or other agent of any member or any such affiliate, and who, in such capacity, engages or has engaged in activities on behalf of Charter Holdings, shall be indemnified and held harmless by Charter Holdings to the fullest extent permitted by law from and against any losses, damages, expenses, including attorneys' fees, judgments and amounts paid in settlement actually and reasonably incurred by or in connection with any claim, action, suit or proceeding arising out of or incidental to such indemnifiable person's conduct or activities on behalf of Charter Holdings. Notwithstanding the foregoing, no indemnification is available under the limited liability company agreement in respect of any such claim adjudged to be primarily the result of bad faith, willful misconduct or fraud of an indemnifiable person. Payment of these indemnification obligations shall be made from the assets of Charter Holdings and the members shall not be personally liable to an indemnifiable person for payment of indemnification. INDEMNIFICATION UNDER THE DELAWARE LIMITED LIABILITY COMPANY ACT. Section 18-108 of the Delaware Limited Liability Company Act authorizes a limited liability company to indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever, subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement. INDEMNIFICATION UNDER THE BY-LAWS OF CHARTER CAPITAL. The by-laws of Charter Capital provide that Charter Capital, to the broadest and maximum extent permitted by applicable law, will indemnify each person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of Charter Capital, or is or was serving at the request of Charter Capital as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. To the extent that a director, officer, employee or agent of Charter Capital has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in the preceding paragraph, or in defense of any claim, issue or matter, such person will be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by such person. Expenses, including attorneys' fees, incurred by a director or officer in defending any civil or criminal action, suit or proceeding may be paid by Charter Capital in advance of the final disposition of such action, suit or proceeding, as authorized by the board of directors of Charter Capital, upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such director or officer was not entitled to be indemnified by Charter Capital as authorized in the by-laws of Charter Capital. The indemnification and advancement of expenses provided by, or granted pursuant to, the by-laws of Charter Capital will not be deemed exclusive and are declared expressly to be non-exclusive of any other rights to which those seeking indemnification or advancements of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors II-1 727 or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding an office, and, unless otherwise provided when authorized or ratified, will continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. INDEMNIFICATION UNDER THE DELAWARE GENERAL CORPORATION LAW. Section 145 of the Delaware General Corporation Law, authorizes a corporation to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. In addition, the Delaware General Corporation Law does not permit indemnification in any threatened, pending or completed action or suit by or in the right of the corporation in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses, which such court shall deem proper. To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any claim, issue or matter, such person shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by such person. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended. The Delaware General Corporation Law also allows a corporation to provide for the elimination or limit of the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock purchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. These provisions will not limit the liability of directors or officers under the federal securities laws of the United States. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. EXHIBITS 1.1 Purchase Agreement, dated as of January 6, 2000 by and among Charter Communications Holdings, LLC, Charter Communications Capital Corporation and Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation*
II-2 728 2.1 Merger Agreement, dated March 31, 1999, by and between Charter Communications Holdings, LLC and Marcus Cable Holdings, LLC(1) 2.2(a) Membership Purchase Agreement, dated as of January 1, 1999, by and between ACEC Holding Company, LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(2) 2.2(b) Assignment of Membership Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment II, LLC(2) 2.3(a) Asset Purchase Agreement, dated as of February 17, 1999, among Greater Media, Inc., Greater Media Cablevision, Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)(2) 2.3(b) Assignment of Asset Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment I, LLC(2) 2.4 Purchase Agreement, dated as of February 23, 1999, by and among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Renaissance Media Holdings LLC and Renaissance Media Group LLC(2) 2.5 Purchase Agreement, dated as of March 22, 1999, among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Charter Helicon, LLC, Helicon Partners I, L.P., Baum Investments, Inc. and the limited partners of Helicon Partners I, L.P.(2) 2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999, between InterMedia Partners of West Tennessee, L.P. and Charter Communications, LLC(1) 2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID 1P-V, Inc. and Charter Communications, LLC(1) 2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between Robin Media Group, Inc., InterMedia Partners of West Tennessee, L.P. and Charter RMG, LLC(1) 2.6(d) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners Southeast, Charter Communications, LLC, Charter Communications Properties, LLC, and Marcus Cable Associates, L.L.C.(1) 2.6(d)(i) Amendment to Asset Exchange Agreement, made as of October 1, 1999, by and among InterMedia Partners Southeast and Charter Communications, LLC, Charter Communications Properties, LLC and Marcus Cable Associates, L.L.C.(6) 2.6(e) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners, a California Limited Partnership, Brenmor Cable Partners, L.P. and Robin Media Group, Inc.(1) 2.6(f) Common Agreement, dated April 20, 1999, between InterMedia Partners, InterMedia Partners Southeast, InterMedia Partners of West Tennessee, L.P., InterMedia Capital Partners IV, L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners, L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter Communications Properties, LLC, Marcus Cable Associates, L.L.C. and Charter RMG, LLC(4)+ 2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by and among InterLink Communications Partners, LLLP, the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(1) 2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by and among Rifkin Acquisition Partners, L.L.L.P., the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(2) 2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(2)
II-3 729 2.7(d) Assignment of Purchase Agreement with InterLink Communications Partners, LLLP, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(2) 2.7(e) Assignment of Purchase Agreement with Rifkin Acquisition Partners L.L.L.P., dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(2) 2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(2) 2.7(g) Amendment to the Purchase Agreement with InterLink Communications Partners, LLLP, dated June 29, 1999(5) 2.7(h) Contribution Agreement, dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc., Paul G. Allen and the certain other individuals and entities listed on the signature pages thereto(6) 2.7(i) Form of First Amendment to the Contribution Agreement dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc. and Paul G. Allen(7) 2.8 Contribution and Sale Agreement dated as of December 30, 1999, by and among Charter Communications Holding Company, LLC, CC VII Holdings, LLC and Charter Communications VII, LLC(8) 2.9 Contribution and Sale Agreement dated as of December 30, 1999, by and among Charter Communications Holding Company, LLC and Charter Communications Holdings, LLC(8) 2.10(a) Securities Purchase Agreement, dated May 13, 1999, by and between Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC and Charter Communications Holdings LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.10(b) Assignment and Contribution Agreement, entered into as of October 11, 1999 by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.(6) 2.10(c) Assignment Agreement effective as of June 16, 1999, by and among Charter Communications, Inc., Charter Communications Holdings LLC, Charter Communications Holding Company, LLC, Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC(6) 2.11(a) Purchase and Contribution Agreement, dated as of May 26, 1999, by and among Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)(10) 2.11(b) First Amendment to Purchase and Contribution Agreement, dated as of June 22, 1999, by and among Charter Communications, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc.(11) 2.11(c) Form of Second Amendment to Purchase And Contribution Agreement, dated as of October 27, 1999, by and among Charter Investment, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Holding Group, Inc. and DHN Inc.(7) 2.11(d) Third Amendment to Purchase and Contribution Agreement dated as of November 12, 1999, by and among Charter Communications, Inc., Falcon Communications L.P., Falcon Holdings Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc. (12)
II-4 730 2.12(a) Purchase Agreement, dated as of May 21, 1999, among Blackstone TWF Capital Partners, L.P., Blackstone TWF Capital Partners A L.P., Blackstone TWF Capital Partners B L.P., Blackstone TWF Family Investment Partnership, L.P., RCF Carry, LLC, Fanch Management Partners, Inc., PBW Carried Interest, Inc., RCF Indiana Management Corp, The Robert C. Fanch Revocable Trust, A. Dean Windry, Thomas Binning, Jack Pottle, SDG/Michigan Communications Joint Venture, Fanch-JV2 Master Limited Partnership, Cooney Cable Associates of Ohio, Limited Partnership, North Texas Cablevision, LTD., Post Cablevision of Texas, Limited Partnership, Spring Green Communications, L.P., Fanch-Narragansett CSI Limited Partnership, and Fanch Cablevision of Kansas General Partnership and Charter Communications, Inc. (now called Charter Investment, Inc.)(10) 2.12(b) Assignment of Purchase Agreement by and between Charter Investment, Inc. and Charter Communications Holding Company, LLC, effective as of September 21, 1999(6) 2.13 Purchase and Contribution Agreement, entered into as of June 1999, by and among BCI (USA), LLC, William Bresnan, Blackstone BC Capital Partners L.P., Blackstone BC Offshore Capital Partners L.P., Blackstone Family Investment Partnership III L.P., TCID of Michigan, Inc. and TCI Bresnan LLC and Charter Communications Holding Company, LLC (now called Charter Investment, Inc.)(10) 3.1 Certificate of Formation of Charter Communications Holdings, LLC(1) 3.2 Limited Liability Company Agreement of Charter Communications Holdings, LLC(1) 3.3 Certificate of Incorporation of Charter Communications Holdings Capital Corporation(1) 3.4 By-Laws of Charter Communications Holdings Capital Corporation(1) 4.1(a) Indenture relating to the 10.00% Senior notes due 2009, dated as of January 12, 2000 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank* 4.1(b) Form of 10.00% Senior Note due 2010 (included in Exhibit No. 4.1(a))* 4.1(c) Exchange and Registration Rights Agreement, dated January 12, 2000, by and among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation, Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation, relating to the 10.00% Senior Notes due 2009* 4.2(a) Indenture relating to the 10.25% Senior Notes due 2010, dated as of January 12, 2000, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank* 4.2(b) Form of 10.25% Senior Note due 2010 (included in Exhibit No. 4.2(a))* 4.2(c) Exchange and Registration Rights Agreement, dated January 12, 2000, by and among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation, Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation, relating to the 10.25% Senior Notes due 2010* 4.3(a) Indenture relating to the 11.75% Senior Discount Notes due 2010, dated as of January 12, 2000, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank* 4.3(b) Form of 11.75% Senior Discount Note due 2010 (included in Exhibit No. 4.3(a))*
II-5 731 4.3(c) Exchange and Registration Rights Agreement, dated January 12, 2000, by and among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation, Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation, relating to the 11.75% Senior Discount Notes due 2010* 4.4(a) Indenture relating to the 8.250% Senior Notes due 2007, dated as of March 17, 1999, between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 4.4(b) Indenture relating to the 8.625% Senior Notes due 2009, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 4.4(c) Indenture relating to the 9.920% Senior Discount Notes due 2011, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 4.4(d) Indenture, dated as of April 9, 1998, by and among Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC, Renaissance Media Capital Corporation, Renaissance Media Group LLC and United States Trust Company of New York, as trustee(14) 4.4(e) Indenture, dated January 15, 1996, by and among Rifkin Acquisition Partners, L.L.L.P., Rifkin Acquisition Capital Corp., as issuers, Cable Equities of Colorado Management Corp., FNI Management Corp., Cable Equities of Colorado, Ltd., Cable Equities, Inc. and Rifkin/ Tennessee, Ltd., as Subsidiary Guarantors, and Marine Midland Bank, as trustee(15) 4.5(a) Indenture, dated as of December 10, 1998 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers and The Bank of New York, as trustee for the Notes(19) 4.5(b) Supplemental Indenture, dated as of March 26, 1999 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers, Avalon Cable of Michigan, Inc., as guarantor, and The Bank of New York, as trustee for the Notes(18) 5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding legality* 8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding tax matters* 10.1 Credit Agreement, dated as of March 18, 1999, between Charter Communications Operating, LLC, and certain lenders and agents named therein(1) 10.1(a) First Amendment to Credit Agreement dated as of June 28, 1999 between Charter Communications Operating, LLC, Charter Communications Holdings LLC and certain lenders and agents named therein* 10.1(b) Second Amendment to Credit Agreement dated as of December 14, 1999 between Charter Communications Operating, LLC, Charter Communications Holdings LLC and certain lenders and agents named therein* 10.2(a)(1) Form of Second Amended Management Agreement, dated as of November 8, 1999, by and among Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Operating, LLC(6) 10.2(a)(2) Amended and Restated Management Agreement, dated March 17, 1999 between Charter Communications Operating, LLC and Charter Communications, Inc.(2) 10.2(b) Form of Mutual Services Agreement, dated as of November 9, 1999, by and between Charter Communications, Inc. and Charter Investment, Inc.(10) 10.2(c) Form of Management Agreement, dated as of November 9, 1999, by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.(6)
II-6 732
10.2(d) Management Agreement, dated as of November 12, 1999, by and between CC VI Operating Company, LLC and Charter Communications, Inc. 10.2(e) Management Agreement, dated as of November 12, 1999 by and between Falcon Cable Communications, LLC and Charter Communications, Inc. 10.3 Consulting Agreement, dated as of March 10, 1999, by and between Vulcan Northwest Inc., Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Holdings, LLC(2) 10.4 Charter Communications Holdings, LLC 1999 Option Plan(2) 10.4(a) Assumption Agreement regarding option plan, dated as of May 25, 1999, by and between Charter Communications Holdings, LLC and Charter Communications Holding Company, LLC(5) 10.4(b) Form of Amendment No. 1 to the Charter Communications Holdings, LLC 1999 Option Plan(3) 10.4(c) Amendment No. 2 to the Charter Communications Holdings, LLC 1999 Option Plan(21) 10.5 Membership Interests Purchase Agreement, dated July 22, 1999, by and between Charter Communications Holding Company, LLC and Paul G. Allen(5) 10.6 Employment Agreement, dated as of August 28, 1998, between Jerald L. Kent and Paul G. Allen(13) 10.7 Assignment of Employment Agreements, dated as of December 23, 1998, between Paul G. Allen and Charter Communications, Inc. (now called Charter Investment, Inc.)(5) 10.8(a) Option Agreement, dated as of February 9, 1999, between Jerald L. Kent and Charter Communications Holdings, LLC(5) 10.8(b) Amendment to the Option Agreement, dated as of August 23, 1999, between Jerald L. Kent and Charter Communications Holding Company, LLC(5) 10.8(c) Form of Amendment to the Option Agreement, dated as of November 8, 1999, by and among Jerald L. Kent, Charter Communications Holding Company, LLC and Charter Communications, Inc.(3) 10.9 Letter Agreement, dated as of July 22, 1999 between Charter Communications Holding Company, LLC and Charter Communications Holdings, LLC(12) 10.10 Amendment to Membership Interests Purchase Agreement, dated as of August 10, 1999, by and among Charter Communications Holding Company, LLC, Vulcan Cable III Inc. and Paul G. Allen(5) 10.11 Form of Assignment and Assumption Agreement, dated as of November 4, 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.(10) 10.12 Form of Registration Rights Agreement, dated as of November 12, 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Vulcan Cable III Inc., Mr. Paul G. Allen, Mr. Jerald L. Kent, Mr. Howard L. Wood and Mr. Barry L. Babcock(6) 10.13 Form of Consulting Agreement, dated as of October 18, 1999, by and between Barry L. Babcock and Charter Communications, Inc.(3) 10.14 Form of Termination of Employment Agreement, dated as of October 18, 1999, by and between Barry L. Babcock and Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Holding Company, LLC(3) 10.15 Form of Consulting Agreement, dated as of November 1, 1999, by and between Howard L. Wood and Charter Communications, Inc.(3) 10.16 Form of Termination of Employment Agreement, dated as of November 1, 1999, by and between Howard L. Wood and Charter Investment, Inc., Communications, Inc. and Charter Communications Holding Company, LLC(3)
II-7 733 10.17 Letter Agreement, dated September 21, 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Charter Communications Holding Company, Inc. and Vulcan Ventures Inc.(6) 10.18 Loan Agreement dated as of February 2, 1999 among Bresnan Telecommunications Company LLC (now called CC VIII Operating LLC), as borrower and several financial institutions named therein(16) 10.18(a) Amended and Restated Credit Agreement dated as of February 14, 2000 by and among CC VIII Operating, LLC, as borrower, CC VIII Holdings, LLC, as guarantor, and several financial institutions or entities named therein(21) 10.19 Credit Agreement, dated as of November 15, 1999, among Avalon Cable LLC, CC Michigan, LLC, CC New England, LLC, and several financial institutions or entities named therein(17) 10.19(a) First Amendment to Credit Agreement, dated December 21, 1999, by and among CC Michigan, LLC and CC New England, LLC as borrowers, CC V Holdings, LLC as guarantor and several banks and other financial institutions or entities named therein* 10.20 Form of Credit Agreement, dated as of June 30, 1998, as Amended and Restated as of November 12, 1999, among Falcon Cable Communications, LLC, certain guarantors and several financial institutions or entities named therein(6) 10.21 Credit Agreement, dated as of November 12, 1999, among CC VI Holdings, LLC, CC VI Operating Company, LLC and several financial institutions or entities named therein.(17) 10.22 Amended and Restated Limited Liability Company Agreement for Charter Communications Holding Company, LLC, dated February 14, 2000(20) 10.23 Letter Agreement, dated May 25, 1999, between Charter Communications, Inc. and Marc Nathanson* 10.24 Exchange Agreement, dated as of February 14, 2000, by and among Charter Communications, Inc., BCI (USA), LLC, William J. Bresnan, Blackstone BC Capital Partners L.P., Blackstone BC Offshore Capital Partners L.P., Blackstone Family Media, III L.P. (as assignee of Blackstone Family Investment III L.P.), TCID of Michigan, Inc., and TCI Bresnan LLC(20) 10.25 Form of Exchange Agreement, dated as of November 12, 1999 by and among Charter Investments, Inc., Charter Communications, Inc., Vulcan Cable III Inc. and Paul G. Allen(6) 10.26 Commitment Letter dated April 14, 2000 from Morgan Stanley Senior Funding, Inc. 12.1 Predecessor of Charter Communications Holdings, LLC and Charter Communications Holdings, LLC Ratio of Earnings to Fixed Charges Calculation 21.1 Subsidiaries of Charter Communications Holdings, LLC and Charter Communications Capital Corporation(22) 23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained in Exhibit No. 5.1) 23.2 Consent of Arthur Andersen LLP 23.3 Consent of KPMG LLP 23.4 Consent of Ernst & Young LLP 23.5 Consent of Ernst & Young LLP 23.6 Consent of KPMG LLP 23.7 Consent of PricewaterhouseCoopers LLP 23.8 Consent of PricewaterhouseCoopers LLP 23.9 Consent of Ernst & Young LLP 23.10 Consent of PricewaterhouseCoopers LLP
II-8 734 23.11 Consent of PricewaterhouseCoopers LLP 23.12 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C. 23.13 Consent of PricewaterhouseCoopers LLP 23.14 Consent of Ernst & Young LLP 23.15 Consent of KPMG LLP 23.16 Consent of KPMG LLP 23.17 Consent of Ernst & Young LLP 23.18 Consent of Ernst & Young LLP 23.19 Consent of Ernst & Young LLP 23.20 Consent of Shields & Co. 24.1 Power of Attorney (included in Part II to the Registration Statement on the signature page)* 25.1 Statement of Eligibility of and Qualification (Form T-1) of Harris Trust and Savings Bank* 27.1 Financial Data Schedule(22) 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery*
- - - --------------- * Previously filed. + Portions of this exhibit have been omitted pursuant to a request for confidential treatment. (1) Incorporated by reference to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499). (2) Incorporated by reference to Amendment No. 4 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 22, 1999 (File No. 333-77499). (3) Incorporated by reference to Amendment No. 4 to the registration statement on Form S-1 of Charter Communications, Inc. filed on November 1, 1999 (File No. 333-83887). (4) Incorporated by reference to Amendment No. 3 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 2, 1999 (File No. 333-77499). (5) Incorporated by reference to Amendment No. 6 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 27, 1999 (File No. 333-77499). (6) Incorporated by reference to Amendment No. 3 to the registration statement on Form S-1 of Charter Communications, Inc. filed on October 18, 1999 (File No. 333-83887). (7) Incorporated by reference to Amendment No. 5 to the registration Statement on Form S-1 of Charter Communications, Inc. filed on November 4, 1999 (File No. 333-83887). (8) Incorporated by reference to the report on Form 8-K of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on January 18, 2000 (File No. 333-77499). (9) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable of Michigan LLC, Avalon Cable of Michigan Inc., Avalon Cable of New England LLC and Avalon Cable Finance Inc. filed on May 28, 1999 (File No. 333-75453). (10) Incorporated by reference to Amendment No. 2 to the registration statement on Form S-1 of Charter Communications, Inc. filed on September 28, 1999 (File No. 333-83887). II-9 735 (11) Incorporated by reference to the quarterly report on Form 10-Q filed by Falcon Communications, L.P. and Falcon Funding Corporation on August 13, 1999 (File Nos. 333-60776 and 333-55755). (12) Incorporated by reference to the report on Form 8-K of CC VII Holdings, LLC and Falcon Funding Corporation filed on November 26, 1999 (File No. 033-60776). (13) Incorporated by reference to Amendment No. 5 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 10, 1999 (File No. 333-77499). (14) Incorporated by reference to the registration statement on Forms S-4 and S-1 of Renaissance Media Group LLC, Renaissance Media (Tennessee) LLC, Renaissance Media (Louisiana) LLC and Renaissance Media Capital Corporation filed on June 12, 1998 (File No. 333-56679). (15) Incorporated by reference to the registration statement on Form S-1 of Rifkin Acquisition Capital Corp. and Rifkin Acquisition Partners, L.L.P. filed on April 2, 1996 (File No. 333-3084). (16) Incorporated by reference to the registration statement on Form S-4 of Bresnan Communications Group LLC and Bresnan Capital Corporation filed on May 3, 1999 (File No. 333-77637). (17) Incorporated by reference to the report on Form 8-K of Charter Communications, Inc. filed on November 29, 1999 (File No. 333-83887). (18) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. filed on May 28, 1999 (File No. 333-75415). (19) Incorporated by reference to the registration statement on Form S-4 of Falcon Holding Group, L.P. filed on April 18, 1993 (File No. 33-60776). (20) Incorporated by reference to the current report on Form 8-K of Charter Communications, Inc. filed on February 29, 2000 (File No. 333-83887). (21) Incorporated by reference to the annual report on Form 10-K filed by Charter Communications, Inc. on March 30, 2000 (File No. 333-83887). (22) Incorporated by reference to the Annual Report on Form 10-K filed by Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation on March 30, 2000 (File No. 333-77499). FINANCIAL STATEMENT SCHEDULES Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the information required by such omitted schedules is set forth in the financial statements or the notes thereto. ITEM 22. UNDERTAKINGS. The undersigned registrants hereby undertake that: (1) Prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to the reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (2) Every prospectus: (i) that is filed pursuant to the immediately preceding paragraph or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act and is II-10 736 used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post- effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-11 737 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Charter Communications Holdings, LLC has duly caused this Amendment No. 1 to Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri on the 18th day of April 2000. CHARTER COMMUNICATIONS HOLDINGS, LLC: a registrant By: CHARTER COMMUNICATIONS HOLDING COMPANY, LLC, its sole member By: CHARTER COMMUNICATIONS, INC., its member and manager, and the manager of Charter Communications Holdings, LLC By: /s/ CURTIS S. SHAW ------------------------------------------ Name: Curtis S. Shaw Title: Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
CAPACITY WITH CHARTER COMMUNICATIONS, INC., THE MANAGER OF CHARTER COMMUNICATIONS HOLDINGS, LLC AND THE MANAGER OF CHARTER COMMUNICATIONS HOLDING COMPANY, LLC, THE SOLE MEMBER OF SIGNATURE CHARTER COMMUNICATIONS HOLDINGS, LLC DATE --------- ------------------------------------------- ---- * Director April 18, 2000 - - - ------------------------------------------ William D. Savoy * President, Chief Executive Officer and Director April 18, 2000 - - - ------------------------------------------ (Principal Executive Officer) Jerald L. Kent * Director April 18, 2000 - - - ------------------------------------------ Nancy B. Peretsman * Director April 18, 2000 - - - ------------------------------------------ Marc B. Nathanson * Director April 18, 2000 - - - ------------------------------------------ Ronald L. Nelson * Director April 18, 2000 - - - ------------------------------------------ Howard L. Wood * Senior Vice President and Chief Financial Officer April 18, 2000 - - - ------------------------------------------ (Principal Financial Officer and Principal Kent D. Kalkwarf Accounting Officer)
*By: /s/ CURTIS S. SHAW -------------------------- Attorney-in-Fact II-12 738 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Charter Communications Holdings Capital Corporation has duly caused this Amendment No. 1 to Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri on the 18th day of April 2000. CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION, a registrant By: /s/ CURTIS S. SHAW --------------------------------------- Name: Curtis S. Shaw Title: Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- * President, Chief Executive Officer and Director April 18, 2000 - - - ------------------------------------ (Principal Executive Officer) Jerald L. Kent * Senior Vice President and Chief Financial April 18, 2000 - - - ------------------------------------ Officer (Principal Financial Officer and Kent D. Kalkwarf Principal Accounting Officer)
*By: /s/ CURTIS S. SHAW ---------------------- Attorney-in-Fact II-13 739 EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- 1.1 Purchase Agreement, dated as of January 6, 2000 by and among Charter Communications Holdings, LLC, Charter Communications Capital Corporation and Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation* 2.1 Merger Agreement, dated March 31, 1999, by and between Charter Communications Holdings, LLC and Marcus Cable Holdings, LLC(1) 2.2(a) Membership Purchase Agreement, dated as of January 1, 1999, by and between ACEC Holding Company, LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(2) 2.2(b) Assignment of Membership Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment II, LLC(2) 2.3(a) Asset Purchase Agreement, dated as of February 17, 1999, among Greater Media, Inc., Greater Media Cablevision, Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)(2) 2.3(b) Assignment of Asset Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment I, LLC(2) 2.4 Purchase Agreement, dated as of February 23, 1999, by and among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Renaissance Media Holdings LLC and Renaissance Media Group LLC(2) 2.5 Purchase Agreement, dated as of March 22, 1999, among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Charter Helicon, LLC, Helicon Partners I, L.P., Baum Investments, Inc. and the limited partners of Helicon Partners I, L.P.(2) 2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999, between InterMedia Partners of West Tennessee, L.P. and Charter Communications, LLC(1) 2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID 1P-V, Inc. and Charter Communications, LLC(1) 2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between Robin Media Group, Inc., InterMedia Partners of West Tennessee, L.P. and Charter RMG, LLC(1) 2.6(d) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners Southeast, Charter Communications, LLC, Charter Communications Properties, LLC, and Marcus Cable Associates, L.L.C.(1) 2.6(d)(i) Amendment to Asset Exchange Agreement, made as of October 1, 1999, by and among InterMedia Partners Southeast and Charter Communications, LLC, Charter Communications Properties, LLC and Marcus Cable Associates, L.L.C.(6) 2.6(e) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners, a California Limited Partnership, Brenmor Cable Partners, L.P. and Robin Media Group, Inc.(1) 2.6(f) Common Agreement, dated April 20, 1999, between InterMedia Partners, InterMedia Partners Southeast, InterMedia Partners of West Tennessee, L.P., InterMedia Capital Partners IV, L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners, L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter Communications Properties, LLC, Marcus Cable Associates, L.L.C. and Charter RMG, LLC(4)+ 2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by and among InterLink Communications Partners, LLLP, the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(1)
740
EXHIBIT DESCRIPTION ------- ----------- 2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by and among Rifkin Acquisition Partners, L.L.L.P., the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(2) 2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(2) 2.7(d) Assignment of Purchase Agreement with InterLink Communications Partners, LLLP, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(2) 2.7(e) Assignment of Purchase Agreement with Rifkin Acquisition Partners L.L.L.P., dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(2) 2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(2) 2.7(g) Amendment to the Purchase Agreement with InterLink Communications Partners, LLLP, dated June 29, 1999(5) 2.7(h) Contribution Agreement, dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc., Paul G. Allen and the certain other individuals and entities listed on the signature pages thereto(6) 2.7(i) Form of First Amendment to the Contribution Agreement dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc. and Paul G. Allen(7) 2.8 Contribution and Sale Agreement dated as of December 30, 1999, by and among Charter Communications Holding Company, LLC, CC VII Holdings, LLC and Charter Communications VII, LLC(8) 2.9 Contribution and Sale Agreement dated as of December 30, 1999, by and among Charter Communications Holding Company, LLC and Charter Communications Holdings, LLC(8) 2.10(a) Securities Purchase Agreement, dated May 13, 1999, by and between Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC and Charter Communications Holdings LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.10(b) Assignment and Contribution Agreement, entered into as of October 11, 1999 by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.(6) 2.10(c) Assignment Agreement effective as of June 16, 1999, by and among Charter Communications, Inc., Charter Communications Holdings LLC, Charter Communications Holding Company, LLC, Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC(6) 2.11(a) Purchase and Contribution Agreement, dated as of May 26, 1999, by and among Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)(10) 2.11(b) First Amendment to Purchase and Contribution Agreement, dated as of June 22, 1999, by and among Charter Communications, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc.(11) 2.11(c) Form of Second Amendment to Purchase And Contribution Agreement, dated as of October 27, 1999, by and among Charter Investment, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Holding Group, Inc. and DHN Inc.(7)
741
EXHIBIT DESCRIPTION ------- ----------- 2.11(d) Third Amendment to Purchase and Contribution Agreement dated as of November 12, 1999, by and among Charter Communications, Inc., Falcon Communications L.P., Falcon Holdings Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc. (12) 2.12(a) Purchase Agreement, dated as of May 21, 1999, among Blackstone TWF Capital Partners, L.P., Blackstone TWF Capital Partners A L.P., Blackstone TWF Capital Partners B L.P., Blackstone TWF Family Investment Partnership, L.P., RCF Carry, LLC, Fanch Management Partners, Inc., PBW Carried Interest, Inc., RCF Indiana Management Corp, The Robert C. Fanch Revocable Trust, A. Dean Windry, Thomas Binning, Jack Pottle, SDG/Michigan Communications Joint Venture, Fanch-JV2 Master Limited Partnership, Cooney Cable Associates of Ohio, Limited Partnership, North Texas Cablevision, LTD., Post Cablevision of Texas, Limited Partnership, Spring Green Communications, L.P., Fanch-Narragansett CSI Limited Partnership, and Fanch Cablevision of Kansas General Partnership and Charter Communications, Inc. (now called Charter Investment, Inc.)(10) 2.12(b) Assignment of Purchase Agreement by and between Charter Investment, Inc. and Charter Communications Holding Company, LLC, effective as of September 21, 1999(6) 2.13 Purchase and Contribution Agreement, entered into as of June 1999, by and among BCI (USA), LLC, William Bresnan, Blackstone BC Capital Partners L.P., Blackstone BC Offshore Capital Partners L.P., Blackstone Family Investment Partnership III L.P., TCID of Michigan, Inc. and TCI Bresnan LLC and Charter Communications Holding Company, LLC (now called Charter Investment, Inc.)(10) 3.1 Certificate of Formation of Charter Communications Holdings, LLC(1) 3.2 Limited Liability Company Agreement of Charter Communications Holdings, LLC(1) 3.3 Certificate of Incorporation of Charter Communications Holdings Capital Corporation(1) 3.4 By-Laws of Charter Communications Holdings Capital Corporation(1) 4.1(a) Indenture relating to the 10.00% Senior notes due 2009, dated as of January 12, 2000 between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank* 4.1(b) Form of 10.00% Senior Note due 2010 (included in Exhibit No. 4.1(a))* 4.1(c) Exchange and Registration Rights Agreement, dated January 12, 2000, by and among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation, Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation, relating to the 10.00% Senior Notes due 2009* 4.2(a) Indenture relating to the 10.25% Senior Notes due 2010, dated as of January 12, 2000, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank* 4.2(b) Form of 10.25% Senior Note due 2010 (included in Exhibit No. 4.2(a))* 4.2(c) Exchange and Registration Rights Agreement, dated January 12, 2000, by and among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation, Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation, relating to the 10.25% Senior Notes due 2010* 4.3(a) Indenture relating to the 11.75% Senior Discount Notes due 2010, dated as of January 12, 2000, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank* 4.3(b) Form of 11.75% Senior Discount Note due 2010 (included in Exhibit No. 4.3(a))*
742
EXHIBIT DESCRIPTION ------- ----------- 4.3(c) Exchange and Registration Rights Agreement, dated January 12, 2000, by and among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation, Goldman, Sachs & Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation, relating to the 11.75% Senior Discount Notes due 2010* 4.4(a) Indenture relating to the 8.250% Senior Notes due 2007, dated as of March 17, 1999, between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 4.4(b) Indenture relating to the 8.625% Senior Notes due 2009, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 4.4(c) Indenture relating to the 9.920% Senior Discount Notes due 2011, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 4.4(d) Indenture, dated as of April 9, 1998, by and among Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC, Renaissance Media Capital Corporation, Renaissance Media Group LLC and United States Trust Company of New York, as trustee(14) 4.4(e) Indenture, dated January 15, 1996, by and among Rifkin Acquisition Partners, L.L.L.P., Rifkin Acquisition Capital Corp., as issuers, Cable Equities of Colorado Management Corp., FNI Management Corp., Cable Equities of Colorado, Ltd., Cable Equities, Inc. and Rifkin/ Tennessee, Ltd., as Subsidiary Guarantors, and Marine Midland Bank, as trustee(15) 4.5(a) Indenture, dated as of December 10, 1998 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers and The Bank of New York, as trustee for the Notes(19) 4.5(b) Supplemental Indenture, dated as of March 26, 1999 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers, Avalon Cable of Michigan, Inc., as guarantor, and The Bank of New York, as trustee for the Notes(18) 5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding legality* 8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding tax matters* 10.1 Credit Agreement, dated as of March 18, 1999, between Charter Communications Operating, LLC, and certain lenders and agents named therein(1) 10.1(a) First Amendment to Credit Agreement dated as of June 28, 1999 between Charter Communications Operating, LLC, Charter Communications Holdings LLC and certain lenders and agents named therein* 10.1(b) Second Amendment to Credit Agreement dated as of December 14, 1999 between Charter Communications Operating, LLC, Charter Communications Holdings LLC and certain lenders and agents named therein* 10.2(a)(1) Form of Second Amended Management Agreement, dated as of November 8, 1999, by and among Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Operating, LLC(6) 10.2(a)(2) Amended and Restated Management Agreement, dated March 17, 1999 between Charter Communications Operating, LLC and Charter Communications, Inc.(2) 10.2(b) Form of Mutual Services Agreement, dated as of November 9, 1999, by and between Charter Communications, Inc. and Charter Investment, Inc.(10) 10.2(c) Form of Management Agreement, dated as of November 9, 1999, by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.(6)
743
EXHIBIT DESCRIPTION ------- ----------- 10.2(d) Management Agreement, dated as of November 12, 1999, by and between CC VI Operating Company, LLC and Charter Communications, Inc. 10.2(e) Management Agreement, dated as of November 12, 1999 by and between Falcon Cable Communications, LLC and Charter Communications, Inc. 10.3 Consulting Agreement, dated as of March 10, 1999, by and between Vulcan Northwest Inc., Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Holdings, LLC(2) 10.4 Charter Communications Holdings, LLC 1999 Option Plan(2) 10.4(a) Assumption Agreement regarding option plan, dated as of May 25, 1999, by and between Charter Communications Holdings, LLC and Charter Communications Holding Company, LLC(5) 10.4(b) Form of Amendment No. 1 to the Charter Communications Holdings, LLC 1999 Option Plan(3) 10.4(c) Amendment No. 2 to the Charter Communications Holdings, LLC 1999 Option Plan(21) 10.5 Membership Interests Purchase Agreement, dated July 22, 1999, by and between Charter Communications Holding Company, LLC and Paul G. Allen(5) 10.6 Employment Agreement, dated as of August 28, 1998, between Jerald L. Kent and Paul G. Allen(13) 10.7 Assignment of Employment Agreements, dated as of December 23, 1998, between Paul G. Allen and Charter Communications, Inc. (now called Charter Investment, Inc.)(5) 10.8(a) Option Agreement, dated as of February 9, 1999, between Jerald L. Kent and Charter Communications Holdings, LLC(5) 10.8(b) Amendment to the Option Agreement, dated as of August 23, 1999, between Jerald L. Kent and Charter Communications Holding Company, LLC(5) 10.8(c) Form of Amendment to the Option Agreement, dated as of November 8, 1999, by and among Jerald L. Kent, Charter Communications Holding Company, LLC and Charter Communications, Inc.(3) 10.9 Letter Agreement, dated as of July 22, 1999 between Charter Communications Holding Company, LLC and Charter Communications Holdings, LLC(12) 10.10 Amendment to Membership Interests Purchase Agreement, dated as of August 10, 1999, by and among Charter Communications Holding Company, LLC, Vulcan Cable III Inc. and Paul G. Allen(5) 10.11 Form of Assignment and Assumption Agreement, dated as of November 4, 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.(10) 10.12 Form of Registration Rights Agreement, dated as of November 12, 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Vulcan Cable III Inc., Mr. Paul G. Allen, Mr. Jerald L. Kent, Mr. Howard L. Wood and Mr. Barry L. Babcock(6) 10.13 Form of Consulting Agreement, dated as of October 18, 1999, by and between Barry L. Babcock and Charter Communications, Inc.(3) 10.14 Form of Termination of Employment Agreement, dated as of October 18, 1999, by and between Barry L. Babcock and Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Holding Company, LLC(3) 10.15 Form of Consulting Agreement, dated as of November 1, 1999, by and between Howard L. Wood and Charter Communications, Inc.(3) 10.16 Form of Termination of Employment Agreement, dated as of November 1, 1999, by and between Howard L. Wood and Charter Investment, Inc., Communications, Inc. and Charter Communications Holding Company, LLC(3) 10.17 Letter Agreement, dated September 21, 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Charter Communications Holding Company, Inc. and Vulcan Ventures Inc.(6)
744
EXHIBIT DESCRIPTION ------- ----------- 10.18 Loan Agreement dated as of February 2, 1999 among Bresnan Telecommunications Company LLC (now called CC VIII Operating LLC), as borrower and several financial institutions named therein(16) 10.18(a) Amended and Restated Credit Agreement dated as of February 14, 2000 by and among CC VIII Operating, LLC, as borrower, CC VIII Holdings, LLC, as guarantor, and several financial institutions or entities named therein(21) 10.19 Credit Agreement, dated as of November 15, 1999, among Avalon Cable LLC, CC Michigan, LLC, CC New England, LLC, and several financial institutions or entities named therein(17) 10.19(a) First Amendment to Credit Agreement, dated December 21, 1999, by and among CC Michigan, LLC and CC New England, LLC as borrowers, CC V Holdings, LLC as guarantor and several banks and other financial institutions or entities named therein* 10.20 Form of Credit Agreement, dated as of June 30, 1998, as Amended and Restated as of November 12, 1999, among Falcon Cable Communications, LLC, certain guarantors and several financial institutions or entities named therein(6) 10.21 Credit Agreement, dated as of November 12, 1999, among CC VI Holdings, LLC, CC VI Operating Company, LLC and several financial institutions or entities named therein.(17) 10.22 Amended and Restated Limited Liability Company Agreement for Charter Communications Holding Company, LLC, dated February 14, 2000(20) 10.23 Letter Agreement, dated May 25, 1999, between Charter Communications, Inc. and Marc Nathanson* 10.24 Exchange Agreement, dated as of February 14, 2000, by and among Charter Communications, Inc., BCI (USA), LLC, William J. Bresnan, Blackstone BC Capital Partners L.P., Blackstone BC Offshore Capital Partners L.P., Blackstone Family Media, III L.P. (as assignee of Blackstone Family Investment III L.P.), TCID of Michigan, Inc., and TCI Bresnan LLC(20) 10.25 Form of Exchange Agreement, dated as of November 12, 1999 by and among Charter Investments, Inc., Charter Communications, Inc., Vulcan Cable III Inc. and Paul G. Allen(6) 10.26 Commitment Letter dated April 14, 2000 from Morgan Stanley Senior Funding, Inc. 12.1 Predecessor of Charter Communications Holdings, LLC and Charter Communications Holdings, LLC Ratio of Earnings to Fixed Charges Calculation 21.1 Subsidiaries of Charter Communications Holdings, LLC and Charter Communications Capital Corporation(22) 23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained in Exhibit No. 5.1) 23.2 Consent of Arthur Andersen LLP 23.3 Consent of KPMG LLP 23.4 Consent of Ernst & Young LLP 23.5 Consent of Ernst & Young LLP 23.6 Consent of KPMG LLP 23.7 Consent of PricewaterhouseCoopers LLP 23.8 Consent of PricewaterhouseCoopers LLP 23.9 Consent of Ernst & Young LLP 23.10 Consent of PricewaterhouseCoopers LLP 23.11 Consent of PricewaterhouseCoopers LLP 23.12 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C. 23.13 Consent of PricewaterhouseCoopers LLP 23.14 Consent of Ernst & Young LLP 23.15 Consent of KPMG LLP 23.16 Consent of KPMG LLP 23.17 Consent of Ernst & Young LLP
745
EXHIBIT DESCRIPTION ------- ----------- 23.18 Consent of Ernst & Young LLP 23.19 Consent of Ernst & Young LLP 23.20 Consent of Shields & Co. 24.1 Power of Attorney (included in Part II to the Registration Statement on the signature page)* 25.1 Statement of Eligibility of and Qualification (Form T-1) of Harris Trust and Savings Bank* 27.1 Financial Data Schedule(22) 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery*
- - - --------------- * Previously filed. + Portions of this exhibit have been omitted pursuant to a request for confidential treatment. (1) Incorporated by reference to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 22, 1999 (File No. 333-77499). (2) Incorporated by reference to Amendment No. 4 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 22, 1999 (File No. 333-77499). (3) Incorporated by reference to Amendment No. 4 to the registration statement on Form S-1 of Charter Communications, Inc. filed on November 1, 1999 (File No. 333-83887). (4) Incorporated by reference to Amendment No. 3 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 2, 1999 (File No. 333-77499). (5) Incorporated by reference to Amendment No. 6 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 27, 1999 (File No. 333-77499). (6) Incorporated by reference to Amendment No. 3 to the registration statement on Form S-1 of Charter Communications, Inc. filed on October 18, 1999 (File No. 333-83887). (7) Incorporated by reference to Amendment No. 5 to the registration Statement on Form S-1 of Charter Communications, Inc. filed on November 4, 1999 (File No. 333-83887). (8) Incorporated by reference to the report on Form 8-K of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on January 18, 2000 (File No. 333-77499). (9) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable of Michigan LLC, Avalon Cable of Michigan Inc., Avalon Cable of New England LLC and Avalon Cable Finance Inc. filed on May 28, 1999 (File No. 333-75453). (10) Incorporated by reference to Amendment No. 2 to the registration statement on Form S-1 of Charter Communications, Inc. filed on September 28, 1999 (File No. 333-83887). (11) Incorporated by reference to the quarterly report on Form 10-Q filed by Falcon Communications, L.P. and Falcon Funding Corporation on August 13, 1999 (File Nos. 333-60776 and 333-55755). (12) Incorporated by reference to the report on Form 8-K of CC VII Holdings, LLC and Falcon Funding Corporation filed on November 26, 1999 (File No. 033-60776). 746 (13) Incorporated by reference to Amendment No. 5 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 10, 1999 (File No. 333-77499). (14) Incorporated by reference to the registration statement on Forms S-4 and S-1 of Renaissance Media Group LLC, Renaissance Media (Tennessee) LLC, Renaissance Media (Louisiana) LLC and Renaissance Media Capital Corporation filed on June 12, 1998 (File No. 333-56679). (15) Incorporated by reference to the registration statement on Form S-1 of Rifkin Acquisition Capital Corp. and Rifkin Acquisition Partners, L.L.L.P. filed on April 2, 1996 (File No. 333-3084). (16) Incorporated by reference to the registration statement on Form S-4 of Bresnan Communications Group LLC and Bresnan Capital Corporation filed on May 3, 1999 (File No. 333-77637). (17) Incorporated by reference to the report on Form 8-K of Charter Communications, Inc. filed on November 29, 1999 (File No. 333-83887). (18) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. filed on May 28, 1999 (File No. 333-75415). (19) Incorporated by reference to the registration statement on Form S-4 of Falcon Holding Group, L.P. filed on April 18, 1993 (File No. 33-60776). (20) Incorporated by reference to the current report on Form 8-K of Charter Communications, Inc. filed on February 29, 2000 (File No. 333-83887). (21) Incorporated by reference to the annual report on Form 10-K filed by Charter Communications, Inc. on March 30, 2000 (File No. 333-83887). (22) Incorporated by reference to the annual report on Form 10-K filed by Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation on March 30, 2000 (file No. 333-77499).
   1
                                                                 EXHIBIT 10.2(d)


                              MANAGEMENT AGREEMENT



     THIS MANAGEMENT AGREEMENT (this "Agreement") is made as of the 12th day of
November, 1999, by and between CC VI Operating Company, LLC, a Delaware limited
liability company (the "Company"), and Charter Communications, Inc., a Delaware
corporation (the "Manager").

A.   The Company desires to retain the Manager to manage and operate the cable
     television systems owned by the Company and its subsidiaries and any cable
     television systems subsequently acquired by the Company and its
     subsidiaries (the "Cable Systems").

B.   The Manager has agreed to manage and operate the Cable Systems, all upon
     the terms and conditions hereinafter set forth.

     In consideration of the mutual covenants and agreements contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:

     1. Retention of the Manager. The Company hereby appoints the Manager as a
manager for the Cable Systems, and the Manager hereby agrees to serve the
Company as a manager for the Cable Systems, pursuant to the terms and conditions
hereinafter set forth.

     2. Authority and Duties of the Manager.

          (a) The Company agrees to seek the advice of the Manager regarding the
business, properties and activities of the Cable Systems during the term hereof,
and subject to the direction, control and general supervision of the Company,
the Manager agrees to provide such advice. The Manager shall give such advice in
a businesslike, efficient, lawful and professional manner in accordance with
this Agreement.

          (b) Without limiting the generality of the foregoing, the Manager
shall provide all management services with respect to the operation of the Cable
Systems, including, but not limited to the following:

               (i) advice concerning the hiring, termination, performance and
training of personnel;

               (ii) review, consultation and advice concerning personnel,
operations, engineering and other management and operating policies and
procedures;


   2


               (iii) review, consultation and advice concerning maintenance
standards for plant and equipment of the Cable Systems, advice as to the Cable
Systems' normal repairs, replacements, maintenance and plant upgrades, and
provide for periodic inspections;

               (iv) recommendations on all necessary action to keep the
operation of the Cable Systems in compliance, in all material respects, with the
conditions of the Company's franchises and all applicable rules, regulations and
orders of any federal, state, county or municipal authority having jurisdiction
over the Cable Systems;

               (v) assistance in the negotiation, or directly negotiate, on
behalf of the Company, of operating agreements (including, but not limited to,
pole attachment agreements, office and headend leases, easements and
right-of-way agreements), contracts for the purchase, lease, license or use of
properties, equipment and rights as may be necessary or desirable in connection
with the operation or maintenance of the Cable Systems and such other agreements
on behalf of the Company as are necessary or advisable for the Cable Systems and
assistance in the procuring, or directly procuring, on behalf of the Company,
such programming, billing and other services and equipment deemed necessary and
advisable for the Cable Systems;

               (vi) development of recommendations for, and negotiate the
acquisition and maintenance of, such insurance coverage with respect to the
Cable Systems as the Company may determine upon advice and consultation of the
Manager;

               (vii) guidance on all marketing, sales promotions and advertising
for the Cable Systems;

               (viii) assistance in the financial budgeting process and the
implementation of appropriate accounting, financial, administrative and
managerial controls for the Cable Systems;

               (ix) preparation for use by the Company of financial reports and
maintenance of books of accounts and other records reflecting the results of
operation of each Cable System and/or subsidiary; and

               (x) advice and consultation with the Company in connection with
any and all aspects of the Cable Systems and the day to day operation thereof
and consultation with the Company with respect to the selection of attorneys,
consultants and accountants.

     3. Management Expenses.


          (a) The Manager shall charge to, or be reimbursed by the Company for,
all expenses, costs, losses, liabilities or damages incurred by the Manager
attributable to the ownership or operation of the Cable Systems, including,
where applicable, pro rata allocation for services and purchases made by the
Manager on behalf of the Cable Systems and other companies and cable systems
managed by the Manager, subject to the limitations set forth in



                                       2
   3

Section 6 (the "Company Expenses"). In addition to reimbursement for Company
Expenses, the Manager shall be reimbursed for all other expenses, costs, losses,
liabilities or damages incurred by the Manager in connection with the
performance of its duties hereunder, including, without limitation, the
Manager's costs for overhead, administration and salaries (collectively, the
"Management Fee"), provided that the Management Fee shall not include expenses
incurred by Manager that are in the nature of the "Company Expenses" and are
paid to the Manager by another company or cable system managed by Manager.
Notwithstanding the foregoing, and subject to the payment priority provisions of
the following paragraph, in no event may the Management Fee portion of Company
Expenses be reimbursable in any year in an amount in excess five percent (5.0%)
of the Gross Revenue of the Company, payable monthly in arrears or as otherwise
agreed upon. "Gross Revenue" will include all revenues from the operation of the
Cable Systems including, without limitation, subscriber payments, advertising
revenues and revenues from other services provided by the Cable Systems, but not
including interest income or income from investments unrelated to the Cable
Systems. Management Fees shall only be paid to the Manager by the Company to the
extent permitted by the Credit Agreement (as defined below) and any other
material agreement and applicable charter document of the Company and the
Manager.


          Notwithstanding the foregoing, the Management Fees (but not other
Company Expenses) due and payable as provided in the preceding paragraph of this
Section 3 shall be subordinated and junior in right of payment to the prior
payment in full in cash of all of the Senior Debt (as defined below) and shall
not be paid except to the extent allowed under the Credit Agreement (as defined
below). In the event of any bankruptcy or similar proceeding relative to the
Company (a "Reorganization"), then all of the Senior Debt shall first be paid in
full in cash before any payment of the Management Fees is made, and in any
Reorganization any amount payable in respect of the Management Fees shall be
paid directly to the Funding Agent referred to below, unless all the Senior Debt
has been paid in full in cash. The Manager hereby irrevocably authorizes the
Funding Agent, as attorney-in-fact for the Manager, to vote, file or prove any
claim or proof of claim in any Reorganization in respect of the Management Fees
and to demand, sue for, collect and receive any such payment. The Manager shall
take any actions requested by the Funding Agent in order to accomplish any of
the foregoing. If the Manager receives any payment hereunder in violation of the
terms hereof or in connection with any Reorganization (prior to the payment in
full in cash of the Senior Debt), the Manager shall hold such payment in trust
for the benefit of the holders of the Senior Debt and forthwith pay it over to
the Funding Agent. Amounts payable to the Manager in accordance with this
Section 3 which remain unpaid by reason of the foregoing shall be accrued as a
liability of the Company and shall be payable as soon as the conditions to
payment are fulfilled. The deferred portion of the Management Fees will bear
interest at the rate of ten percent (10%) per annum, compounded annually, from
the date otherwise due and payable until the payment thereof.


          As used herein, (i) "Credit Agreement" means the Credit Agreement,
dated as of November 12, 1999, among CC VI Operating Company, LLC, certain of
its affiliates, the Lenders parties thereto, Toronto Dominion (Texas), Inc., as
Administrative Agent (the "Funding Agent"), and various Syndication and other
Agents named therein, as amended, restated, supplemented or otherwise modified
from time to time, and (ii) "Senior Debt" means the



                                       3
   4

principal amount of all loans and guarantee obligations from time to time
outstanding or owing under the Credit Agreement and the other loan documents
executed and delivered by the Company pursuant thereto, together with interest
thereon (including any interest subsequent to any filing for Reorganization,
whether or not such interest would constitute an allowed claim, calculated at
the rate set forth for overdue loans in the Credit Agreement) and all other
obligations of the Company under the Credit Agreement and such other loan
documents.

          (b) Notwithstanding any termination of this Agreement pursuant to
Section 4, the Manager shall, subject to the limitations set forth in the
preceding paragraphs above, remain entitled (i) to receive the Management Fees
set forth in Section 3(a) incurred prior to the date of termination which have
not been paid to the Company; and (ii) to receive payment of the deferred
Management Fees at the time of such termination if, and to the extent that,
payment thereof is otherwise permitted under Section 3(a).

     4. Effective Date. This Agreement shall become effective only upon the
closing (the "Effective Date") of the initial public offering of the Manager as
contemplated by its Registration Statement on Form S-1 filed with the Securities
and Exchange Commission.

     5. Term of Agreement. The term of this Agreement shall be ten years
commencing on the Effective Date, unless sooner terminated pursuant to the terms
of this Agreement. This Agreement may be terminated as follows: (a) by the
Company immediately upon written notice to the manager for Cause (as defined
below) or (b) automatically on the consummation of the sale of all or
substantially all of the Company's assets. For purposes hereof, "Cause" shall
exist if the Manager has engaged in gross negligence or willful misconduct in
the performance of its duties hereunder which could have a material adverse
effect on the Company.

     6. Liability. The Company shall bear any and all expenses, liabilities,
losses or damages resulting from the operation of the Cable Systems, and the
Manager, its partners, officers, directors and employees shall not, under any
circumstances, be held liable therefor, except that the Manager shall be liable
for any loss or damage which results from its own gross negligence or willful
misconduct. Neither the Manager nor any of its partners, members, officers,
directors and employees shall be held to have incurred any liability to the
Company, the Cable Systems or any third party by virtue of any action not
constituting gross negligence or willful misconduct taken in good faith by it in
discharge of its duties hereunder, and the Company agrees to indemnify the
manager and its shareholders, partners, directors, officers and employees and
hold the Manager and its partners, directors, officers and employees harmless
with respect of the foregoing, including, but not limited to, reasonable
attorneys' fees.

     7. Notices. All notices, demands, requests or other communications which
may be or are required to be given, served or sent by a party pursuant to this
Agreement shall be in writing and shall be deemed given upon receipt if
personally delivered (including by messenger or recognized delivery or courier
service) or on the date of receipt on the return receipt if mailed by registered
or certified mail, return receipt requested, postage prepaid, delivered or
addressed


                                       4
   5


as set forth below. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall be deemed
receipt of the notice:

                  (a)      If to the Company:

                           CC VI Operating Company, LLC
                           12444 Powerscourt Drive, Suite 400
                           St. Louis, Missouri  63131
                           Attention:  Jerald L. Kent

                  (b)      If to the Manager:

                           Charter Communications, Inc.
                           12444 Powerscourt Drive, Suite 400
                           St. Louis, Missouri  63131
                           Attention:  Jerald L. Kent

     8. Governing Law. This Agreement and the rights and obligations of the
parties hereunder and the persons subject hereto shall be governed by, and
construed and interpreted in accordance with, the laws of the State of New York,
without giving effect to the choice of law principles thereof.

     9. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by and against the parties hereto and their
respective successors and assigns. This Agreement embodies the entire agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument. This
Agreement is not transferable or assignable by any of the parties hereto except
as may be expressly provided herein. This Agreement may not be amended,
supplemented or otherwise modified except in accordance with the Credit
Agreement.





                                       5
   6



     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written and effective as of the
Effective Date.



                      CC VI OPERATING COMPANY, LLC
                      a Delaware limited liability company





                              /s/ Marcy Lifton
                      By:______________________________________________
                              Name:
                              Title:




                      CHARTER COMMUNICATIONS, INC.,
                      a Delaware corporation




                              /s/ Curtis S. Shaw
                      By:______________________________________________
                              Name:
                              Title:










                                       6
   1
                                                                 EXHIBIT 10.2(e)

                              MANAGEMENT AGREEMENT



     THIS MANAGEMENT AGREEMENT (this "Agreement") is made as of the 12th day of
November, 1999, by and between Falcon Cable Communications, LLC, a Delaware
limited liability company (the "Company"), and Charter Communications, Inc., a
Delaware corporation (the "Manager").

     A.   The Company desires to retain the Manager to manage and operate the
          cable television systems owned by the Company and its subsidiaries and
          any cable television systems subsequently acquired by the Company and
          its subsidiaries (the "Cable Systems").

     B.   The Manager has agreed to manage and operate the Cable Systems, all
          upon the terms and conditions hereinafter set forth.

     In consideration of the mutual covenants and agreements contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:

     1. Retention of the Manager. The Company hereby appoints the Manager as a
manager for the Cable Systems, and the Manager hereby agrees to serve the
Company as a manager for the Cable Systems, pursuant to the terms and conditions
hereinafter set forth.

     2. Authority and Duties of the Manager.

          (a) The Company agrees to seek the advice of the Manager regarding the
business, properties and activities of the Cable Systems during the term hereof,
and subject to the direction, control and general supervision of the Company,
the Manager agrees to provide such advice. The Manager shall give such advice in
a businesslike, efficient, lawful and professional manner in accordance with
this Agreement.

          (b) Without limiting the generality of the foregoing, the Manager
shall provide all management services with respect to the operation of the Cable
Systems, including, but not limited to the following:

               (i) advice concerning the hiring, termination, performance and
training of personnel;

               (ii) review, consultation and advice concerning personnel,
operations, engineering and other management and operating policies and
procedures;




   2


               (iii) review, consultation and advice concerning maintenance
standards for plant and equipment of the Cable Systems, advice as to the Cable
Systems' normal repairs, replacements, maintenance and plant upgrades, and
provide for periodic inspections;

               (iv) recommendations on all necessary action to keep the
operation of the Cable Systems in compliance, in all material respects, with the
conditions of the Company's franchises and all applicable rules, regulations and
orders of any federal, state, county or municipal authority having jurisdiction
over the Cable Systems;

               (v) assistance in the negotiation, or directly negotiate, on
behalf of the Company, of operating agreements (including, but not limited to,
pole attachment agreements, office and headend leases, easements and
right-of-way agreements), contracts for the purchase, lease, license or use of
properties, equipment and rights as may be necessary or desirable in connection
with the operation or maintenance of the Cable Systems and such other agreements
on behalf of the Company as are necessary or advisable for the Cable Systems and
assistance in the procuring, or directly procuring, on behalf of the Company,
such programming, billing and other services and equipment deemed necessary and
advisable for the Cable Systems;

               (vi) development of recommendations for, and negotiate the
acquisition and maintenance of, such insurance coverage with respect to the
Cable Systems as the Company may determine upon advice and consultation of the
Manager;

               (vii) guidance on all marketing, sales promotions and advertising
for the Cable Systems;

               (viii) assistance in the financial budgeting process and the
implementation of appropriate accounting, financial, administrative and
managerial controls for the Cable Systems;

               (ix) preparation for use by the Company of financial reports and
maintenance of books of accounts and other records reflecting the results of
operation of each Cable System and/or subsidiary; and

               (x) advice and consultation with the Company in connection with
any and all aspects of the Cable Systems and the day to day operation thereof
and consultation with the Company with respect to the selection of attorneys,
consultants and accountants.

     3. Management Expenses.


          The Manager shall charge to, or be reimbursed by the Company for, all
expenses, costs, losses, liabilities or damages incurred by the Manager
attributable to the ownership or operation of the Cable Systems, including,
where applicable, pro rata allocation for services and purchases made by the
Manager on behalf of the Cable Systems and other companies and cable systems
managed by the Manager, subject to the limitations set forth in



                                       2
   3

Section 6 (the "Company Expenses"). In addition to reimbursement for Company
Expenses, the Manager shall be reimbursed for all other expenses, costs, losses,
liabilities or damages incurred by the Manager in connection with the
performance of its duties hereunder, including, without limitation, the
Manager's costs for overhead, administration and salaries (collectively, the
"Management Fee"), provided that the Management Fee shall not include expenses
incurred by Manager that are in the nature of the "Company Expenses" and are
paid to the Manager by another company or cable system managed by Manager.
Notwithstanding the foregoing, and subject to the payment priority provisions of
the following paragraph, in no event may the Management Fee portion of Company
Expenses be reimbursable in any year in an amount in excess five percent (5.0%)
of the Gross Revenue of the Company, payable monthly in arrears or as otherwise
agreed upon. "Gross Revenue" will include all revenues from the operation of the
Cable Systems including, without limitation, subscriber payments, advertising
revenues and revenues from other services provided by the Cable Systems, but not
including interest income or income from investments unrelated to the Cable
Systems. Management Fees shall only be paid to the Manager by the Company to the
extent permitted by the Credit Agreement (as defined below) and any other
material agreement and applicable charter document of the Company and the
Manager.


          Notwithstanding the foregoing, the Management Fees (but not other
Company Expenses) due and payable as provided in the preceding paragraph of this
Section 3 shall be subordinated and junior in right of payment to the prior
payment in full in cash of all of the Senior Debt (as defined below) and shall
not be paid except to the extent allowed under the Credit Agreement (as defined
below). In the event of any bankruptcy or similar proceeding relative to the
Company (a "Reorganization"), then all of the Senior Debt shall first be paid in
full in cash before any payment of the Management Fees is made, and in any
Reorganization any amount payable in respect of the Management Fees shall be
paid directly to the Funding Agent referred to below, unless all the Senior Debt
has been paid in full in cash. The Manager hereby irrevocably authorizes the
Funding Agent, as attorney-in-fact for the Manager, to vote, file or prove any
claim or proof of claim in any Reorganization in respect of the Management Fees
and to demand, sue for, collect and receive any such payment. The Manager shall
take any actions requested by the Funding Agent in order to accomplish any of
the foregoing. If the Manager receives any payment hereunder in violation of the
terms hereof or in connection with any Reorganization (prior to the payment in
full in cash of the Senior Debt), the Manager shall hold such payment in trust
for the benefit of the holders of the Senior Debt and forthwith pay it over to
the Funding Agent. Amounts payable to the Manager in accordance with this
Section 3 which remain unpaid by reason of the foregoing shall be accrued as a
liability of the Company and shall be payable as soon as the conditions to
payment are fulfilled. The deferred portion of the Management Fees will bear
interest at the rate of ten percent (10%) per annum, compounded annually, from
the date otherwise due and payable until the payment thereof.


          As used herein, (i) "Credit Agreement" means the Credit Agreement,
dated as of November 12, 1999, among Falcon Cable Communications, LLC, certain
of its affiliates, the Lenders parties thereto, Toronto Dominion (Texas), Inc.,
as Administrative Agent (the "Funding Agent"), and various Syndication and other
Agents named therein, as amended, restated, supplemented or otherwise modified
from time to time, and (ii) "Senior Debt" means the



                                       3
   4


principal amount of all loans and guarantee obligations from time to time
outstanding or owing under the Credit Agreement and the other loan documents
executed and delivered by the Company pursuant thereto, together with interest
thereon (including any interest subsequent to any filing for Reorganization,
whether or not such interest would constitute an allowed claim, calculated at
the rate set forth for overdue loans in the Credit Agreement) and all other
obligations of the Company under the Credit Agreement and such other loan
documents.

          (b) Notwithstanding any termination of this Agreement pursuant to
Section 4, the Manager shall, subject to the limitations set forth in the
preceding paragraphs above, remain entitled (i) to receive the Management Fees
set forth in Section 3(a) incurred prior to the date of termination which have
not been paid to the Company; and (ii) to receive payment of the deferred
Management Fees at the time of such termination if, and to the extent that,
payment thereof is otherwise permitted under Section 3(a).

     4. Effective Date. This Agreement shall become effective only upon the
closing (the "Effective Date") of the initial public offering of the Manager as
contemplated by its Registration Statement on Form S-1 filed with the Securities
and Exchange Commission.

     5. Term of Agreement. The term of this Agreement shall be ten years
commencing on the Effective Date, unless sooner terminated pursuant to the terms
of this Agreement. This Agreement may be terminated as follows: (a) by the
Company immediately upon written notice to the manager for Cause (as defined
below) or (b) automatically on the consummation of the sale of all or
substantially all of the Company's assets. For purposes hereof, "Cause" shall
exist if the Manager has engaged in gross negligence or willful misconduct in
the performance of its duties hereunder which could have a material adverse
effect on the Company.

     6. Liability. The Company shall bear any and all expenses, liabilities,
losses or damages resulting from the operation of the Cable Systems, and the
Manager, its partners, officers, directors and employees shall not, under any
circumstances, be held liable therefor, except that the Manager shall be liable
for any loss or damage which results from its own gross negligence or willful
misconduct. Neither the Manager nor any of its partners, members, officers,
directors and employees shall be held to have incurred any liability to the
Company, the Cable Systems or any third party by virtue of any action not
constituting gross negligence or willful misconduct taken in good faith by it in
discharge of its duties hereunder, and the Company agrees to indemnify the
manager and its shareholders, partners, directors, officers and employees and
hold the Manager and its partners, directors, officers and employees harmless
with respect of the foregoing, including, but not limited to, reasonable
attorneys' fees.

     7. Notices. All notices, demands, requests or other communications which
may be or are required to be given, served or sent by a party pursuant to this
Agreement shall be in writing and shall be deemed given upon receipt if
personally delivered (including by messenger or recognized delivery or courier
service) or on the date of receipt on the return receipt if mailed by registered
or certified mail, return receipt requested, postage prepaid, delivered or
addressed

                                       4
   5

as set forth below. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall be deemed
receipt of the notice:

                  (a)      If to the Company:

                           Falcon Cable Communications, LLC
                           12444 Powerscourt Drive, Suite 400
                           St. Louis, Missouri  63131
                           Attention:  Jerald L. Kent

                  (b)      If to the Manager:

                           Charter Communications, Inc.
                           12444 Powerscourt Drive, Suite 400
                           St. Louis, Missouri  63131
                           Attention:  Jerald L. Kent

     8. Governing Law. This Agreement and the rights and obligations of the
parties hereunder and the persons subject hereto shall be governed by, and
construed and interpreted in accordance with, the laws of the State of New York,
without giving effect to the choice of law principles thereof.

     9. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by and against the parties hereto and their
respective successors and assigns. This Agreement embodies the entire agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument. This
Agreement is not transferable or assignable by any of the parties hereto except
as may be expressly provided herein. This Agreement may not be amended,
supplemented or otherwise modified except in accordance with the Credit
Agreement.





                                       5
   6



     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written and effective as of the
Effective Date.



                            FALCON CABLE COMMUNICATIONS, LLC,
                            a Delaware limited liability company





                                    /s/ Marcy Lifton
                            By:______________________________________________
                                    Name:
                                    Title:




                            CHARTER COMMUNICATIONS, INC.,
                            a Delaware corporation




                                   /s/ Curtis S. Shaw
                            By:______________________________________________
                                   Name:
                                   Title:







                                       6
   1

                                                                   Exhibit 10.26



                       MORGAN STANLEY SENIOR FUNDING, INC.
                                  1585 BROADWAY
                            NEW YORK, NEW YORK 10036


                                COMMITMENT LETTER


PERSONAL AND CONFIDENTIAL

April 14, 2000

Mr. Kent Kalkwarf
Chief Financial Officer
Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
12444 Powerscourt Drive
St. Louis, Missouri  63131


Ladies and Gentlemen:

                  We are pleased to confirm the arrangements under which Morgan
Stanley Senior Funding, Inc. ("MSSF" or the "ADMINISTRATIVE AGENT") is
exclusively authorized by Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation (collectively, "CHARTER") to act as
the sole lead arranger and sole bookrunner in connection with the bridge loans
described herein, and, together with any other entities that become lenders in
accordance with the syndication arrangements set forth below (collectively with
the Administrative Agent, the "LENDERS"), commits, severally and not jointly, to
provide the bridge loans described herein, in each case on the terms and subject
to the conditions set forth in this letter and the attached Annex A (together,
the "COMMITMENT LETTER") and the Fee Letter (as defined below). The term
"Initial Lenders" means MSSF and any other Lender identified by Charter who
agrees in writing prior to the date 14 days after the date hereof to assume a
portion of MSSF's commitment to make Bridge Loans under this Commitment Letter,
provided Charter agrees in writing to release MSSF from the portion of its
commitment assumed by such Lender on or prior to the date 14 days after the date
hereof.

                  We understand that Charter may require funds on an interim
basis, in the form of bridge loans, to fund its accelerated capital expenditure
plan.

                  1. Commitment. MSSF is pleased to confirm its commitment (the
"COMMITMENT") to provide Charter with Senior Increasing Rate Bridge Loans in an
aggregate principal amount of up to $1.0 billion (the "BRIDGE LOANS"), or such
lesser amount as Charter may specify, having the terms set forth on Annex A, on
the terms and subject to the conditions contained in this Commitment Letter.
MSSF's Commitment is subject to the conditions set forth
   2
in this Commitment Letter, including, without limitation, the conditions
precedent set forth in Annex A hereto, and to the negotiation, execution and
delivery of definitive documentation, including, without limitation, a bridge
loan agreement (the "BRIDGE LOAN AGREEMENT"), consistent with the terms of Annex
A hereto and satisfactory to each of Charter, the Lenders and their counsel and
the satisfaction of the terms, conditions and covenants contained therein. The
terms of this Commitment Letter are intended as an outline of certain of the
material terms of the Bridge Loans, but do not include all of the terms,
conditions, covenants, representations, warranties, default clauses and other
provisions that will be contained in the Bridge Loan Agreement.

                  2. Fees and Expenses. The fees for these services are set
forth in a separate fee letter (the "FEE LETTER"), entered into by MSSF and
Charter. In addition, pursuant to an engagement letter (the "ENGAGEMENT
LETTER"), dated as of the date hereof, between Charter and Morgan Stanley & Co.
Incorporated ("MORGAN STANLEY"), Charter has agreed to offer Morgan Stanley and
the Initial Lenders or their affiliates the right to act as the exclusive
initial purchasers, underwriters or placement agents in connection with the sale
of Debt Securities (as defined in the Engagement Letter) and to offer Morgan
Stanley the right to act as sole bookrunner, in each case, pursuant to the terms
of the Engagement Letter.

                  3. Syndication. Charter shall have the right to have
additional lenders become Initial Lenders. Following the syndication to the
Initial Lenders, the Administrative Agent intends and reserves the right to
further syndicate the Commitments and/or the Bridge Loans to other Lenders after
the date that is 14 days after the date hereof (the "Syndication"). The
Administrative Agent will lead the Syndication, including determining the timing
of all offers to potential Lenders and the acceptance of commitments, any title
of agent or similar designations awarded to Lenders, the amounts offered and the
compensation provided to each Lender from the amounts to be paid to the
Administrative Agent pursuant to the terms of this Commitment Letter and the Fee
Letter. The Administrative Agent will determine the identity of any entities
that become Lenders (other than Initial Lenders) after the date hereof and the
final commitment allocations subject to the consent of Charter, which will not
be unreasonably withheld, and will notify Charter of such determinations.
Pursuant to the syndication process described herein, the rights and obligations
of each Lender, including the right and obligation to make any Bridge Loan, may
(with the consent of the Administrative Agent, in its sole discretion, and
subject to the consent of Charter in the case of transfers to non-affiliates,
which consent will not be unreasonably withheld) be assigned by such Lender, in
whole or in part, to any other bank, financial institution or other investor and
upon such assignment, the assignee shall become a Lender hereunder and the
assigning Lender will be relieved from all obligations with respect to any
Commitment assigned. To ensure an orderly and effective Syndication of the
Bridge Loans, you agree that until the later of the termination of the
Syndication as determined by the Administrative Agent and 90 days following the
date of initial funding under the Bridge Loans, Charter will not and will not
permit any of its subsidiaries to syndicate or issue, attempt to syndicate or
issue, announce or authorize the announcement of the syndication or issuance of,
or engage in discussions concerning the syndication or issuance of, any debt
facility or debt or preferred equity security (other than the Bridge Loans),
including any renewals or refinancings of any existing debt facility or debt or
preferred equity security, without the prior written consent of
   3
the Administrative Agent (which consent will not be unreasonably withheld).
Notwithstanding the foregoing, Charter may syndicate the $590 million permitted
to be incurred under the greenshoe for the Falcon credit facility at any time.
The Lenders acknowledge that Charter has no obligation to utilize the financing
offered hereby and can terminate this Commitment Letter at any time.

                  4. Cooperation. Charter agrees to cooperate, and to cause its
affiliates to cooperate, with the Administrative Agent in connection with (i)
the preparation of an information package regarding the business, operations and
prospects of Charter including, without limitation, the delivery of all
information relating to the transactions contemplated hereunder and all other
information deemed reasonably necessary by the Administrative Agent to complete
the syndication of the Commitment and/or Bridge Loans and (ii) the presentation
of such information package in lender meetings and other communications with
prospective Lenders in connection with the syndication of the Bridge Loans.
Charter agrees to make its representatives and senior management reasonably
available to meet with the Lenders and prospective Lenders and rating agencies
and to make customary "road show" presentations at such locations as the
Administrative Agent may reasonably suggest. Charter shall be solely responsible
for the contents of any such information package and presentation (other than
information concerning the Lenders and the syndication process) and acknowledges
that the Lenders will be using and relying upon the information contained in
such information package and presentation without independent verification
thereof. In addition, Charter represents and covenants that all information
provided by Charter or its agents to the Administrative Agent or the other
Lenders in connection with the transactions contemplated hereunder is and will
be complete and correct in all material respects and does not and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. Charter agrees to
supplement such information from time to time until the Closing Date (as defined
in Annex A) and, if requested by the Administrative Agent in writing, for a
reasonable period thereafter (not to exceed six months) necessary to complete
the syndication of the Bridge Loans, so that the representations and covenants
contained in the preceding sentence remain correct.

                  5. Indemnification and Contribution. In partial consideration
for our commitment hereunder, Charter hereby agrees to indemnify and hold
harmless MSSF and each other Lender, each of the members or shareholders or
other investors or holders of interests in, or other transferees of MSSF or
another Lender (collectively, "ADDITIONAL INVESTORS"), any affiliates of MSSF,
the other Lenders and the Additional Investors, and each other person, if any,
controlling MSSF, the other Lenders or any Additional Investors and any of their
respective affiliates, and any of the directors, officers, agents and employees
of any of the foregoing (each, an "INDEMNIFIED PERSON") from and against any
losses, claims, damages or liabilities related to, arising out of or in
connection with the matters which are the subject of the commitment made
hereunder (including, without limitation, any use made or proposed to be made by
Charter of the proceeds from the transactions referred to above) (collectively,
the "SUBJECT MATTER"), and will reimburse any Indemnified Person for all
expenses (including fees and expenses of counsel) as they are incurred in
connection with investigating, preparing, pursuing or defending any action,
claim, suit, investigation or proceeding related to, arising out of or in
connection with the Subject
   4
Matter, whether or not pending or threatened and whether or not such action,
claim, suit or proceeding is brought by you, your subsidiaries, creditors or any
Indemnified Person, or any Indemnified Person is otherwise a party thereto.
Charter will not, however, be responsible for any losses, claims, damages or
liabilities (or expenses relating thereto) that are judicially determined to
have resulted from the bad faith or gross negligence of any Indemnified Person.
Charter also agrees that no Indemnified Person shall have any liability (whether
direct or indirect, in contract or tort or otherwise) to Charter for or in
connection with the Subject Matter, except for any such liability for losses,
claims, damages or liabilities incurred by you that are judicially determined to
have resulted from the bad faith or gross negligence of such Indemnified Person.
None of MSSF nor any other Lender shall be liable or responsible for any
consequential damages that may be alleged as a result of any failure to fund the
Bridge Loans.

                  Charter will not, without the prior written consent of MSSF,
settle, compromise, consent to the entry of any judgment in or otherwise seek to
terminate any action, claim, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any Indemnified Person
is a party thereto) unless such settlement, compromise, consent or termination
includes a full and unconditional release of each Indemnified Person from any
liabilities arising out of such action, claim, suit or proceeding.

                  If the indemnification provided for in the second preceding
paragraph of this Commitment Letter is judicially determined to be unavailable
(other than in accordance with the terms hereof) to an Indemnified Person in
respect of any losses, claims, damages or liabilities referred to herein, then,
in lieu of indemnifying such Indemnified Person hereunder, Charter agrees to
contribute to the amount paid or payable by such Indemnified Person as a result
of such losses, claims, damages or liabilities (and expenses relating thereto)
(i) in such proportion as is appropriate to reflect the relative benefits to
Charter on the one hand, and MSSF and the other Lenders, on the other hand, of
the financing or (ii) if the allocation provided by clause (i) is not available,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in such clause (i) but also the relative fault of Charter on the one
hand, and MSSF and the other Lenders, on the other hand, as well as any other
relevant equitable considerations; provided that in no event shall MSSF's or any
other Lender's contribution to the amount paid or payable exceed the aggregate
amount of fees actually received by such entity under the Fee Letter.

                  6. Confidentiality. Please note that this Commitment Letter,
the Fee Letter, the Engagement Letter and any written or oral advice provided by
the Lenders in connection with this arrangement is exclusively for the
information of the Board of Directors of Charter and may not be disclosed to any
other party or circulated or referred to publicly without the Administrative
Agent's prior written consent, except, after providing written notice to the
Administrative Agent, pursuant to law or a subpoena or order issued by a court
of competent jurisdiction or by a judicial, administrative or legislative body
or committee. In addition, we hereby consent to your disclosure of such advice
to your officers, directors, agents and advisors who are directly involved in
the consideration of the Bridge Loans to the extent such persons are obligated
to hold such advice in confidence and to the filing of this Commitment Letter
with the SEC, if required, and the description of this Commitment Letter in any
SEC filing, to the extent required. Notwithstanding the foregoing, Charter may
disclose the contents of this Commitment
   5
Letter to potential lenders and their affiliates and advisors solely for the
purpose of their consideration of becoming an Initial Lender provided that such
persons agree to keep such information confidential.

                  7. Additional Matters. You may not assign any of your rights
or be relieved of any of your obligations hereunder without the prior written
consent of each of the Lenders. As you know, each of the Lenders is a full
service securities firm and as such may from time to time effect transactions,
for its own account or the account of customers, and hold positions in
securities or options on securities of Charter and its subsidiaries and other
companies that may be the subject of this arrangement. In addition, the
Administrative Agent may employ the services of its affiliates in providing
certain services hereunder and may exchange with such affiliates information
concerning Charter and its subsidiaries and other companies that may be the
subject of this arrangement.

                  The Lenders' commitment hereunder shall terminate on October
14, 2000 unless the closing of the Bridge Loans, on the terms and subject to the
conditions contained herein, shall have been consummated.
   6
                  Please confirm that the foregoing is in accordance with your
understanding by signing and returning to MSSF the enclosed copies of this
Commitment Letter, together, if not previously executed and delivered, with the
Fee Letter and the Engagement Letter on or before the close of business, on
April 14, 2000, whereupon this Commitment Letter, the Fee Letter and the
Engagement Letter shall become binding agreements between us. If not signed and
returned as described in the preceding sentence by such date, this offer will
terminate on such date. We look forward to working with you on this transaction.

                                   Very truly yours,

                                   MORGAN STANLEY SENIOR FUNDING, INC.


                                   By: /s/ R. Brian Smith
                                            Authorized Signatory

                                   Confirmed as of the date above:

                                   CHARTER COMMUNICATIONS HOLDINGS,
                                   LLC

                                   By: /s/ Curtis S. Shaw
                                          Name: Curtis S. Shaw
                                          Title: Senior Vice President General
                                                 and Secretary

                                   CHARTER COMMUNICATIONS HOLDINGS
                                   CAPITAL CORPORATION

                                   By: /s/ Curtis S. Shaw
                                          Name: Curtis S. Shaw
                                          Title: Senior Vice President General
                                                 Counsel and Secretary
   7
ANNEX A

                 SUMMARY OF TERMS AND CONDITIONS OF BRIDGE LOANS

         This Summary of Terms and Conditions outlines certain terms of the
Bridge Loans and the Bridge Loan Agreement referred to in the Commitment Letter,
of which this Annex A is a part. Certain capitalized terms used herein are
defined in the Commitment Letter.

BORROWERS                              Charter Communications Holdings, LLC and
                                    Charter Communications Holdings Capital
                                    Corporation (collectively, "CHARTER"),
                                    jointly and severally liable.

LOANS                                 Senior Increasing Rate Bridge Loans in a
                                    principal amount of up to $1.0 billion (the
                                    "BRIDGE LOANS").

NUMBER OF PERMITTED DRAWS             Two (the first such draw, "DRAW 1 BRIDGE
                                    LOAN" and the second such draw, "DRAW 2
                                    BRIDGE LOAN") on or prior to October 14,
                                    2000.

MINIMUM DRAW AMOUNT                   $400 million.

NOTICE                                Charter must provide written notice to
                                    the Administrative Agent three business days
                                    prior to any requested funding date.

MATURITY                              The Bridge Loans mature one year from
                                    the date of the making of Draw 1 Bridge Loan
                                    (the "MATURITY DATE"). If, upon the Maturity
                                    Date, the Bridge Loans have not been
                                    previously repaid in full, and provided no
                                    Conversion Default (as defined below) has
                                    occurred and is continuing, the outstanding
                                    Bridge Loans shall be automatically
                                    converted into Senior Term Loans (each a
                                    "TERM LOAN") due on the nine-year
                                    anniversary of the Maturity Date. At any
                                    time on or after the Maturity Date, at the
                                    option of the applicable Lender, the Senior
                                    Term Loans may be exchanged in whole or in
                                    part for Senior Exchange Notes due on the
                                    nine-year anniversary of the Maturity Date
                                    (the "EXCHANGE NOTES") having an equal
                                    principal amount. The initial date of
                                    funding of the Draw 1 Bridge Loan is
                                    hereinafter referred to as the "CLOSING
                                    DATE."

                                    "CONVERSION DEFAULT" shall mean any material
                                    default under the Bridge Loan Agreement, any
                                    payment default under any material
                                    indebtedness, a
   8
                                    bankruptcy default (as defined) or any
                                    default under the Engagement Letter or the
                                    Fee Letter.

                                    The Senior Term Loans will be governed by
                                    the provisions of the Bridge Loan Agreement
                                    and will have the same terms as the Bridge
                                    Loans, except as expressly set forth on
                                    Exhibit 1 to this Annex A. The Exchange
                                    Notes will be issued pursuant to an
                                    Indenture that will have the terms set forth
                                    on Exhibit 1 to this Annex A.

INTEREST                              The Draw 1 Bridge Loan will initially
                                    bear interest at a rate per annum equal to
                                    (a) the bid-side yield, as of the Closing
                                    Date, on the 10.25% Senior Notes due 2010 of
                                    Charter less (b) 25 basis points. If the
                                    Draw 1 Bridge Loan is not repaid in whole
                                    within 90 days following the Closing Date,
                                    the interest rate on such outstanding Bridge
                                    Loan will increase by 125 basis points at
                                    the end of such 90-day period and will
                                    increase by an additional 50 basis points at
                                    the end of each 90-day period thereafter.
                                    The last day of each such period being a
                                    "STEP-UP DATE."

                                        The Draw 2 Bridge Loan will initially
                                        bear interest at a rate per annum equal
                                        to the greater of (a) the interest rate
                                        on the Draw 1 Bridge Loan on the date of
                                        funding of the Draw 2 Bridge Loan or (b)
                                        the bid- side yield, as of the date of
                                        funding of the Draw 2 Bridge Loan, on
                                        the 10.25% Senior Notes due 2010 of
                                        Charter. If the Draw 2 Bridge Loan is
                                        not repaid in whole by any Step-Up Date
                                        following the funding of the Draw 2
                                        Bridge Loan, the interest rate on such
                                        outstanding Bridge Loan will increase on
                                        such Step-Up Date by an amount equal to
                                        the increase in interest rate on Draw 1
                                        Bridge Loan on such Step-Up Date.

                                        Notwithstanding the foregoing, except in
                                        the case of default interest described
                                        below, at no time will the interest rate
                                        in effect on the Bridge Loans be less
                                        than 9% per annum or exceed 15% per
                                        annum.

                                        Interest will be payable quarterly in
                                        arrears and on the date of any
                                        prepayment of the Bridge Loans.


   9
                                        Notwithstanding the foregoing, after the
                                        occurrence and during the continuance of
                                        an Event of Default (to be defined in
                                        the Bridge Loan Agreement), interest
                                        will accrue on the Bridge Loans at the
                                        then applicable rate plus 200 basis
                                        points per annum.

USE OF PROCEEDS                         To fund Charter's accelerated capital
                                    expenditure plan.

MANDATORY
REPAYMENT                               The net cash proceeds received by
                                    Charter or any of its affiliates from (i)
                                    any direct or indirect public offering or
                                    private placement of any debt or equity
                                    securities by Charter or any subsidiary of
                                    Charter, (ii) any future bank borrowings
                                    (other than under any of the existing credit
                                    facilities of Charter and its Subsidiaries
                                    (the "Credit Facilities") as in effect on
                                    the Closing Date and an additional $590
                                    million permitted to be incurred under the
                                    greenshoe for the Falcon credit facility;
                                    provided that the aggregate amount under the
                                    Credit Facilities, including the Falcon
                                    credit facility, does not exceed $9 billion)
                                    and (iii) any future asset sales (subject to
                                    certain ordinary course exceptions and other
                                    exceptions to be agreed) by Charter or any
                                    subsidiary of Charter will be used to redeem
                                    the Bridge Loans in each case at 100% of the
                                    principal amount of the Bridge Loans
                                    redeemed plus accrued interest to the date
                                    of the redemption subject, in the case of
                                    clauses (ii) and (iii) only, to the terms of
                                    the existing Credit Facilities or indentures
                                    requiring prepayment of any amounts
                                    outstanding thereunder.

CHANGE OF
CONTROL                                Each holder of Bridge Loans will be
                                    entitled to require Charter, and Charter
                                    must offer, to repay the Bridge Loans held
                                    by such holder at a price of 100% of
                                    principal amount, plus accrued interest,
                                    upon the occurrence of a Change of Control
                                    (to be defined in the Bridge Loan Agreement)
                                    of Charter, subject to the optional
                                    redemption provisions described below.

OPTIONAL
REPAYMENT                              The Bridge Loans may be prepaid, in
                                    whole or in

   10
                                    part, at the option of Charter at any time
                                    upon three business days' written notice at
                                    a price equal to 100% of the principal
                                    amount thereof plus accrued interest to the
                                    date of repayment.

PAYMENTS                               Payments by Charter will be made by wire
                                    transfer of immediately available funds.

TRANSFERABILITY AND
PARTICIPATIONS                         Each of the Lenders will be free (with
                                    the consent of the Administrative Agent, in
                                    its sole discretion) to sell or transfer all
                                    or any part of or any participation in any
                                    of the Bridge Loans to any third party and
                                    to pledge any or all of the Bridge Loans to
                                    any commercial bank or other institutional
                                    lender or the Federal Reserve Bank, to the
                                    extent permitted by law.

MODIFICATION OF
THE BRIDGE LOANS                       Modification of the Bridge Loans may be
                                    made with the consent of Lenders holding
                                    greater than 50% of the Bridge Loans then
                                    outstanding, except that no modification or
                                    change may extend the maturity of the Bridge
                                    Loans or time of payment of interest of the
                                    Bridge Loans, reduce the rate of interest or
                                    the principal amount of the Bridge Loans,
                                    alter the redemption provisions of the
                                    Bridge Loans or reduce the percentage of
                                    holders necessary to modify or change the
                                    Bridge Loans without the consent of Lenders
                                    holding 100% of the Bridge Loans affected
                                    thereby.

COST AND
YIELD PROTECTION                       The Lenders will receive cost and yield
                                    protection customary for facilities and
                                    transactions of this type, including, but
                                    not limited to taxes (including but not
                                    limited to gross-up provisions for
                                    withholding taxes imposed by the United
                                    States or any State thereof as a result of a
                                    change in law, and income taxes associated
                                    with all gross-up payments), changes in
                                    capital requirements, guidelines or policies
                                    or their interpretation or application,
                                    illegality, change in circumstances,
                                    reserves and other provisions deemed
                                    necessary by the Lenders to provide
                                    customary protection for U.S. and non-U.S.
                                    financial institutions.

CONDITIONS
   11
PRECEDENT                                The several obligations of the Lenders
                                    to make, or cause one of their respective
                                    affiliates to make, the Bridge Loans will be
                                    subject to closing conditions deemed
                                    appropriate by the Lenders for financings of
                                    this kind generally and for this transaction
                                    in particular, including, without
                                    limitation, the following closing
                                    conditions:

                                        1.  Defaults Under Financing Agreements.
                                            There shall not exist any default or
                                            event of default under any of the
                                            Credit Facilities, the Bridge Loans,
                                            the Bridge Loan Agreement or any of
                                            the other documents to be executed
                                            in connection therewith (the "LOAN
                                            DOCUMENTS"), or under other material
                                            indebtedness of Charter or its
                                            subsidiaries.

                                        2.  Due Diligence. Each of the Lenders
                                            shall have conducted a due diligence
                                            review in form, scope and substance
                                            satisfactory to such Lender and
                                            shall be satisfied with the results
                                            thereof. Such review may include but
                                            may not be limited to an examination
                                            of (i) the capitalization, corporate
                                            and ownership structure of Charter
                                            and its subsidiaries, (ii)
                                            accounting, legal, regulatory, tax,
                                            labor, insurance, pension and
                                            environmental liabilities, actual or
                                            contingent (which, at the request of
                                            the Lenders, shall include an
                                            environmental audit satisfactory to
                                            the Lenders and their counsel),
                                            (iii) material contracts, leases and
                                            debt agreements and (iv) the general
                                            business, operations, financial
                                            condition, management, prospects and
                                            value of Charter and its
                                            subsidiaries.

                                            The Lenders shall not have become
                                            aware of any information relating to
                                            conditions or events not previously
                                            described to the Lenders or
                                            constituting new information or
                                            additional developments concerning
                                            conditions or events previously
                                            disclosed to the Lenders which they,
                                            in their judgment, believe may have
                                            a material adverse effect on the
                                            condition (financial or otherwise),
                                            assets, liabilities (contingent or


   12
                                            otherwise), properties, solvency,
                                            business, management or prospects of
                                            Charter.

                                        3.  Absence of Certain Changes. No
                                            material change in the capital
                                            stock, liabilities or long- term
                                            debt of Charter and its subsidiaries
                                            (other than increases in liabilities
                                            and long-term debt contemplated by
                                            and set forth in the supplemental
                                            unaudited pro forma data in
                                            Charter's Form 10-K for the fiscal
                                            year ended December 31, 1999 and
                                            those incurred in the ordinary
                                            course of business consistent with
                                            past practice) or any material
                                            adverse change, or any development
                                            involving a prospective material
                                            adverse change, in or affecting the
                                            general affairs, management,
                                            financial position, stockholders'
                                            equity, results of operations or
                                            prospects of Charter, shall have
                                            occurred since December 31, 1999
                                            (the date of the most recent
                                            financial statements that have been
                                            delivered to the Lenders as of the
                                            date hereof) and no material
                                            inaccuracy in such financial
                                            statements shall exist. No Change of
                                            Control shall have occurred. On or
                                            after the date hereof (i) no
                                            downgrading (other than a
                                            downgrading resulting from the
                                            execution of the Commitment Letter
                                            or funding of the Bridge Loans)
                                            shall have occurred in the rating
                                            accorded Charter's debt securities
                                            by any "nationally recognized
                                            statistical rating organization," as
                                            that term is defined by the
                                            Securities and Exchange Commission
                                            for purposes of Rule 436(g)(2) under
                                            the Act, and (ii) no such
                                            organization shall have publicly
                                            announced that it has under
                                            surveillance or review, with
                                            possible negative implications, its
                                            rating of any of Charter's debt
                                            securities, excluding any such
                                            surveillance or review caused by the
                                            execution of the Commitment Letter
                                            or funding of the Bridge Loans.

                                        4.  Documentation, Legal Matters, etc.
                                            The Bridge Loan Agreement and the
                                            other definitive documentation
                                            evidencing the Bridge Loans



   13

                                            shall be prepared by counsel to the
                                            Administrative Agent and shall be in
                                            form and substance reasonably
                                            satisfactory to the Administrative
                                            Agent and Charter. All other matters
                                            relating to the Bridge Loan
                                            Agreement shall be reasonably
                                            satisfactory to Charter and the
                                            Administrative Agent in all respects
                                            and the Lenders shall have received
                                            such additional certificates, legal
                                            and other opinions, in form and
                                            substance reasonably satisfactory to
                                            the Administrative Agent and its
                                            counsel, and such other
                                            documentation as it shall request.

                                        5.  Market Disruption. There shall not
                                            have occurred any disruption or
                                            adverse change, as determined by
                                            MSSF in its sole discretion, in the
                                            financial or capital markets
                                            generally, or in the markets for
                                            bridge loan syndication, high yield
                                            debt or equity securities in
                                            particular or affecting the
                                            syndication or funding of bridge
                                            loans (or the refinancing thereof)
                                            that may have a material adverse
                                            impact on the ability to sell or
                                            place Debt Securities or to
                                            syndicate the Bridge Loans.

                                        6.  Approvals and Consents. All
                                            governmental, shareholder and
                                            third-party approvals and consents
                                            necessary or, in the reasonable
                                            opinion of the Administrative Agent,
                                            desirable in connection with the
                                            Bridge Loans shall have been
                                            received and shall be in full force
                                            and effect.

                                        7.  Litigation, etc. There shall not
                                            exist any action, suit,
                                            investigation, litigation or
                                            proceeding pending or threatened in
                                            any court or before any arbitrator
                                            or governmental authority that, in
                                            the reasonable opinion of the
                                            Administrative Agent, affects any of
                                            the transactions contemplated
                                            hereby, or that could have a
                                            material adverse effect on Charter
                                            and its subsidiaries.

                                        8.  Availability Under Credit
                                            Facilities. Charter shall have
                                            adequate availability under the
                                            Credit

   14
                                            Facilities, in the sole reasonable
                                            judgment of the Administrative
                                            Agent.

                                        9.  Payment of Fees and Expenses. All
                                            fees and expenses due to the
                                            Lenders, MSSF, Morgan Stanley or the
                                            Administrative Agent on or before
                                            the closing date pursuant to the
                                            Commitment Letter, the Fee Letter,
                                            the Engagement Letter or otherwise
                                            shall have been paid in full.

COVENANTS                                The Bridge Loan Agreement will contain
                                    such covenants by Charter (with respect to
                                    Charter and its subsidiaries) as are usual
                                    and customary for financings of this kind or
                                    as otherwise deemed appropriate by the
                                    Administrative Agent for this transaction in
                                    particular (in its sole discretion), based
                                    upon the covenants in the Credit Facilities.

EVENTS OF
DEFAULT                                 The Bridge Loan Agreement will include
                                    such events of default (and, as appropriate,
                                    grace periods) as are usual and customary
                                    for financings of this kind or as otherwise
                                    deemed appropriate by the Administrative
                                    Agent for this transaction in particular (in
                                    its sole discretion), based upon the events
                                    of default in the Credit Facilities.

REPRESENTATIONS
AND WARRANTIES                          The Bridge Loan Agreement will contain
                                    such representations and warranties by
                                    Charter (with respect to Charter and its
                                    subsidiaries) as are usual and customary for
                                    financings of this kind or as are otherwise
                                    deemed appropriate by the Administrative
                                    Agent for this transaction in particular (in
                                    its sole discretion), based upon the
                                    representations and warranties in the Credit
                                    Facilities.

TAXES, RESERVE
REQUIREMENTS AND
INDEMNITIES                            The Bridge Loan Agreement will provide
                                    that all payments will be made free and
                                    clear of any taxes (other than franchise
                                    taxes and taxes on overall net income),
                                    imposts, assessments, withholdings or other

   15
                                    deductions whatsoever assessed by the United
                                    States or any State thereof and resulting
                                    from a change in law. Foreign Lenders will
                                    be required to furnish to the Administrative
                                    Agent appropriate certificates or other
                                    evidence of exemption from U.S. federal tax
                                    withholding.

                                       Charter will indemnify the Lenders
                                       against all increased costs of capital
                                       resulting from reserve requirements or
                                       otherwise imposed, in each case subject
                                       to customary increased costs and capital
                                       adequacy.

INDEMNITY                               The Bridge Loan Agreement will contain
                                    customary and appropriate provisions
                                    relating to indemnity and related matters in
                                    a form reasonably satisfactory to the
                                    Administrative Agent and the Lenders and
                                    acceptable to Charter.

GOVERNING LAW AND
JURISDICTION                            The Bridge Loan Agreement will provide
                                    that Charter will submit to the
                                    non-exclusive jurisdiction and venue of the
                                    federal and state courts of the State of New
                                    York and will waive any right to trial by
                                    jury. New York law will govern the Loan
                                    Documents.

         The foregoing is intended to summarize certain basic terms of the
Bridge Loans. It is not intended to be a definitive list of all of the
requirements of the Lenders in connection with the Bridge Loans.
   16
                              EXHIBIT 1 TO ANNEX A

     SUMMARY OF TERMS AND CONDITIONS OF SENIOR TERM LOANS AND EXCHANGE NOTES

         Capitalized terms used herein have the meanings assigned to them in the
Summary of Terms and Conditions of Bridge Loans to which this Exhibit 1 is
attached.

                                SENIOR TERM LOANS

         On the Maturity Date, so long as no Conversion Default has occurred and
is continuing, the outstanding Bridge Loans will be automatically converted into
Senior Term Loans. The Senior Term Loans will be governed by the provisions of
the Bridge Loan Agreement and, except as expressly set forth below, the Senior
Term Loans will have the same terms as the Bridge Loans.

MATURITY                               The Senior Term Loans will mature on the
                                    ninth anniversary of the Maturity Date.

INTEREST RATE                          The Senior Term Loans will initially
                                    bear interest at a rate per annum equal to
                                    the sum of (i) greater of (a) the interest
                                    rate applicable to the Draw 1 Bridge Loan on
                                    the Maturity Date (after giving effect to
                                    any applicable step-up) and (b) the interest
                                    rate applicable to the Draw 2 Bridge Loan on
                                    the Maturity Date (after giving effect to
                                    any applicable step-up) plus (ii) 50 bps. If
                                    the Senior Term Loans are not repaid within
                                    90 days following the Maturity Date, the
                                    interest rate on the Senior Term Loans will
                                    increase by 50 basis points at the end of
                                    such 90-day period and will increase by an
                                    additional 50 basis points at the end of
                                    each 90-day period thereafter.
                                    Notwithstanding the foregoing, except in the
                                    case of default interest described below, at
                                    no time will the interest rate in effect on
                                    the Senior Term Loans be less than 9% per
                                    annum or exceed 15% per annum.

                                        Interest on the Senior Term Loans will
                                        be payable quarterly in arrears and on
                                        the date of any prepayment of such
                                        Senior Term Loans.

                                        Notwithstanding the foregoing, after the
                                        occurrence and during the continuance of
                                        an Event of Default, interest will
                                        accrue on the Senior Term Loans at the
                                        then applicable rate plus 200 basis
                                        points per

   17
                                        annum.


   18
                              SENIOR EXCHANGE NOTES

         At any time on or after the Maturity Date, upon five or more business
days prior notice, Senior Term Loans may, at the option of a Lender, be
exchanged for a principal amount of Exchange Notes equal to 100% of the
aggregate principal amount of the Senior Term Loans so exchanged in connection
with a transfer of Exchange Notes to an unaffiliated third party. No Exchange
Notes will be issued until Charter receives requests to issue at least $25.0
million in aggregate principal amount of Exchange Notes. Charter will issue
Exchange Notes under an indenture which complies with the Trust Indenture Act of
1939, as amended (the "INDENTURE"). Charter will appoint a trustee reasonably
acceptable to the holders of the Bridge Loans. The Indenture will be fully
executed and delivered on the Closing Date and the Exchange Notes will be fully
executed and deposited into escrow on the Closing Date.

MATURITY                               The Exchange Notes will mature on the
                                    ninth anniversary of the Maturity Date.

INTEREST RATE                          Each Exchange Note will bear interest at
                                    a fixed rate equal to the greater of (x) the
                                    interest rate on the Senior Term Loans on
                                    the date of issuance of such Exchange Notes
                                    or (y) the bid side yield on Charter's
                                    currently outstanding 10.25% Senior Notes
                                    due 2010, on the date prior to the date of
                                    issuance of the Exchange Notes; provided
                                    that in no event will the interest rate in
                                    effect on the Exchange Notes be less than 9%
                                    or exceed 15% per annum.

OPTIONAL
REDEMPTION                             Exchange Notes will be non-callable
                                    until the fifth anniversary of the Closing
                                    Date. Thereafter, each Exchange Note will be
                                    callable at par plus accrued interest plus a
                                    premium equal to one half of the coupon on
                                    such Exchange Note, which premium shall
                                    decline ratably on each yearly anniversary
                                    to zero on the date that is two years prior
                                    to the maturity of the Exchange Notes.

DEFEASANCE
PROVISIONS OF
EXCHANGE NOTES                         Customary.

MODIFICATION                           Customary.


REGISTRATION
RIGHTS                                 Charter will file within 300 days after
                                    the Closing Date and will use all
                                    commercially reasonable efforts to cause to
                                    become effective as soon thereafter as
                                    practicable, a shelf registration statement
                                    with respect to the Exchange Notes (a "SHELF
                                    REGISTRATION STATEMENT"). If a Shelf
                                    Registration Statement is filed and becomes
                                    effective, Charter will use commercially
                                    reasonable efforts to keep such registration
                                    statement effective and available (subject
                                    to customary exceptions) until it is no
                                    longer needed to permit unrestricted resales
                                    of the Exchange Notes. If within 90 days
                                    from the Maturity Date (the

   19
                                    "EFFECTIVENESS DATE") a Shelf Registration
                                    Statement for the Exchange Notes has not
                                    been declared effective because Charter has
                                    failed to use commercially reasonable
                                    efforts to have it become effective, then
                                    Charter will pay liquidated damages in the
                                    form of increased interest of 50 basis
                                    points per annum on the principal amount of
                                    Exchange Notes and Senior Term Loans
                                    outstanding to holders of such Exchange
                                    Notes and Senior Term Loans who are unable
                                    freely to transfer Exchange Notes from and
                                    including the 9lst day after the Maturity
                                    Date to but excluding the effective date of
                                    such Shelf Registration Statement. On the
                                    90th day after the Effectiveness Date, if a
                                    Shelf Registration Statement for the
                                    Exchange Notes has not been declared
                                    effective because Charter has failed to use
                                    commercially reasonable efforts to have it
                                    become effective, the liquidated damages
                                    shall increase by 50 basis points per annum,
                                    and on each 90 day anniversary of the
                                    Effectiveness Date thereafter, if a Shelf
                                    Registration Statement for the Exchange
                                    Notes has not been declared effective
                                    because Charter has failed to use
                                    commercially reasonable efforts to have it
                                    become effective, shall increase by 50 basis
                                    points per annum, to a maximum increase in
                                    interest of 100 basis points. Charter will
                                    also pay such liquidated damages for any
                                    period of time (subject to customary
                                    exceptions) following the effectiveness of a
                                    Shelf Registration Statement that such Shelf
                                    Registration Statement is not available for
                                    sales thereunder. All accrued liquidated
                                    damages will be paid on each interest
                                    payment date.

COVENANTS                              The indenture relating to the Exchange
                                    Notes will include covenants that are
                                    substantially similar to those contained in
                                    the indenture governing Charter's 10.25%
                                    Senior Notes due 2010, but more restrictive
                                    in certain limited respects.

EVENTS OF DEFAULT                       The indenture relating to the Exchange
                                    Notes will provide for Events of Default
                                    similar to those contained in the indenture
                                    governing Charter's 10.25% Senior Notes due
                                    2010.

COUNSEL FOR
THE LENDERS                             Shearman & Sterling.


         The foregoing is intended to summarize certain basic terms of the
Senior Term Loans and Exchange Notes. It is not intended to be a definitive list
of all of the requirements of the Lenders in connection with the Senior Term
Loans and Exchange Notes.
   1
                                                                    EXHIBIT 12.1

                      CHARTER COMMUNICATIONS HOLDINGS, LLC
                 RATIO OF EARNINGS TO FIXED CHARGES CALCULATION
                                 (IN THOUSANDS)

Charter Communications Properties Holdings, LLC Charter Communications Holdings, LLC 1/1/98 through 12/24/98 through 1996 1997 12/23/98 12/31/98 1999 ---- ---- -------- -------- ---- EARNINGS Loss from Continuing Operations before Extraordinary Item $ (2,723) $ (4,623) $ (17,222) $ (5,277) $(578,130) Fixed Charges 4,442 5,283 17,614 (2,332) 490,359 --------- --------- --------- --------- --------- Earnings $ 1,719 $ 660 $ 392 $ (7,609) $ (87,771) ========= ========= ========= ========= ========= FIXED CHARGES Interest Expense $ 4,415 $ 5,120 $ 17,277 $ (2,353) $ 477,799 Amortization of Debt Costs -- 123 267 -- 10,200 Interest Element of Rentals 27 40 70 21 2,360 Total Fixed Charges $ 4,442 $ 5,283 $ 17,614 $ (2,332) $ 490,359 ========= ========= ========= ========= ========= Ratio of Earnings to Fixed Charges (1) -- -- -- -- -- ========= ========= ========= ========= =========
(1) Earnings for the years ended December 31, 1996 and 1997, for the periods from January 1, 1998 through December 23, 1998, and from December 24, 1998 through December 31, 1998, and for the year ended December 31, 1999, were insufficient to cover fixed charges by $2,723, $4,623, $17,222, $5,277 and $578,130, respectively. As a result of such deficiencies, the ratios are not presented above.
   1

                                                                    Exhibit 23.2

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the use of our reports
covering the audited financial statements of Charter Communications Holdings,
LLC and subsidiaries, CCA Group, CharterComm Holdings, L.P. and subsidiaries,
Long Beach Acquisition Corp., Sonic Communications Cable Television Systems,
Greater Media Cablevision Systems, Marcus Cable Holdings, LLC and subsidiaries
for the three months ended March 31, 1999, Helicon Partners I, L.P. and
affiliates for the seven months ended July 30, 1999, and CC V Holdings, LLC and
subsidiaries, and the audited supplemental financial statements of Charter
Communications Holdings, LLC and subsidiaries, (and to all references to our
Firm) included in or made a part of this registration statement.


/s/ ARTHUR ANDERSEN LLP


St. Louis, Missouri
April 13, 2000

   1

                                                                    Exhibit 23.3

                       CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
Charter Communications, Inc.:

We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report on the consolidated balance sheets of
Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, members' equity/partners'
capital and cash flows for each of the years in the three-year period ended
December 31, 1998 included herein and to the reference to our firm under the
heading "Experts" in the registration statement.

                                       /s/ KPMG LLP


Dallas, Texas
April 13, 2000

   1

                                                                    Exhibit 23.4

                        CONSENT OF INDEPENDENT AUDITORS

     We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 22, 1999 (except for Note 11, as to which
the date is February 24, 1999), with respect to the consolidated financial
statements of Renaissance Media Group LLC included in Amendment No. 1 to the
Registration Statement on Form S-4 (No. 333-77499) and related Prospectus of
Charter Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.

                                       /s/  ERNST & YOUNG LLP
New York, New York
April 17, 2000
   1

                                                                    Exhibit 23.5

                        CONSENT OF INDEPENDENT AUDITORS

     We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 22, 1999, with respect to the combined
financial statements of the Picayune MS, Lafourche LA, St. Tammany LA, St.
Landry LA, Pointe Coupee LA and Jackson TN cable television systems included in
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-77499) and
related Prospectus of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation for the registration of
$1,532,000,000 Senior Notes and Senior Discount Notes.

                                       /s/  ERNST & YOUNG LLP
New York, New York
April 17, 2000
   1

                                                                    Exhibit 23.6

                       CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
Charter Communications, Inc.:

We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report relating to the combined balance
sheets of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and
1998 and the related combined statements of operations, changes in partners'
deficit, and cash flows for each of the years in the three-year period ended
December 31, 1998 included herein and to the reference to our firm under the
heading "Experts" in the registration statement.

                                       /s/ KPMG LLP


New York, New York
April 13, 2000

   1

                                                                    Exhibit 23.7

                       CONSENT OF INDEPENDENT ACCOUNTANTS

     We hereby consent to the use in this Amendment No. 1 to the Registration
Statement on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation of our report dated January 6, 2000,
relating to the combined financial statements of InterMedia Cable Systems, which
appears in such Amendment No. 1 to the Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Amendment No. 1 to
the Registration Statement.

/s/ PRICEWATERHOUSECOOPERS LLP


San Francisco, California
April 13, 2000

   1

                                                                    Exhibit 23.8

                       CONSENT OF INDEPENDENT ACCOUNTANTS


     We hereby consent to the use in this Registration Statement on Form S-4 of
Charter Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation of:


     *  Our reports dated March 19, 1999, relating to the financial statements
        of Rifkin Acquisition Partners, L.L.L.P., and Rifkin Cable Income
        Partners LP for the year ended December 31, 1998, which appear in such
        Registration Statement; and

     *  Our reports dated February 15, 2000, relating to the financial
        statements of Rifkin Acquisition Partners, L.L.L.P., Rifkin Cable Income
        Partners LP, Indiana Cable Associates, Ltd and R/N South Florida Cable
        Management Limited Partnership for the period ended September 13, 1999,
        which appear in such Registration Statement.

     We also consent to the references to us under the headings "Experts" in
such Registration Statement.


/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
April 17, 2000

   1

                                                                    Exhibit 23.9

                        CONSENT OF INDEPENDENT AUDITORS

     We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 19, 1999, with respect to the consolidated
financial statements of R/N South Florida Cable Management Limited Partnership
and Indiana Cable Associates, Ltd. included in Amendment No. 1 to the
Registration Statement on Form S-4 and related Prospectus of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.

                                               /s/ ERNST & YOUNG LLP

Denver, Colorado
April 13, 2000

   1
                                                                   Exhibit 23.10


                       Consent Of Independent Accountants


We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 for Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation (i) of our report dated March 30, 1999, except as
to the agreement with Charter Communications, Inc. under which Charter
Communications, Inc. agreed to purchase Avalon Cable LLC's cable television
systems and assume some of their debt described in Note 12 which is as of May
13, 1999, relating to the financial statements of Avalon Cable LLC as of
December 31, 1998 and 1997 and for the year ended December 31, 1998 and for the
period from September 4, 1997 (inception) through December 31, 1997; (ii) of our
report dated March 30, 1999, except as to the agreement with Charter
Communications, Inc. under which Charter Communications, Inc. agreed to purchase
Avalon Cable LLC's cable television systems and assume some of their debt
described in Note 13 which is as of May 13, 1999, relating to the financial
statements of Avalon Cable of Michigan Holdings, Inc., as of December 31, 1998
and 1997 and for the year ended December 31, 1998 and for the period from
September 4, 1997 (inception) through December 31, 1997; and (iii) of our report
dated March 30, 1999 relating to the consolidated financial statements of Cable
Michigan, Inc. and Subsidiaries as of December 31, 1997 and November 5, 1998 and
for each of the two years in the period ended December 31, 1997 and for the
period from January 1, 1998 through November 5, 1998 which appear in such
Registration Statement. We also consent to the references to us under the
headings "Experts" in such Registration Statement.




/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York
April 17, 2000
   1
                                                                   Exhibit 23.11


                       Consent of Independent Accountants



We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report dated March 30, 1999 relating to the
combined financial statements of the Combined Operations of Pegasus Cable
Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus
Cable Television, Inc. as of December 31, 1996, and 1997 and June 30, 1998 and
for each of the three years in the period ended December 31, 1997 and the period
from January 1, 1998 through June 30, 1998 which appear in such Registration
Statement. We also consent to the references to us under the headings "Experts"
in such Registration Statement.



/s/ PRICEWATERHOUSECOOPERS LLP


Philadelphia, Pennsylvania
April 17, 2000
   1

                                                                   Exhibit 23.12






                       Consent Of Independent Accountants

We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 for Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report dated February 13, 1998, relating to
the financial statements of Amrac Clear View, a Limited Partnership, as of
December 31, 1997 and 1996 and for the three years in the period ended December
31, 1997 which appear in such Registration Statement. We also consent to the
references to us under the headings "Experts" in such Registration Statement.





/s/ Greenfield, Altman, Brown, Berger & Katz, P.C.

Canton, Massachusetts
April 17, 2000
   1
                                                                   Exhibit 23.13

                       Consent Of Independent Accountants

We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 for Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report dated September 11, 1998, relating to
the financial statements of Amrac Clear View, a Limited Partnership, as of May
28, 1998 and for the period January 1, 1998 through May 28, 1998 which appear in
such Registration Statement. We also consent to the references to us under the
headings "Experts" in such Registration Statement.




/s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
April 17, 2000
   1

                                                                   Exhibit 23.14

                        CONSENT OF INDEPENDENT AUDITORS


     We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 2, 2000, with respect to the consolidated
financial statements of Falcon Communications, L.P. included in Amendment No. 1
to the Registration Statement on Form S-4 (No. 333-77499) and related Prospectus
of Charter Communications Holdings, LLC and Charter Communications Holdings
Capital Corporation for the registration of $1,532,000,000 of Senior Notes and
Senior Discount Notes.



     We also consent to the use of our report dated March 2, 2000, with respect
to the combined financial statements of CC VII Holdings, LLC - Falcon Systems
not separately included in Amendment No. 1 to the Registration Statement on
Form S-4 (No. 333-77499) and related Prospectus of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital Corporation for the
registration of $1,532,000,000 of Senior Notes and Senior Discount Notes.




                                       /s/ ERNST & YOUNG LLP


Los Angeles, California
April 14, 2000

   1

                                                                   Exhibit 23.15

                       CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
Tele-Communications, Inc.:

We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report on the combined balance sheets of the
TCI Falcon Systems (as defined in Note 1 to the combined financial statements)
as of September 30, 1998 and December 31, 1997, and the related combined
statements of operations and parent's investment, and cash flows for the
nine-month period ended September 30, 1998 and for each of the years in the
two-year period ended December 31, 1997 included herein and to the reference to
our firm under the heading "Experts" in the registration statement.

                                       /s/ KPMG LLP


Denver, Colorado
April 13, 2000

   1

                                                                   Exhibit 23.16

                       CONSENT OF INDEPENDENT ACCOUNTANTS

The Common Member and Manager
Bresnan Communications Group LLC:


We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report on the consolidated balance sheets of
Bresnan Communications Group LLC and its subsidiaries as of December 31, 1998
and 1999 and the related consolidated statements of operations and members'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1999 included herein and to the reference to our firm under
the heading "Experts" in the registration statement.


                                          /s/ KPMG LLP

Denver, Colorado
April 13, 2000
   1

                                                                   Exhibit 23.17

                        CONSENT OF INDEPENDENT AUDITORS

     We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 28, 2000, with respect to the combined
financial statements of Fanch Cable Systems Sold to Charter Communications, Inc.
(comprised of Components of TWFanch-one Co., Components of TWFanch-two Co., Mark
Twain Cablevision, North Texas Cablevision LTD., Post Cablevision of Texas L.P.,
Spring Green Communications L.P., Fanch Narragansett CSI L.P., Cable Systems
Inc., ARH, and Tioga) included in Amendment No. 1 to the Registration Statement
on Form S-4 (No. 333-77499) and related Prospectus of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital Corporation for the
registration of $1,532,000,000 Senior Notes and Senior Discount Notes.


     We also consent to the use of our report dated February 11, 2000, with
respect to the consolidated financial statements of Charter Communications VI
Operating Company, LLC and subsidiaries not separately included in Amendment No.
1 to the Registration Statement on Form S-4 (No. 333-77499) and related
Prospectus of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation for the registration of $1,532,000,000 of Senior
Notes and Senior Discount Notes.


                                       /s/ ERNST & YOUNG LLP

Denver, Colorado
April 13, 2000
   1

                                                                   Exhibit 23.18

                        CONSENT OF INDEPENDENT AUDITORS

     We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 16, 1998, with respect to the combined
financial statements of the Picayune MS, Lafourche LA, St. Tammany LA, St.
Landry LA, Pointe Coupee LA and Jackson TN cable television systems included in
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-77499) and
related Prospectus of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation for the registration of
$1,532,000,000 Senior Notes and Senior Discount Notes.

                                       /s/  ERNST & YOUNG LLP
New York, New York
April 17, 2000
   1
                                                                Exhibit 23.19

                        CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 4, 1999 (except for Note 11, as to which the date
is June 29, 1999), with respect to the consolidated financial statements of
Renaissance Media Group LLC included in Amendment No. 1 to the Registration
Statement on Form S-4 (No. 333-77499) and related Prospectus of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.

                                           /s/ ERNST & YOUNG LLP

New York, New York
April 17, 2000
   1
                                                             Exhibit 23.20


                        CONSENT OF INDEPENDENT AUDITORS

     We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 9, 1999, March 10, 1999, and March 9, 1999,
with respect to the financial statements of North Texas Cablevision LTD., Spring
Green Communications L.P., and Cable Systems, Inc. and Fanch Narragansett CSI
Limited Partnership, respectively, included in Amendment No. 1 to the
Registration Statement on Form S-4 (No. 333-77499) and related Prospectus of
Charter Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.


                                            /s/ SHIELDS & CO.



Denver, Colorado
April 13, 2000