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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1999
REGISTRATION NO. 333-77499
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5 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 NUMBER)
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.
THOMAS R. POLLOCK, 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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED OFFER TO THE PUBLIC 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 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.
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SUBJECT TO COMPLETION, DATED AUGUST 10, 1999
$3,575,000,000
OFFER TO EXCHANGE
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND 9.920% SENIOR DISCOUNT NOTES DUE 2011
FOR ANY AND ALL OUTSTANDING
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND 9.920% SENIOR DISCOUNT NOTES DUE 2011,
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
, 1999, 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.
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SEE "RISK FACTORS" BEGINNING ON PAGE 18 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 , 1999.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 18
Forward-Looking Statements.................................. 30
Use of Proceeds............................................. 31
Capitalization.............................................. 36
Unaudited Pro Forma Financial Statements.................... 34
Unaudited Selected Historical Combined Financial and
Operating Data............................................ 54
Selected Historical Financial Data.......................... 56
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 57
The Exchange Offer.......................................... 78
Business.................................................... 87
Regulation and Legislation.................................. 115
Management.................................................. 122
Principal Equity Holders.................................... 131
Certain Relationships and Related Transactions.............. 132
Description of Certain Indebtedness......................... 143
Description of Notes........................................ 148
Material United States Federal Income Tax Considerations.... 193
Plan of Distribution........................................ 201
Experts..................................................... 202
Legal Matters............................................... 202
Index to Financial Statements............................... F-1
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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 original
notes in exchange for new notes. For a more complete understanding of the
exchange offer, we encourage you to read this entire prospectus and other
documents to which we refer.
OUR BUSINESS
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 television employs technology that uses discrete levels,
usually 0 and 1, to represent characters or numbers. We have also started to
introduce a number of other new products and services, including interactive
video programming and high-speed Internet access, and are exploring
opportunities in telephony. The introduction of these new services represents an
important step toward the realization of our "wired world" 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. As of March 31, 1999, we served approximately 2.3
million cable television service customers in 22 states.
We have grown rapidly over the past five years. During this period, our
management team has successfully completed 26 acquisitions, including six
acquisitions closed in 1999. In addition, we have entered into agreements to
acquire additional cable systems with approximately 729,000 customers. We have
also expanded our customer base through significant internal growth. 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%. In 1997, our internal customer growth, without giving effect to the
cable systems we acquired in that year, was 3.5%, significantly higher than the
national industry average of 2.0%.
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.
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. Bandwidth is a measure of the
information-carrying capacity of a communication channel. It is the range
of usable frequencies that can be carried by a cable television
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system. Channel capacity is the number of channels that can be
simultaneously carried on the cable system and is generally defined in
terms of the number of analog channels. 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 sales;
- emphasize local management autonomy to better serve our customers and
centralized financial controls, while providing support from regional and
corporate offices; and
- improve the geographic clustering of our cable systems by selectively
trading or acquiring systems to increase operating efficiencies and
improve operating margins. Clusters are areas where owned cable systems
are within the same geographic proximity to other cable systems.
RECENT EVENTS
We have completed, and are in the process of completing, the acquisitions
described below. Certain of these acquisitions were originally acquisitions of
Charter Investment. Charter Investment subsequently assigned those acquisitions
to us. Charter Investment and other affiliates are making other acquisitions.
There is no present intention on their part to assign these other acquisitions
to us.
RECENT ACQUISITIONS
In the second and third quarters of 1999, we completed six transactions in
which we acquired cable systems serving a total of approximately 582,000
customers. The total purchase price for these acquisitions was approximately
$1.9 billion. For the year ended December 31, 1998, these systems had revenues
of approximately $268 million. The following table is a breakdown of our recent
acquisitions:
FOR THE THREE MONTHS
ENDED MARCH 31, 1999
----------------------------
CLOSING PURCHASE BASIC REVENUE
RECENT ACQUISITION DATE PRICE SUBSCRIBERS (IN THOUSANDS)
- ------------------ ------- -------- ----------- --------------
American Cable Entertainment, LLC....................... 4/99 $240 million 68,000 $ 9,151
Renaissance Media Group LLC............................. 4/99 459 million 132,000 15,254
Cable Systems of Greater Media Cablevision, Inc. ....... 6/99 500 million 174,000 20,394
-------------- ------- -------
Helicon Partners I, L.P. and Affiliates................. 7/99 550 million 172,000 21,252
Other (Vista Broadband Communications, LLC and certain
cable assets of Cable Satellite of South Miami,
Inc.)................................................. 7/99 and 8/99 148 million 36,000 3,354
Total............................................... $1.9 billion 582,000 $69,405
============== ======= =======
PENDING ACQUISITIONS
In addition to the recent acquisitions described above, since the beginning
of 1999, we have entered into agreements to acquire additional cable systems.
The total purchase price for these acquisitions will be approximately $2.3
billion. This includes the exchange with another cable service provider of
certain of our cable television systems with a fair market value of $0.4 billion
for cable systems that we can operate more efficiently because of their
geographic proximity to our other systems. As of March 31, 1999, the systems to
be acquired by us served, in the
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aggregate, approximately 729,000 customers. For the year ended December 31,
1998, these systems had revenues of approximately $329 million. The following
table is a breakdown of our pending acquisitions:
FOR THE THREE MONTHS
ENDED MARCH 31, 1999
ANTICIPATED ----------------------------
CLOSING PURCHASE BASIC REVENUE
PENDING ACQUISITION DATE PRICE SUBSCRIBERS (IN THOUSANDS)
- ------------------- ----------- -------- ----------- --------------
Cable systems of InterMedia Capital Partners 408,000
IV, L.P., InterMedia Partners and 3rd or 4th $872.7 million + (142,000)
Affiliates.................................. Quarter 1999 systems' swap 266,000 $48,288
Rifkin Acquisition Partners, L.L.L.P. and 3rd or 4th
Interlink Communications Partners, L.L.P.... Quarter 1999 1,460 million 463,000 50,914
------------------ -------- -------
Total..................................... $2.3 billion 729,000 $99,202
================== ======== =======
We expect to finance these pending acquisitions with additional borrowings
under our credit facilities and with additional equity.
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ORGANIZATION
The new notes to be issued in the exchange offer will be issued by Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation, the issuers of the original notes. Charter Communications Holding
Company, LLC is the 100% owner of Charter Holdings and Charter Holdings is the
100% owner of Charter Capital. Our cable systems are owned by wholly owned
subsidiaries of Charter Communications Operating, LLC, which is 100% owned by
Charter Holdings. The chart below sets forth our corporate structure. We have
illustrated "Operating Companies that formerly comprised CCA Group" on this
chart in order to show the placement of the successor entities to the entities
that served as the basis for CCA Group's historical financial statements
presented in this prospectus.
[CHARTER COMMUNICATIONS ORGANIZATION CHART]
Charter Communications, Inc., a newly formed Delaware corporation, recently
filed a registration statement for an initial public offering of its Class A
common stock. Charter Communications, Inc. expects to raise approximately $3.45
billion through its offering and will use these proceeds to purchase membership
interests in our direct parent, Charter Holdco, thereby become the controlling
managing member of Charter Holdco. Charter Holdco will also raise an additional
$750 million through the sale of membership interests to Vulcan Cable III, Inc.,
a company owned by Paul G. Allen. We will not receive any of the proceeds from
the sale of Charter Holdco membership interests to Charter Communications, Inc.
and Vulcan Cable III. Those proceeds will be used to fund acquisitions being
undertaken by Charter Holdco. Charter Holdco will thereafter be owned by Charter
Investment, Charter Communications, Inc. and Vulcan Cable III. The equity
interest of each of these owners has not yet been determined. We will continue
to be 100% owned by Charter Holdco.
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THE EXCHANGE OFFER
Resales Without Further
Registration.................... We believe that the new notes issued
pursuant to the exchange offer in exchange
for original notes may be offered for
resale, resold and otherwise transferred by
you without compliance with the registration
and prospectus delivery provisions of the
Securities Act of 1933, 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
, 1999, 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
notes.
Accrued Interest on the New
Notes and Original Notes........ The new notes will bear interest from March
17, 1999. 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.
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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
- 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
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liquidity of the original notes will be
adversely affected.
Material United States Federal
Income Tax Considerations..... 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;
- 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 Company of New York is serving
as exchange agent.
Use of Proceeds................. We will not receive any proceeds from the
exchange offer.
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SUMMARY TERMS OF NEW NOTES
Issuers......................... Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation.
Notes Offered................... $600 million in principal amount of 8.250%
senior notes due 2007.
$1.5 billion in principal amount of 8.625%
senior notes due 2009.
$1.475 billion in principal amount at
maturity of 9.920% senior discount notes due
2011.
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.
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MATURITY
DATE ISSUE PRICE INTEREST
------------- --------------------- ---------------------
8.250% notes......... April 1, 2007 99.233% plus accrued 8.250% per annum,
interest, if any, payable every six
from March 17, 1999 months on April 1 and
October 1, beginning
October 1, 1999
8.625% notes......... April 1, 2009 99.695%, plus accrued 8.625% per annum,
interest, if any, payable every six
from March 17, 1999 months on April 1,
and October 1,
beginning October 1,
1999
9.920% notes......... April 1, 2011 61.394% Interest to accrete
at a rate of 9.920%
per annum through
April 1, 2004; cash
interest every six
months on April 1 and
October 1 at the rate
of 9.920% per annum,
beginning October 1,
2004
Ranking......................... The new notes are senior debts. They rank
equally with the current and future
unsecured and unsubordinated debt, including
trade payables, which are accounts payable
to vendors, suppliers and service providers,
of Charter Holdings. Charter Holdings is a
holding company and conducts all of its
operations through its subsidiaries. If it
defaults, your right to payment under the
new notes will rank below all existing and
future liabilities, including trade
payables, of its subsidiaries. As of March
31, 1999, all of our outstanding
indebtedness, other than the notes but
including our credit facilities, was
incurred by our subsidiaries. As of that
date, our subsidiaries' liabilities, on a
pro forma basis giving effect for our recent
and pending acquisitions, totaled $4
billion. All such liabilities would have
ranked senior to the new notes.
Optional Redemption............. We will not have the right to redeem the
8.250% notes prior to their maturity date on
April 1, 2007.
Before April 1, 2002, we may redeem up to
35% of the 8.625% notes and the 9.920% notes
with the proceeds of certain offerings of
equity securities. On or after April 1,
2004, we may redeem some or all of the
8.625% notes and the 9.920% notes at any
time.
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Mandatory Offer to Repurchase... If we experience certain changes of control,
we must offer to repurchase any then-issued
notes at 101% of their principal amount or
accreted value, as applicable in each class
of notes, plus accrued and unpaid interest.
Basic Covenants of Indentures... The indentures governing the notes, among
other things, restrict our ability and the
ability of certain of our subsidiaries to:
- borrow money;
- create certain liens;
- pay dividends on stock or repurchase
stock;
- make investments;
- 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.
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 certain risks involved with an investment in the new notes.
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UNAUDITED SUMMARY PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Summary Pro Forma Financial Statements are based on
the financial statements of Charter Holdings, CCA Group, and CharterComm
Holdings, LLC, as adjusted to illustrate the estimated effects of our recent
acquisitions and pending acquisitions, as if such acquisitions, had occurred on
March 31, 1999 for the Balance Sheet Data and Operating Data and for the
estimated effects of the following transactions, as if such transactions had
occurred on January 1, 1998 for the Statements of Operations and Other Financial
Data:
(1) the acquisition of us on December 23, 1998 by Paul G. Allen;
(2) the acquisition of certain cable systems of Sonic Communications,
Inc., located in California and Utah, on May 20, 1998, by us 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;
(3) the acquisition of Marcus Cable Company, L.L.C. on April 23, 1998
by Mr. Allen;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) our merger with Marcus Holdings;
(6) our recent acquisitions and pending acquisitions; and
(7) the refinancing of all our debt through the issuance of the
original notes and funding under our current credit facilities.
The Unaudited Summary Pro Forma Financial Statements reflect the
application of the principles of purchase accounting to the transactions listed
in items (1) through (4) and (6) of the preceding sentence. In purchase
accounting, all separately identifiable assets and liabilities are recorded at
fair value with the excess purchase price recorded as franchises. The allocation
of the purchase price is based, in part, on preliminary information, which is
subject to adjustment upon obtaining complete valuation information of
intangible assets. The valuation information is expected to be finalized in the
fourth quarter of 1999. However, no significant adjustments are anticipated.
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The Unaudited Summary Pro Forma Financial Statements 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. See
"Unaudited Pro Forma Financial Statements."
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues.................................. $ 286,135 $ 70,511 $ 356,646 $ 88,625 $ -- $ 445,271
---------- ----------- ---------- ---------- -------- -----------
Operating expenses:
Operating, general and
administrative........................ 152,075 36,223 188,298 48,000 -- 236,298
Depreciation and amortization........... 153,747 35,470 189,217 49,233 -- 238,450
Corporate expense charges(a)............ 5,323 1,757 7,080 -- -- 7,080
Management fees......................... -- 1,338 1,338 1,444 -- 2,782
---------- ----------- ---------- ---------- -------- -----------
Total operating expenses.............. 311,145 74,788 385,933 98,677 -- 484,610
---------- ----------- ---------- ---------- -------- -----------
Loss from operations...................... (25,010) (4,277) (29,287) (10,052) -- (39,339)
Interest expense.......................... (71,591) (14,818) (86,409) (38,782) (12,775) (137,966)
Interest income........................... 1,733 159 1,892 100 -- 1,992
Other income (expense).................... 15 (31) (16) (106) -- (122)
---------- ----------- ---------- ---------- -------- -----------
Net loss.................................. $ (94,853) $ (18,967) $ (113,820) $ (48,840) $(12,775) $ (175,435)
========== =========== ========== ========== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)................................. $ 128,752 $ 31,162 $ 159,914 $ 39,075 $ 198,989
EBITDA margin(c).......................... 45.0% 44.2% 44.8% 44.1% 44.7%
Adjusted EBITDA(d)........................ 134,060 34,288 168,348 40,625 208,973
Cash flows from operating activities...... 45,824 19,420 65,244 20,424 85,668
Cash flows used in investing activities... (116,800) (19,953) (136,753) (31,220) (163,973)
Cash flows from financing activities...... 1,098,950 (1,030,691) 68,259 172,077 240,336
Cash interest expense..................... 109,186
Capital expenditures...................... $ 109,629 $ 12,517 $ 122,146 $ 30,951 $ 153,097
Total debt to annualized EBITDA........... 8.3x
Total debt to annualized Adjusted
EBITDA.................................. 7.9
EBITDA to cash interest expense........... 1.8
EBITDA to interest expense................ 1.4
Deficiency of earnings to cover fixed
charges(e).............................. $ 175,435
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.............................. $8,357,282 $ 902,237 $9,259,519 $2,381,963 $ -- $11,641,482
Total debt................................ 4,754,018 863,130 5,617,148 1,007,172 -- 6,624,320
Members' equity........................... 3,326,142 -- 3,326,142 1,325,000 -- 4,651,142
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THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES):
Homes passed(f)........................... 3,977,000 823,000 4,800,000 1,092,000 5,892,000
Basic customers(g)........................ 2,344,000 582,000 2,926,000 729,000 3,655,000
Basic penetration(h)...................... 58.9% 70.7% 61.0% 66.8% 62.0%
Premium units(i).......................... 1,322,000 318,000 1,640,000 439,000 2,079,000
Premium penetration(j).................... 56.4% 54.6% 56.0% 60.2% 56.9%
Average monthly revenue per basic
customer(k)............................. $ 40.69 $ 40.38 $ 40.63 $ 40.52 $ 40.61
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UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- --------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues.......................... $ 611,690 $ 448,192 $ 268,460 $1,328,342 $ 328,981 $ -- $ 1,657,323
---------- --------- ---------- ---------- ---------- -------- -----------
Operating expenses:
Operating, general and
administrative................ 310,100 231,050 138,524 679,674 167,686 -- 847,360
Depreciation and amortization... 375,899 252,855 141,535 770,289 186,485 -- 956,774
Corporate expense charges(a).... 16,493 17,042 6,759 40,294 -- -- 40,294
Management fees................. -- -- 4,573 4,573 10,100 -- 14,673
---------- --------- ---------- ---------- ---------- -------- -----------
Total operating expenses...... 702,492 500,947 291,391 1,494,830 364,271 -- 1,859,101
---------- --------- ---------- ---------- ---------- -------- -----------
Loss from operations.............. (90,802) (52,755) (22,931) (166,488) (35,290) -- (201,778)
Interest expense.................. (207,468) (137,953) (95,489) (440,910) (118,511) 7,500 (551,921)
Other income (expense)............ 518 -- 84 602 (5,944) -- (5,342)
---------- --------- ---------- ---------- ---------- -------- -----------
Net loss.......................... $ (297,752) $(190,708) $ (118,336) $ (606,796) $ (159,745) $ 7,500 $ (759,041)
========== ========= ========== ========== ========== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)......................... $ 285,615 $ 200,100 $ 118,688 $ 604,403 $ 145,251 $ 749,654
EBITDA margin(c).................. 46.7% 44.6% 44.2% 45.5% 44.2% 45.2%
Adjusted EBITDA(d)................ 301,590 217,142 129,936 648,668 161,295 809,963
Cash flows from operating
activities...................... 137,160 139,908 38,186 315,254 36,208 351,462
Cash flows used in investing
activities...................... (387,633) (217,729) (56,242) (661,604) (177,891) (839,495)
Cash flows from (used in)
financing activities............ 211,726 108,504 (21,932) 298,298 45,184 343,482
Cash interest expense............. 436,432
Capital expenditures.............. $ 213,353 $ 224,723 $ 22,672 $ 460,748 $ 70,435 $ 531,183
Total debt to EBITDA.............. 8.8x
Total debt to Adjusted EBITDA..... 8.1
EBITDA to cash interest expense... 1.7
EBITDA to interest expense........ 1.4
Deficiency of earnings to cover
fixed charges(e)................ $ 759,041
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets...................... $7,235,656 $ -- $1,941,773 $9,177,429 $2,409,913 $125,000 $11,712,342
Total debt........................ 3,523,201 -- 1,901,590 5,424,791 1,007,171 128,604 6,560,566
Members' equity................... 3,429,291 -- -- 3,429,291 1,325,000 (3,604) 4,750,687
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YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES):
Homes passed(f).................. 2,149,000 1,743,000 806,000 4,698,000 989,000 5,687,000
Basic customers(g)............... 1,255,000 1,062,000 562,000 2,879,000 738,000 3,617,000
Basic penetration(h)............. 58.4% 60.9% 69.7% 61.3% 74.6% 63.6%
Premium units(i)................. 845,000 411,000 299,000 1,555,000 512,000 2,067,000
Premium penetration(j)........... 67.3% 38.7% 53.2% 54.0% 69.4% 57.1%
Average monthly revenue per basic
customer(k).................... NM NM $ 39.81 $ 38.45 $ 37.15 $ 38.18
- -------------------------
(a) Charter Investment provided corporate management and consulting services to
our subsidiaries during 1998 and 1999, and to subsidiaries of Marcus
Holdings beginning in October 1998. See "Certain Relationships and Related
Transactions."
(b) EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television 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.
(c) EBITDA margin represents EBITDA as a percentage of revenues.
(d) Adjusted EBITDA means EBITDA before corporate expenses, management fees and
other income (expense) in accordance with the term "Consolidated EBITDA"
used in the indentures governing the notes. See "Description of Notes" for
a complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted
financial indicator of a cable company's ability to meet its debt payments
and because it is used in the indentures to determine compliance with
certain covenants. 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) 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.
(g) Basic customers are customers who receive basic cable service.
(h) Basic penetration represents basic customers as a percentage of homes
passed.
(i) Premium units represent the total number of subscriptions to premium
channels.
(j) Premium penetration represents premium units as a percentage of basic
customers.
(k) Average monthly revenue per basic customer represents revenues divided by
the number of months in the period divided by the number of basic customers
at period end.
See "Notes to the Unaudited Pro Forma Financial Statements."
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UNAUDITED SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
The Unaudited Summary Historical Combined Financial and Operating Data for
the years ended December 31, 1996, 1997 and 1998 have been derived from the
separate financial statements of Charter Holdings, CCA Group, and CharterComm
Holdings, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The combined
financial and operating data represent the sum of the results of each of our
operating subsidiaries. Each of the companies was managed by Charter Investment,
under the terms of its respective management agreement with such company during
the presented periods. Since our operating subsidiaries were under common
management, we believe presenting combined financial information of these
companies is informative.
As a result of the acquisition of us by Paul G. Allen, we have applied
purchase accounting, whereby all separately identifiable assets and liabilities
are recorded at fair value, which had the effect of increasing total assets,
total debt and members' equity as of December 23, 1998. In addition, we have
retroactively restated our financial statements to include the results of
operations of Marcus Cable for the period from December 24, 1998 through
December 31, 1998, and the balance sheet of Marcus Cable as of December 31,
1998. As a result of our acquisition by Mr. Allen and our merger with Marcus
Holdings, we believe that the periods on or prior to December 23, 1998 are not
comparable to the periods after December 23, 1998.
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CHARTER HOLDINGS, CCA GROUP, CHARTER
AND CHARTERCOMM HOLDINGS HOLDINGS
---------------------------------- ----------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT CUSTOMER DATA)
COMBINED STATEMENT OF OPERATIONS:
Revenues........................................... $ 368,553 $ 484,155 $570,964 $ 23,450
---------- ---------- -------- ----------
Operating expenses:
Operating, general and administrative............ 190,084 249,419 288,428 12,679
Depreciation and amortization.................... 154,273 198,718 240,294 13,811
Management fees/corporate expense charges(a)..... 15,094 20,759 38,348 766
---------- ---------- -------- ----------
Total operating expenses...................... 359,451 468,896 567,070 27,256
---------- ---------- -------- ----------
Income (loss) from operations...................... $ 9,102 $ 15,259 $ 3,894 $ (3,806)
========== ========== ======== ==========
CAPITAL EXPENDITURES............................... $ 110,291 $ 162,607 $195,468 $ 13,672
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets....................................... $1,660,242 $2,002,181 $7,235,656
Total debt......................................... 1,195,899 1,846,159 3,523,201
Members' equity.................................... 26,099 (80,505) 3,429,291
OPERATING DATA (AT END OF PERIOD, EXCEPT FOR
AVERAGES):
Homes passed(b).................................... 1,546,000 1,915,000 3,892,000
Basic customers(c)................................. 902,000 1,086,000 2,317,000
Basic penetration(d)............................... 58.3% 56.7% 59.5%
Premium units(e)................................... 517,000 629,000 1,256,000
Premium penetration(f)............................. 57.3% 57.9% 54.2%
- -------------------------
(a) Charter Investment provided corporate management and consulting services to
us. CCA Group, and CharterComm Holdings paid fees to Charter Investment as
compensation for such services and recorded such fees as expense. See
"Certain Relationships and Related Transactions." Charter Holdings recorded
charges for actual corporate expenses incurred by Charter Investment on
behalf of Charter Holdings. Management fees/corporate expense charges for
the period ended December 23, 1998 include $14.4 million of change of
control payments under the terms of then-existing equity appreciation rights
plans. Such payments were triggered by the acquisition of us by Paul G.
Allen. Such payments were made by Charter Investment and were not subject to
reimbursement by us but were allocated to us for financial reporting
purposes. The equity appreciation rights plans were terminated in connection
with our acquisition by Mr. Allen, and these costs will not recur.
(b) 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.
(c) Basic customers are customers who receive basic cable service.
(d) Basic penetration represents basic customers as a percentage of homes
passed.
(e) Premium units represent the total number of subscriptions to premium
channels.
(f) Premium penetration represents premium units as a percentage of basic
customers.
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RISK FACTORS
The new notes, like the old notes, entail the following risks. You should
carefully consider these risk factors, as well as the other information in this
prospectus, before tendering original notes in exchange for new notes.
OUR BUSINESS
WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL ADDITIONAL DEBT
WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING
OUR OBLIGATIONS UNDER THE NOTES.
We have a significant amount of debt. As of March 31, 1999, pro forma for
our pending acquisitions and acquisitions completed since that date, our total
debt was approximately $6.6 billion, our total members' equity was approximately
$4.7 billion, and the deficiency of our earnings available to cover fixed
charges was approximately $175 million.
Our substantial debt could have important consequences to you. For example,
it could:
- make it more difficult for us to satisfy our obligations to you with
respect to the notes and to satisfy our obligations under our credit
facilities;
- 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 such debt.
We anticipate incurring substantial additional debt in the future to fund
the expansion, maintenance and the upgrade of our systems. If new debt is added
to our current debt levels, the related risks that we and you now face could
intensify.
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THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND
LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT OUR ABILITY TO OPERATE OUR BUSINESS
AND REPAY THE NOTES.
Our credit facilities and the indentures governing the notes contain a
number of significant covenants that could adversely impact our business. These
covenants, among other things, restrict the ability of our subsidiaries to:
- pay dividends;
- pledge assets;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- make certain investments or acquisitions.
In addition, our credit facilities require the particular borrower to maintain
cash 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.
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 OUR INDENTURES.
SUCH DEFAULTS MAY ADVERSELY AFFECT US.
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
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 our 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. In addition, under the terms of the Charter Operating credit
facilities, if the 8.250% notes are not refinanced at least six months prior to
the date of their maturity, the entire amount due under such credit facilities
will become due and payable and we may not have the ability to make such
payment. Any default under any of our credit facilities or our indentures may
adversely affect our growth, our financial condition and our results of
operations.
THE NOTES ARE THE OBLIGATIONS OF A HOLDING COMPANY WHICH HAS NO OPERATIONS AND
DEPENDS ON ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED
IN THEIR ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF AMOUNTS DUE UNDER
THE NOTES.
As a holding company, Charter Holdings does not hold substantial assets
other than its direct or indirect investments in and advances to our operating
subsidiaries. Consequently, our subsidiaries conduct all of our operations and
own substantially all of our assets. As a result, our cash flow and our ability
to meet our debt payment obligations on the notes will depend upon the cash flow
of our subsidiaries and the payment of funds by our subsidiaries to us in the
form of loans, equity distributions or otherwise. Our
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subsidiaries are not obligated to make funds available to us for payment on the
notes. In addition, our subsidiaries' ability to make any such loans, equity
distributions or other payments to us will depend on their earnings, the terms
of their indebtedness, business and tax considerations and legal restrictions.
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, THE NOTES WILL BE SUBORDINATE TO ALL
LIABILITIES OF OUR SUBSIDIARIES.
Under our credit facilities, Charter Operating is the borrower, and our
other subsidiaries are guarantors. The lenders under our credit facilities will
have the right to be paid before you 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 us as a shareholder or
otherwise. This will adversely affect our ability to make payments to you as a
holder of the notes.
OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE OUR
DEBT AND GROW OUR BUSINESS DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on our debt, including the notes, and to fund
our planned capital expenditures for upgrading our cable systems and for other
purposes 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 that are 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 our
debt, including the notes, to grow our business or to fund our other liquidity
needs.
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. Giving effect to our merger with Marcus
Holdings and our recent and pending acquisitions, our systems currently serve
approximately 58% 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 and growth in EBITDA over our
short operating history is not necessarily indicative of future performance.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES.
CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE OUR FUTURE OPERATIONS.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. We reported net losses from continuing
operations, before extraordinary items, of $157 million for 1997, $200 million
for 1998, and $94.9 million for the three months ended March 31, 1999. On a pro
forma basis, giving effect to our merger with Marcus Holdings and our recent and
pending acquisitions, we had net losses from continuing operations, before
extraordinary items of $759 million for 1998. For the three months ended March
31, 1999, on the same pro forma basis, we had net losses from continuing
operations, before extraordinary items of $175 million. We expect our net losses
to increase as a result of our recent and pending acquisitions. We cannot
predict what
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24
impact, if any, continued losses will have on our ability to finance our
operations in the future.
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. Over the next three years, we
plan to spend approximately $900 million, or $1.2 billion pro forma including
our recent and pending acquisitions, to upgrade the systems we own and the
systems we have agreed to acquire in our pending acquisitions. We also plan to
spend an additional $900 million, or $1.3 billion pro forma for our recent and
pending acquisitions, to maintain and expand the systems we own and the systems
we will acquire. 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, our financial condition and the results of our operations could
suffer materially.
IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, WE MAY BE UNABLE TO
FULFILL OUR OBLIGATIONS UNDER THE NOTES.
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.
WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW SYSTEMS THAT WE ACQUIRE AND THE
CUSTOMERS THEY SERVE WITH OUR EXISTING SYSTEMS. THIS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS AND GROWTH STRATEGY.
Upon the completion of our pending acquisitions, we will own and operate
cable systems serving approximately 3.7 million customers, as compared to the
cable systems we currently own which serve approximately 2.3 million customers
as of March 31, 1999. In addition, we may acquire more cable systems in the
future, through system swaps or otherwise. The integration of our new cable
systems 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, informational services, and
financial, legal and marketing resources. Our current operating and
financial systems and controls
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25
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.
- 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 ACQUISITION. THIS
WOULD PREVENT OR DELAY OUR STRATEGY TO EXPAND OUR BUSINESS AND INCREASE
REVENUES.
Our pending acquisitions are subject to federal, state and local regulatory
approvals. We cannot assure that we will be able to obtain any necessary
approvals. These pending acquisitions are also subject to a number of other
closing conditions. There can be no assurance as to when, or if, each such
acquisition will be consummated. Any delay, prohibition or modification could
adversely affect the terms of a pending acquisition or could require us to
abandon an otherwise attractive opportunity and possible forfeit earnest money.
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. In addition, as we upgrade the channel capacity
of our systems and 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 provides unedited, commercial-free movies, sports and other special
event entertainment programming. The inability to pass programming cost
increases on to our customers will have an adverse impact on our cash flow and
operating margins.
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 in our pending acquisitions will require us to hire contractors and
enter into a number of construction agreements. We may have difficulty hiring
experienced 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
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26
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.
OUR PRINCIPAL EQUITY HOLDER MAY HAVE INTERESTS ADVERSE TO YOUR INTERESTS.
Paul G. Allen beneficially owns approximately 96% of our outstanding equity
interests on a fully diluted basis. Accordingly, Mr. Allen has the ability to
control fundamental corporate transactions requiring equity holder approval,
including without limitation, election of directors, approval of merger
transactions involving us and sales of all or substantially all of our assets.
Further, through his effective control of our management and affairs, Mr. Allen
could cause us to enter into contracts with another corporation 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 or electronic
commerce, or other businesses that compete or may in the future compete with us
through one or more of his affiliates. If he did so, we and Mr. Allen would be
competing. 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's affiliates. Current or future
agreements between us and Mr. Allen may not be the result of arm's-length
negotiations. Consequently, such agreements may be less favorable to us than
agreements that we could otherwise have entered into with unaffiliated third
parties. Further, many past and future transactions with Mr. Allen or his
affiliates are informal in nature and, therefore, costs and benefits are not
formally allocated among the parties to the transactions. As a result, there
inevitably will be some discretion left to the parties, who are subject to the
potentially conflicting interests described above.
We have not instituted any formal plan or arrangement to address potential
conflicts of interest or allocation of corporate opportunities that may arise.
UPON THE COMPLETION OF THE INITIAL PUBLIC OFFERING BY CHARTER COMMUNICATIONS,
INC., IT IS ANTICIPATED THAT WE WILL NOT BE PERMITTED TO ENGAGE IN ANY BUSINESS
ACTIVITY OTHER THAN THE CABLE TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR.
ALLEN FIRST DETERMINES NOT TO PURSUE THE 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.
The certificate of incorporation of Charter Communications, Inc. and
Charter Holdco's operating agreement will provide that, until all of the shares
of Charter Communications, Inc.'s Class B common stock held by Mr. Allen have
automatically converted into shares of Class A common stock, Charter
Communications, Inc. and Charter Holdco, including their subsidiaries, cannot
engage in any business transaction outside the cable transmission business,
unless the opportunity to pursue the particular business transaction is first
offered to Mr. Allen. Mr. Allen must decide not to pursue such other business
transaction and consent to our engaging in the business transaction. 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
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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 WILL BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND WILL
NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD IMPAIR OUR OPERATING
RESULTS AND GIVE RISE TO CONFLICTS OF INTEREST.
Mr. Allen and certain other of our affiliates, including our direct parent,
Charter Holdco, have agreed to acquire, and may from time to time in the future
acquire, cable systems in addition to those owned or acquired by us. To date,
such affiliates have signed agreements to purchase cable systems with a total of
approximately 2.5 million customers. Although in the past, Charter Investment
has assigned certain of their acquisitions to us, there is no present intention
on the part of Charter Investment or any of our other affiliates to contribute
any additional acquisitions to us or to any of our subsidiaries.
Charter Investment, of which Mr. Allen is the majority owner, as well as
some of the officers of Charter Investment who currently manage our cable
systems, will have a substantial role in managing these outside systems. Charter
Investment and its officers and employees now devote substantially all of their
time to managing our systems. However, when such persons begin to manage outside
cable systems as well, the time they devote to managing our systems will be
correspondingly reduced. This could impair our results of operations. Moreover,
allocating managers' time and other resources of Charter Investment between our
systems and outside systems held by our affiliates could give rise to conflicts
of interest. Charter Investment does not have or plan to create formal
procedures for determining whether and to what extent outside cable television
systems described above will receive priority with respect to personnel
requirements.
THE LOSS OF CERTAIN KEY EXECUTIVES COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE
OUR BUSINESS.
Our operations are managed by Charter Investment which, in turn, is managed
by a small number of key executive officers, including Jerald L. Kent. The loss
of the services of these individuals, and, in particular, of Mr. Kent, could
adversely affect our ability to manage our business which, in turn, could
adversely affect our financial condition and results of operations.
DATA PROCESSING FAILURES AFTER DECEMBER 31, 1999 COULD SIGNIFICANTLY DISRUPT OUR
OPERATIONS, CAUSING A DECLINE IN CASH FLOW AND REVENUES AND OTHER DIFFICULTIES.
The year 2000 problem affects our owned and licensed computer systems and
equipment used in connection with internal operations. It also affects our
non-information technology systems, including embedded systems in our buildings
and other infrastructure. Additionally, since we rely directly and indirectly,
in the regular course of business, on the proper operation and compatibility of
third party systems, the year 2000 problem could cause these systems to fail,
err, or become incompatible with our systems.
Much of our assessment efforts regarding the year 2000 problem has
involved, and depends on, inquiries to third party service providers. Some of
these third parties that have certified the readiness of their products will not
certify that such products have operating compatibility with our systems. If we,
or a significant third party with whom we communicate and do business through
computers, fails to become year 2000 ready, or if
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the year 2000 problem causes our systems to become internally incompatible or
incompatible with key third party systems, our business could suffer material
disruptions. We could also face disruptions if the year 2000 problem causes
general widespread problems or an economic crisis. We cannot now estimate the
extent of these potential disruptions. We cannot assure you that our efforts to
date and our ongoing efforts to prepare for the year 2000 problem will be
sufficient to prevent a material disruption of our operations, particularly with
respect to systems we may acquire prior to December 31, 1999. As a result of any
such disruption our growth, financial condition and results of operations could
suffer materially.
THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR
OBLIGATIONS IN THE FUTURE.
In the past, Mr. Allen has contributed equity to Charter Investment. In
July 1999, Mr. Allen agreed to contribute $500 million on or before August 13,
1999, and $825 million on or before September 1, 1999, to Charter Holdco,
pursuant to a membership interests purchase agreement. Charter Holdco has
committed to contribute all of this equity to us. There can be no expectation
that Mr. Allen will continue to contribute funds to us or to our affiliates in
the future.
OUR INDUSTRY
WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN 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 cable television operators, regional telephone companies,
long distance telephone service providers, electric utilities, local exchange
carriers that provide local telecommunications exchange and access services to
customers, providers of cellular and other wireless communications services and
others may result in providers capable of offering cable television and other
telecommunications services in direct competition with us.
We also face competition within the subscription television industry, which
includes providers of paid television service, and excludes broadcast companies
that transmit their signal to customers without assessing a subscription fee.
The competition we face is from non-cable technologies for distributing
television broadcast signals 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 additional telecommunications services, we will be
subject to competition from other telecommunications providers. We cannot
predict the extent to which this competition may affect our business and
operations in the future.
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WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS OR
SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY.
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 or 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, results of operation and financial
condition could suffer materially.
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. The existence of more than one cable system
operating in the same territory is referred to as an overbuild. Overbuilds can
adversely affect our operations. We are currently aware of overbuild situations
in six of our systems and potential overbuild situations in another four of our
systems, together representing a total of approximately 89,000 customers.
Additional overbuild situations may occur in other 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 non-exclusive 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
certain cases, 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 renew these franchises in the future. In the
future, a sustained and material failure to renew a franchise could adversely
affect our business in the affected metropolitan area.
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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 a basic programming services. As of March 31,
1999, we have refunded an aggregate amount of approximately $453,000 since our
inception. We may be required to refund additional amounts in the future.
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 such regulation 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. We
expect further efforts, but cannot predict whether 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.
There are proposals before the United States Congress and the Federal
Communications Commission to require all cable operators to make a portion of
their cable systems' bandwidth available to other Internet service providers,
such as telephone companies. Certain local franchising authorities are
considering or have already approved such "open access" requirements. A federal
district court in Portland, Oregon, recently upheld the legality of an open
access requirement. 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. Broward County,
Florida recently granted open access to an
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Internet service provider as a condition to a cable operators' transfer of its
franchise for cable service. The cable operator has commenced legal action at
the district level. 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. In addition, our Internet service provider
competitors would be strengthened. We may also decide not to upgrade our systems
which would prevent us from introducing our planned new products and services.
In addition, we cannot assure that if we were required to provide access in this
manner, it would not adversely impact our profitability in many ways, including
any or all of the following:
- significantly increasing competition;
- increasing the expenses we incur to maintain our systems; and
- increasing the expense of upgrading and/or expanding our systems.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE
CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS
COULD IMPAIR OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS OR CAUSE
US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS.
On March 31, 1999, the pricing guidelines of expanded basic cable
programming packages were 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 such services. We may not be able to obtain such authorizations in a
timely manner, if 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, which provide the
ability to offer telephone services over the Internet, generally are subject to
significant regulation as well as higher fees for pole attachments. 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.
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THE OFFERING
THERE IS NO PUBLIC MARKET FOR THE NOTES. AN ACTIVE 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 securities
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 OFFER. 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 credit facilities. Because the credit facilities are obligations of our
subsidiaries, the credit facilities would have to be repaid by our subsidiaries
before their assets could be used to repurchase the notes. Our failure to make
or complete an offer to repurchase the notes would place us in default under the
indentures.
THE 9.920% NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT. CONSEQUENTLY,
HOLDERS OF 9.920% NOTES WILL GENERALLY BE REQUIRED TO INCLUDE AMOUNTS IN GROSS
INCOME FOR FEDERAL INCOME TAX PURPOSES IN ADVANCE OF RECEIVING CASH.
The 9.920% notes will be issued at a substantial discount from their stated
principal amount. As a result, purchasers of such notes generally will be
required to include the accrued portion of such discount in gross income, as
interest, for United States federal income tax purposes in advance of the
receipt of cash payments of such interest.
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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 9.920% 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 9.920% notes, the claim by a holder of
such notes for the principal amount of such notes may be limited to an amount
equal to the sum of:
(1) the initial offering price for such 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
9.920% notes under these circumstances may receive a lesser amount than they
would be entitled to receive under the terms of the indenture governing the
9.920% 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
9.920% notes may realize taxable gain or loss upon payment of that holder's
claim in bankruptcy.
IF WE DO NOT FULFILL OUR OBLIGATIONS TO YOU UNDER THE NOTES, YOU WILL NOT HAVE
ANY RECOURSE AGAINST OUR 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 Paul G. 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 liability for our obligations under the notes or the
indentures. By accepting the notes, you waive and release all such liability as
consideration for issuance of the notes. Consequently, if we do not fulfill our
obligations to you under the notes, you will have no recourse against any of
these parties.
Additionally, our equity holders, including 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 as well.
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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. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this prospectus are
set forth under the caption "Risk Factors" and elsewhere in this prospectus, and
include, but are not limited to:
- our plans to achieve growth by offering new and enhanced services and
through acquisitions;
- our anticipated capital expenditures for our planned upgrades, and the
ability to fund such upgrades;
- our beliefs regarding the affects of governmental regulation on our
business;
- our ability to effectively compete in a highly competitive environment;
and
- our expectations to be ready for any year 2000 problem.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by those cautionary statements.
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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 like 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 $2.99 billion from the private
placement of the original notes. Some of these proceeds were used to complete
cash tender offers for certain then-outstanding notes of our subsidiaries. Some
of these proceeds were also used to pay off a portion of our previous credit
facilities, and to fund working capital, capital expenditures and recent
acquisitions.
The break-down of the uses of these proceeds are as follows (in billions):
Tender offers:
CharterComm Holdings (a)
14.00% senior secured discount debentures due 2007..... $0.14
11.25% senior notes due 2006........................... 0.14
Marcus Cable (b)
13.50% senior subordinated guaranteed discount notes
due 2004.............................................. 0.43
14.25% senior discount notes due 2005.................. 0.30
Previous credit facilities:
Charter Properties credit agreement (c)................... 0.07
CharterComm Holdings credit agreements (d)................ 0.16
CCA Group credit agreements (e)........................... 0.27
Marcus Cable credit agreement (f):........................ 0.83
Cash used to fund working capital, capital expenditures and
recent acquisitions....................................... 0.53
Discounts and commissions................................... 0.07
Expenses.................................................... 0.05
-----
Total....................................................... $2.99
=====
- ---------------
(a) As of December 31, 1998, the effective interest rate of the 14.00% senior
secured discount debentures, which mature March 2007, was 10.7%, and the
effective interest rate of the 11.25% senior notes, which mature March 2006,
was 9.6%.
(b) As of December 31, 1998, the effective interest rate of the 13.50% senior
subordinated guaranteed discount notes, which mature August 2004, was 10.0%,
and the effective interest rate of the 14.25% senior discount notes, which
mature December 2005, was 14.1%.
(c) As of December 31, 1998, the variable interest rates of the Charter
Properties credit agreement, with maturity dates ranging from March 2000
through June 2007, ranged from 7.44% to 8.19%. Included in the $70 million
repayment is $30 million of borrowings, incurred in March 1998, to finance
part of the Sonic acquisition.
(d) As of December 31, 1998, the variable interest rates of the CharterComm
Holdings credit agreements, with maturity dates ranging from June 2002
through June 2007, ranged from 6.69% to 7.31%.
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(e) As of December 31, 1998, the variable interest rates of one of the CCA Group
credit agreements, with maturity dates ranging from March 2002 through March
2007, ranged from 6.88% to 8.06% and the variable interest rates of the
other CCA Group credit agreement, with maturity dates ranging from December
1999 through March 2006, ranged from 6.56% to 7.59%. Included in the $270
million repayment is $30 million of borrowings, incurred in October 1998, to
repay a portion of a note payable.
(f) As of December 31, 1998, the variable interest rates of the Marcus credit
agreement, with maturity dates ranging from December 2002 through April
2004, ranged from 6.23% to 7.75%.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 as
adjusted to give effect to additional borrowings under our credit facilities and
an additional equity contribution in connection with our recent acquisitions and
pending acquisitions, as if such transactions had occurred on March 31, 1999.
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 MARCH 31, 1999
-------------------------
AS
HISTORICAL ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
CHARTER HOLDINGS:
Cash and cash equivalents(a).............................. $1,038,360 $ 30,464
========== ===========
Long-term debt:
Credit facilities......................................... $1,750,000 $ 3,512,686
8.250% senior notes....................................... 598,398 598,398
8.625% senior notes....................................... 1,495,480 1,495,480
9.920% senior discount notes.............................. 909,055 909,055
Other(b).................................................. 1,085 26,085
10% senior discount notes -- Renaissance(c)............... -- 82,616
---------- -----------
Total long-term debt................................... 4,754,018 6,624,320
Members' equity(d)........................................ 3,326,142 4,651,142
---------- -----------
Total capitalization................................... $8,080,160 $11,275,462
========== ===========
- -------------------------
(a) We presented cash and cash equivalents historical of $1 billion since we
were required to draw the full amount of the Tranche B term loan under our
credit facilities pursuant to the terms of the credit facilities. Therefore,
Charter Holdings will have cash available pending application of such
amounts to future acquisitions, capital expenditures and other working
capital purposes.
(b) Represents the notes of certain subsidiaries not tendered in connection with
the tender offers and preferred equity interests.
(c) Represents debt of Renaissance Media Group LLC.
(d) Members' equity, as adjusted, is increased by $1.325 billion, the additional
equity that is expected from Paul Allen in connection with our recent and
pending acquisitions.
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements are based on the
financial statements of Charter Holdings, CCA Group, and CharterComm Holdings.
They are adjusted to illustrate the estimated effects of our recent and pending
acquisitions, as if such acquisitions had occurred on March 31, 1999 for the
Balance Sheet Data and Operating Data, and for the estimated effects of the
following transactions as if they had occurred on January 1, 1998 for the
Statement of Operations and Other Financial Data:
(1) the acquisition of us on December 23, 1998 by Paul G. Allen;
(2) the acquisition of Sonic on May 20, 1998 by us;
(3) the acquisition of Marcus Cable on April 23, 1998 by Paul G. Allen;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) our merger with Marcus Holdings;
(6) our recent and pending acquisitions; and
(7) the refinancing of all the debt of our subsidiaries through the
issuance of the original notes and funding under our credit facilities.
The Unaudited Pro Forma Financial Statements reflect the application of the
principles of purchase accounting to the transactions listed in items (1)
through (4) and (6). The allocation of purchase price is based, in part, on
preliminary information which is subject to adjustment upon obtaining complete
valuation information of intangible assets. The valuation information is
expected to be finalized in the third quarter of 1999. We believe that
finalization of the purchase price will not have a material impact on the
results of operations or financial position of Charter Holdings.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable. In particular, the pro
forma adjustments assume that the sellers of Rifkin will elect all cash for
payment of the Rifkin purchase price. The Rifkin sellers may elect to take up to
$240 million of the purchase price in preferred limited liability company
interests. The impact of such is disclosed in Note B to the Unaudited Pro Forma
Statement of Operations for the three months ended March 31, 1999 and Note D to
the Unaudited Pro Forma Statement of Operations for the year ended December 31,
1998. We have also assumed the obligations to purchase the Helicon and Rifkin
notes through tender offers. We have already purchased 30% of the Renaissance
notes. We have financed, and will finance these purchases through borrowings
under our credit facilities. The Helicon notes are currently callable. The
estimated impact on interest expense, should we be unsuccessful in our tender
offer for the Rifkin notes, is disclosed in Note B to the Unaudited Pro Forma
Statement of Operations for the three months ended March 31, 1999, and Note D to
the Unaudited Pro Forma Statement of Operations for the year ended December 31,
1998. The Unaudited Pro Forma Financial Statements and accompanying notes should
be read in conjunction with the historical financial statements and other
financial information appearing elsewhere in this prospectus, including
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
35
39
The Unaudited Pro Forma Financial Statements do not purport to be
indicative of what our financial position or results of operations would
actually have been had the transactions above been completed on the dates
indicated or to project our results of operations for any future date.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------------------------------------------
RECENT PENDING REFINANCING
CHARTER ACQUISITIONS ACQUISITIONS ADJUSTMENTS
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL
---------- ------------ ---------- ---------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues...................... $ 286,135 $ 70,511 $ 356,646 $ 88,625 $ -- $ 445,271
---------- ----------- ---------- ---------- ---------- ----------
Operating expenses:
Operating, general and
administrative............ 152,075 36,223 188,298 48,000 -- 236,298
Depreciation and
amortization.............. 153,747 35,470 189,217 49,233 -- 238,450
Corporate expense charges
(Note C).................. 5,323 1,757 7,080 -- -- 7,080
Management fees............. -- 1,338 1,338 1,444 -- 2,782
---------- ----------- ---------- ---------- ---------- ----------
Total operating
expenses............... 311,145 74,788 385,933 98,677 -- 484,610
---------- ----------- ---------- ---------- ---------- ----------
Loss from operations.......... (25,010) (4,277) (29,287) (10,052) -- (39,339)
Interest expense.............. (71,591) (14,818) (86,409) (38,782) (12,775) (137,966)
Interest income............... 1,733 159 1,892 100 -- 1,992
Other income (expense)........ 15 (31) (16) (106) -- (122)
---------- ----------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item.......... $ (94,853) $ (18,967) $ (113,820) $ (48,840) $ (12,775) $ (175,435)
========== =========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA (Note D)............... $ 128,752 $ 31,162 $ 159,914 $ 39,075 $ 198,989
EBITDA margin (Note E)........ 45.0% 44.2% 44.8% 44.1% 44.7%
Adjusted EBITDA (Note F)...... 134,060 34,288 168,348 40,625 208,973
Cash flows from operating
activities.................. 45,824 19,420 65,244 20,424 85,668
Cash flows used in investing
activities.................. (116,800) (19,953) (136,753) (31,220) (163,973)
Cash flows from financing
activities.................. 1,098,950 (1,030,691) 68,259 172,077 240,336
Cash interest expense......... 109,186
Capital expenditures.......... $ 109,629 $ 12,517 $ 122,146 $ 30,951 $ 153,097
Total debt to annualized
EBITDA...................... 8.3x
Total debt to annualized
Adjusted EBITDA............. 7.9
EBITDA to cash interest
expense..................... 1.8
EBITDA to interest expense.... 1.4
Deficiency of earnings to
cover fixed charges (Note
G).......................... $ 175,435
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR
AVERAGES):
Homes passed (Note H)......... 3,977,000 823,000 4,800,000 1,092,000 5,892,000
Basic customers (Note I)...... 2,344,000 582,000 2,926,000 729,000 3,655,000
Basic penetration (Note J).... 58.9% 70.7% 61.0% 66.8% 62.0%
Premium units (Note K)........ 1,322,000 318,000 1,640,000 439,000 2,079,000
Premium penetration (Note
L).......................... 56.4% 54.6% 56.0% 60.2% 56.9%
Average monthly revenue per
basic customer (Note M)..... $ 40.69 $ 40.38 $ 40.63 $ 40.52 $ 40.61
36
40
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for our recent acquisitions and
pending acquisitions consist of the following (dollars in thousands):
Three Months Ended March 31, 1999
-----------------------------------------------------------------------------------------------------
Recent Acquisitions -- Historical Pending Acquisitions -- Historical
-------------------------------------------------------------- ------------------------------------
Greater
American Media Total Intermedia Total
Renaissance Cable Systems Helicon Other Recent Systems Rifkin(a) Pending
----------- -------- ------- ------- ------ -------- ----------- ---------- ---------
Revenues.................. $15,254 $ 9,151 $20,394 $21,252 $3,354 $ 69,405 $ 48,288 $ 50,914 $ 99,202
Operating expenses:
Operating, general and
administrative........ 6,889 4,681 12,757 11,277 1,594 37,198 26,080 27,028 53,108
Depreciation and
amortization.......... 6,655 5,536 2,425 6,828 938 22,382 26,100 26,187 52,287
Management fees......... -- 275 -- 1,063 -- 1,338 781 841 1,622
------- ------- ------- ------- ------ -------- -------- -------- --------
Total operating
expenses............ 13,544 10,492 15,182 19,168 2,532 60,918 52,961 54,056 107,017
Income (loss) from
operations.............. 1,710 (1,341) 5,212 2,084 822 8,487 (4,673) (3,142) (7,815)
Interest expense.......... (4,797) (2,450) (157) (7,821) (758) (15,983) (5,778) (11,414) (17,192)
Interest income........... 90 18 -- 51 -- 159 77 -- 77
Other income (expense).... -- -- (16) -- -- (16) -- (77) (77)
------- ------- ------- ------- ------ -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit)............... (2,997) (3,773) 5,039 (5,686) 64 (7,353) (10,374) (14,633) (25,007)
Income tax (benefit)
expense................. 58 -- 2,088 -- -- 2,146 (1,396) (537) (1,933)
------- ------- ------- ------- ------ -------- -------- -------- --------
Income (loss) before
extraordinary item...... $(3,055) $(3,773) $ 2,951 $(5,686) $ 64 $ (9,499) $ (8,978) $(14,096) $(23,074)
======= ======= ======= ======= ====== ======== ======== ======== ========
Three Months Ended March 31, 1999
--------------------------------------------------------------------------------------
Recent Acquisitions Pending Acquisitions
------------------------------------------------------ ----------------------------
Pro Forma Pro Forma
----------------------------------------- ---------------
Historical Acquisitions(b) Adjustments Total Historical Acquisitions(b)
---------- --------------- ----------- -------- ---------- ---------------
Revenues............... $69,405 $1,106 $ -- $ 70,511 $ 99,202 $ 5,372
Operating expenses:
Operating, general
and
administrative..... 37,198 782 (1,757)(d) 36,223 53,108 2,794
Depreciation and
amortization....... 22,382 529 12,559(e) 35,470 52,287 881
Corporate expense
charges............ -- -- 1,757(d) 1,757 -- --
Management fees...... 1,338 -- -- 1,338 1,622 280
------- ------ -------- -------- -------- -------
Total operating
expenses........... 60,918 1,311 12,559 74,788 107,017 3,955
Income (loss) from
operations........... 8,487 (205) (12,559) (4,277) (7,815) 1,417
Interest expense....... (15,983) (25) 1,190(f) (14,818) (17,192) (1,309)
Interest income........ 159 -- -- 159 77 23
Other income
(expense)............ (16) (15) -- (31) (77) (29)
------- ------ -------- -------- -------- -------
Income (loss) before
income tax expense
(benefit)............ (7,353) (245) (11,369) (18,967) (25,007) 102
Income tax (benefit)
expense.............. 2,146 -- (2,146)(h) -- (1,933) (114)
------- ------ -------- -------- -------- -------
Income (loss) before
extraordinary item... $(9,499) $ (245) $ (9,223) $(18,967) $(23,074) $ 216
======= ====== ======== ======== ======== =======
Three Months Ended March 31, 1999
-----------------------------------------
Pending Acquisitions
-----------------------------------------
Pro Forma
-----------------------------------------
Dispositions(c) Adjustments Total
--------------- ----------- --------
Revenues............... $(15,949) $ -- $ 88,625
Operating expenses:
Operating, general
and
administrative..... (7,902) -- 48,000
Depreciation and
amortization....... (6,883) 2,948(e) 49,233
Corporate expense
charges............ -- -- --
Management fees...... (458) -- 1,444
-------- -------- --------
Total operating
expenses........... (15,243) 2,948 98,677
Income (loss) from
operations........... (706) (2,948) (10,052)
Interest expense....... (4) (20,277)(f) (38,782)
Interest income........ -- -- 100
Other income
(expense)............ -- -- (106)
-------- -------- --------
Income (loss) before
income tax expense
(benefit)............ (710) (23,225) (48,840)
Income tax (benefit)
expense.............. -- 2,047(g) --
-------- -------- --------
Income (loss) before
extraordinary item... $ (710) $(25,272) $(48,840)
======== ======== ========
37
41
- -------------------------
(a) 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 as follows (dollars in thousands):
RIFKIN RIFKIN INDIANA SOUTH
ACQUISITION CABLE INCOME CABLE FLORIDA OTHER TOTAL
----------- ------------ ------- ------- ------- --------
Revenues............................. $24,017 $1,351 $2,102 $ 6,146 $17,298 $ 50,914
Income (loss) from operations........ 467 404 (361) (4,523) 871 (3,142)
Income (loss) before extraordinary
item............................... (5,000) 305 (564) (5,131) (3,706) (14,096)
(b) Represents the historical results of operations for the period from January
1, 1999 through the date of purchase for acquisitions completed by
Renaissance and Rifkin, and for the period from January 1, 1999 through
March 31, 1999 for acquisitions to be completed subsequent to March 31,
1999.
These acquisitions will be accounted for using the purchase method of
accounting. A definitive written agreement exists for all acquisitions that have
not yet closed. Purchase price and anticipated closing dates are as follows:
RENAISSANCE RIFKIN
ACQUISITION ACQUISITIONS
------------- ---------------------
Purchase price........................................... $ 2.7 million $165.0 million
Closing date............................................. Feb. 1999 Feb. 1999
Purchase price........................................... $53.8 million
Closing date............................................. July 1999
(c) Represents the elimination of the operating results primarily related to the
cable systems to be transferred to the InterMedia Systems as part of a swap
of cable systems and to the sale of several smaller cable systems. A
definitive written agreement exists for the disposition on these systems.
The fair value of our systems to be transferred is $420 million. No material
gain or loss is anticipated on the disposition as these systems were
recently acquired and recorded at fair value at that time. It is anticipated
that this transfer will close during the third or fourth quarter of 1999.
(d) Reflects a reclassification of expenses representing corporate expenses that
would have occurred at Charter Investment.
(e) Represents additional amortization of franchises as a result of our recent
and pending acquisitions. A large portion of the purchase price was
allocated to franchises ($3.6 billion) that are amortized over 15 years. The
adjustment to depreciation and amortization expense consists of the
following (in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
Franchises........................................... $3,600.0 15 $60.0
Cable distribution systems........................... 888.3 9 24.5
Land, buildings and improvements..................... 20.7 10 0.5
Vehicles and equipment............................... 61.8 3 5.2
-----
Total depreciation and amortization............................................. 90.2
Less-historical depreciation and amortization................................... 74.7
-----
Adjustment................................................................. $15.5
=====
38
42
(f) Reflects additional interest expense on borrowings, which will be used to
finance the acquisitions as follows (in millions):
$2.8 billion credit facilities at 7.4%...................... $51.6
$83 million 10% senior discount notes -- Renaissance........ 2.0
-----
Total interest expense................................. 53.6
Less-historical interest expense from acquired
companies............................................. 34.5
-----
Adjustment........................................ $19.1
=====
(g) Reflects the elimination of income tax expense as a result of being acquired
by a limited liability company.
NOTE B: We have extinguished substantially all of our long-term debt, excluding
borrowings of our previous credit facilities, and refinanced all previous credit
facilities, and have incurred and plan to incur additional debt in connection
with our recent acquisitions and pending acquisitions. See "Capitalization." The
refinancing adjustment of greater interest expense consists of the following
(dollars in thousands):
INTEREST
DESCRIPTION EXPENSE
----------- --------
$600 million 8.25% senior notes............................. $12,400
$1,500 million 8.625% senior notes.......................... 32,400
$1,475 million ($906 million carrying value) 9.92% senior
discount notes............................................ 22,450
Credit facilities ($3,476 million at composite current rate
of 7.4%).................................................. 64,250
Amortization of debt issuance costs......................... 3,900
Commitment fee on unused portion of our credit facilities
($624,000 at 0.375%)...................................... 575
10% senior discount notes -- Renaissance.................... 2,000
-------
Total pro forma interest expense.......................... 137,975
Less -- interest expense (including our recent and pending
acquisitions).......................................... 125,200
-------
Adjustment............................................. $12,775
=======
An increase in the interest rate of 0.125% would result in an increase in
interest expense of $1.1 million. The Rifkin sellers may take up to $250 million
in equity instead of cash. This would reduce interest expense by up to $4.6
million. Additionally, we have assumed that the Rifkin notes will be tendered.
Should we be unable to purchase all or a portion of the Rifkin notes, interest
expense will increase by up to $1.2 million.
NOTE C: Charter Investment provides corporate management and consulting
services to us. See "Certain Relationships and Related Transactions."
NOTE D: EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television 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 E: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE F: Adjusted EBITDA means EBITDA before corporate expenses, management fees
and other income (expense) in accordance with the term "Consolidated EBITDA"
used in the indentures governing the notes. See "Description of Notes" for a
complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial
indicator of a cable
39
43
company's ability to service indebtedness and because it is used in the
indentures to determine compliance with certain covenants. 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 G: Earnings include net income (loss) plus fixed charges. Fixed charges
consist of interest expense and an estimated interest component of rent expense.
NOTE H: 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 I: Basic customers are customers who receive basic cable service.
NOTE J: Basic penetration represents basic customers as a percentage of homes
passed.
NOTE K: Premium units represent the total number of subscriptions to premium
channels.
NOTE L: Premium penetration represents premium units as a percentage of basic
customers.
NOTE M: Average monthly revenue per basic customer represents revenues divided
by the number of months in the period divided by the number of basic customers
at March 31, 1999.
40
44
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS ACQUISITIONS ADJUSTMENTS
(NOTE A) (NOTE B) (NOTE C) SUBTOTAL (NOTE C) (NOTE D) TOTAL
--------- --------- ------------ ---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues........................ $ 611,690 $ 448,192 $ 268,460 $1,328,342 $ 328,981 $ -- $1,657,323
--------- --------- --------- ---------- --------- ------ ----------
Operating expenses:
Operating, general and
administrative.............. 310,100 231,050 138,524 679,674 167,686 -- 847,360
Depreciation and
amortization................ 375,899 252,855 141,535 770,289 186,485 -- 956,774
Corporate expense charges
(Note E).................... 16,493 17,042 6,759 40,294 -- -- 40,294
Management fees............... -- -- 4,573 4,573 10,100 -- 14,673
--------- --------- --------- ---------- --------- ------ ----------
Total operating expenses.... 702,492 500,947 291,391 1,494,830 364,271 -- 1,859,101
--------- --------- --------- ---------- --------- ------ ----------
Loss from operations............ (90,802) (52,755) (22,931) (166,488) (35,290) -- (201,778)
Interest (expense) benefit...... (207,468) (137,953) (95,489) (440,910) (118,511) 7,500 (551,921)
Other income (expense).......... 518 -- 84 602 (5,944) -- (5,342)
--------- --------- --------- ---------- --------- ------ ----------
Net income (loss)............... $(297,752) $(190,708) $(118,336) $ (606,796) ($159,745) $7,500 $ (759,041)
========= ========= ========= ========== ========= ====== ==========
OTHER FINANCIAL DATA:
EBITDA (Note F)................. $ 285,615 $ 200,100 $ 118,688 $ 604,403 $ 145,251 $ 749,654
EBITDA margin (Note G).......... 46.7% 44.6% 44.2% 45.5% 44.2% 45.2%
Adjusted EBITDA (Note H)........ 301,590 217,142 129,936 648,668 161,295 809,963
Cash flows from operating
activities.................... 137,160 139,908 38,186 315,254 36,208 351,462
Cash flows used in investing
activities.................... (387,633) (217,729) (56,242) (661,604) (177,891) (839,495)
Cash flows from (used in)
financing activities.......... 211,726 108,504 (21,932) 298,298 45,184 343,482
Cash interest expense........... 436,432
Capital expenditures............ $ 213,353 $ 224,723 $ 22,672 $ 460,748 $ 70,435 $ 531,183
Total debt to EBITDA............ 8.8x
Total debt to Adjusted EBITDA... 8.1
EBITDA to cash interest
expense....................... 1.7
EBITDA to interest expense...... 1.4
Deficiency of earnings to cover
fixed charges (Note I)........ $ 759,041
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR AVERAGES):
Homes passed (Note J)........... 2,149,000 1,743,000 806,000 4,698,000 989,000 5,687,000
Basic customers (Note K)........ 1,255,000 1,062,000 562,000 2,879,000 738,000 3,617,000
Basic penetration (Note L)...... 58.4% 60.9% 69.7% 61.3% 74.6% 63.6%
Premium units (Note M).......... 845,000 411,000 299,000 1,555,000 512,000 2,067,000
Premium penetration (Note N).... 67.3% 38.7% 53.2% 54.0% 69.4% 57.1%
Average monthly revenue per
basic customer (Note O)....... NM NM $ 39.81 $ 38.45 $ 37.15 $ 38.18
See "Notes to the Unaudited Pro Forma Financial Statements."
41
45
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Holdings, including the
acquisition of us on December 23, 1998 by Paul G. Allen and the acquisition of
Sonic, consist of the following (dollars in thousands):
12/24/98 1/1/98
THROUGH THROUGH
1/1/98 THROUGH 12/23/98 12/31/98 5/20/98
----------------------------------- -------- -------
CCA CHARTERCOMM
GROUP HOLDINGS CHARTER HOLDINGS SONIC ELIMINATIONS SUBTOTAL
--------- ----------- ------------------- ------- ------------ ---------
Revenues...................... $ 324,432 $196,801 $ 49,731 $23,450 $17,276 $ -- $ 611,690
--------- -------- -------- ------- ------- --------- ---------
Operating expenses:
Operating, general and
administrative............ 164,145 98,331 25,952 12,679 8,993 -- 310,100
Depreciation and
amortization.............. 136,689 86,741 16,864 13,811 2,279 -- 256,384
Management fees/corporate
expense charges........... 17,392 14,780 6,176 766 -- -- 39,114
--------- -------- -------- ------- ------- --------- ---------
Total operating
expenses................ 318,226 199,852 48,992 27,256 11,272 -- 605,598
--------- -------- -------- ------- ------- --------- ---------
Income (loss) from
operations.................. 6,206 (3,051) 739 (3,806) 6,004 -- 6,092
Interest expense.............. (113,824) (66,121) (17,277) (5,051) (2,624) 1,900(c) (202,997)
Other income (expense)........ 4,668 (1,684) (684) 133 (15) (1,900)(c) 518
--------- -------- -------- ------- ------- --------- ---------
Income (loss) before income
taxes....................... (102,950) (70,856) (17,222) (8,724) 3,365 -- (196,387)
Provision for income taxes.... -- -- -- -- 1,346 -- 1,346
--------- -------- -------- ------- ------- --------- ---------
Income (loss) before
extraordinary item.......... $(102,950) $(70,856) $(17,222) $(8,724) $ 2,019 $ -- $(197,733)
========= ======== ======== ======= ======= ========= =========
PRO FORMA
------------------------
ADJUSTMENTS TOTAL
----------- ---------
Revenues...................... $ -- $ 611,690
--------- ---------
Operating expenses:
Operating, general and
administrative............ 310,100
Depreciation and
amortization.............. 119,515(a) 375,899
Management fees/corporate
expense charges........... (22,621)(b) 16,493
--------- ---------
Total operating
expenses................ 96,894 702,492
--------- ---------
Income (loss) from
operations.................. (96,894) (90,802)
Interest expense.............. (4,471)(d) (207,468)
Other income (expense)........ -- 518
--------- ---------
Income (loss) before income
taxes....................... (101,365) (297,752)
Provision for income taxes.... (1,346)(e) --
--------- ---------
Income (loss) before
extraordinary item.......... $(100,019) $(297,752)
========= =========
- -------------------------
(a) Represents additional amortization of franchises as a result of the
acquisition of us by Mr. Allen. A large portion of the purchase price was
allocated to franchises ($3.6 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 (IN YEARS) LIFE AMORTIZATION
---------- ---------------- -------------
Franchises............................................ $3,600.0 15 $240.0
Cable distribution systems............................ 1,439.2 12 120.1
Land, buildings and improvements...................... 41.3 11 3.6
Vehicles and equipment................................ 61.2 5 12.2
------
Total depreciation and amortization.............. 375.9
Less-historical depreciation and amortization.... 256.4
------
Adjustment.................................. $119.5
======
(b) Reflects the reduction in corporate expense charges of approximately $8.2
million to reflect the actual costs incurred. Management fees charged to CCA
Group and CharterComm Holdings, companies not controlled by Charter
Investment at that time exceeded the allocated costs incurred by Charter
Investment on behalf of those companies by $8.2 million. Also reflects the
elimination of approximately $14.4 million of change of control payments
under the terms of then-existing equity appreciation rights plans. Such
payments were triggered by the acquisition of us by Mr. Allen. Such payments
were made by Charter Investment and were not subject to reimbursement by us,
but were allocated to us for financial reporting purposes. The equity
appreciation rights plans were terminated in connection with the acquisition
of us by Mr. Allen, and these costs will not recur.
(c) Represents the elimination of intercompany interest on a note payable from
Charter Holdings to CCA Group.
(d) Reflects additional interest expense of $228.4 million of borrowings under
our previous credit facilities used to finance the acquisition by us of
Sonic, using a 7.4% interest rate as follows (in millions):
$228.4 million of credit facilities......................... $ 7.1
Less historical Sonic interest expense...................... (2.6)
-----
Adjustment........................................ $ 4.5
=====
(e) Reflects the elimination of provision for income taxes, as Charter Holdings
will operate as a limited liability company and all income taxes will flow
through to the members.
42
46
NOTE B: Pro forma operating results for Marcus Cable consist of the
following (dollars in thousands):
January 1, April 23,
1998 1998
through through Pro Forma
APRIL 22, DECEMBER 23, ------------------------------------------------------------
1998 1998 Acquisitions(a) Dispositions(b) Adjustments Total
---------- ------------ --------------- --------------- ----------- ---------
Revenues........................... $ 157,763 $ 332,320 $2,620 $(44,511) $ -- $ 448,192
--------- --------- ------ -------- --------- ---------
Operating expenses:
Operating, general and
administrative................ 84,746 181,347 1,225 (20,971) (15,297)(c) 231,050
Depreciation and
amortization.................. 64,669 174,968 -- -- 13,218(d) 252,855
Corporate expense charges........ -- 17,042(c) 17,042
Management fees.................. -- 3,048 -- -- (3,048)(c) --
Transaction and severance
costs......................... 114,167 16,034 -- -- (130,201)(e) --
--------- --------- ------ -------- --------- ---------
Total operating expenses...... 263,582 375,397 1,225 (20,971) (118,286) 500,947
--------- --------- ------ -------- --------- ---------
Income (loss) from
operations....................... (105,819) (43,077) 1,395 (23,540) 118,286 (52,755)
Interest (expense) benefit......... (49,905) (93,103) -- -- 5,055(d) (137,953)
Other income (expense)............. 43,662 -- -- (43,662) -- --
--------- --------- ------ -------- --------- ---------
Income (loss) before extraordinary
item............................. $(112,062) $(136,180) $1,395 $(67,202) $ 123,341 $(190,708)
========= ========= ====== ======== ========= =========
- -------------------------
(a) Represents the results of operations of acquired cable systems prior to
their acquisition in 1998 by Marcus Cable.
(b) Represents the elimination of the operating results and corresponding gain
on sale of cable systems sold by Marcus Cable during 1998.
(c) Represents a reclassification to reflect the expenses totaling $15.3 million
from operating, general and administrative to corporate expenses. Also
reflects the elimination of management fees and the addition of corporate
expense charges of $1.7 million for actual costs incurred by Charter
Investment, on behalf of Marcus Cable. Management fees charged to Marcus
Cable exceeded the costs incurred by Charter Investment by $1.3 million.
(d) As a result of the acquisition of Marcus Cable by Paul G. Allen, 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, 1998 through April 23, 1998. The adjustment to
depreciation and amortization expense consists of the following (dollars in
millions):
Weighted Average Depreciation/
Fair Value (in years) life Amortization
---------- ---------------- -------------
Franchises........................................ $2,500.0 15 $166.7
Cable distribution systems........................ 777.4 10 78.1
Land, buildings and improvements.................. 30.6 10 3.1
Vehicles and equipment............................ 14.7 3 4.9
------
Total depreciation and amortization..... 252.8
Less-historical depreciation and
amortization.......................... 239.6
------
Adjustment............................ $ 13.2
======
43
47
Additionally, 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 in interest expense for the period from January 1, 1998
through April 23, 1998.
(e) As a result of the acquisition of Marcus Cable by Mr. Allen, Marcus Cable
recorded transaction costs of approximately $114.2 million. These costs
comprised of approximately $90.2 million paid to employees of Marcus Cable
in settlement of specially designated Class B units and approximately $24.0
million of transaction fees paid to certain equity partners for investment
banking services. In addition, Marcus Cable recorded costs related to
employee and officer stay-bonus and severance arrangements of approximately
$16.0 million.
44
48
NOTE C: Pro forma operating results for our recent and pending
acquisitions consist of the following (dollars in thousands):
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------
RECENT ACQUISITIONS -- HISTORICAL
---------------------------------------------------------------------
GREATER
AMERICAN MEDIA OTHER TOTAL
RENAISSANCE CABLE SYSTEMS HELICON ACQUISITIONS RECENT
----------- -------- ------- -------- ------------ --------
Revenues................ $ 41,524 $15,685 $78,635 $ 75,577 $ 9,336 $220,757
-------- ------- ------- -------- ------- --------
Operating expenses:
Operating, general and
administrative...... 21,037 7,441 48,852 40,179 4,618 122,127
Depreciation and
amortization........ 19,107 6,784 8,612 24,290 2,794 61,587
Corporate expense
charges............. -- -- -- -- -- --
Management fees....... -- 471 -- 3,496 -- 3,967
-------- ------- ------- -------- ------- --------
Total operating
expenses.......... 40,144 14,696 57,464 67,965 7,412 187,681
-------- ------- ------- -------- ------- --------
Income from
operations............ 1,380 989 21,171 7,612 1,924 33,076
Interest expense........ (14,358) (4,501) (535) (27,634) (2,375) (49,403)
Interest income......... 158 122 -- 93 -- 373
Other income
(expense)............. -- -- (493) -- 3 (490)
-------- ------- ------- -------- ------- --------
Income (loss) before
income tax expense
(benefit)............. (12,820) (3,390) 20,143 (19,929) (448) (16,444)
Income tax (benefit)
expense............... 135 -- 7,956 -- -- 8,091
-------- ------- ------- -------- ------- --------
Income (loss) before
extraordinary item.... $(12,955) $(3,390) $12,187 $(19,929) $ (448) $(24,535)
======== ======= ======= ======== ======= ========
YEAR ENDED DECEMBER 31, 1998
------------------------------------
PENDING ACQUISITIONS -- HISTORICAL
------------------------------------
INTERMEDIA TOTAL
SYSTEMS RIFKIN(a) PENDING
----------- ---------- ---------
Revenues................ $176,062 $124,382 $300,444
-------- -------- --------
Operating expenses:
Operating, general and
administrative...... 86,753 63,815 150,568
Depreciation and
amortization........ 85,982 47,657 133,639
Corporate expense
charges............. -- -- --
Management fees....... 3,147 4,106 7,253
-------- -------- --------
Total operating
expenses.......... 175,882 115,578 291,460
-------- -------- --------
Income from
operations............ 180 8,804 8,984
Interest expense........ (25,449) (30,482) (55,931)
Interest income......... 341 -- 341
Other income
(expense)............. 23,030 36,279 59,309
-------- -------- --------
Income (loss) before
income tax expense
(benefit)............. (1,898) 14,601 12,703
Income tax (benefit)
expense............... 1,623 (4,178) (2,555)
-------- -------- --------
Income (loss) before
extraordinary item.... $ (3,521) $ 18,779 $ 15,258
======== ======== ========
45
49
Year Ended December 31, 1998
--------------------------------------------------------------------------------------
Recent Acquisitions Pending Acquisitions
------------------------------------------------------- ----------------------------
Pro Forma Pro Forma
------------------------------------------ ---------------
Total
Historical Acquisitions(b) Adjustments Recent Historical Acquisitions(b)
---------- --------------- ----------- --------- ---------- ---------------
Revenues............. $220,757 $47,703 $ -- $ 268,460 $300,444 $ 98,245
Operating expenses:
Operating, general
and
administrative... 122,127 23,156 (6,759)(d) 138,524 150,568 52,689
Depreciation and
amortization..... 61,587 17,290 62,658(e) 141,535 133,639 21,224
Corporate expense
charges.......... -- -- 6,759(d) 6,759 -- --
Management fees.... 3,967 606 -- 4,573 7,253 3,783
-------- ------- -------- --------- -------- --------
Total operating
expenses....... 187,681 41,052 62,658 291,391 291,460 77,696
-------- ------- -------- --------- -------- --------
Income (loss) from
operations......... 33,076 6,651 (62,658) (22,931) 8,984 20,549
Interest expense..... (49,403) (7,434) (38,652)(f) (95,489) (55,931) (27,212)
Interest income...... 373 157 -- 530 341 175
Other income
(expense).......... (490) 140 (96)(g) (446) 59,309 263
-------- ------- -------- --------- -------- --------
Income (loss) before
income tax expense
(benefit).......... (16,444) (486) (101,406) (118,336) 12,703 (6,225)
Income tax expense
(benefit).......... 8,091 1,191 (9,282)(h) -- (2,555) 329
-------- ------- -------- --------- -------- --------
Income (loss) before
extraordinary
item............... $(24,535) $(1,677) $(92,124) $(118,336) $ 15,258 $ (6,554)
======== ======= ======== ========= ======== ========
Year Ended December 31, 1998
------------------------------------------
Pending Acquisitions
------------------------------------------
Pro Forma
------------------------------------------
Total
Dispositions(c) Adjustments Pending
--------------- ----------- ---------
Revenues............. $(69,708) $ -- $ 328,981
Operating expenses:
Operating, general
and
administrative... (35,571) -- 167,686
Depreciation and
amortization..... (40,812) 72,434(e) 186,485
Corporate expense
charges.......... -- -- --
Management fees.... (936) -- 10,100
-------- --------- ---------
Total operating
expenses....... (77,319) 72,434 364,271
-------- --------- ---------
Income (loss) from
operations......... 7,611 (72,434) (35,290)
Interest expense..... 19,544 (54,912)(f) (118,511)
Interest income...... (9) -- 507
Other income
(expense).......... (379) (65,644)(g) (6,451)
-------- --------- ---------
Income (loss) before
income tax expense
(benefit).......... 26,767 (192,990) (159,745)
Income tax expense
(benefit).......... 310 1,916(h) --
-------- --------- ---------
Income (loss) before
extraordinary
item............... $ 26,457 $(194,906) $(159,745)
======== ========= =========
- -------------------------
(a) Includes the results of operations of Rifkin Acquisition Partners, L.L.L.P.,
as follows (dollars in thousands):
Rifkin
Acquisition Other Total
----------- ------- --------
Revenues.............................................. $89,921 $34,461 $124,382
Income from operations................................ 1,040 7,764 8,804
Income (loss) before extraordinary item............... 24,419 (5,640) 18,779
(b) Represents the historical results of operations for the period from January
1, 1998 through the date of purchase for acquisitions completed by
Renaissance, the InterMedia systems, Helicon and Rifkin, and for the period
from January 1, 1998 through December 31, 1998 for acquisitions to be
completed in 1999. A definitive written agreement exists for all
acquisitions that have not yet closed.
46
50
These acquisitions will be accounted for using the purchase method of
accounting. Purchase price and the closing date or anticipated closing date
for significant acquisitions are as follows:
RENAISSANCE INTERMEDIA HELICON RIFKIN
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITIONS
-------------- ------------- ------------- ---------------------
Purchase price.................................... $2.7 million $29.1 million $26.1 million $165.0 million
Closing date...................................... Feb. 1999 Dec. 1998 Dec. 1998 Feb. 1999
Purchase price.................................... $309.5 million $53.8 million
Closing date...................................... April 1999 July 1999
The InterMedia acquisition above is part of a "swap."
(c) Represents the elimination of the operating results primarily related to the
cable systems to be transferred to the InterMedia systems as part of a swap
of cable systems and to the sale of several smaller cable systems. A
definitive written agreement exists for the disposition on these systems.
The fair value of the systems to be transferred is $420 million. No material
gain or loss is anticipated on the disposition as these systems were
recently acquired and recorded at fair value at that time. It is anticipated
that this transfer will close during the third or fourth quarter of 1999.
(d) Reflects a reclassification of expenses representing corporate expenses that
would have occurred at Charter Investment.
(e) Represents additional amortization of franchises as a result of our recent
and pending acquisitions. A large portion of the purchase price was
allocated to franchises ($3.6 billion) that are amortized over 15 years. The
adjustment to depreciation and amortization expense consists of the
following (in millions):
FAIR WEIGHTED AVERAGE DEPRECIATION/
VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
Franchises......................................... $3,600.0 15 240.0
Cable distribution systems......................... 798.2 10 73.4
Land, building and improvements.................... 19.0 10 1.8
Vehicles and equipment............................. 57.8 4 12.9
------
Total depreciation and amortization........... 328.1
Less-historical depreciation and 193.0
amortization................................
------
Adjustment.................................. $135.1
======
(f) Reflects additional interest expense on borrowings which will be used to
finance the acquisitions as follows (in millions):
$2.8 billion credit facilities at 7.4%...................... $206.0
$83 million 10% senior discount notes -- Renaissance........ 8.0
------
Total interest expenses................................... 214.0
Less-historical interest expense from acquired
companies.............................................. 120.4
------
Adjustment............................................. $93.6
======
(g) Represents the elimination of gain (loss) on the sale of cable television
systems whose results of operations have been eliminated in (c) above.
(h) Reflects the elimination of income tax expense as a result of being acquired
by a limited liability company.
47
51
NOTE D: We have extinguished substantially all of our long-term debt,
excluding borrowings of our previous credit facilities, and refinanced all
previous credit facilities, and have incurred and plan to incur additional debt
in connection with our recent acquisitions and pending acquisitions. See
"Capitalization." The refinancing adjustment of lower interest expense consists
of the following (dollars in thousands):
INTEREST
DESCRIPTION EXPENSE
- ----------- ---------
$600 million 8.25% senior notes............................. $ 49,600
$1,500 million 8.625% senior notes.......................... 129,600
$1,475 million ($906 million carrying value) 9.92% senior
discount notes............................................ 89,800
Credit facilities ($3,476 million at composite current rate
of 7.4%).................................................. 257,000
Amortization of debt issuance costs......................... 15,600
Commitment fee on unused portion of credit facilities
($624,000 at 0.375%)...................................... 2,300
10% senior discount notes -- Renaissance.................... 8,000
---------
Total pro forma interest expense.......................... 551,900
Less -- interest expense (including Marcus Cable and
recent acquisitions and pending acquisitions).......... (559,400)
---------
Adjustment............................................. $ (7,500)
=========
An increase in the interest rate of 0.125% would result in an increase in
interest expense of $4.3 million. The Rifkin sellers may take up to $250
million in equity instead of cash. This would reduce interest expense by up
to $18.5 million. Additionally, we have assumed that the Rifkin notes will
be tendered. Should we be unable to tender all or a portion of the Rifkin
notes, interest expense will increase by up to $4.7 million.
NOTE E: Charter Investment provided corporate management and consulting
services to Charter Holdings in 1998 and to Marcus Cable beginning in October
1998. See "Certain Relationships and Related Transactions."
NOTE F: EBITDA represents earnings (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television 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 corporate expenses, management
fees and other income (expense) in accordance with the term "Consolidated
EBITDA" used in the indentures governing the notes. See "Description of Notes"
for a complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial
indicator of a cable company's ability to service indebtedness and because it is
used in the indentures to determine compliance with certain covenants. 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
48
52
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 the number of months in the period divided by the number of basic
customers at December 31, 1998.
49
53
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1999
-------------------------------------------------------------------
RECENT PENDING
CHARTER ACQUISITIONS ACQUISITIONS PRO FORMA
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) TOTAL
---------- ------------ ---------- ------------ -----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET
Cash and cash equivalents............... $1,038,360 $(1,013,769) $ 24,591 $ 5,873 $ 30,464
Accounts receivable, net................ 30,314 8,504 38,818 15,341 54,159
Prepaid expenses and other.............. 15,882 7,846 23,728 3,745 27,473
---------- ----------- ---------- ---------- -----------
Total current assets............... 1,084,556 (997,419) 87,137 24,959 112,096
Property, plant and equipment........... 1,533,197 245,740 1,778,937 434,872 2,213,809
Franchises.............................. 5,607,539 1,653,916 7,261,455 1,922,132 9,183,587
Other assets............................ 131,990 -- 131,990 -- 131,990
---------- ----------- ---------- ---------- -----------
Total assets....................... $8,357,282 $ 902,237 $9,259,519 $2,381,963 $11,641,482
========== =========== ========== ========== ===========
Accounts payable and accrued expenses... $ 216,397 $ 34,734 $ 251,131 $ 49,791 $ 300,922
Payables to manager of cable television
systems............................... 12,554 -- 12,554 -- 12,554
---------- ----------- ---------- ---------- -----------
Total current liabilities.......... 228,951 34,734 263,685 49,791 313,476
Long-term debt.......................... 4,754,018 863,130 5,617,148 1,007,172 6,624,320
Other long-term liabilities............. 48,171 4,373 52,544 -- 52,544
Members' equity......................... 3,326,142 -- 3,326,142 1,325,000 4,651,142
---------- ----------- ---------- ---------- -----------
Total liabilities and equity....... $8,357,282 $ 902,237 $9,259,519 $2,381,963 $11,641,482
========== =========== ========== ========== ===========
50
54
NOTE A: Pro forma balance sheet for our recent acquisitions, fully
described in the "Business" section, and pending acquisitions consists of the
following (dollars in thousands):
AS OF MARCH 31, 1999
------------------------------------------------------------------------------------------------------
RECENT ACQUISITIONS -- HISTORICAL PENDING ACQUISITIONS -- HISTORICAL
----------------------------------------------------------------- ----------------------------------
GREATER
AMERICAN MEDIA TOTAL INTERMEDIA TOTAL
RENAISSANCE CABLE SYSTEMS HELICON OTHER RECENT SYSTEMS RIFKIN PENDING
----------- -------- ------- --------- ------- -------- ---------- -------- ----------
Cash and cash
equivalents.............. $ 8,901 $ 1,201 $ 2,440 $ 11,464 $ 585 $ 24,591 $ -- $ 7,580 $ 7,580
Accounts receivable, net... 1,283 620 2,577 1,619 1,450 7,549 13,949 12,009 25,958
Receivable from related
party.................... -- -- -- -- -- -- 5,038 -- 5,038
Prepaid expenses and
other.................... 381 1,436 3,052 2,867 110 7,846 1,053 2,789 3,842
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total current assets..... 10,565 3,257 8,069 15,950 2,145 39,986 20,040 22,378 42,418
Receivable from related
party.................... -- -- -- -- -- -- -- -- --
Property, plant and
equipment................ 64,594 15,327 58,196 88,723 9,934 236,774 225,682 283,208 508,890
Franchises................. 222,971 143,546 2,653 12,096 55,452 436,718 240,567 456,523 697,090
Deferred income tax
assets................... -- -- -- -- -- -- 13,994 -- 13,994
Other assets............... 16,129 2,334 80 83,546 205 102,294 3,697 54,469 58,166
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total assets............. $314,259 $164,464 $68,998 $ 200,315 $67,736 $815,772 $503,980 $816,578 $1,320,558
======== ======== ======= ========= ======= ======== ======== ======== ==========
Accounts payable and
accrued expenses......... $ 7,649 $ 3,623 $ 6,022 $ 16,496 $ 1,899 $ 35,689 $ 19,030 $ 34,486 $ 53,516
Current deferred revenue... -- -- 1,904 -- 1,207 3,111 11,944 2,092 14,036
Note payable to related
party.................... -- -- -- -- -- -- 3,057 -- 3,057
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total current
liabilities............ 7,649 3,623 7,926 16,496 3,106 38,800 34,031 36,578 70,609
Deferred revenue........... 651 -- -- -- -- 651 3,900 -- 3,900
Deferred income taxes...... -- -- -- -- -- -- -- 7,405 7,405
Long-term debt............. 212,503 118,000 -- 295,345 38,914 664,762 -- 541,575 541,575
Note payable to related
party, including accrued
interest................. 135 -- -- 5,137 -- 5,272 412,436 -- 412,436
Other long-term
liabilities, including
redeemable preferred
shares................... 755 -- 3,618 18,708 -- 23,081 14,430 -- 14,430
Equity..................... 92,566 42,841 57,454 (135,371) 25,716 83,206 39,183 231,020 270,203
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total liabilities and
equity................. $314,259 $164,464 $68,998 $ 200,315 $67,736 $815,772 $503,980 $816,578 $1,320,558
======== ======== ======= ========= ======= ======== ======== ======== ==========
51
55
As of March 31, 1999
-------------------------------------------------------------------------------------------
Recent Acquisitions Pending Acquisitions
------------------------------------------ ----------------------------------------------
Pro Forma Pro Forma
------------------------------------------ ----------------------------------------------
Historical Adjustments Total Historical Acquisitions(a) Dispositions(b)
---------- -------------- ----------- ---------- --------------- ---------------
Cash and cash
equivalents.............. $ 24,591 $(1,038,360)(c) $(1,013,769) $ 7,580 $ 90 $ (1,797)
Accounts receivable, net... 7,549 955 8,504 25,958 54 (1,671)
Receivable from related
party.................... -- -- -- 5,038 -- --
Prepaid expenses and
other.................... 7,846 -- 7,846 3,842 713 (810)
-------- ----------- ----------- ---------- ------- ---------
Total current assets..... 39,986 (1,037,405) (997,419) 42,418 857 (4,278)
Property, plant and
equipment................ 236,774 8,966 245,740 508,890 4,009 (78,027)
Franchises................. 436,718 1,217,198(f) 1,653,916 697,090 98 (342,844)
Deferred income tax
assets................... -- -- -- 13,994 -- --
Other assets............... 102,294 (102,294)(h) -- 58,166 -- --
-------- ----------- ----------- ---------- ------- ---------
Total assets............. $815,772 $ 86,465 $ 902,237 $1,320,558 $ 4,964 $(425,149)
======== =========== =========== ========== ======= =========
Accounts payable and
accrued expenses......... $ 35,689 $ (955) $ 34,734 $ 53,516 $ 896 $ (4,621)
Current deferred revenue... 3,111 (3,111)(d) -- 14,036 -- --
Note payable to related
party.................... -- -- -- 3,057 -- --
-------- ----------- ----------- ---------- ------- ---------
Total current
liabilities............ 38,800 (4,066) 34,734 70,609 896 (4,621)
Deferred revenue........... 651 (651)(d) -- 3,900 173 --
Deferred income taxes...... -- -- -- 7,405 -- --
Long-term debt............. 664,762 198,368(j) 863,130 541,575 1,260 (420,528)
Note payable to related
party, including accrued
interest................. 5,272 (5,272)(i) -- 412,436 -- --
Other long-term
liabilities.............. 23,081 (18,708) 4,373 14,430 -- --
Equity..................... 83,206 (83,206)(k) -- 270,203 2,635 --
-------- ----------- ----------- ---------- ------- ---------
Total liabilities and
equity................. $815,772 $ 86,465 $ 902,237 $1,320,558 $ 4,964 $(425,149)
======== =========== =========== ========== ======= =========
As of March 31, 1999
-------------------------
Pending Acquisitions
-------------------------
Pro Forma
-------------------------
Adjustments Total
----------- ----------
Cash and cash
equivalents.............. $ -- $ 5,873
Accounts receivable, net... (9,000)(d) 15,341
Receivable from related
party.................... (5,038)(e) --
Prepaid expenses and
other.................... -- 3,745
---------- ----------
Total current assets..... (14,038) 24,959
Property, plant and
equipment................ -- 434,872
Franchises................. 1,567,788(f) 1,922,132
Deferred income tax
assets................... (13,994)(g) --
Other assets............... (58,166)(h) --
---------- ----------
Total assets............. $1,481,590 $2,381,963
========== ==========
Accounts payable and
accrued expenses......... $ -- $ 49,791
Current deferred revenue... (14,036)(d) --
Note payable to related
party.................... (3,057)(i) --
---------- ----------
Total current
liabilities............ (17,093) 49,791
Deferred revenue........... (4,073)(d) --
Deferred income taxes...... (7,405)(g) --
Long-term debt............. 884,865(j) 1,007,172
Note payable to related
party, including accrued
interest................. (412,436)(i) --
Other long-term
liabilities.............. (14,430)(i) --
Equity..................... 1,052,162(k) 1,325,000
---------- ----------
Total liabilities and
equity................. $1,481,590 $2,381,963
========== ==========
- -------------------------
(a) Represents the historical balance sheets as of March 31, 1999, of our recent
and pending acquisitions.
(b) Represents the historical assets and liabilities as of March 31, 1999, of
the cable systems to be transferred to InterMedia as part of a swap of cable
systems. The cable systems being swapped will be accounted for at fair
value. No material gain or loss is anticipated in conjunction with the swap.
See the "Business" section.
(c) Represents the use of Charter Holdings cash for the recent and pending
acquisitions. The sources of cash for the recent and pending acquisitions is
as follows (in millions):
Charter Holdings historical cash............................ $1,038.3
Expected equity contribution................................ 1,325.0
Expected credit facilities draw down........................ 1,762.7
10% senior discount notes-Renaissance....................... 82.7
Helicon preferred limited liability company interests....... 25.0
--------
$4,233.7
========
52
56
(d) Represents the offset of advance billings against deferred revenue to be
consistent with Charter Holdings' accounting policy and the elimination of
deferred revenue.
(e) Reflects assets retained by the seller.
(f) Substantial amounts of the purchase price in (c) above have been allocated
to franchises based on estimated fair values. This results in an allocation
of purchase price as follows (in thousands):
GREATER
AMERICAN MEDIA INTERMEDIA
RENAISSANCE CABLE SYSTEMS SYSTEMS HELICON RIFKIN OTHER TOTAL
----------- -------- -------- ---------- -------- ---------- -------- ----------
Working capital.................. $ 2,916 $ (366) $ 2,047 $(12,685) $ 1,364 $ (12,147) $ 246 $ (18,625)
Property, plant and equipment.... 64,594 15,327 58,196 147,655 88,723 287,217 18,900 680,612
Franchises....................... 397,085 225,039 443,375 737,202 459,913 1,184,930 128,504 3,576,048
Other............................ (755) -- (3,618) -- -- -- -- (4,373)
-------- -------- -------- -------- -------- ---------- -------- ----------
$463,840 $240,000 $500,000 $872,172 $550,000 $1,460,000 $147,650 $4,233,662
======== ======== ======== ======== ======== ========== ======== ==========
(g) Represents the elimination of deferred income tax assets and liabilities.
(h) Represents the elimination of the unamortized historical cost of various
assets based on the allocation of purchase price (see (f) above) as follows
(in thousands):
Subscriber lists............................................ $(104,244)
Noncompete agreements....................................... (14,570)
Deferred financing costs.................................... (18,062)
Goodwill.................................................... (69,324)
Other assets................................................ (6,415)
---------
(212,615)
Less-accumulated amortization............................... 52,155
---------
$(160,460)
=========
(i) Represents liabilities retained by the seller.
(j) Represents the following (in thousands):
Long-term debt not assumed.................................. $ (664,451)
Additional borrowings under our credit facilities........... 1,722,684
Helicon preferred limited liability company interests....... 25,000
----------
$1,083,233
==========
(k) Represents the following (in thousands):
Elimination of historical equity............................ $ (356,044)
Additional contributions.................................... 1,325,000
----------
$ 968,956
==========
53
57
UNAUDITED SELECTED HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
The Unaudited Selected Historical Combined Financial and Operating Data for
the years ended December 31, 1996, 1997 and 1998 have been derived from the
separate financial statements of Charter Holdings, CCA Group and CharterComm
Holdings, which have been audited by Arthur Andersen, independent public
accountants, and are included elsewhere in this prospectus. The combined
financial and operating data represent the sum of the results of each of our
then-existing subsidiaries prior to our merger with Marcus Holdings and our
recent acquisitions. Each such subsidiary was managed by Charter Investment in
accordance with its respective management agreement during the presented
periods. Since these subsidiaries were under common management, we believe
presenting combined financial information of these companies is informative.
As a result of the acquisition of us by Paul G. Allen, we have applied the
purchase accounting method which had the effect of increasing total assets,
total debt and members' equity as of December 23, 1998. In addition, we have
retroactively restated our financial statements to include the results of
operations of Marcus Cable for the period from December 24, 1998, through
December 31, 1998, and the balance sheet of Marcus Cable as of December 31,
1998. As a result of the acquisition of us by Mr. Allen and our merger with
Marcus Holdings, we believe that the periods on or prior to December 23, 1998
are not comparable to the periods after December 23, 1998.
CHARTER HOLDINGS, CCA GROUP AND CHARTER
CHARTERCOMM HOLDINGS HOLDINGS
---------------------------------- ----------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
COMBINED STATEMENT OF OPERATIONS:
Revenues............................ $ 368,553 $ 484,155 $570,964 $ 23,450
---------- ---------- -------- ----------
Operating expenses:
Operating, general and
administrative................. 190,084 249,419 288,428 12,679
Depreciation and amortization..... 154,273 198,718 240,294 13,811
Management fees/corporate expense
charges(a)..................... 15,094 20,759 38,348 766
---------- ---------- -------- ----------
Total operating expenses....... 359,451 468,896 567,070 27,256
---------- ---------- -------- ----------
Income (loss) from operations....... $ 9,102 $ 15,259 $ 3,894 $ (3,806)
========== ========== ======== ==========
CAPITAL EXPENDITURES................ $ 110,291 $ 162,607 $195,468 $ 13,672
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets........................ $1,660,242 $2,002,181 $7,235,656
Total debt.......................... 1,195,899 1,846,159 3,523,201
Members' equity..................... 26,099 (80,505) 3,429,291
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CHARTER HOLDINGS, CCA GROUP AND CHARTER
CHARTERCOMM HOLDINGS HOLDINGS
---------------------------------- ----------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGES):
Homes passed(b)..................... 1,546,000 1,915,000 3,892,000
Basic customers(c).................. 902,000 1,086,000 2,317,000
Basic penetration(d)................ 58.3% 56.7% 59.5%
Premium units(e).................... 517,000 629,000 1,256,000
Premium penetration(f).............. 57.3% 57.9% 54.2%
- -------------------------
(a) Charter Investment provided corporate management and consulting services to
us. CCA Group and CharterComm Holdings paid fees to Charter Investment as
compensation for such services and recorded management fee expense. See
"Certain Relationships and Related Transactions." Charter Holdings recorded
actual corporate expense charges incurred by Charter Investment on our
subsidiaries' behalf. Management fees and corporate expenses for the year
ended December 31, 1998 include $14.4 million of change of control payments
under the terms of then-existing equity appreciation rights plans. Such
payments were triggered by the acquisition of us by Paul G. Allen. Such
payments were made by Charter Investment and were not subject to
reimbursement by us, but were allocated to us for financial reporting
purposes. The equity appreciation rights plans were terminated in connection
with the acquisition of us Mr. Allen, and these costs will not recur.
(b) 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.
(c) Basic customers are customers who receive basic cable service.
(d) Basic penetration represents basic customers as a percentage of homes
passed.
(e) Premium units represent the total number of subscriptions to premium
channels.
(f) Premium penetration represents premium units as a percentage of basic
customers.
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SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data below 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, are derived from the
consolidated financial statements of Charter Holdings. They have been audited by
Arthur Andersen LLP, independent public accountants, and are included elsewhere
in this prospectus. The selected historical financial data for the period from
October 1, 1995 through December 31, 1995, are derived from the predecessor of
Charter Holdings' unaudited financial statements and are not included elsewhere
in this prospectus. The selected historical financial data for the year ended
December 31, 1994 and 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
YEAR ENDED 1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98
DECEMBER 31, THROUGH THROUGH ----------------- THROUGH THROUGH
1994 9/30/95 12/31/95 1996 1997 12/23/98 12/31/98
------------ ------- -------- ------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS:
Revenues....................... $ 6,584 $ 5,324 $ 1,788 $14,881 $18,867 $ 49,731 $ 23,450
Operating expenses:
Operating, general and
administrative............ 3,247 2,581 931 8,123 11,767 25,952 12,679
Depreciation and
amortization.............. 2,508 2,137 648 4,593 6,103 16,864 13,811
Management fees/corporate
expense charges........... 106 224 54 446 566 6,176 766
-------- ------- ------- ------- ------- -------- ----------
Total operating
expenses................ 5,861 4,942 1,633 13,162 18,436 48,992 27,256
-------- ------- ------- ------- ------- -------- ----------
Income (loss) from
operations................... 723 382 155 1,719 431 739 (3,806)
Interest expense............... -- -- (691) (4,415) (5,120) (17,277) (5,051)
Interest income................ 26 -- 5 20 41 44 133
Other income (expense)......... -- 38 -- (47) 25 (728) --
-------- ------- ------- ------- ------- -------- ----------
Net income (loss).............. $ 749 $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (8,724)
======== ======= ======= ======= ======= ======== ==========
Ratio of Earnings to Fixed
Charges(a)................... 45.14x 34.00x -- -- -- -- --
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets................... $ 25,511 $26,342 $31,572 $67,994 $55,811 $281,969 $7,235,656
Total debt..................... 10,194 10,480 28,847 59,222 41,500 274,698 3,523,201
Members' equity (deficit)...... 14,822 15,311 971 2,648 (1,975) (8,397) 3,429,291
- -------------------------
(a) Earnings include net income (loss) plus fixed charges. Fixed charges consist
of interest expense and an estimated interest component of rent expense.
Earnings for the period from October 1, 1995 through December 31, 1995,
years ended December 31, 1996 and 1997, periods from January 1, 1998 through
December 23, 1998, and the period from December 24, 1998 through December
31, 1998 were inadequate to cover fixed charges by $531, $2,723, $4,623,
$17,222 and $8,724, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to the "Certain Trends and Uncertainties" section below
in this Management's Discussion and Analysis for discussion of important factors
that could cause actual results to differ from expectations and non-historical
information contained herein.
INTRODUCTION
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of recent and
pending significant events, including:
(1) the acquisition of us by Paul G. Allen,
(2) our merger with Marcus Holdings,
(3) our recent and pending acquisitions,
(4) the refinancing of our previous credit facilities, and
(5) the purchase of publicly held notes that had been issued by several of
our subsidiaries.
Provided below is a discussion of:
(1) our operation and development prior to the acquisition of us by Mr.
Allen,
(2) the acquisition of us by Mr. Allen,
(3) our merger with Marcus Holdings, and
(4) our recent acquisitions and pending acquisitions.
ORGANIZATIONAL HISTORY
Prior to our acquisition by Mr. Allen on December 23, 1998, our cable
systems were operated under four groups. Three of these groups were comprised of
companies that were managed by Charter Investment prior to our acquisition by
Mr. Allen and the fourth group was comprised of companies that collectively were
part of Marcus Cable.
The following is an explanation of how:
(1) Charter Properties, the operating companies that formerly comprised CCA
Group, Charter Communications, LLC 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 Holdco;
and
(4) Charter Holdco became a wholly owned subsidiary of Charter Investment.
THE CHARTER COMPANIES
Prior to Charter Investment acquiring the remaining interests it did not
previously own in CCA Group and CharterComm Holdings, LLC, as described below,
the operating subsidiaries were parties to separate management agreements with
Charter Investment pursuant to which Charter Investment provided management and
consulting services. The three groups which
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formerly comprised the companies managed by Charter Investment prior to our
acquisition by Mr. Allen were as follows:
(1) Charter Communications Properties Holdings, LLC
CCP Holdings was a wholly owned subsidiary of Charter Investment. The
primary subsidiary of CCP Holdings which owned the cable systems was
Charter Properties. In connection with Mr. Allen's acquisition on December
23, 1998, CCP Holdings was merged out of existence. Charter Properties
became a direct, wholly owned subsidiary of Charter Investment.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates of
Kelso & Co. Charter Investment had only a minority interest. On December
21, 1998, prior to Mr. Allen's acquisition, the remaining interests it did
not previously own in CCA Group were acquired by Charter Investment from
the Kelso affiliates. Consequently, the companies comprising CCA Group
became wholly owned subsidiaries of Charter Investment.
CCA Group consisted of the following three sister companies:
(i) CCT Holdings, LLC,
(ii) CCA Holdings, LLC, and
(iii) Charter Communications Long Beach, LLC
The cable systems were owned by the various subsidiaries of these
three sister companies. 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. On December 21, 1998, prior to Mr. Allen's
acquisition, the remaining interests it did not previously own in
CharterComm Holdings were acquired by Charter Investment from the
Charterhouse affiliates. 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
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.
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
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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 Holdco.
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 debt we assumed. Charter Properties, the
operating companies that formerly comprised CCA Group and Charter
Communications, LLC were contributed to Charter Operating subsequent to Mr.
Allen's acquisition. Charter Properties is deemed to be our predecessor.
Consequently, the contribution of Charter Properties was accounted for as a
reorganization under common control. Accordingly, the accompanying financial
statements for periods prior to December 24, 1998, include the accounts of
Charter Properties. The contributions of the operating companies that formerly
comprised CCA Group and Charter Communications, LLC were accounted for in
accordance with purchase accounting. Accordingly, the financial statements for
periods after December 23, 1998, include the accounts of Charter Properties, CCA
Group and CharterComm Holdings.
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. 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 the cable systems. This agreement placed the Marcus cable systems under
common management with our cable systems.
In February 1999, Marcus Holdings was formed and all of Mr. Allen's
interests in Marcus Cable were transferred to Marcus Holdings. In March 1999,
Mr. Allen acquired the remaining interests in Marcus Cable, which interests were
transferred to Marcus Holdings. In April 1999, Mr. Allen merged Marcus Holdings
into us, and the operating subsidiaries of Marcus Holdings and all of the cable
systems they own came under the ownership of Charter Holdings.
Our merger with Marcus Holding was accounted for as a reorganization under
common control similar to a pooling of interests because of Mr. Allen's
controlling interests in Marcus Holdings and Charter Holdings. As such, the
accounts of Charter Holdings and Marcus Holdings have been consolidated since
December 23, 1998.
ACQUISITIONS
In the second and third quarters of 1999, we acquired American Cable, the
Greater Media systems, Renaissance, Helicon, Vista and certain cable assets of
Cable Satellite of South Miami for a total purchase price of approximately $1.9
billion and total debt assumed of $226 million. See "Business -- Acquisitions"
and "Description of Certain Indebtedness." These acquisitions were funded
through excess cash from the issuance of the original notes, additional
borrowings under our credit facilities and the assumption of Renaissance notes
and Helicon notes. Due to the change of control of Renaissance, an offer to
purchase the Renaissance notes was made at 101% of their accreted value on the
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date of purchase, plus accrued interest. Of the $163.175 million face amount of
Renaissance notes outstanding, $48.762 million were repurchased. Due to the
change of control of Helicon, an offer to purchase the Helicon notes will be
made in accordance with the terms of the Helicon notes.
In addition to these acquisitions, since the beginning of 1999, we have
entered into definitive agreements to acquire the InterMedia systems and Rifkin,
all as forth in the table below. These acquisitions are expected to be funded
through excess cash, additional borrowings under our credit facilities,
additional equity contributions and the assumption of Rifkin notes. Rifkin
sellers could elect to receive some of the purchase price in the form of
preferred or common equity of Charter Holdings or, if mutually agreed to by the
parties, of a parent of Charter Holdings. If issued, this equity would be valued
between approximately $25 million and $250 million. The Rifkin notes are
expected to be tendered after closing.
As part of the transaction with InterMedia, we will "swap" some of our
non-strategic cable systems located in Indiana, Montana, Utah and northern
Kentucky, representing 142,000 basic customers, and pay cash of $872 million.
The InterMedia systems serve approximately 408,000 customers in Georgia, North
Carolina, South Carolina and Tennessee.
AS OF AND FOR THE
THREE MONTHS ENDED
MARCH 31, 1999
-------------------------
(DOLLARS IN
ACTUAL OR THOUSANDS)
ANTICIPATED PURCHASE BASIC -----------
ACQUISITION ACQUISITION DATE PRICE SUBSCRIBERS REVENUE
- ----------- ---------------- -------- ----------- -------
American Cable......................... 4/99 $240 million 68,000 $ 9,151
Renaissance............................ 4/99 459 million 132,000 15,254
Greater Media Systems.................. 6/99 500 million 174,000 20,394
Helicon................................ 7/99 550 million 172,000 21,252
Other (Vista and certain cable assets
of Cable Satellite).................. 7/99 and 8/99 148 million 36,000 3,354
InterMedia Systems..................... 3rd or 4th Quarter 872 million + 408,000 48,288
1999 systems' swap (142,000)
---------
266,000
Rifkin................................. 3rd or 4th Quarter 1,460 million 463,000 50,914
1999
---------------- --------- --------
Total.............................. $4,229 million 1,311,000 $168,607
================ ========= ========
The systems acquired pursuant to these recent and pending acquisitions
serve, in the aggregate, approximately 1.3 million customers. In addition, we
are negotiating with several other potential acquisition candidates whose
systems would further complement our regional operating clusters. We expect to
finance our pending acquisitions and any other future acquisitions with
additional borrowings under our credit facilities and with additional equity.
Certain of these acquisitions were originally acquisitions of Charter
Investment. Charter Investment subsequently assigned those acquisitions to us.
Charter Investment and other affiliates are making other acquisitions. There is
no present intention on their part to assign these other acquisitions to us.
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PUBLIC OFFERING OF COMMON STOCK BY AN INDIRECT PARENT OF CHARTER HOLDINGS
Charter Communications, Inc. filed a registration statement for an initial
public offering of its Class A common stock. Charter Communications, Inc.
expects to raise approximately $3.45 billion through its offering and will use
these proceeds to purchase membership interests in Charter Holdco, thereby
become the controlling managing member of Charter Holdco. Charter Holdco will
also raise an additional $750 million through the sale of membership interests
to Vulcan Cable III. Charter Holdco will thereafter be owned by Charter
Investment, Charter Communications, Inc. and Vulcan Cable III. The equity
interest of each of these owners has not yet been determined. We will continue
to be 100% owned by Charter Holdco.
The initial public offering will affect us in many ways, including the
following:
- Our Management. The current management agreement between Charter
Operating and Charter Investment, described under the heading "Certain
Relationships and Related Transactions," will be terminated and a new management
agreement will be entered into between Charter Communications, Inc. and Charter
Holdco. The new management agreement will have terms substantially identical to
the existing management agreement except that the fees payable thereunder will
only allow Charter Communications, Inc. to be reimbursed for its actual
expenses. This agreement will apply to us and all of our subsidiaries.
- Option Plan. After the initial public offering, each Charter Holdco
membership interest held as a result of an exercise of an option will
automatically be exchanged into shares of Class A common stock of Charter
Communications, Inc. Any shares of Class A common stock received in any such
exchange will be subject to purchase by Mr. Allen or Charter Holdco in the event
of the termination of the employment or consulting relationship of the optionee
for cause as described in "Management -- Option Plan."
- Business Activities. It is contemplated that, upon the completion of the
initial public offering, we will not be permitted to engage in business activity
other than the cable transmission of video, audio and data unless Mr. Allen
first determines not to pursue the particular business activity. See "Risk
Factors -- We will not be able to engage in any business other than the cable
transmission of video, audio and data unless Mr. Allen first determines not to
pursue the particular business activity."
OVERVIEW
Approximately 87% of our revenues are primarily 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 increases
in revenues in each of the past three fiscal years, primarily through internal
customer growth, basic and expanded tier rate increases and acquisitions as well
as innovative marketing such as our MVP package of premium services. This
entitles customers to receive a substantial discount on bundled premium services
of HBO, Showtime, Cinemax and The Movie Channel. The MVP package has increased
premium revenue by 3.4% and premium cash flow by 5.5% in the initial nine months
of this program. We are beginning to offer our customers several other services,
which are
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expected to significantly contribute to our revenue. One of these services is
digital cable, which provides subscribers with additional programming options.
We are also offering high speed Internet access to the worldwide web through
cable modems. Cable modems can be attached to personal computers so that users
can send and receive data over cable systems. Our television based Internet
access allows us to offer the services provided by WorldGate, 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
account for approximately 50 percent of our operating costs. 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. A significant factor
with respect to increased programming costs is 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 have benefited in the past from our membership in an industry
cooperative that provides members with volume discounts from programming
networks. We believe our membership has minimized increases to our programming
costs relative to what the increases would otherwise have been. We also believe
that we should derive additional discounts from programming networks due to our
increased size. Finally, we were able to negotiate favorable terms with premium
networks in conjunction with the premium packages, which minimized the 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
to or charges from Charter Investment for corporate management and consulting
services. Charter Holdings records actual corporate expense charges incurred by
Charter Investment 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 equal to 3.0% to 5.0% of gross revenues plus
certain expenses. In October 1998, Charter Investment began managing the cable
operations of Marcus Holdings under a management fee arrangement. The Charter
Operating credit facilities limit management fees 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 the depreciation and amortization expenses
associated with our acquisitions, the capital expenditures related to
construction and upgrading of our systems, and interest costs on borrowed money.
We cannot predict what impact, if any, continued losses will have on our ability
to finance our operations in the future.
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RESULTS OF OPERATIONS
The following discusses the results of operations for
(1) Charter Holdings, comprised of Charter Properties, for the period from
January 1, 1998 through March 31, 1998, and
(2) Charter Holdings, comprised of Charter Properties, CCA Group,
CharterComm Holdings and Marcus Holdings, for the period from January
1, 1999 through March 31, 1999.
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods.
THREE MONTHS ENDED
--------------------------------------
3/31/99 3/31/98
----------------- -----------------
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS
Revenues.................................... $286,135 100.0% $ 4,782 100.00%
-------- ----- ------- ------
Operating expenses
Operating, general and administrative
costs.................................. 152,075 53.1% 2,638 55.2%
Depreciation and amortization............. 153,747 53.7% 1,605 33.6%
Management fees/corporate expense
charges................................ 5,323 1.9% 143 3.0%
-------- ----- ------- ------
Total operating expenses.......... 311,145 108.7% 4,386 91.7%
-------- ----- ------- ------
Income (loss) from operations............... (25,010) (8.7%) 396 8.3%
Interest income............................. 1,733 0.6% 8 0.2%
Interest expense............................ (71,591) (25.0%) (1,329) (27.8%)
Other income................................ 15 0.0% 2 0.0%
-------- ----- ------- ------
Net loss before extraordinary item.......... (94,853) (33.1%) $ (923) (19.3%)
Extraordinary item-loss from early
extinguishment of debt.................... 3,604 (1.3%) -- 0.0%
------- ------
Net loss.................................... $(98,457) (34.4%) $ (923) (19.3%)
======== ===== ======= ======
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PERIOD FROM JANUARY 1, 1999 THROUGH MARCH 31, 1999
COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH MARCH 31, 1998
REVENUES. Revenues increased by $281.3 million, or 5,883.6%, from $4.8
million for the period from January 1, 1998 through March 31, 1998 to $286.1
million for the period from January 1, 1999 through March 31, 1999. The increase
in revenues primarily resulted from the acquisitions of the CCA Group,
CharterComm Holdings and Sonic, and our merger with Marcus Holdings. The
revenues of these entities for the three months ended March 31, 1999 were $89.4
million, $53.4 million, $13.1 million and $125.2 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $149.5 million, or 5.750.0%, from $2.6
million for the period from January 1, 1998 through March 31, 1998 to $152.1
million for the period from January 1, 1999 through March 31, 1999. This
increase was due primarily to the acquisitions of the CCA Group, CharterComm
Holdings and Sonic, and our merger with Marcus Holdings whose operating, general
and administrative expenses were $46.5 million, $26.9 million, $6.9 million and
$69.0 million for the three months ended March 31, 1999, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $152.1 million, or 9,479.3%, from $1.6 million for the period from
January 1, 1998 through March 31, 1998 to $153.7 million for the period from
January 1, 1999 through March 31, 1999. There was a significant increase in
amortization resulting from the acquisitions of the CCA Group, CharterComm
Holdings and Sonic, and our merger with Marcus Holdings whose incremental
amortization expenses for the three months ended March 31, 1999 were $49.1
million, $32.6 million, $4.3 million and $63.7 million for the three months
ended March 31, 1999, respectively.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $5.2 million, or 3,622.4% from $0.1 million for the
period from January 1, 1998 through March 31, 1998 to $5.3 million for the
period from January 1, 1999 through March 31, 1999. The increase from the period
from January 1, 1998 through March 31, 1998 compared to the period from January
1, 1999 through March 31, 1999 was the result of the acquisitions of the CCA
Group, CharterComm Holdings and Sonic, and our merger with Marcus Holdings.
INTEREST EXPENSE. Interest expense increased by $70.2 million, or
5,286.8%, from $1.3 million for the period from January 1, 1998 through March
31, 1998 to $71.6 million for the period from January 1, 1999 through March 31,
1999. This increase resulted primarily from the financing of the acquisitions of
the CCA Group and CharterComm Holdings, and our merger with Marcus Holdings. The
interest expenses resulting from each of these transactions were $14.4 million,
$12.0 million, and $26.1 million, respectively.
NET LOSS. Net loss increased by $97.5 million, or 10,567.1%, from $0.9
million for the period from January 1, 1998 through March 31, 1998 to $98.5
million for the period from January 1, 1999 through March 31, 1999.
The increase in revenues that resulted from the acquisitions of the CCA
Group, CharterComm Holdings and Sonic, and our merger with Marcus Holdings was
not sufficient to offset the significant costs related to the acquisitions.
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RESULTS OF OPERATIONS
The following discusses the results of operations for
(1) Charter Holdings, comprised of Charter Properties, for the period from
January 1, 1998 through December 23, 1998 and for the years ended
December 31, 1997 and 1996, and
(2) Charter Holdings, comprised of Charter Properties, CCA Group,
CharterComm Holdings and Marcus Holdings, for the period from December
24, 1998 through December 31, 1998.
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods.
YEAR ENDED
DECEMBER 31, 1/1/98 12/24/98
------------------------------------ THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------------- ---------------- ----------------- ----------------
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS
Revenues........................... $14,881 100.0% $18,867 100.0% $ 49,731 100.0% $23,450 100.0%
------- ----- ------- ----- -------- ----- ------- -----
Operating expenses
Operating costs................... 5,888 39.6% 9,157 48.5% 18,751 37.7% 9,957 42.5%
General and administrative
costs........................... 2,235 15.0% 2,610 13.8% 7,201 14.5% 2,722 11.6%
Depreciation and amortization..... 4,593 30.9% 6,103 32.3% 16,864 33.9% 13,811 58.9%
Management fees/corporate expense
charges......................... 446 3.0% 566 3.0% 6,176 12.4% 766 3.3%
------- ----- ------- ----- -------- ----- ------- -----
Total operating expenses.......... 13,162 88.4% 18,436 97.7% 48,992 98.5% 27,256 116.2%
------- ----- ------- ----- -------- ----- ------- -----
Income (loss) from operations...... 1,719 11.6% 431 2.3% 739 1.5% (3,806) (16.2%)
Interest income.................... 20 0.1% 41 0.2% 44 0.1% 133 0.6%
Interest expense................... (4,415) (29.7%) (5,120) (27.1%) (17,277) (34.7%) (5,051) (21.5%)
Other income (expense)............. (47) (0.3%) 25 0.1% (728) (1.5%) -- --
------- ----- ------- ----- -------- ----- ------- -----
Net loss........................... $(2,723) (18.3%) $(4,623) (24.5%) $(17,222) (34.6%) $(8,724) (37.2%)
======= ===== ======= ===== ======== ===== ======= =====
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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 Charter Properties, but also the results of operations
of those entities purchased in the acquisition of us and our merger with Marcus
Holdings. 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 $30.8 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 whose revenues for that period were $30.5 million.
OPERATING EXPENSES. Operating expenses 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, whose operating expenses for that period were $11.5,
partially offset by the loss of $1.4 million on the sale of a cable system in
1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
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 whose general and administrative
expenses for that period were $4.4 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 $10.3 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 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 $1.5 million in management services
provided by Charter Investment 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 $60.7 million,
incurred in connection with the acquisition of Sonic resulting in $12.1 million
of 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 significant costs related to the
acquisition of Sonic.
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1997 COMPARED TO 1996
REVENUES. Revenues increased by $4.0 million, or 26.8%, from $14.9 million
in 1996 to $18.9 million in 1997. The primary reason for this increase is due to
the acquisition of 5 cable systems in 1996 that increased customers by 58.9%.
Revenues of Charter Properties, excluding the activity of any other systems
acquired during the periods, increased by $0.7 million, or 8.9%, from $7.9
million in 1996 to $8.6 million in 1997.
OPERATING EXPENSES. Operating expenses increased by $3.3 million, or
55.5%, from $5.9 million in 1996 to $9.2 million in 1997. This increase was
primarily due to the acquisitions of the cable systems in 1996 and the loss of
$1.4 million on the sale of a cable system in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $0.4 million, or 16.8%, from $2.2 million in 1996 to $2.6 million
in 1997. This increase was primarily due to the acquisitions of the cable
systems in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1.5 million, or 32.9%, from $4.6 million in 1996 to $6.1 million
in 1997. There was a significant increase in amortization resulting from the
acquisitions of the cable systems in 1996.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $0.1 million, or 26.9%, from $0.4 million in 1996 to $0.6 million
in 1997. These fees were 3.0% of revenues in both 1996 and 1997.
INTEREST EXPENSE. Interest expense increased by $0.7 million, or 16.0%,
from $4.4 million in 1996 to $5.1 million in 1997. This increase resulted
primarily from the indebtedness incurred in connection with the acquisitions of
several cable systems in 1996.
NET LOSS. Net loss increased by $1.9 million, or 69.8%, from $2.7 million
in 1996 to $4.6 million in 1997. The increase in net loss is primarily related
to the $1.4 million loss on the sale of a cable system.
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SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
COMBINED CHARTER COMPANIES OPERATING RESULTS
The following discusses the combined statements of operations of Charter
Holdings, CCA Group and CharterComm Holdings for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 through December 23,
1998. Since these companies were under the common management of Charter
Investment, the current manager of our cable systems, we believe presenting
their combined results of operations is meaningful and informative. These
statements depict the historical results of the companies acquired by Paul G.
Allen on December 23, 1998. The statements do not reflect any pro forma
adjustments.
CHARTER HOLDINGS, CCA GROUP AND CHARTERCOMM HOLDINGS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------- 1/1/98 THROUGH
1996 1997 12/23/98
------------------------ ------------------------ ------------------------
(DOLLARS IN THOUSANDS)
STATEMENTS OF OPERATIONS
Revenues.................................... $ 368,553 100.0% $ 484,155 100.0% $ 570,964 100.0%
--------------- ------ --------------- ------ --------------- ------
Operating expenses:
Operating costs........................... 159,835 43.4% 207,802 42.9% 238,201 41.7%
General and administrative costs.......... 30,249 8.2% 41,617 8.6% 50,227 8.8%
Depreciation and amortization............. 154,273 41.9% 198,718 41.0% 240,294 42.1%
Management fees/corporate expense
charges................................. 15,094 4.1% 20,759 4.3% 38,348 6.7%
--------------- ------ --------------- ------ --------------- ------
Total operating expenses............ 359,451 97.4% 468,896 96.8% 567,070 99.3%
--------------- ------ --------------- ------ --------------- ------
Income (loss) from operations............... $ 9,102 2.6% $ 15,259 3.2% $ 3,894 0.7%
=============== ====== =============== ====== =============== ======
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PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997
REVENUES. Revenues increased by $86.8 million, or 17.9%, from $484.2
million in 1997 to $571.0 million for the period from January 1, 1998 through
December 23, 1998. Increase in revenues of $30.5 million and $16.8 million
resulted from the acquisitions of Sonic in 1998 and Long Beach in 1997,
respectively. The remaining increase in revenues is primarily related to
internally generated increases in basic subscribers and increases in premium
service subscriptions.
We have grown our subscriber base internally as a result of management's
marketing efforts to add new customers, increased efforts to retain existing
customers and a limited amount of new-build construction to increase the
coverage area of our systems.
Premium subscriptions have increased as a result of the acquisition of
Sonic and our marketing efforts.
OPERATING EXPENSES. Operating expenses increased by $30.4 million, or
14.6%, from $207.8 million in 1997 to $238.2 million for the period from January
1, 1998 through December 23, 1998. Increases in operating expenses of $11.5
million and $6.0 million resulted from acquisitions of Sonic in 1998 and Long
Beach in 1997, respectively. The remaining difference is primarily related to
increased programming cost.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $8.6 million, or 20.7%, from $41.6 million in 1997 to $50.2 million
for the period from January 1, 1998 through December 23, 1998. Increases in
general and administrative expenses of $4.4 million and $1.6 million resulted
from acquisitions of Sonic in 1998 and Long Beach in 1997, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$41.6 million, or 20.9% from $198.7 million in 1997 to $240.3 million for the
period from January 1, 1998 through December 23, 1998. Increases in depreciation
and amortization of $10.3 million and $8.4 million resulted from acquisitions of
Sonic in 1998 and Long Beach in 1997, respectively. The increase is also
attributed to capital expenditures of $195.5 million for the period from January
1, 1998 through December 23, 1998 and $162.6 million during 1997.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $17.6 million, or 84.7% from $20.8 million in 1997
to $38.3 million for the period from January 1, 1998 through December 23, 1998.
The increase from 1997 compared to 1998 was primarily the result of additional
Charter Investment charges related to the equity appreciation rights plans of
$14.4 million for fiscal 1998 and the additional management fees as a result of
the Sonic and Long Beach acquisitions of $1.5 million and $0.5 million,
respectively.
1997 COMPARED TO 1996
REVENUES. Revenues increased by $115.6 million, or 31.4%, from $368.6
million in 1996 to $484.2 million in 1997. This increase was due to several
acquisitions of cable systems in 1996 and 1997, including the acquisition of
Long Beach whose incremental revenues were $23.7 million, as well as an increase
in the average monthly revenue per basic customer from $34.05 in 1996 to $37.15
in 1997.
OPERATING EXPENSES. Operating expenses increased by $48.0 million, or
30.0%, from $159.8 million in 1996 to $207.8 million in 1997. This increase was
primarily due to the
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acquisitions in 1996 and 1997, most significant being the acquisition of Long
Beach whose operating expenses were $10.9 million.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $11.4 million, or 37.6%, from $30.2 million in 1996 to $41.6
million in 1997. This increase was primarily due to the acquisitions acquired in
1996 and 1997, most significant being the acquisition of Long Beach whose
general and administrative expenses were $1.9 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$44.4 million, or 28.8%, from $154.3 million in 1996 to $198.7 million in 1997.
There was a significant increase in amortization resulting from the acquisitions
of several cable systems in 1996 and 1997. In connection, with such
acquisitions, the acquired franchises were recorded at fair market value, which
resulted in a stepped-up basis upon acquisition. The increase is also attributed
to capital expenditures of $162.6 million in 1997 and $110.3 million in 1996.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $5.7 million, or 37.5%, from $15.1 million in 1996
to $20.8 million in fiscal 1997. This increase is primarily the result of an
increase in revenues from 1996 and 1997 and additional costs incurred by Charter
Investment to provide the management services.
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 plant and infrastructure;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
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, Charter
Holdings has participated in one swap in connection with the transaction with
InterMedia. We are currently negotiating other possible swap transactions.
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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 and financings, debt financings and
borrowings under our credit facilities.
Pro forma for our recent and pending acquisitions, our cash flows from
operating activities for 1998 were $351.5 million, and for the three months
ended March 31, 1999 were $85.7 million. Without giving effect to the cable
systems we acquired in 1999, our cash flows for 1998 were $137.2 million, and
for the three months ended March 31, 1999 were $45.8 million.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our existing 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.
Over the next three years, we plan to spend $1.8 billion for capital
expenditures, approximately $900 million of which will be used to upgrade and
rebuild our existing systems to bandwidth capacity of 550 megahertz or greater
and add two-way capability, so that we may offer advanced services. The
remaining $900 million will be used for extensions of systems, development of
new products and services, converters and system maintenance. Capital
expenditures for 1999, 2000 and 2001 are expected to be approximately $600
million, $650 million, and $550 million, respectively. If our recent and pending
acquisitions are completed over the next three years, we plan to spend an
additional $700 million to upgrade our systems to bandwidth capacity of 550
megahertz or greater, so that we may offer advanced cable services. An
additional $400 million will be used for plant extensions, new services,
converters and system maintenance. We expect to finance 80% and 20% of the
anticipated capital expenditures with distributions generated from operations
and additional borrowings under our credit facilities, respectively. We cannot
assure you that these amounts will be sufficient to accomplish our planned
system upgrade, expansion and maintenance. See "Risk Factors -- Our
Business -- We may not be able to obtain capital sufficient to fund our planned
upgrades and to keep pace with technological developments." This 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.
For the three months ended March 31, 1999, we made capital expenditures,
excluding the acquisitions of cable systems, of $109.6 million and $29.0 million
for all of 1998. The majority of the capital expenditures related to rebuilding
existing cable systems.
FINANCING ACTIVITIES
On March 17, 1999, we issued $3.6 billion principal amount of senior notes.
The net proceeds of approximately $2.99 billion, combined with the borrowings
under our credit
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facilities, were used to consummate tender offers for publicly held debt of
several of our subsidiaries, as described below, refinance borrowings under our
previous credit facilities and for working capital purposes.
Semi-annual interest payments with respect to the 8.250% notes and the
8.625% notes will be approximately $89.4 million, commencing on October 1, 1999.
No interest on the 9.920% notes will be payable prior to April 1, 2004.
Thereafter, semiannual interest payments will be approximately $162.6 million in
the aggregate, commencing on October 1, 2004.
Concurrently with the issuance of the original notes, we refinanced
substantially all of our previous credit facilities with new credit facilities
entered into by Charter Operating. 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 notes except for $1.1 million in
principal amount were paid off.
Our credit facilities provide for two term facilities, one with a principal
amount of $1.0 billion that matures September 2008 (Term A), and the other with
the principal amount of $1.85 billion that matures on March 2009 (Term B). Our
credit facilities also provide for a $1.25 billion revolving credit facility
with a maturity date of September 2008. As of March 31, 1999, approximately
$2.35 billion was available for borrowing under our credit facilities. After
giving effect to our pending acquisitions, there will be approximately $741
million of borrowing availability under our new credit facilities. In addition,
an uncommitted incremental term facility of up to $500 million with terms
similar to the terms of the credit facilities is permitted under the credit
facilities, but will be conditioned on receipt of additional new commitments
from existing and new lenders.
Amounts under our new credit facilities bear interest at a base rate or a
eurodollar rate, plus a margin up to 2.75%. 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. The weighted average interest rate for
outstanding debt on March 31, 1999 was 7.44%. Furthermore, we have entered into
interest rate protection agreements to reduce the impact of changes in interest
rates on our debt outstanding under our credit facilities. See "-- Interest Rate
Risk."
We acquired Renaissance in April 1999. Renaissance has outstanding publicly
held debt comprised of 10% senior discount notes due 2008 with a $163.2 million
principal amount at maturity and $100.0 million accreted value. The Renaissance
notes do not require the payment of interest until April 15, 2003. From and
after April 15, 2003, the Renaissance notes bear interest, payable semi-annually
in cash, on each April 15 and October 15, commencing October 15, 2003. The
Renaissance notes are due on April 15, 2008.
We acquired Helicon in July 1999. Helicon has outstanding $115 million in
principal amount of 11% senior secured notes due 2003. As a result of the
acquisition, we will be required under the change of control covenant contained
in the indenture for these notes to make an offer to purchase these notes at a
price equal to 101% of their principal amount plus accrued interest.
Following the Rifkin acquisition, we will likewise be required to make an
offer to repurchase outstanding publicly held debt issued by Rifkin.
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Our significant amount of debt may adversely affect our ability to obtain
financing in the future and react to changes in our business. Our debt requires
us to comply with various financial and operating covenants that could adversely
impact our ability to operate our business. See "Risk Factors -- Our
Business -- The agreements and instruments governing our debt contain
restrictions and limitations which could significantly impact our ability to
operate our business and repay the notes."
For a more detailed description of our debt and the debt that we will
assume or refinance in connection with our pending acquisitions, see
"Description of Certain Indebtedness."
The following table sets forth the sources and uses as of March 31, 1999,
as discussed above, giving effect to additional borrowings under our credit
facilities and additional equity contributions in connection with refinancing of
our previous credit facilities and funding our pending acquisitions as if such
transactions had occurred on that date. This presentation assumes that the
Helicon notes are called and that we are successful in purchasing all the Rifkin
notes in connection with our tender. This table also assumes that the Rifkin
sellers do not elect to receive membership units in Charter Holdings or of the
parent of Charter Holdings. This assumption is based on the fact that the terms
of the equity have not been finalized and that seller participation has not been
determined. Therefore, the cash portion of the purchase price of Rifkin has not
been reduced.
SOURCES: --------
Proceeds from issuance of notes:
8.250% notes.................. $ 600
8.625% notes.................. 1,500
9.920% notes.................. 903
Borrowings under our credit
facilities
Tranche A..................... 1,100
Tranche B..................... 1,850
Revolver...................... 509
Renaissance debt................ 83
Helicon preferred limited
liability company interests... 25
Equity contribution............. 1,325
------
$7,895
======
Tender offers to retire:
USES: -----
(DOLLARS IN MILLIONS)
14.00% senior discount notes
issued by Charter Southeast
Holdings................... $ 141
11.25% senior notes issued by
Charter Southeast.......... 141
13.50% senior subordinated
discount notes issued by
Marcus Cable Operating..... 432
14.25% senior discount notes
used by Marcus Cable....... 291
Refinance previous credit
facilities.................... 2,535
Payments for pending
acquisitions.................. 4,230
Fees and expenses associated
with issuance of notes........ 125
------
$7,895
======
Prior to our acquisition by Paul G. Allen, we have received minimal equity
contributions. In order to fund a portion of the pending acquisitions, Paul G.
Allen has committed to contribute $1.325 billion of additional equity to Charter
Holdco. Charter Holdco has committed to contribute the $1.325 billion to us.
CERTAIN TRENDS AND UNCERTAINTIES
SUBSTANTIAL LEVERAGE. As of March 31, 1999, pro forma for our pending
acquisitions and acquisitions completed since that date, our total debt was
approximately $6.6 billion,
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our total members' equity was approximately $4.7 billion, and the deficiency of
our earnings available to cover fixed charges was approximately $197 million. We
anticipate incurring substantial additional debt in the future to fund the
expansion, maintenance and the upgrade of our systems.
Our ability to make payments on our debt, including the notes, and to fund
our planned capital expenditures for upgrading our cable systems 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 that are beyond our control. Based
upon the current levels of operations, we believe that cash flow from operations
and available cash, together with available borrowings under our credit
facilities, will be adequate to meet our liquidity and capital needs for at
least the next several years. However, there can be no assurance our business
will generate sufficient cash flow from operations, or that future borrowings
will be available to us under our credit facilities or from other sources of
financing 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. If interest
rates rise, our costs relative to those obligations would also rise.
RESTRICTIVE COVENANTS. Our credit facilities contain a number of
significant covenants that, among other things, restrict the ability of our
subsidiaries to:
- pay dividends;
- pledge assets;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- make certain investments or acquisitions.
In addition, each of our credit facilities requires the particular borrower
to maintain cash 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 permit acceleration of the
debt. Any default under our credit facilities or our indentures 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
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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 us by Paul G.
Allen, our merger with Marcus Holdings and our recent and pending acquisitions,
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 cost and all benefit plans have been
terminated with acquired employees transferring to our 401(k) plan. No
significant severance cost is expected in conjunction with the recent and
pending acquisitions. 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 pending acquisitions, we have formed
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 customer. 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.
Basic cable service is the service that cable customers receive for a threshold
fee. This service usually includes local television stations, some distant
signals and perhaps one or more non-broadcast services. 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 or if it were to allow unaffiliated internet service
providers seeking direct cable access to invoke commercial leased access rights
originally devised for video programmers. The Federal Communications Commission
is currently conducting proceedings in which it is considering both of these
channel usage possibilities.
There is also uncertainty whether local franchising authorities, the
Federal Communications Commission, 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
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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.
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 our credit facilities. Our policy is
to manage interest costs using a mix of fixed and variable rate debt. Using
interest rate swap agreements, we agree to exchange, at specified intervals, the
difference between fixed and variable interest amounts calculated by reference
to an agreed-upon notional principal amount. Interest rate cap agreements are
used to lock in a maximum interest rate should variable rates rise, but enable
us to otherwise pay lower market rates. Collars limit our exposure to and
benefits from interest rate fluctuations on variable rate debt to within a
certain range of rates.
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, 1998 (dollars in thousands):
EXPECTED MATURITY DATE FAIR VALUE AT
---------------------------------------------------- DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
-------- -------- -------- -------- -------- ---------- ---------- -------------
DEBT
Fixed Rate............... -- -- -- -- -- $ 984,509 $ 984,509 $ 974,327
Average Interest Rate... -- -- -- -- -- 13.5% 13.5%
Variable Rate............ $ 87,950 $110,245 $148,950 $393,838 $295,833 $1,497,738 $2,534,554 $2,534,533
Average Interest Rate... 6.0% 6.1% 6.3% 6.5% 7.2% 7.6% 7.2%
INTEREST RATE INSTRUMENTS
Variable to Fixed
Swaps................... $130,000 $255,000 $180,000 $320,000 $370,000 $ 250,000 $1,505,000 $ (28,977)
Average Pay Rate........ 4.9% 6.0% 5.8% 5.5% 5.6% 5.6% 5.6%
Average Receive Rate.... 5.0% 5.0% 5.2% 5.2% 5.4% 5.4% 5.2%
Caps..................... $ 15,000 -- -- -- -- -- $ 15,000 --
Average Cap Rate........ 8.5% -- -- -- -- -- 8.5%
Collar................... -- $195,000 $ 85,000 $ 30,000 -- -- $ 310,000 $ (4,174)
Average Cap Rate........ -- 7.0% 6.5% 6.5% -- -- 6.8%
Average Floor Rate...... -- 5.0% 5.1% 5.2% -- -- 5.0%
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. Interest
rates on variable debt are estimated using the average implied forward LIBOR
rates for the year of maturity based on the yield curve in effect at December
31, 1998 plus the borrowing margin in effect for each credit facility at
December 31, 1998. 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, 1998, 1997, and 1996 was not
significant.
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In March 1999, substantially all existing long-term debt, excluding
borrowings of our previous credit facilities was extinguished, and all previous
credit facilities were refinanced with the credit facilities. The following
table set forth the fair values and contract terms of the long-term debt
maintained by us as of March 31, 1999 (dollars in thousands):
EXPECTED MATURITY DATE FAIR VALUE AT
-------------------------------------------------- MARCH 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999
-------- -------- -------- ------- ------- ---------- ---------- -------------
DEBT
Fixed Rate................. -- -- -- -- -- $3,575,000 $3,575,000 $3,004,023
Average Interest Rate..... -- -- -- -- -- 9.0% 9.0%
Variable Rate.............. -- -- -- $13,125 $17,500 $1,719,375 $1,750,000 $1,750,000
Average Interest Rate..... -- -- -- 5.9% 6.0% 6.4% 6.4%
Interest rates on variable debt are estimated using the average implied
forward LIBOR rates for the year of maturity based on the yield curve in effect
at March 31, 1998 plus the borrowing margin in effect for each credit facility
at March 31, 1999.
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 upcoming 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.
These problems are expected to increase in frequency and severity as the
year 2000 approaches. This issue impacts our owned or licensed computer systems
and equipment used in connection with internal operations, including:
- information processing and financial reporting systems;
- customer billing systems;
- customer service systems;
- telecommunication transmission and reception systems; and
- facility systems.
THIRD PARTIES. We also rely directly and indirectly, in the regular course
of business, on the proper operation and compatibility of third party systems.
The year 2000 problem could cause these systems to fail, err, or become
incompatible with our systems.
If we or a significant third party on which we rely fails to become year
2000 ready, or if the year 2000 problem causes our systems to become internally
incompatible or incompatible with such third party systems, our business could
suffer from material disruptions, including the inability to process
transactions, send invoices, accept customer orders or provide customers with
our cable services. We could also face similar disruptions if the year 2000
problem causes general widespread problems or an economic crisis. We cannot now
estimate the extent of these potential disruptions.
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STATE OF READINESS. We are addressing the Year 2000 problem with respect
to our internal operations in three stages:
(1) conducting an inventory and evaluation of our systems, components, and
other significant infrastructure to identify those elements that
reasonably could be expected to be affected by the year 2000 problems.
This initiative has been completed;
(2) remediating or replacing equipment that will fail to operate properly
in the year 2000. We plan to be finished with the remediation by
September 1999; and
(3) testing of the remediation and replacement conducted in stage two. We
plan to complete all testing by September 1999.
Much of our assessment efforts in stage one have involved, and depend on,
inquiries to third party service providers, who are the suppliers and vendors of
various parts or components of our systems. Certain of these third parties that
have certified the readiness of their products will not certify their
interoperability within our fully integrated systems. We cannot assure you that
these technologies of third parties, on which we rely, will be year 2000 ready
or timely converted into year 2000 compliant systems compatible with our
systems. Moreover, because a full test of our systems, on an integrated basis,
would require a complete shut down of our operations, it is not practicable to
conduct such testing. However, we are utilizing a third party, in cooperation
with other cable operators, to test a "mock-up" of our major billing and plant
components, including pay-per-view systems, as an integrated system. We are
utilizing another third party to also conduct comprehensive testing on our
advertising related scheduling and billing systems. In addition, we are
evaluating the potential impact of third party failure and integration failure
on our systems.
RISKS AND REASONABLY LIKELY WORST CASE SCENARIOS. The failure to correct a
material year 2000 problem could result in system failures leading to a
disruption in, or failure of certain normal business activities or operations.
Such failures could materially and adversely affect our results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the year 2000 problem, resulting in part from the uncertainty of the year 2000
readiness of third-party suppliers and customers, we are unable to determine at
this time whether the consequences of year 2000 failures will have a material
impact on our results of operations, liquidity or financial condition. The year
2000 taskforce is expected to significantly reduce our level of uncertainty
about the year 2000 problem and, in particular, about the year 2000 compliance
and readiness of our material vendors.
We are in the process of acquiring certain cable televisions systems, and
have negotiated certain contractual rights in the acquisition agreements
relating to the year 2000. We have included the acquired cable television
systems in our year 2000 taskforce's plan. We are monitoring the remediation
process for systems we are acquiring to ensure completion of remediation before
or as we acquire these systems. We have found that these companies are following
a three stage process similar to that outlined above and are on a similar time
line. We are not currently aware of any likely material system failures relating
to the year 2000 affecting the acquired systems.
CONTINGENCY AND BUSINESS CONTINUATION PLAN. The year 2000 plan calls for
suitable contingency planning for our at-risk business functions. We normally
make contingency plans in order to avoid interrupted service providing video,
voice and data products to our customers. The normal contingency planning is
being reviewed and will be revised by
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August 1999, where appropriate, to specifically address year 2000 exposure with
respect to service to customers.
COST. We have incurred $4.9 million in costs to date directly related to
addressing the year 2000 problem. We have redeployed internal resources and have
selectively engaged outside vendors to meet the goals of our year 2000 program.
We currently estimate the total cost of our year 2000 remediation program to be
approximately $7 million. Although we will continue to make substantial capital
expenditures in the ordinary course of meeting our telecommunications system
upgrade goals through the year 2000, we will not specifically accelerate those
expenditures to facilitate year 2000 readiness, and accordingly those
expenditures are not included in the above estimate.
OPTIONS
In accordance with an employment agreement between Charter Investment and
Jerald L. Kent, the President and Chief Executive Officer of Charter Investment,
and a related option agreement between Charter Holdco and Mr. Kent, an option to
purchase 3% of the equity value of Charter Holdco was issued to Mr. Kent. The
option exercise price was equal to the fair market value at the date of grant.
The option vests over a four year period and expires ten years from the date of
grant.
In February 1999, Charter Holdings adopted an option plan providing for the
grant of options to purchase up to an aggregate of 10% of the equity value of
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. The option exercise price was equal to the
fair market value at the date of grant. Options granted vest over five years.
However, if there has not been a public offering of the equity interests of
Charter Holdco or an affiliate, vesting will occur only upon termination of
employment for any reason, other than for cause or disability. 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.
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------------------------------- -----------
NUMBER OF EXERCISE TOTAL REMAINING CONTRACT NUMBER OF
OPTIONS PRICE DOLLARS LIFE (IN YEARS) OPTIONS
---------- -------- ------------ ------------------ -----------
Outstanding as of
January 1, 1999....... 7,044,127 $20.00 $140,882,540 9.4 1,761,032
Granted:
February 2, 1999...... 9,050,881 20.00 181,017,620 9.5 --
March 5, 1999......... 443,200 20.73 9,187,536 9.7 --
---------- ------ ------------ --- ---------
Outstanding as of
June 30, 1999......... 16,538,208 $20.02 $331,087,696 9.5 1,761,032
========== ====== ============ === =========
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for the option plans. No compensation expense is
recognized in our consolidated financial statements because the option exercise
price is equal to the fair value of the underlying membership interests on the
date of grant.
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
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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, 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).
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
We sold the original notes on March 17, 1999 in a transaction exempt from
the registration requirements of the Securities Act of 1933. 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 of 1933.
In connection with the sale of original notes to the initial purchasers
pursuant to the Purchase Agreement, dated March 12, 1999, among us and Goldman,
Sachs & Co., Chase Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities LLC,
Salomon Smith Barney Inc., Credit Lyonnais Securities (USA), Inc., First Union
Capital Markets Corp., Prudential Securities Incorporated, TD Securities (USA)
Inc., CIBC Oppenheimer Corp. and Nesbitt Burns Securities Inc., the holders of
the original notes became entitled to the benefits of the exchange and
registration rights agreements dated March 17, 1999, 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 90
days after the issue date and cause the exchange offer registration statement to
become effective within 150 days after the issue date. 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 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
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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.
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 180 days after March
17, 1999,
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
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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.
INCREASE IN INTEREST RATE
If we are required to file the shelf registration statement and either
(1) 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
(2) 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
annum following such default, determined daily, from the date of such default
until the date it is cured, and by an additional 0.25% per annum for each
subsequent 90-day period. However, in no event will the interest rate borne by
the original notes be increased by an aggregate of more than 1.0% per annum.
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 9:00 a.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
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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.
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
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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 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.
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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.
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
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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 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
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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
(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 Company of New York 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 Company of New York addressed as follows:
For Information by Telephone:
(212) 701-7637
By Hand or Overnight Delivery Service:
Harris Trust Company of New York
Wall Street Plaza
88 Pine Street
19th Floor
New York, New York 10005
Attention: Reorganization Trust Department
By Facsimile Transmission:
(212) 701-7637
(Telephone Confirmation)
(212) 701-7624
Harris Trust Company of New York 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
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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 Company
of New York 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.
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.
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BUSINESS
GENERAL
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;
- high-speed Internet access; and
- interactive video programming, which allows information to flow in both
directions.
We are also exploring opportunities in telephony.
These new products and services 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.
As of March 31, 1999, we served approximately 2.3 million cable television
service customers in 22 states. We have entered into agreements to acquire
additional cable systems that would have increased the number of our customers
to 3.7 million as of that date.
For the year ended December 31, 1998, pro forma for our merger with Marcus
Holdings and the acquisitions we completed during 1998, our revenues were
approximately $1.2 billion. For the three months ended March 31, 1999, pro forma
for our merger with Marcus Holdings and the acquisitions we completed during
1999, our revenues were approximately $331 million. Pro forma for our merger
with Marcus Holdings and our recent and pending acquisitions, for the year ended
December 31, 1998, our revenues would have been approximately $1.7 billion. Pro
forma for our merger with Marcus Holdings and our recent and pending
acquisitions, for the three months ended March 31, 1999, our revenues would have
been approximately $445 million.
Paul G. Allen, the principal owner of our ultimate parent company 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:
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INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate
newly acquired cable systems and apply our core operating strategies to raise
the financial and operating performance of these systems. Our integration
process occurs in three stages:
SYSTEM EVALUATION. We conduct extensive evaluation of each system we
are considering acquiring. This process begins prior to reaching an
agreement to purchase the system and focuses on the system's:
- 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 upgrade, market positioning, new product and
service launches and human resource requirements.
IMPLEMENTATION OF OUR CORE OPERATING STRATEGIES. To achieve 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
stock 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 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.
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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 genre. In addition to these expanded cable services, 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 access and other interactive services, including EarthLink Network,
Inc., High Speed Access Corp., WorldGate Communications, Inc., Wink
Communications, Inc. and Excite@Home.
UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. Over the next three years,
we plan to spend approximately $1.2 billion to upgrade to 550 megahertz or
greater the bandwidth of the systems we acquire through our pending
acquisitions. 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 the Internet access, will not require a separate
telephone line.
As of March 31, 1999, approximately 60% of our customers were served by
cable systems with at least 550 megahertz bandwidth capacity, and approximately
35% of our customers had two-way communication capability. By year end 2003,
including all recent and pending acquisitions, we expect that approximately 94%
of our customers will be served by cable systems with at least 550 megahertz
bandwidth capacity and two-way communication capability.
Our planned upgrades will reduce the number of headends from 1,243 in 1999
to 779 in 2003 including our pending acquisitions. 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.
MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we
operate our business to provide reliable, high-quality products and service
offerings, 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, which is 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
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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
specific 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. 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 seven operating regions. A regional management team oversees
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 them 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 and cash and equity-based compensation.
Charter Holdco has adopted a plan to distribute to employees and consultants,
including members of corporate management and to key regional and system-level
management personnel equity-based incentive compensation based on the equity
value of Charter Holdco on a fully-diluted basis.
CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve
operating margins and increase operating efficiencies, we 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 enable us to improve operating efficiencies by
consolidating headends and spread fixed costs over a larger subscriber base.
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
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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 plant and infrastructure;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
See "Description of Certain Indebtedness" for a description of the material
debt that we have assumed or intend to assume in connection with our recent and
pending acquisitions.
MERGER WITH MARCUS HOLDINGS. 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 our subsidiaries. Paul G. Allen had entered into the agreement to
purchase the Marcus cable systems in April 1998. During the period of obtaining
the requisite regulatory approvals for the transaction, the Marcus systems came
under common management with us in October 1998 pursuant to the terms of a
management agreement. The Marcus systems continue to be under common operating
management with us.
RECENTLY COMPLETED ACQUISITIONS
AMERICAN CABLE. In April 1999, we purchased American Cable for
approximately $240 million. American Cable owns cable systems located in
California serving approximately 68,000 customers and is being operated as part
of our Western region. For the three months ended March 31, 1999, American Cable
had revenues of approximately $9.2 million. For the year ended December 31,
1998, American Cable had revenues of approximately $15.7 million. At year-end
1998, none of the American Cable system's customers were served by systems with
at least 550 megahertz bandwidth capacity or greater.
RENAISSANCE. In April 1999, we purchased Renaissance for approximately $459
million, consisting of $348 million in cash and $111 million of debt to be
assumed. See "Description of Certain Indebtedness." As a result of our
acquisition of Renaissance, we recently completed a tender offer for this
publicly held debt due to the change of control. Holders of notes representing
30% of the outstanding principal amount of notes tendered
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their notes. Renaissance owns cable systems located in Louisiana, Mississippi
and Tennessee, has approximately 132,000 customers and is being operated as part
of our Southern region. For the three months ended March 31, 1999, Renaissance
had revenues of approximately $15.3 million. For the year ended December 31,
1998, Renaissance had revenues of approximately $41.5 million. At year end 1998,
approximately 36% of Renaissance's customers were served by systems with at
least 550 megahertz bandwidth capacity.
GREATER MEDIA SYSTEMS. In June 1999, we purchased certain cable systems of
Greater Media for approximately $500 million. The Greater Media systems are
located in Massachusetts, have approximately 174,000 customers and are being
operated as part of our Northeast Region. For the three months ended March 31,
1999, the Greater Media systems had revenues of approximately $20.4 million. For
the year ended December 31, 1998, the Greater Media systems had revenues of
approximately $78.6 million. At year end 1998, approximately 75% of the Greater
Media systems customers were served by systems with at least 550 megahertz
bandwidth capacity.
HELICON. In July 1999, we acquired Helicon and affiliates for approximately
$550 million, consisting of $410 million in cash, $115 million of debt, and $25
million in the form of preferred limited liability company interests. The
holders of the preferred interest have the right to require Mr. Allen to
purchase the interest until the fifth anniversary of the closing of the Helicon
acquisition. The preferred interests will be redeemable at any time following
the fifth anniversary of the Helicon acquisition or upon a change of control,
and it must be redeemed on the tenth anniversary of the Helicon acquisition.
Upon completion of the proposed initial public offering of Charter
Communications, Inc., these limited liability company interests will be
convertible into equity of Charter Communications, Inc. Helicon owns cable
systems located in Alabama, Georgia, New Hampshire, North Carolina, West
Virginia, South Carolina, Tennessee, Pennsylvania, Louisiana and Vermont, has
approximately 172,000 customers and will be operated as part of our Southeast,
Southern and Northeast regions. For the three months ended March 31, 1999,
Helicon had revenues of approximately $21.3 million. For the year ended December
31, 1998, Helicon had revenues of approximately $75.6 million. At year end 1998,
approximately 69% of Helicon's customers were served by systems with at least
550 megahertz bandwidth capacity. The debt we have assumed consists of public
notes of Helicon which we are required to make an offer to repurchase at a price
equal to 101% of their principal amount, plus accrued interest, to the date of
the purchase within 120 days of the acquisition. See "Description of Certain
Indebtedness."
OTHER ACQUISITIONS. In July 1999, we acquired Vista. In August 1999, we
acquired certain cable assets of Cable Satellite. These cable systems are
located in Georgia and southern Florida, and serve a total of approximately
36,000 customers. The total purchase price for these acquisitions was
approximately $148 million. For the three months ended March 31, 1999, these
systems had revenues of approximately $3.4 million. For the year ended December
31, 1998, these systems had revenues of $9.3 million.
PENDING ACQUISITIONS
INTERMEDIA SYSTEMS. In April 1999, two of our subsidiaries, Charter
Communications, LLC, and Charter Properties, entered into agreements to purchase
certain cable systems of InterMedia in exchange for cash in the amount of $873
and certain of our cable systems. The InterMedia systems serve approximately
408,000 customers in North Carolina, South Carolina, Georgia and Tennessee. As
part of this transaction, we will "swap" some of our
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non-strategic cable systems serving approximately 142,000 customers located in
Indiana, Montana, Utah and northern Kentucky. The purchase price of the
InterMedia systems, net of the "swap," is approximately $872 million. This
transaction will result in a net increase of 266,000 customers concentrated in
our Southeast and Southern regions. For the three months ended March 31, 1999,
the InterMedia systems had revenues of approximately $48.3 million. For the year
ended December 31, 1998, the InterMedia systems had revenues of approximately
$176.1 million. At year end 1998, approximately 79% of these customers were
served by systems with at least 550 megahertz bandwidth capacity. Following
regulatory approvals, we anticipate that acquisition of the InterMedia systems
will close during the third or fourth quarter of 1999. There are no material
termination or penalty provisions in the acquisition agreements if we do not
close as of a certain date.
RIFKIN. In April 1999, Charter Investment entered into agreements to
purchase Rifkin for a purchase price of approximately $1.5 billion in cash and
assumed debt. Charter Investment has assigned its rights under such agreements
to our subsidiary, Charter Operating. Certain sellers under the agreements could
elect to receive some or all of their pro rata portion of the purchase price in
the form of preferred or common equity of Charter Holdings or, if mutually
agreed to by the parties, of a parent of Charter Holdings. Depending on the
level of seller interest, this equity, if issued, would be valued between
approximately $25 million and $240 million. The cash portion of the purchase
price would be reduced accordingly. However, because such terms have not been
finalized, and seller participation has not been determined, we cannot be
certain that any such equity will be issued or that the cash portion of the
purchase price will be reduced below $1.46 billion. The debt to be assumed
consists of public notes of Rifkin. See "Description of Certain Indebtedness."
Rifkin owns cable systems primarily in Florida, Georgia, Illinois, Indiana,
Tennessee, Virginia and West Virginia serving approximately 463,000 customers.
For the three months ended March 31, 1999, Rifkin had revenues of approximately
$50.9 million. For the year ended December 31, 1998, Rifkin had revenues of
approximately $124.4 million. At year end 1998, approximately 36% of Rifkin's
customers were served by systems with at least 550 megahertz bandwidth capacity.
Following regulatory approvals, we anticipate that this transaction will close
during the third or fourth quarter of 1999. There are no material termination or
penalty provisions in the acquisition agreements if we do not close as of a
certain date. However, each party can require specific performance.
OUR CABLE SYSTEMS
As of March 31, 1999, our systems consisted of approximately 65,900 miles
of coaxial cable and approximately 8,500 sheath miles of fiber optic cable
passing approximately 4.0 million households and serving approximately 2.3
million customers. A sheath mile is the actual length of cable in route miles.
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. 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 March 31, 1999, approximately 60% of our customers are served by systems with
at least 550 megahertz bandwidth capacity, approximately 40% have at least 750
megahertz bandwidth capacity and approximately 35% were served by systems
capable of providing two-way interactive communication capability, such as
two-way Internet connections, Wink services and
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interactive program guides. These amounts do not reflect the impact of our
recent or pending acquisitions.
CORPORATE MANAGEMENT. We are managed from the corporate offices of Charter
Investment in St. Louis, Missouri. The senior management of Charter Investment
at these offices consist of approximately 175 people led by 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 seven operating regions: Western; Central;
MetroPlex (Dallas/Fort Worth); North Central; Northeast; Southeast; and
Southern. Each of the two divisions is managed by a Senior Vice President who
reports directly to Mr. Kent and is responsible for overall supervision of the
operating regions within. 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.
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The following table provides an overview of selected technical, operating
and financial data for each of our operating regions for the three months ended
March 31, 1999. The following table does not reflect the impact of our recent or
pending acquisitions. Upon completion of our recent and pending acquisitions,
our systems will pass approximately 6.1 million homes serving approximately 3.7
million customers.
SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA BY OPERATING REGION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
NORTH
WESTERN CENTRAL METROPLEX CENTRAL NORTHEAST SOUTHEAST SOUTHERN TOTAL
------- ------- --------- ------- --------- --------- -------- ---------
TECHNICAL DATA:
Miles of coaxial cable........ 7,500 8,800 5,700 10,000 4,600 16,700 12,600 65,900
Density(a).................... 132 67 85 60 32 39 40 60
Headends...................... 21 34 16 86 7 60 59 283
Planned headend
eliminations................ 3 3 1 30 0 11 8 56
Plant bandwidth(b):
450 megahertz or less......... 21.9% 53.7% 28.0% 41.9% 51.2% 37.9% 58.2% 42.7%
550 megahertz................. 8.0% 10.2% 14.4% 12.9% 33.5% 25.6% 13.8% 16.9%
750 megahertz or greater...... 70.1% 36.1% 57.6% 45.2% 15.4% 36.5% 28.0% 40.4%
Two-way capability............ 55.6% 45.5% 62.2% 56.2% 15.4% 15.5% 19.8% 35.1%
OPERATING DATA:
Homes passed.................. 993,000 592,000 486,000 603,000 148,000 648,000 507,000 3,977,000
Basic customers............... 502,000 363,000 186,000 399,000 124,000 451,000 319,000 2,344,000
Basic penetration............. 50.6% 61.3% 38.3% 66.2% 83.8% 69.6% 62.9% 58.9%
Premium units................. 316,000 203,000 133,000 146,000 118,000 254,000 152,000 1,322,000
Premium penetration........... 62.9% 55.9% 71.5% 36.6% 95.2% 56.3% 47.6% 56.4%
FINANCIAL DATA:
Revenues, in millions(c)...... $65.7 $47.9 $25.6 $44.6 $15.9 $49.2 $37.2 $286.1
Average monthly total revenue
per customer(d)............. $43.63 $43.99 $45.88 $37.26 $42.74 $36.36 $38.87 $40.69
- -------------------------
(a) Represents homes passed divided by miles of coaxial cable.
(b) Represents percentage of basic customers within a region served by the
indicated plant bandwidth.
(c) Gives effect to all acquisitions and dispositions as if they had occurred on
January 1, 1999. See "Unaudited Pro Forma Financial Statement and Operating
Data."
(d) Represents total revenues divided by three divided by the number of
customers at period end.
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WESTERN REGION. The Western region consists of cable systems serving
approximately 502,000 customers located entirely in the state of California,
with approximately 401,000 customers located within the Los Angeles metropolitan
area. These customers reside primarily in the communities of Pasadena, Alhambra,
Glendale, Long Beach and Riverside. We also have approximately 101,000 customers
in central California, principally located in the communities of San Luis
Obispo, West Sacramento and Turlock. The Western region will also be responsible
for managing the approximately 68,000 customers associated with the recent
acquisition of American Cable and 4,000 customers associated with the pending
acquisition of Rifkin. According to National Decision Systems, the projected
median household growth in the counties currently served by this region's
systems is 5.2% for the period ending 2003, which the projected U.S. median
household growth for the same period.
The Western region's cable systems have been significantly upgraded with
approximately 78% of the region's customers served by cable systems with at
least 550 megahertz bandwidth capacity as of March 31, 1999. The planned upgrade
of the Western region's cable systems will reduce the number of headends from 21
to 18 by December 31, 2001. We expect that by December 31, 2001, 99% of this
region's customers will be served by systems with at least 550 megahertz
bandwidth capacity and two-way communication capability.
CENTRAL REGION. The Central region consists of cable systems serving
approximately 363,000 customers of which approximately 246,000 customers reside
in and around St. Louis County or in adjacent areas in Illinois, and over 94%
are served by two headends. The remaining approximately 117,000 of these
customers reside in Indiana, and these systems are primarily classic cable
systems serving small to medium-sized communities. The Indiana systems will be
"swapped" as part of the InterMedia transaction. See "-- Recent Events." The
Central region will also be responsible for managing approximately 112,000
customers associated with the pending acquisition of Rifkin. According to
National Decision Systems, the projected median household growth in the counties
currently served by this region's systems is 4.7% for the period ending 2003,
versus the projected U.S. median household growth of 5.2% for the same period.
At March 31, 1999, approximately 46% of the Central region's customers were
served by cable systems with at least 550 megahertz bandwidth capacity. The
majority of the cable plants in the Illinois systems have been upgraded to 750
megahertz bandwidth capacity. The planned upgrade of the Central region's cable
systems will reduce the number of headends from 34 to 31 by December 31, 2001.
We have begun a three-year project, scheduled for completion in 2001, to upgrade
the cable plant in St. Louis County, serving approximately 175,000 customers, to
870 megahertz bandwidth capability. We expect that by December 31, 2001,
approximately 89% of this region's customers will be served by cable systems
with at least 550 megahertz bandwidth capacity and two-way communication
capability.
METROPLEX REGION. The MetroPlex region consists of cable systems serving
approximately 186,000 customers of which approximately 129,000 are served by the
Fort Worth system. The systems in this region serve one of the fastest growing
areas of Texas. The anticipated population growth combined with the existing low
basic penetration rate of approximately 43% offers significant potential to
increase the total number of customers and the associated revenue and cash flow
in this region. According to National Decision Systems, the projected median
household growth in the counties served by this region's
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systems is 8.4% for the period ending 2003, versus the projected U.S. median
household growth of 5.2% for the same period.
The MetroPlex region's cable systems have been significantly upgraded with
approximately 72% of the region's customers served by cable systems with at
least 550 megahertz bandwidth capacity as of March 31, 1999. In 1997, we began
to upgrade the Fort Worth system to 870 megahertz of bandwidth capacity. We
expect to complete this project during 1999. The planned upgrade of the
MetroPlex region's cable systems will reduce the number of headends from 16 to
15 by December 31, 2001. We expect that by December 31, 2001, approximately 98%
of this region's customers will be served by cable systems with at least 550
megahertz bandwidth capacity and two-way communication capability.
NORTH CENTRAL REGION. The North Central region consists of cable systems
serving approximately 399,000 customers. These customers are primarily located
throughout the state of Wisconsin, along with a small system of approximately
27,000 customers in Rosemont, Minnesota, a suburb of Minneapolis. Within the
state of Wisconsin, the four largest operating clusters are located in and
around Eau Claire, Fond du Lac, Janesville and Wausau. According to National
Decision Systems, the projected median household growth in the counties served
by this region's systems is 5.4% for the period ending 2003, versus the
projected U.S. median household growth of 5.2% for the same period.
At March 31, 1999, approximately 31.8% of the North Central region's
customers were served by cable systems with at least 550 megahertz bandwidth
capacity. The planned upgrade of the North Central region's cable systems will
reduce the number of headends from 86 to 56 by December 31, 2001. We plan to
rebuild much of the region's cable plant, and expect that by December 31, 2001,
approximately 93% of this region's customers will be served by cable systems
with capacity between 550 megahertz and 750 megahertz of bandwidth capacity and
two-way communication capability.
NORTHEAST REGION. The Northeast region consists of cable systems serving
approximately 124,000 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, Massachusetts, and are included
in the New York, Hartford, and Boston areas of demographic influence. The
Northeast region will be responsible for managing the approximately 170,000
customers associated with the recent acquisition of cable systems from Greater
Media and approximately 56,000 customers associated with the pending acquisition
of Helicon. According to National Decision Systems, the projected median
household growth in the counties currently served by this region's systems is
3.7% for the period ending 2003, versus the projected U.S. median household
growth of 5.2% for the same period.
At March 31, 1999, approximately 49% of the Northeast region's customers
were served by cable systems with at least 550 megahertz of bandwidth capacity.
We have begun to rebuild this region's cable plant, and expect that by December
31, 2001, all of this region's customers will be served by cable systems with at
least 750 megahertz bandwidth capacity and two-way communication capability.
SOUTHEAST REGION. The Southeast region consists of cable systems serving
approximately 451,000 customers residing primarily in small to medium-sized
communities in North Carolina, South Carolina, Georgia and eastern Tennessee.
There are significant clusters of cable systems in and around the cities and
counties of Greenville/Spartanburg, South Carolina; Hickory and Asheville, North
Carolina; Henry County, Georgia, a suburb
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of Atlanta; and Johnson City, Tennessee. These areas have experienced rapid
population growth over the past few years, contributing to the high rate of
internal customer growth for these systems. According to National Decision
Systems, the projected median household growth in the counties currently served
by this region's systems is 6.9% for the period ending 2003, versus the
projected U.S. median household growth of 5.2% for the same period. In addition,
the Southeast region will be responsible for managing an aggregate of 541,000
customers associated with the Helicon, InterMedia, Rifkin, Vista and Cable
Satellite acquisitions.
At March 31, 1999, approximately 62% of the Southeast region's customers
were served by cable systems with at least 550 megahertz bandwidth capacity. The
planned upgrade of the Southeast region's cable systems will reduce the number
of headends from 60 to 49 by December 31, 2001. The rebuild program for this
region is anticipated to result in approximately 94% of this region's customer
base being served by December 31, 2001 served by cable systems with at least 550
megahertz bandwidth capacity and two-way communication capability.
SOUTHERN REGION. The Southern region consists of cable systems serving
approximately 319,000 customers located primarily in the states of Louisiana,
Alabama, Kentucky, Mississippi and central Tennessee. In addition, the Southern
region includes systems in Kansas, Colorado, Utah and Montana. The Southern
region has significant clusters of cable systems in and around the cities of
Birmingham, Alabama; Nashville, Tennessee; and New Orleans, Louisiana. According
to National Decision Systems, the projected median household growth in the
counties currently served by this region's systems is 6.3% for the period ending
2003, versus the projected U.S. median household growth of 5.2% for the same
period. In addition, the Southern region will be responsible for managing an
aggregate of 335,000 customers associated with the Helicon, InterMedia and
Rifkin acquisitions.
At March 31, 1999, approximately 42% of the Southern region's customers
were served by cable systems with at least 550 megahertz bandwidth capacity. The
planned upgrade of the Southeast region's cable systems will reduce the number
of headends from 59 to 51 by December 31, 2001. The rebuild program for this
region is anticipated to result in approximately 75% of this region's customer
base being served by cable systems with at least 550 megahertz bandwidth
capacity and two-way communication capability by December 31, 2001.
PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to
upgrade our existing cable plant over the next three years. As such, we intend
to invest approximately $1.8 billion through December 31, 2001, with
approximately one-half of that amount used to rebuild and upgrade our existing
cable plant. 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 and the anticipated progress of planned upgrades through 2001, based on
the percentage of our customers who will have access to the bandwidth and other
features shown:
LESS THAN 750 MEGAHERTZ TWO-WAY
550 MEGAHERTZ 550 MEGAHERTZ OR GREATER CAPABILITY
------------- ------------- ------------- ----------
March 31, 1999.............. 42.7% 16.9% 40.4% 35.1%
December 31, 1999........... 23.9% 20.1% 56.0% 65.2%
December 31, 2000........... 12.9% 22.2% 64.9% 81.4%
December 31, 2001........... 7.7% 21.5% 70.8% 91.8%
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We have adopted the hybrid fiber optic/coaxial architecture, a type of
distribution network generally referred to as the HFC architecture, as the
standard for our ongoing systems upgrades. The 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 connect fiber optic cable to individual
nodes serving an average of 800 homes or commercial buildings. 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, wide area network, which permits 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. 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 that gives the subscriber the ability to select
pay-per-view programming through the cable system without placing a
separate call, 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.
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,
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including adding new programming and other telecommunications services, and will
continue to position cable television as an essential service.
TRADITIONAL CABLE TELEVISION SERVICES. More than 85% of our customers
subscribe to both "basic" and "expanded basic" service and generally, receive a
line-up of between 33 to 85 channels of television programming, depending on the
bandwidth capacity of the system. Customers who pay additional amounts can also
subscribe for additional channels, either individually or in packages of several
channels, as add-ons to the basic channels. Approximately 25% of our customers
subscribe for premium channels, with additional customers subscribing for other
special add-on packages. We tailor both our basic line-up and our additional
channel offerings to each system in response 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. As of March 31, 1999, the average monthly fee was
$11.07 for 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. As of March 31, 1999,
the average monthly fee was $18.80 for 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 premium channel
packages. As of March 31, 1999, the average monthly fee was $6.47 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 $3 to $9 for movies. For special events,
such as championship boxing matches, we have charged a fee of up to
$49.99.
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, utilizing 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.
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 services beyond
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the traditional offerings of analog television programming for the benefit of
both our residential and commercial customers. These new products include:
- digital television and its related enhancements;
- high-speed Internet access, through television set-top converter boxes,
cable modems installed in personal computers and traditional telephone
Internet access;
- interactive services, such as Wink; and
- telephony and data transmission services which are private network
services interconnecting locations for a customer.
We believe that we are well positioned to compete with other providers of
these services due to the high bandwidth of cable technology and our ability to
access homes and businesses.
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 which is a service that allows many users to request
the same videos at the same time or anytime. We expect to increase the amount of
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 basic channels, which are marketed in systems primarily
serving rural communities;
- additional premium channels, which are marketed in systems serving both
rural and suburban communities;
- "multiplexes" of premium channels to which a customer previously
subscribed, which allows multiple channels of programming to be carried
over a common transmission medium. Consequently, programming provided by
HBO or Showtime can be varied as to time of broadcast or varied based on
programming content, and then marketed in systems serving both rural and
suburban 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 suburban communities.
As part of our current 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
of our systems also offer additional basic and expanded basic tiers of service.
These tiers of services retail for $6.95 per month. As of March 31, 1999, we had
in excess of 3,000 customers subscribing to digital services offered by eight of
our cable systems, which serve approximately 318,000 basic cable customers. By
December 31, 1999, we anticipate that approximately 734,000 of our customers
will be served by cable systems capable of delivering digital services.
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INTERNET ACCESS. We currently provide Internet access to our customers by
two principal means:
(1) through cable modems attached to personal computers, either directly or
through an outsourcing contract with an Internet service provider; and
(2) 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 service provider. Modems convert digital signals to
analog signals and vice-versa and are used to send digital data signals over the
telephone network, which is usually analog.
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 28.8 kilobits per second
telephone modem. Furthermore, a two-way communication cable system using the HFC
architecture can support the entire connection at cable modem speeds without any
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 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 cable system, we also
provide our commercial customers fiber optic cable access at a price that we
believe is less than 25% of 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 a users' connection speeds may
diminish as additional users connect through the same node. To induce users to
switch to our Internet services, however, 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.
We currently offer cable modem-based Internet access services in Lanett,
Alabama; Los Angeles and Riverside, California; Newtown, Connecticut; Newnan,
Georgia; St. Louis, Missouri; Fort Worth, Texas; and Eau Claire, Wisconsin. As
of March 31, 1999, we provided Internet access service to approximately 9,300
homes and 130 businesses. The following table indicates the historical and
projected availability of Internet access services to our existing customer base
as of the dates indicated. These numbers reflect the number
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of our customers who have access to these services provided through us. The
percentage of these customers who have subscribed for these services is
currently a small percentage.
BASIC CUSTOMERS WITH ADVANCED
SERVICES AVAILABLE AS OF
----------------------------------
MARCH 31, 1999 DECEMBER 31, 1999
-------------- -----------------
(PROJECTED)
High-speed internet access via cable modems:
EarthLink/Charter Pipeline..................... 413,000 740,000
High Speed Access.............................. 15,000 640,000
Excite@Home.................................... 159,000 270,000
---------- ---------
Total cable modems.......................... 559,000 1,534,000
========== =========
Internet Access via WorldGate.................... 230,000 854,000
---------- ---------
- CABLE MODEM-BASED INTERNET ACCESS. Generally, we offer Internet access
through cable modems to our customers in systems that have been upgraded to at
least 550 megahertz bandwidth capacity. We have an agreement with EarthLink, an
independent Internet service provider, to provide as a private label service
Charter Pipeline(TM), which is a cable modem-based, high-speed Internet access
service we offer. We currently charge a monthly usage fee of between $24.95 and
$34.95. Our customers have the option to lease a cable modem for $10 to $15 a
month or to purchase a modem for between $300 and $400. As of March 31, 1999, we
offered EarthLink Internet access to approximately 421,000 of our homes passed
and have approximately 5,300 customers.
We have a relationship with High Speed Access 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(TM) 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 turnkey
service, 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. Turnkey service
is a complete service, including sales, marketing, installation, service and
support. We receive 50% of the monthly $39.95 service fee. As of March 31, 1999,
High Speed Access offers Internet access to approximately 225,000 of our homes
passed and approximately 3,000 customers have signed up for the service. During
1999, High Speed Access plans to launch this service in an additional 29
systems, covering approximately 415,000 additional homes passed. Vulcan
Ventures, Inc., a company controlled by Paul G. Allen, has an equity investment
in High Speed Access. See "Certain Relationships and Related Transactions."
We also have a revenue sharing agreement with Excite@Home, under which
Excite@Home currently 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 the cable
infrastructure. As of March 31, 1999, we offered the @Home broadband Internet
service to approximately 159,000 of our homes passed and have approximately
2,000 customers.
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As of March 31, 1999, we provided Internet access to approximately 100
commercial customers. We actively market our cable modem service to businesses
in every 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, which permit networks of computers to be connected within a given area
and are more commonly referred to as LANs. These LANs are established for
municipal and educational facilities, including Cal Tech, the City of Pasadena
and the City of West Covina in our Los Angeles cluster.
- TV-BASED INTERNET ACCESS THROUGH WORLDGATE. 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 e-mail and Internet access without using a
PC, obtaining an additional telephone line or tying up an existing line, or
purchasing 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, which interfaces
with the box. WorldGate works on both advanced analog and digital platforms and,
therefore, can be installed utilizing the analog converters already deployed.
Analog converters are devices to convert analog signals to digital signals. 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 users who prefer this more user-friendly interface. Of these users,
41% use WorldGate at least once a day, and 77% use it at least once a week.
Although the WorldGate service bears the WorldGate brand name, the Internet
"domain name" of the customers who use this service is "Charter.net." This
allows the customer 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 our systems in Logan, Utah, Maryville, Illinois and Newtown, Connecticut, and
plan to introduce it in eight additional systems by December 31, 1999. Charter
Investment owns a minority interest in WorldGate. See "Certain Relationships and
Related Transactions." As of March 31, 1999, we provided WorldGate Internet
service to approximately 1,800 customers.
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
converter 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 service with our traditional cable services in both our advanced
analog and digital platforms. Wink services
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are provided free of charge. Vulcan Ventures, Inc., a company controlled by Paul
G. Allen, has made an equity investment in Wink. See "Certain Relationships and
Related Transactions."
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. Each time one of our
customers uses Wink to request certain additional information or order an
advertised product we receive fees from Wink.
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. Traditional
switching technologies include standard technologies used to connect public
switch telephone networks. 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 Marcus FiberLink LLC, one of our subsidiaries.
A competitive access provider provides telecommunication connection to the
Internet. We are currently looking to expand our services as a competitive
access provider into other states.
MISCELLANEOUS SERVICES. We also offer paging services to our customers in
certain markets. As of March 31, 1999, we had approximately 9,300 paging
customers. We also lease our fiber-optic cable plant and equipment to commercial
and non-commercial users of data and voice telecommunications services.
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. Our
on-time service call rate was 99.8% in 1997, and 99.7% in 1998.
As of March 31, 1999, we maintained eight call centers located in our seven
regions, which are responsible for handling call volume for more than 58% 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 in equipment to ensure that these call centers are professionally
managed and employ state-of-the-art technology. We also maintain approximately
143 field offices, and employ approximately 1,200 customer service
representatives throughout the systems. 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. We
have approximately 2,300 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
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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 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 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;
- - create a variety of service packages to promote the sale of premium services
and niche programming;
- - offer customers more value through discounted bundling of products;
- - deepen the penetration of the advanced digital platform within the home;
- - target households based on demographic data;
- - develop specialized programs to attract former customers, those that have
never subscribed and illegal users of the service; and
- - employ Charter branding of products to promote customer awareness and loyalty.
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We have innovative marketing programs which utilize market research on
selected systems, compare the data to national research and tailor a marketing
program for individual markets. We gather detailed customer information through
our regional marketing representatives and use Claritas Corporation's
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.
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 those customers that have children under a specified age who do not
currently subscribe to The Disney Channel, which then enables us to target our
marketing efforts with respect to The Disney Channel to specific addresses. In
1998, we were chosen by Claritas, 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.
Our marketing professionals have also received numerous industry awards
within the last two years, including the Cable and Telecommunication Association
of Marketers' awards for consumer research and best advertising and marketing
programs.
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
premium household penetration, premium revenue and cash flow. As a result of
this package, HBO recognized us as a top performing customer. 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 utilize 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, "nevers" are the most difficult
customer to attract. Furthermore, we have succeeded in retaining these "nevers."
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
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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. See "-- Sales and Marketing."
PROGRAMMING SOURCES. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. We obtain approximately
50% of our programming through contracts entered into directly with a
programming supplier. We obtain 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. 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 expenses associated with the channel launch. The amounts
we receive in distribution fees are not significant. For home shopping channels,
we may receive a percentage of the amount spent in home shopping purchases by
our customers on channels we carry. In 1998, pro forma for our merger with
Marcus Holdings such revenues totalled approximately $5 million.
Our programming contracts generally continue for a fixed period of time,
usually from three to ten years. 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.
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.
The combined programming cost of Charter Holdings, CCA Group and CharterComm
Holdings were equal to approximately 21% of revenues in 1998. 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 now contract through TeleSynergy for more approximately 50% of our
programming. We believe our partnership in TeleSynergy limits increases in our
programming costs relative to what the increases would otherwise be, although
given our increased size and purchasing ability, the effect may not be material.
This is because some programming suppliers offer advantageous pricing terms to
cable operators whose number of customers exceeds threshholds
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established by such programming suppliers. Our increase in size in 1999 should
provide increased bargaining power resulting in an ability to limit increases in
programming costs. Management believes it will, as a general matter, be able to
pass increases in its programming costs through to customers, although we cannot
assure you that it will be possible.
RATES
Pursuant to the FCC'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 a 11.25% rate of return and have
unbundled these charges from the charges for the provision of cable service.
Rates charged to customers vary based on the market served and service
selected, and are typically adjusted on an annual basis. As of March 31, 1999,
the average monthly fee was $11.07 for basic service and $18.80 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 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 fashion 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 March 31, 1999, our systems operated pursuant to an aggregate of
1,158 franchises, permits and similar authorizations issued by local and state
governmental authorities. Each franchise is awarded by a governmental authority
and is usually not transferable unless the granting governmental authority
consents. Most franchises are subject to termination proceedings in the event of
a material breach. In addition, most franchises require us to pay the granting
authority a franchise fee of up to 5.0% of gross revenues generated by cable
television services under the franchise (i.e., the maximum amount that may be
charged under the Communications Act).
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Our franchises have terms which range from 4 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. See "Risk Factors--Our
Industry--Our franchises are subject to non-renewal or termination." The
following table summarizes our systems' franchises by year of expiration, and
approximate number of basic customers as of March 31, 1999, and does not reflect
acquisitions completed in 1999 or our pending acquisitions.
PERCENTAGE PERCENTAGE
NUMBER OF OF TOTAL TOTAL BASIC OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS CUSTOMERS
- ---------------------------- ---------- ---------- ----------- ----------
Prior to December 31, 1999...... 127 11% 328,000 14%
2000 to 2002.................... 214 18% 516,000 22%
2003 to 2005.................... 239 21% 445,000 19%
2006 or after................... 578 50% 1,055,000 45%
Total...................... 1,158 100% 2,344,000 100%
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises in order to provide telecommunications services, and granting
authorities are prohibited from limiting, restricting or conditioning the
provision of such services. In addition, 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 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 digital television, Internet access, interactive services and
Internet protocol telephony, we face competition from other cable
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systems operators providing such services as well as from other providers of
each type of service we will provide.
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, customers will come to expect a variety of services from a single
provider. While the TCI/AT&T merger has 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 a traditional "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. The recent licensing of digital spectrum by the Federal
Communications Commission will provide incumbent television broadcast licensees
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, is a satellite service of
one or more entertainment or information program channels that can be received
directly using an antenna on the subscriber's premises. 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 approximately 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 cable system. DBS, however, is limited in the local
programming it can provide because of the current capacity limitations of
satellite technology. In addition, existing copyright rules restrict the ability
of DBS providers to offer local broadcast programming. Congress is now
considering legislation that would remove these legal obstacles. After recent
mergers, the two primary DBS providers are DirecTV, Inc., and EchoStar
Communications Corporation. America Online Inc., the nation's leading provider
of Internet services has recently announced a plan to invest $1.5 billion in
Hughes Electronics Corp., DirecTV, Inc.'s parent company, and these companies
intend to jointly market America Online's prospective Internet television
service to DirecTV's DBS customers.
- 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. Although still relatively
uncommon, it is possible that a franchising authority, which is the government
entity that grants a cable operator a franchise to construct and operate a cable
television system within the bounds of that entity's governmental authority,
might grant a second franchise to another cable operator. 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
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system, may be able to avoid local franchising requirements. Well financed
businesses from outside the cable industry, such as the public 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. 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.
We are aware of overbuild situations in six of our systems located in
Newnan, Columbus and West Point, Georgia; Barron, Wisconsin; and Lanett and
Valley, Alabama. Approximately 44,000 basic customers, 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 four of our systems located in Southlake, Roanoke and Keller,
Texas and Willimantic, Connecticut. These potential overbuild areas service an
aggregate of approximately 45,000 basic customers or approximately 1.9% 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 each of these systems to at least 750
megahertz two-way HFC architecture, with the exceptions of our systems in
Columbus, Georgia, and Willimantic, Connecticut. Upgrades to at least 750
megahertz two-way HFC architecture with respect to these two systems are
expected to be completed by December 31, 2000 and December 31, 2001,
respectively.
- TELEPHONE COMPANIES. The competitive environment has been significantly
affected both by 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 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 franchised, 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. 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
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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, is likely to become more widespread and could
adversely affect the profitability and valuation of the systems.
- SMATV. Additional competition is posed by satellite master antenna
television systems, known as "SMATV systems," serving multiple dwelling units.
SMATV systems are systems using one central antenna to receive signals and
deliver them to a concentrated grouping of television sets. Multiple dwelling
units are units that include condominiums, apartment complexes and private
residential communities. These private cable systems may enter into exclusive
agreements with multiple dwelling units, which may preclude us from serving
residents of these private complexes. These 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. In addition, some of our
current and potential competitors may be exempt from some or all of the
regulations that we are subject to, and this could provide these competitors
with a competitive advantage to certain of our current and potential
competitors.
- 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 is a collection of
various distribution services and microwave radio authorizations that can be
combined to provide up to 28 channels of entertainment, education and
information. 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. While no longer as significant
a competitor, 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 plant and
equipment, including signal receiving, encoding and decoding devices, headend
reception facilities, distribution systems and customer drop equipment for each
of its 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. The physical components of our
cable television systems require maintenance and periodic upgrading to keep pace
with technological advances. We own or lease real property for signal reception
sites and business offices in many of the communities served by its systems and
for its principal executive offices. We own most of our service vehicles.
We own the real property housing our regional data center in Town &
Country, Missouri, as well as the regional office for the Northeast Region in
Newtown, Connecticut and additional owned real estate located in Hickory, North
Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo,
California. In addition, we lease
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space for our regional data center located in Dallas, Texas and additional
locations for business offices throughout our operating regions. 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.
All of our properties and assets are subject to liens securing payment of
indebtedness under the existing credit facilities. We believe that our
properties are in good operating condition and are suitable and adequate for our
business operations.
EMPLOYEES
Neither Charter Holdings nor Charter Capital has any employees. As of March
31, 1999, our operating subsidiaries had approximately 4,770 full-time
equivalent employees of which 265 were represented by the International
Brotherhood of Electrical Workers. We believe we have a good relationship with
such employees and have never experienced a work stoppage.
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.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 to register this exchange offer. This prospectus, which
forms a part of the registration statement, does not contain all the information
included in that registration statement. For further information about us and
the new notes offered in this prospectus, you should refer to the registration
statement and its exhibits. You may read and copy any document we file with the
Securities and Exchange Commission at the public reference facilities maintained
by the Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Securities and Exchange Commission's regional
offices at 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326-1232.
Copies of such material may be obtained from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You can also review such material by accessing the
Securities and Exchange Commission's internet web site at http://www.sec.gov.
This site contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Securities and
Exchange Commission.
We intend to furnish to each holder of the new notes annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year. We will also furnish to each holder of the new notes such other reports as
may be required by law.
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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 Telecommunications Act of 1996 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 are subject to rate regulation, unless they face "effective competition"
in their local franchise area. Federal law now defines "effective competition"
on a community-specific basis as requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the Federal Communications Commission has 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 -- 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 March 31, 1999, local franchising authorities covering approximately
42% of our systems' subscribers 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 rates in the future.
The Federal Communications Commission itself directly administers rate
regulation of cable programming service tiers, which is expanded basic
programming offering more services than basic programming, which typically
contain satellite-delivered programming. Under the 1996 Telecom Act, the Federal
Communications Commission can regulate cable programming service tier rates only
if a local franchising authority first receives at least two rate complaints
from local subscribers and then files a formal complaint with the Federal
Communications Commission. When new cable programming service tier rate
complaints are filed, the Federal Communications Commission considers only
whether the
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incremental increase is justified and it will not reduce the previously
established cable programming service tier rate. We currently have 45 rate
complaints relating to approximately 400,000 subscribers pending at the Federal
Communications Commission. Significantly, the Federal Communications
Commission's authority to regulate cable programming service tier rates expired
on March 31, 1999. The Federal Communications Commission has taken the position
that it will still adjudicate cable programming service tier complaints filed
after this sunset date, but no later than 180 days after the last cable
programming service tier rate increase imposed prior to March 31, 1999, and will
strictly limit its review, and possibly 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, which is the rate
regulation of a particular level of packaged programming services, typically
referring to the expanded basic level of services, in a prospective basis
affords us substantially greater pricing flexibility.
Under the rate regulations of the Federal Communications 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, as do affirmatively
marketed packages consisting entirely of new programming product. 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, FCC regulation of cable programming service tier rates for
all systems, regardless of size, sunset pursuant to the 1996 Telecom Act on
March 31, 1999. Certain legislators, however, have called for new rate
regulations if unregulated cost rates increase dramatically. 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 telecommunication 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 telecommunication
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
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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 recently
clarified that a cable operator's favorable pole rates are not endangered by the
provision of Internet access.
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. In July
1997, the Eighth Circuit Court of Appeals vacated certain aspects of the Federal
Communications Commission initial interconnection order but most of that
decision was reversed by the U.S. Supreme Court in January 1999. The Supreme
Court effectively 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 whether the Federal Communications
Commission ultimately can mandate that incumbent carriers make available
specific network elements, remains subject to further Federal Communications
Commission review. Aggressive regulation by the Federal Communications
Commission in this area, if upheld by the courts, 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 a report to Congress 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. Certain Internet
service providers also are attempting to use existing commercial leased access
provisions to gain access to cable system delivery. A petition on this issue is
now pending before the Federal Communications Commission. Finally, some local
franchising authorities are considering the imposition of mandatory Internet
access requirements as part of cable franchise renewals or transfers. A federal
district court in Portland, Oregon recently upheld the legal ability of local
franchising authority to impose such conditions, but an appeal has been filed.
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.
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, and certain local
exchange carriers have begun offering cable service.
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Various local exchange carriers currently are seeking to provide 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 recently reversed
certain of the Federal Communications Commission's open video system rules,
including its preemption of local franchising. That decision may be subject to
further appeal. 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. 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. Although the 1992 Cable Act also precluded any cable operator from
serving more than 30% of all U.S. domestic cable subscribers, this provision has
been stayed pending further judicial review and Federal Communications
Commission rulemaking.
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
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a "must carry" status or a "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. A new request has been forwarded to the Federal
Communications Commission, however, requesting 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
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. Recently, there has
been increased interest 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.
INSIDE WIRING; SUBSCRIBER ACCESS. In a 1997 Order, the Federal
Communications Commission established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the cable operator in
a multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing
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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
- 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
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control, would be unbundled from basic converter functions, which could then be
satisfied by third party vendors. 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 Association of Songwriters, Composers, Artists and Producers
and Broadcast Music, Inc.. The cable industry and Broadcast Music have reached a
standard licensing agreement, and negotiations with the Association of
Songwriters are ongoing. Although we cannot predict the ultimate outcome of
these industry negotiations 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 television 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 of programming.
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.
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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, cable operators are not required to obtain
franchises for the provision of telecommunications services, and local
franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of such services. 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.
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MANAGEMENT
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 has no
operations. Neither Charter Holdings nor Charter Capital has any employees. We
are managed by Charter Investment pursuant to a management agreement between
Charter Investment and Charter Operating, covering all of our operating
subsidiaries. See "Certain Relationships and Related Transactions."
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors who are responsible for providing significant services
with respect to our management and operations. There are two directors of
Charter Holdings, one director of Charter Capital and three directors of Charter
Investment.
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- --- --------
Paul G. Allen............................. 46 Chairman of the Board of Charter Investment
William D. Savoy.......................... 34 Director of Charter Holdings and Charter
Investment
Jerald L. Kent............................ 43 President, Chief Executive Officer and Director
of Charter Holdings, Charter Capital and Charter
Investment
Barry L. Babcock.......................... 52 Vice Chairman of Charter Investment
Howard L. Wood............................ 60 Vice Chairman of Charter Investment
David G. Barford.......................... 40 Senior Vice President Operations of Charter
Investment -- Western Division
Mary Pat Blake............................ 44 Senior Vice President -- Marketing and
Programming of Charter Investment
Eric A. Freesmeier........................ 46 Senior Vice President -- Administration of
Charter Investment
Thomas R. Jokerst......................... 50 Senior Vice President -- Advanced Technology
Development of Charter Investment
Kent D. Kalkwarf.......................... 39 Senior Vice President and Chief Financial Officer
of Charter Holdings, Charter Capital and Charter
Investment
Ralph G. Kelly............................ 42 Senior Vice President -- Treasurer of Charter
Holdings, Charter Capital and Charter Investment
David L. McCall........................... 44 Senior Vice President Operations of Charter
Investment -- Eastern Division
John C. Pietri............................ 49 Senior Vice President -- Engineering of Charter
Investment
Steven A. Schumm.......................... 46 Executive Vice President, Assistant to the
President of Charter Holdings, Charter Capital
and Charter Investment
Curtis S. Shaw............................ 50 Senior Vice President, General Counsel and
Secretary of Charter Holdings, Charter Capital
and Charter Investment
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The following sets forth certain biographical information with respect to
the executive officers named in the chart above.
PAUL G. ALLEN is the Chairman of the board of directors of Charter
Investment. Mr. Allen 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. Such companies include Interval Research Corporation, of
which Mr. Allen is a director, Vulcan Ventures, Inc., of which Mr. Allen is the
President, Chief Executive Officer and Chairman of the Board, Vulcan Northwest,
Inc., of which Mr. Allen is the Chairman of the Board, and Vulcan Programming,
Inc. In addition, Mr. Allen is the owner and the Chairman of the Board of the
Portland Trail Blazers of the National Basketball Association, and is the owner
and the Chairman of the Board of the Seattle Seahawks of the National Football
League. Mr. Allen currently serves as a director of Microsoft Corporation and
USA Networks, Inc. and also serves as a director of various private
corporations.
WILLIAM D. SAVOY is a director of Charter Holdings and Charter Investment.
Mr. Savoy is also Vice President and a director of Vulcan Ventures, President of
Vulcan Northwest and President and a director of Vulcan Programming, since 1990.
From 1987 until November 1990, Mr. Savoy was employed by Layered, Inc. and
became its President in 1988. Mr. Savoy serves on the Advisory Board of
DreamWorks SKG and also serves as director of Harbinger Corporation, High Speed
Access Corp., Metricom, Inc., Telescan, Inc., Ticketmaster Online -- CitySearch,
U.S. Satellite Broadcasting Co., Inc., and USA Networks, Inc. Mr. Savoy holds a
B.S. in Computer Science, Accounting and Finance from Atlantic Union College.
JERALD L. KENT is a co-founder of Charter Investment, and President and
Chief Executive Officer and director of Charter Holdings, Charter Capital and
Charter Investment and has previously held the position of Chief Financial
Officer of Charter Investment. Prior to co-founding Charter Investment, Mr. Kent
was associated with Cencom Cable Associates, Inc., where he served as Executive
Vice President and Chief Financial Officer. Mr. Kent also served Cencom as
Senior Vice President of Finance from May 1987, Senior Vice President of
Acquisitions and Finance from July 1988, and Senior Vice President and Chief
Financial Officer from January 1989. Mr. Kent is a member of the board of
directors of High Speed Access Corp. and Cable Television Laboratories. Prior to
that time, Mr. Kent was employed by Arthur Andersen LLP, certified public
accountants, where he attained the position of tax manager. Mr. Kent, a
certified public accountant, received his undergraduate and M.B.A. degrees with
honors from Washington University (St. Louis).
BARRY L. BABCOCK is a co-founder of Charter Investment and Vice Chairman of
Charter Investment and has been involved in the cable industry since 1979. Prior
to founding Charter Investment in 1994, Mr. Babcock was associated with Cencom,
where he served as the Executive Vice President from February 1986 to September
1991, and was named Chief Operating Officer in May of 1986. Mr. Babcock was one
of the founders of Cencom Cable Associates, Inc. and, prior to the duties he
assumed in early 1986, was responsible for all of Cencom's in-house legal work,
contracts and governmental relations. Mr. Babcock serves as the Chairman of the
board of directors of Community Telecommunications Association. He also serves
as a director of the National Cable Television Association, Cable in the
Classroom and Mercantile Bank -- St. Louis. Mr. Babcock, an attorney, received
his undergraduate and J.D. degrees from the University of Oklahoma.
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HOWARD L. WOOD is a co-founder of Charter Investment and Vice Chairman of
Charter Investment. Prior to founding Charter Investment, Mr. Wood was
associated with Cencom. Mr. Wood joined Cencom as President, Chief Financial
Officer and Director and assumed the additional position of Chief Executive
Officer effective January 1, 1989. Prior to that time, Mr. Wood was a partner in
Arthur Andersen LLP, certified public accountants, where he served as
Partner-in-Charge of the St. Louis Tax Division from 1973 until joining Cencom.
Mr. Wood is a certified public accountant and a member of the American Institute
of Certified Public Accountants. He also serves as a director of VanLiner Group,
Inc., First State Bank and Gaylord Entertainment Company. Mr. Wood also serves
as Commissioner for the Missouri Department of Conservation. He is also a past
Chairman of the Board and former director of the St. Louis College of Pharmacy.
Mr. Wood graduated with honors from Washington University (St. Louis) School of
Business.
DAVID G. BARFORD is Senior Vice President Operations of Charter
Investment -- Western Division, where he has primary responsibility for all
cable operations in the Central, Western, North Central and MetroPlex Regions.
Prior to joining Charter Investment, he served as Vice President of Operations
and New Business Development for Comcast Cable, where he held various senior
marketing and operating roles over an eight-year period. Mr. Barford received a
B.A. degree from California State University, Fullerton and an M.B.A. from
National University in La Jolla, California.
MARY PAT BLAKE is Senior Vice President -- Marketing and Programming of
Charter Investment and is responsible for all aspects of marketing, sales and
programming and advertising sales. Prior to joining Charter Investment in August
1995, Ms. Blake was active in the emerging business sector, and formed Blake
Investments, Inc. in September 1993, which created, operated and sold a branded
coffeehouse and bakery. From September 1990 to August 1993, Ms. Blake served as
Director -- Marketing for Brown Shoe Company. Ms. Blake has 18 years of
experience with senior management responsibilities in marketing, sales, finance,
systems, and general management with companies such as The West Coast Group,
Pepsico Inc.-Taco Bell Division, General Mills, Inc. and ADP Network Services,
Inc. Ms. Blake received a B.S. degree from the University of Minnesota, and an
M.B.A. degree from the Harvard Business School.
ERIC A. FREESMEIER joined Charter Investment as Senior Vice President --
Administration in April 1998 and is responsible for human resources, public
relations and communications, corporate facilities and aviation. From 1986 until
joining Charter Investment, he served in various executive management positions
at Edison Brothers Stores, Inc., a specialty retail company. His most recent
position was Executive Vice President -- Human Resources and Administration.
From 1974 to 1986, Mr. Freesmeier held management and executive positions with
Montgomery Ward, a national mass merchandise retailer, and its various
subsidiaries. Mr. Freesmeier holds Bachelor of Business degrees in marketing and
industrial relations from the University of Iowa and a Masters of Management
degree in finance from Northwestern University's Kellogg Graduate School of
Management.
THOMAS R. JOKERST is Senior Vice President -- Advanced Technology
Development of Charter Investment. Prior to his appointment to this position,
Mr. Jokerst held the position of Senior Vice President -- Engineering since
December 1993. Prior to joining Charter Investment, from March 1991 to March
1993, Mr. Jokerst served as Vice President -- Office of Science and Technology
for CableTelevision Laboratories in Boulder, Colorado. From June 1976 to March
1993, Mr. Jokerst was Director of Engineering for the midwest
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region of Continental Cablevision. Mr. Jokerst participates in professional
activities with the NCTA, SCTE and Cable Television Laboratories. Mr. Jokerst is
a graduate of Ranken Technical Institute in St. Louis with a degree in
Communications Electronics and Computer Technology and of Southern Illinois
University in Carbondale, Illinois with a degree in Electronics Technology.
KENT D. KALKWARF is Senior Vice President and Chief Financial Officer of
Charter Holdings, Charter Capital and Charter Investment. Prior to joining
Charter Investment, Mr. Kalkwarf was a senior tax manager for Arthur Andersen
LLP, from 1982 to July 1995. Mr. Kalkwarf has extensive experience in cable,
real estate and international tax issues. Mr. Kalkwarf has a B.S. degree from
Illinois Wesleyan University and is a certified public accountant.
RALPH G. KELLY is Senior Vice President -- Treasurer of Charter Holdings,
Charter Capital and Charter Investment. Mr. Kelly joined Charter Investment in
1993 as Vice President -- Finance, a position he held until early 1994 when he
became Chief Financial Officer of CableMaxx, Inc., a wireless cable television
operator. Mr. Kelly returned to Charter Investment as Senior Vice
President -- Treasurer in February 1996, and has responsibility for treasury
operations, investor relations and financial reporting. From 1984 to 1993, Mr.
Kelly was associated with Cencom where he held the positions of Controller from
1984 to 1989 and Treasurer from 1990 to 1993. Mr. Kelly is a certified public
accountant and was in the audit division of Arthur Andersen LLP from 1979 to
1984. Mr. Kelly received his undergraduate degree in accounting from the
University of Missouri -- Columbia and his M.B.A. from Saint Louis University.
DAVID L. MCCALL is Senior Vice President Operations of Charter
Investment -- Eastern Division. Mr. McCall joined Charter Investment in January
1995 as Regional Vice President Operations and he has primary responsibility for
all cable system operations managed by Charter Investment in the Southeast,
Southern and Northeast Regions of the United States. Prior to joining Charter
Investment, Mr. McCall was associated with Crown Cable and its predecessor
company, Cencom, from 1983 to 1994. As a Regional Manager of Cencom, Mr.
McCall's responsibilities included supervising all aspects of operations for
systems located in North Carolina, South Carolina and Georgia, consisting of
over 142,000 customers. From 1977 to 1982, Mr. McCall was System Manager of
Coaxial Cable Developers (known as Teleview Cablevision) in Simpsonville, South
Carolina. Mr. McCall has served as a director of the South Carolina Cable
Television Association for the past ten years.
JOHN C. PIETRI joined Charter Investment in November 1998 as Senior Vice
President -- Engineering. Prior to joining Charter Investment, Mr. Pietri was
with Marcus in Dallas, Texas for eight years, most recently serving as Senior
Vice President and Chief Technical Officer. Prior to Marcus, Mr. Pietri served
as Regional Technical Operations Manager for West Marc Communications in Denver,
Colorado, and before that he served as Operations Manager with Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
STEVEN A. SCHUMM is Executive Vice President, Assistant to the President of
Charter Holdings, Charter Capital and Charter Investment. Mr. Schumm joined
Charter Investment in December 1998 and currently directs the MIS Regulatory and
Financial Controls Groups. Prior to joining Charter Investment, Mr. Schumm was
managing partner of the St. Louis office of Ernst & Young LLP. Mr. Schumm was
with Ernst & Young LLP for 24 years and was a partner of the firm for 14 of
those years. Mr. Schumm held various management positions with Ernst & Young
LLP, including the Director of Tax
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Services for the three-city area of St. Louis, Kansas City and Wichita and then
National Director of Industry Tax Services. He served as one of 10 members
comprising the Firm's National Tax Committee. Mr. Schumm earned a B.S. degree
from St. Louis University with a major in accounting.
CURTIS S. SHAW is Senior Vice President, General Counsel and Secretary of
Charter Holdings, Charter Capital and Charter Investment and is responsible for
all legal aspects of their businesses, government relations and the duties of
the corporate secretary. Mr. Shaw joined Charter Investment in February 1997.
Prior to joining Charter Investment, Mr. Shaw served as corporate Counsel to
NYNEX since 1988. From 1983 until 1988 Mr. Shaw served as Associate General
Counsel for Occidental Chemical Corporation, and, from 1986 until 1988, also as
Vice President and General Counsel of its largest operating division. Mr. Shaw
has 25 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.
DIRECTOR COMPENSATION
The directors of Charter Holdings and Charter Capital are not entitled to
any compensation for serving as a director, nor are they paid any fees for
attendance at any meeting of the board of directors. Directors may be reimbursed
for the actual reasonable costs incurred in connection with attendance at such
board meetings.
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. Such executive officers receive their compensation from
Charter Investment, except for Mr. McCall, who is compensated by an operating
subsidiary. Charter Investment is entitled to receive management fees from us
for providing its management and consulting services. See "Certain Relationships
and Related Transactions."
The following table sets forth information regarding the compensation paid
by Charter Investment during its last completed fiscal year to the President and
Chief Executive Officer and each of the other four most highly compensated
executive officers as of December 31, 1998. This compensation was paid to these
executive officers by certain of our subsidiaries and affiliates for their
services to these entities.
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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............ 1998 790,481 641,353 -- 7,044,127(1) 4,918(2)
President and Chief
Executive Officer
Barry L. Babcock.......... 1998 575,000 925,000(3) -- -- 6,493(4)
Vice Chairman
Howard L. Wood............ 1998 575,000 675,000(5) -- -- 8,050(6)
Vice Chairman
David G. Barford.......... 1998 220,000 225,000(7) -- -- 4,347(8)
Senior Vice President of
Operations -- Western
Division
Curtis S. Shaw............ 1998 190,000 80,000 -- -- 3,336(9)
Senior Vice President,
General Counsel and
Secretary
- ---------------
(1) Options for Charter Holdco units granted pursuant to an employment
agreement and related option agreement.
(2) Includes $4,000 in 401(k) plan matching contribution and $918 in life
insurance premiums.
(3) Includes $500,000 earned as a one-time bonus upon signing of an employment
agreement.
(4) Includes $4,000 in 401(k) plan matching contributions and $2,493 in life
insurance premiums.
(5) Includes $250,000 earned as a one-time bonus upon signing of an employment
agreement.
(6) Includes $4,000 in 401(k) plan matching contributions and $4,050 in life
insurance premiums.
(7) Includes $150,000 received as a one-time bonus after completion of three
years of employment.
(8) Includes $4,000 in 401(k) plan matching contribution and $347 in life
insurance premiums.
(9) Includes $2,529 in 401(k) plan matching contribution and $807 in life
insurance premiums.
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1998 OPTION GRANTS
The following table shows individual grants of options made to certain
executive officers during the fiscal year ended December 31, 1998.
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
MEMBERSHIP % OF TOTAL OF MEMBERSHIP INTEREST
INTERESTS OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------------
NAME GRANTED IN 1998 PRICE DATE 5% 10%
- ---- ---------- ------------ ----------- ---------- ----------- ------------
Jerald L. Kent....... 7,044,127(2) 100% $20.00 12/22/08 $88,600,272 $224,530,486
Barry L. Babcock..... -- -- -- -- -- --
Howard L. Wood....... -- -- -- -- -- --
David G. Barford..... -- -- -- -- -- --
Curtis S. Shaw....... -- -- -- -- -- --
- ---------------
(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 Securities and Exchange Commission and do not represent our estimate
or projection of future prices.
(2) Options for Charter Holdco units granted pursuant to an employment agreement
and a related option agreement which amends the options granted under the
employment agreement. The agreements provide that Mr. Kent receive an option
to purchase 3% of the equity value of all of the cable systems managed by
Charter Investment. Accordingly, Mr. Kent has an option to purchase 3% of
the membership interests of Charter Holdco. The option has a term of 10
years and vests one fourth on December 23, 1998, with the remaining vesting
monthly at a rate of 1/36th on the first of each month for months 13 through
48.
1998 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE
The following table sets forth for certain executive officers information
concerning the options granted during the fiscal year ended December 31, 1998,
and the value of unexercised options as of December 31, 1998.
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, 1998 DECEMBER 31, 1998(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Jerald L. Kent.................. 1,761,032 5,283,095 -- --
Barry L. Babcock................ -- -- -- --
Howard L. Wood.................. -- -- -- --
David G. Barford................ -- -- -- --
Curtis S. Shaw.................. -- -- -- --
- ---------------
(1) No options were in-the-money as of December 31, 1998.
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1999 OPTION GRANTS
The following table shows individual grants of options made to certain
executive officers during 1999, as of June 30, 1999. All such grants were made
under the option plan.
NUMBER OF
MEMBERSHIP
INTERESTS
UNDERLYING
OPTIONS EXERCISE EXPIRATION
NAME GRANTED PRICE DATE
- ---- ---------- ----------- ----------
Jerald L. Kent..................................... -- --
Barry L. Babcock................................... 65,000 $20.00 2/9/09
Howard L. Wood..................................... 65,000 20.00 2/9/09
David G. Barford................................... 200,000 20.00 2/9/09
Curtis S. Shaw..................................... 200,000 20.00 2/9/09
OPTION PLAN
Charter Holdings adopted a plan, which was assumed by Charter Holdco,
providing for the grant of options to purchase up to 25,009,798 Charter Holdco
membership units, which is equal to 10% of the aggregate equity value of Charter
Holdco on February 9, 1999, the date of adoption of the plan. The plan provides
for grants of options to employees, officers and consultants of Charter Holdco
and its affiliates. The plan is intended to promote the long-term financial
interest of Charter Holdco and its affiliates by encouraging eligible
individuals to acquire an ownership position in Charter Holdco and its
affiliates and providing incentives for performance. As of June 30, 1999, there
were a total of 9,494,081 options granted under the plan. Of those, 9,050,881
options were granted on February 9, 1999 with an exercise price of $20.00 and
443,200 options were granted on April 5, 1999 with an exercise price of $20.73.
One-fourth of the options granted on February 9, 1999 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. However, if there
has not been a public offering of the equity interests of Charter Holdco or an
affiliate, vesting will occur only upon termination of employment for any reason
other than for cause, upon death or disability, or immediately prior to the
expiration of an option. The options expire after ten years from the date of
grant. Under the terms of the plan, following the consummation of the initial
public offering of Charter Communications, Inc., each membership unit held 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.
Any unvested options issued under the plan vest immediately upon a change
of control of Charter Holdco. 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 Holdco 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 interests in
the Charter Holdco,
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(2) a merger or consolidation of Charter Holdco with or into any other
corporation or entity, except where Mr. Allen and his affiliates retain
effective voting control of Charter Holdco, or
(3) any other transactions or event, including a sale of the assets of
Charter Holdco, 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 the Charter Holdco.
If an optionee's employment with or service to Charter Holdco or its
affiliates is terminated other than for cause prior to an initial public
offering, the optionee has the right, for a period of thirty (30) days, to put
to Charter Holdco or Mr. Allen at Mr. Allen's option,
(1) all vested options, and
(2) all membership interests in Charter Holdco owned by such optionee
(whether or not obtained by the exercise of options granted under the plan),
in each case at a purchase price calculated based on the fair market value of
Charter Holdco. If an optionee does not exercise his put right as described
above, Charter Holdco has the right for a period of sixty (60) days to purchase
from the optionee all vested options at a price equal to an option spread
calculated based on fair market value or, with respect to membership interests,
the fair market value of the membership interests obtained by the exercise of
any options. Any such payments would be paid to the optionee in the form of cash
or a ten-year note, at the option of Mr. Allen or Charter Holdco.
If an optionee's employment with or service to Charter Holdco or its
affiliates is terminated other than for cause prior to an initial public
offering, the optionee has the right for a period of sixty (60) days to exercise
any vested options. Any options not so exercised terminate after this 60-day
period. For all purposes under the plan, an initial public offering includes a
public offering of the common stock of Charter Holdco's parent.
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
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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.
MANAGEMENT AGREEMENT WITH CHARTER INVESTMENT
We have a management agreement with Charter Investment. The management
agreement provides that Charter Investment will manage us and all of our
subsidiaries on a day-to-day basis, in exchange for fees. See "Certain
Relationship and Related Transactions."
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PRINCIPAL EQUITY HOLDERS
Charter Holdings is a direct, wholly owned subsidiary of Charter Holdco
which, in turn, is a direct, wholly owned subsidiary of Charter Investment. The
beneficial ownership of the equity of Charter Investment is as set forth in the
table below. Charter Capital is a direct, wholly owned finance subsidiary of
Charter Holdings.
NAME AND ADDRESS CLASS HELD AMOUNT HELD PERCENTAGE HELD
- ---------------- ------------ ----------- ---------------
Paul G. Allen..................... Common stock 165,347.9488 96.78%
110 110th Street, N.E.
Suite 500
Bellevue, WA 98004
Jerald L. Kent.................... Common stock 2,748.1044 1.61%
c/o Charter Investment, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
Barry L. Babcock.................. Common stock 1,962.9574 1.15%
c/o Charter Investment, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
Howard L. Wood.................... Common stock 785.1830 0.46%
c/o Charter Investment, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
There are several events that may occur in the future. If these events
occur, they will modify the ownership of Charter Holdco, which would no longer
be a wholly owned subsidiary of Charter Investment. These events include the
completion of the initial public offering of Class A common stock by Charter
Communications, Inc. and the contribution of $750 million to Charter Holdco by
Vulcan Cable III for which Vulcan Cable III will receive Charter Holdco
membership interests. As a result of these events, Charter Investment's
ownership of Charter Holdco will be diluted. In addition, Jerald L. Kent, our
President and Chief Executive Officer, has an option to purchase 3% of the
equity value of Charter Holdco. This will also result in a dilution of Charter
Investment's ownership of Charter Holdco. Until such time as market valuation of
Charter Communications, Inc. is established, we are unable to determine the
extent of this dilution that will result from any of these events.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth certain transactions in which we and our
directors, executive officers and affiliates, including the directors and
executive officers of Charter Investment, are involved in. 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, Paul G. 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 debt assumed. On March 31,
1999, Mr. Allen completed the acquisition of all remaining interests of Marcus
Cable. On February 22, 1999, Marcus Holdings was formed and all of Mr. Allen's
interests in Marcus Cable were transferred to Marcus Holdings.
On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of
Charter Investment 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. On
February 10, 1999, Charter Operating was formed as a wholly owned subsidiary of
Charter Holdings. All of Charter Investment's equity interests in its operating
subsidiaries were subsequently transferred to Charter Operating. On May 25,
1999, Charter Holdco was formed as a wholly owned subsidiary of Charter
Investment. All of Charter Investment's equity interests in Charter Holdings
were transferred to Charter Holdco.
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 we issued the original notes, this merger had not yet occurred.
Consequently, Marcus Holdings was a party to the indentures governing the notes
as a guarantor of our obligations. Charter Holdings loaned some of the proceeds
from the sale of the original 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 $1,548,630,855, 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 as collateral for the equal and ratable
benefit of the
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holders of the notes. Upon the closing of the merger, and in accordance with the
terms of the notes and the indentures:
- 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 notes were
automatically released.
MANAGEMENT AGREEMENTS
PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a
series of management agreements with certain of our subsidiaries, Charter
Investment provided management and consulting services to us. In exchange for
these services, Charter Investment 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 were accrued. Payment is at the discretion of
Charter Investment. Certain deferred portions of management fees bore interest
at the rate of 8% per annum. Following the closing of our current credit
facilities, the previous management agreements were replaced by a new management
agreement. The other material terms of our previous management agreements are
substantially similar to the material terms of the new management agreement.
PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus
entered into a management consulting agreement with Charter Investment pursuant
to which Charter Investment 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 our merger with Marcus
Holdings and the closing of our current credit facilities, this agreement was
terminated and the subsidiaries of Marcus Cable now receive management and
consulting services from Charter Investment under the new management agreement.
THE NEW MANAGEMENT AGREEMENT. On February 23, 1999, Charter Investment
entered into a new management agreement with Charter Operating, which was
amended and restated as of March 17, 1999. Upon the closing of our current
credit facilities on March 18, 1999, our previous management agreements and the
management consulting agreement with Marcus Cable terminated and the new
management agreement became operative. Pursuant to the new management agreement,
Charter Investment has agreed to manage and operate the cable television systems
owned by our subsidiaries, as well as any cable television systems we may
subsequently acquire in the future. The term of the new management agreement is
ten years.
The new management agreement provides that we will reimburse Charter
Investment for all expenses, costs, losses, liabilities or damages incurred by
it in connection with our ownership or operation of our cable television
systems. If Charter Investment pays or incurs any such expenses, costs, losses,
liabilities or damages, it will be reimbursed. In addition to any reimbursement
of expenses, Charter Investment is paid a yearly management fee equal to 3.5% of
our gross revenues. Gross revenues include all revenues
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from the operation of our cable systems, including, without limitation,
subscriber payments, advertising revenues, and revenues from other services
provided by our cable systems. Gross revenues do not include interest income or
income from investments unrelated to our cable systems.
Payment of the management fee to Charter Investment is permitted under our
current credit facilities, but ranks below our payment obligations under our
current credit facilities. In the event any portion of the management fee due
and payable is not paid by us, 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 March 31, 1999, no interest had been accrued.
The management fee is payable to Charter Investment quarterly in arrears.
If the current management agreement is terminated, Charter Investment is
entitled to receive the fee payable for an entire quarter, even if termination
occurred before the end of that quarter. Additionally, Charter Investment is
entitled to receive payment of any deferred amount.
Pursuant to the terms of the new management agreement, we have agreed to
indemnify and hold harmless Charter Investment 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 us.
The total management fees, including expenses, earned by Charter Investment
under all management agreements were as follows:
TOTAL FEES
YEAR FEES PAID EARNED
- ---- --------- ----------
(IN THOUSANDS)
Three Months Ended March 31, 1999................ $13,610 $ 9,938
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 March 31, 1999, $15,924 remains unpaid for all management agreements.
MANAGEMENT AGREEMENT WITH CHARTER COMMUNICATIONS, INC. Upon the closing of
the initial public offering by Charter Communications, Inc. of its Class A
common stock, Charter Communications, Inc. intends to enter into a management
agreement with Charter Holdco. This management agreement will provide that
Charter Communications, Inc. will manage and operate the cable television
systems owned or to be acquired by Charter Holdco and its subsidiaries.
The terms of the Charter Communications, Inc. management agreement will be
substantially similar to the terms of the Charter Operating management
agreement, except that Charter Communications, Inc. will not be paid a yearly
3.5% management fee. Charter Communications, Inc. will be entitled to
reimbursement from Charter Holdco for all expenses, costs, losses, liabilities
and damages incurred by Charter Communications, Inc. under the service agreement
described below.
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SERVICES AGREEMENT WITH CHARTER INVESTMENT. Upon the closing of Charter
Communications, Inc.'s initial public offering, Charter Communications, Inc.
intends to enter into a services agreement with Charter Investment. The services
agreement will provide that Charter Investment will provide to Charter
Communications, Inc. the personnel and services it requires to fulfill Charter
Communications, Inc.'s obligations as the sole manager of Charter Holdco and its
subsidiaries pursuant to the Charter Communications, Inc. management agreement
and the Charter Operating management agreement. Charter Investment will not
receive a fee for providing the personnel and services, but it will be entitled
to reimbursement of all of its expenses in connection with its performance under
the services agreements.
CONSULTING AGREEMENT
On March 10, 1999, Charter Holdings entered into a consulting agreement
with Vulcan Northwest and Charter Investment. Pursuant to the terms of the
consulting agreement, we retained Vulcan Northwest and Charter Investment to
provide advisory, financial and other consulting services with respect to
acquisitions of the business, assets or stock of other companies by us or by any
of our subsidiaries. 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 are our responsibility and must be reimbursed. We must also
pay Vulcan Northwest and Charter Investment a fee for their services rendered
for each acquisition made by us or any of our subsidiaries. This fee equals 1%
of the aggregate value of such acquisition. Neither Vulcan Northwest nor Charter
Investment will receive a fee in connection with the American Cable,
Renaissance, Greater Media, Helicon, Vista and Cable Satellite acquisitions. We
have also agreed to indemnify and hold harmless Vulcan Northwest and Charter
Investment, 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 us.
Mr. Allen owns 100% of Vulcan Northwest and is the Chairman of the Board.
William D. Savoy, another of our directors, is the President and a director of
Vulcan Northwest.
TRANSACTIONS WITH PAUL G. ALLEN
On December 21, 1998, Mr. Allen contributed approximately $431 million to
Charter Investment and received non-voting common stock of Charter Investment.
Such non-voting common stock was converted to voting common stock on December
23, 1998.
On December 23, 1998, Mr. Allen contributed approximately $1.3 billion to
Charter Investment and received voting common stock of Charter Investment.
Additionally, Charter Investment 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 in March 1999. No interest on such bridge loan was accrued
or paid by Charter Investment. 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.
On January 5, 1999, Charter Investment borrowed approximately $132.2
million in the form of a bridge loan from Mr. Allen. This bridge loan was
contributed by Mr. Allen
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to Charter Investment in March 1999. No interest on such bridge loan was accrued
or paid by Charter Investment. On the same date, Mr. Allen also acquired
additional voting common stock of Charter Investment 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 borrowed $25 million in the form of
a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to
Charter Investment in March 1999. No interest on such bridge loan was accrued or
paid by Charter Investment.
On March 16, 1999, Charter Investment borrowed approximately $124.8 million
in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by
Mr. Allen to Charter Investment in March 1999. No interest on such bridge loan
was accrued or paid by Charter Investment.
The $431 million contribution was used to purchase Charter Investment,
including its wholly owned subsidiary Charter Properties and its minority
ownership interest in CCA Group and CharterComm Holdings. The $1.3 billion,
$223.5 million and $176.7 million contributions by Mr. Allen were used by
Charter Investment to purchase the remaining interest in CCA Group and
CharterComm Holdings. All other contributions to Charter Investment by Mr. Allen
were used in operations of Charter Investment and were not contributed to
Charter Holdings.
On July 22, 1999, Charter Holdco and Mr. Allen entered into a membership
interests purchase agreement pursuant to which Mr. Allen has committed to
purchase membership interests of Charter Holdco for a total of $1.325 billion.
Mr. Allen will contribute $500 million on or before August 13, 1999, and $825
million on or before September 1, 1999. Charter Holdco has committed to
contribute this $1.325 billion to us. In return, Mr. Allen will receive
58,533,199 membership interests in Charter Holdco, and the right to use up to
eight digital channels in each of our cable systems. We have agreed and are in
the process of finalizing a contract to license these channels to Mr. Allen. The
number of channels licensed in each system will depend on the bandwidth of the
particular system. We believe that this transaction will be on terms at least as
favorable to us as Mr. Allen would negotiate with other cable operators.
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 opportunities which both Mr. Allen or
his affiliates and we might otherwise wish to pursue, effective upon the
completion of the initial public offering by Charter Communications, Inc. of its
Class A common stock, Charter Holdco and Charter Communications, Inc. will have
agreed, until all of its shares of Class B common stock held by Mr. Allen have
automatically converted into shares of Class A common stock, not to engage in
any business transaction outside the cable transmission business. Charter
Communications, Inc. will also agree with Mr. Allen that, should we wish to
pursue a business transaction outside of this scope, we must first offer Mr.
Allen the opportunity to pursue the particular business transaction. If he
decides not to do so and consents to our engaging in the business transaction,
we will be able to do so and the Charter Communications, Inc. certificate of
incorporation and Charter Holdco's operating agreement would be amended
accordingly. The cable transmission business means the business of transmitting
video,
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audio and data on cable television systems owned, operated or managed by us from
time to time. As long as Mr. Allen is a director of Charter Communications,
Inc., he will be required to present to Charter Communications, Inc. any
opportunity he may have to acquire, directly or indirectly, a majority ownership
interest in any cable television system or any company whose principal business
is the ownership, operation or management of cable television systems. However,
except for the foregoing, Charter Holdco and Charter Communications, Inc. will
agree that Mr. Allen does not have an obligation to present to Charter
Communications, Inc. business opportunities in which both Mr. Allen and we might
have an interest and that he may exploit such opportunities for his own account.
The Charter Communications, Inc. certificate of incorporation and Charter
Holdco's operating agreement will contain provisions to that effect.
ASSIGNMENTS OF ACQUISITIONS
On January 1, 1999, Charter Investment entered into a membership purchase
agreement with ACEC Holding Company, LLC for the acquisition of American Cable.
On February 23, 1999, Charter Investment 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 April 1999.
On February 17, 1999, Charter Investment 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 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 April 1999.
On April 26, 1999, Charter Investment entered into,
- a purchase and sale agreement with Rifkin Acquisition Partners, L.L.L.P.
and the sellers listed in such purchase and sale agreement,
- a purchase and sale agreement with Interlink Communications Partners,
LLLP and the sellers listed in such purchase and sale agreement. and
- an indemnity agreement with the sellers listed in such indemnity
agreement,
for the acquisition of Rifkin. On June 30, 1999, Charter Investment assigned is
rights and obligations under each of these agreements to Charter Operating. Both
Charter Investment and Charter Operating remain liable to the Rifkin sellers for
the performance and fulfillment of the covenants, duties and obligations of the
buyer under these agreements.
EMPLOYMENT AGREEMENTS
Jerald L. Kent. Effective as of August 28, 1998, Jerald L. Kent entered
into an employment agreement with Paul G. Allen for a three-year term with
automatic one-year renewals. Under this agreement, Mr. Kent agrees to serve as
President and Chief Executive Officer of Charter Investment, with responsibility
for the nationwide general management, administration and operation of all
present and future business of Charter Investment and its subsidiaries. During
the initial term of the agreement, Mr. Kent will receive a base salary of
$1,250,000, or such higher rate as may from time to time be determined by the
board of directors in its discretion. In addition, Mr. Kent will be eligible to
receive an annual bonus in an aggregate amount not to exceed $625,000, to be
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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 Investment. Mr. Kent will be reimbursed by Charter
Investment for life insurance premiums up to $30,000 per year. Also under this
agreement and a related agreement, Mr. Kent received options to purchase three
percent (3%) of the net equity value of Charter Holdco. The options have a term
of ten years and will vest twenty-five percent (25%) on December 23, 1998. The
remaining seventy-five percent (75%) will vest 1/36 on the first day of each of
36 months commencing on the first day of the thirteenth month following December
23, 1998.
Charter Investment agrees to 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.
In the event of the expiration of the agreement in accordance with its
terms as a result of Charter Investment giving Mr. Kent notice of its intention
not to extend the initial term, or a termination of the agreement by Mr. Kent
for good reason or by Charter Investment without cause, (a) Charter Investment
will pay to Mr. Kent an amount equal to the aggregate base salary due to Mr.
Kent and the board shall consider additional amounts, if any, to be paid to Mr.
Kent and (b) any unvested options of Mr. Kent shall immediately vest.
Barry L. Babcock. Effective as of December 23, 1998, Barry L. Babcock
entered into an employment agreement with Paul G. Allen for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Babcock agrees to serve
as Vice Chairman of Charter Investment with responsibilities including the
government and public relations of Charter Investment. During the initial term
of the agreement, Mr. Babcock will receive a base salary of $625,000, or such
higher rate as may be determined by the Chief Executive Officer in his
discretion. In addition, Mr. Babcock will be eligible to receive an annual bonus
to be determined by the board of directors in its discretion. Mr. Babcock
received a one time payment as part of his employment agreement of $500,000.
Under the agreement, Mr. Babcock is entitled to participate in any
disability insurance, pension or other benefit plan afforded to employees
generally or executives of Charter Investment. Charter Investment agrees to
grant options to Mr. Babcock to purchase its stock as determined by the board of
directors in its discretion, pursuant to an option plan to be adopted by Charter
Investment.
Charter Investment agrees 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 in connection with or arising out of the
performance by Mr. Babcock of his duties.
In the event of the termination of the agreement by Charter Investment
without cause or by Mr. Babcock for good reason, (a) Charter Investment will pay
to Mr. Babcock an amount equal to the aggregate base salary due to Mr. Babcock
for the remainder of the term of the agreement and (b) vested options, if any,
of Mr. Babcock, will be redeemed for cash for the amount of the spread. Unvested
options will be treated as set forth in the option plan to be adopted as
discussed above.
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Howard L. Wood. Effective as of December 23, 1998, Howard L. Wood entered
into an employment agreement with Paul G. Allen for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Wood agrees to be
employed as an officer of Charter Investment. During the initial term of the
agreement, Mr. Wood will receive a base salary of $312,500, or such higher rate
as may be determined by the Chief Executive Officer in his discretion. In
addition, Mr. Wood will be 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 is entitled to participate in any disability insurance, pension or
other benefit plan afforded to employees generally or executives of Charter
Investment.
Charter Investment agrees 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 in connection with or arising out of the
performance by Mr. Wood of his duties.
In the event of the termination of the agreement by Charter Investment
without cause or by Mr. Wood for good reason, Charter Investment will pay to Mr.
Wood an amount equal to the aggregate base salary due to Mr. Wood for the
remainder of the term of the agreement.
INSURANCE
We receive insurance and workers' compensation coverage through Charter
Investment. Charter Investment's insurance policies provide coverage for Charter
Investment and its
- subsidiaries, and associated, affiliated and inter-related companies,
- majority (51% or more) owned partnerships and joint ventures,
- interest in (or its subsidiaries' interest in) any other partnerships,
joint ventures or limited liability companies,
- interest in (or its subsidiaries' interest in) any company or
organization coming under its active management or control, and
- any entity or party required to be insured under any contract or
agreement,
which may now exist, may have previously existed, or may hereafter be created or
acquired.
During the three-months ended March 31, 1999 and the years-ended December
31, 1998, 1997 and 1996, Charter Investment expensed $3,295,000, $603,000,
$172,100 and $108,000, respectively, relating to insurance allocations.
BUSINESS RELATIONSHIPS
Paul G. 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 subsidiaries with services or programming. Among these entities are High
Speed Access, WorldGate, Wink, ZDTV, LLC, USA Networks and Oxygen Media, Inc.
These affiliates include Charter Investment and Vulcan Ventures. Mr. Allen owns
100% of the equity of Vulcan Ventures, and is the President, Chief Executive
Officer and Chairman of the Board. Mr. Savoy is also a Vice President and a
director of Vulcan Ventures.
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HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet
access over cable modems. In November 1998, Charter Investment 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. 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 midnight of the day High Speed Access ceases to provide High
Speed Access services to cable subscribers in any 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 and,
following this initial term, the network services agreement automatically renews
itself on a year-to-year basis. Additionally, we can terminate our 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. During the term of the agreements, High Speed Access has agreed not
to deploy WorldGate, Web TV, digital television or related products in the
market areas of any committed system or in any area in which we operate a cable
system. All of Charter Investment's operations take place at the subsidiary
level and it is through Charter Investment 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 with resulting
payments to High Speed Access of $76,000 for the quarter.
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 20.15 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 million shares
of common stock at a purchase price of $5.00 per share. These warrants were
converted to warrants to purchase up to approximately 7,739,938 shares of common
stock at a purchase price of $3.23 per share upon completion of High Speed
Access' initial public offering. Vulcan Ventures subsequently assigned the
warrants to Charter Investment.
In addition, Jerald L. Kent, our President and Chief Executive Officer and
a director of Charter Holdings, Mr. Savoy and another individual, who performs
management services for the issuers, are also directors of High Speed Access
Corp.
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WORLDGATE. WorldGate is a provider of Internet access through cable
television systems. On November 7, 1997, Charter Investment signed an
affiliation agreement with WorldGate pursuant to which WorldGate's services will
be offered to some of our customers. 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 Investment's operations take place
at the subsidiary level and it is through Charter Investment 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. 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 three-months ended March 31, 1999, we paid to WorldGate $279,000. For
the year ended December 31, 1998, we paid to WorldGate $276,000. We charged our
subscribers $19,000 for the three-months ended March 31, 1999, and $22,000 for
the year ended December 31, 1998.
On November 24, 1997, Charter Investment acquired 70,423 shares of
WorldGate's Series B preferred stock at a purchase price of $7.10 per share. 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, each share of Series B preferred stock will convert into
two-thirds of a share of WorldGate's common stock, and each share of Series C
preferred stock will convert into two-thirds of a share of WorldGate's common
stock. Upon completion of WorldGate's initial public offering, each series of
preferred stock will automatically convert into 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 signed a cable affiliation agreement with
Wink to deploy this enhanced broadcasting technology in our systems. 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 Investment's operations
take place at the subsidiary level and it is through Charter Investment 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. For the first
year of the agreement, we pay a monthly license fee to Wink which is based on
the number of our subscribers in our operating areas. After the first year of
the agreement we pay a fixed monthly license fee to Wink regardless of the
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number of our subscribers in our operating areas. 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 March 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 Ventures warrants to purchase shares of
common stock. Additionally, Microsoft Corporation, of which Mr. Allen is a
director, also 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 Investment intends to enter into with ZDTV, ZDTV has agreed to provide
us with their programming for broadcast via our cable television systems. 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 term expires on the same day for each of our cable systems, regardless
of when any individual cable system launches ZDTV. All of Charter Investment's
operations take place at the subsidiary level and it is through Charter
Investment that we derive our rights and obligations with respect to ZDTV. 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 infomercials, 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. As of March 31, 1999,
no revenues or expenses have been recognized as a result of these agreements.
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 a director of Vulcan Programming. The remaining approximate
two-thirds interest in ZDTV is owned by Ziff-Davis Inc. Vulcan Ventures acquired
approximately 3% of the interests in Ziff-Davis. The total investment made by
Vulcan Programming and Vulcan Ventures was $54 million.
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 signed an affiliation agreement with USA
Networks. 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. All of Charter
Investment's operations take place at the subsidiary level and it is through
Charter Investment that we derive our rights and obligations with
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respect to USA Networks. 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 number 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 the USA Networks $3,035,000 for the three months
ended March 31, 1999, $556,000 for the year ended December 31, 1998, $204,000
for the year ended December 31, 1997, and $134,000 for the year ended December
31, 1996.
Mr. Allen and Mr. Savoy are also directors of USA Networks. As of April
1999, Mr. Allen also owned approximately 12.4%, and Mr. Savoy owned less than
1%, of the common stock of USA Networks.
OXYGEN MEDIA, INC. Oxygen expects to begin providing content aimed at the
female audience for distribution over the Internet and cable television systems.
Vulcan Ventures has agreed to invest up to $100 million in Oxygen. In addition,
Charter Investment has agreed to enter into a carriage agreement with Oxygen
pursuant to which we intend to carry Oxygen programming content on our cable
systems. As of March 31, 1999, no revenues or expenses have been recognized as a
result of these agreements.
Mr. Allen and his affiliates have, and in the future likely will make,
numerous investments outside of Charter Holdco. 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, that 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. Upon completion of
the initial public offering by Charter Communications, Inc. of its Class A
common stock, Charter Communications, Inc. will have entered into an agreement
with Mr. Allen governing the allocation of corporate opportunities as they
arise.
We have not instituted any formal plan or arrangement to address potential
conflicts of interest.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description is qualified in its entirety by reference to the
credit facilities and related documents governing such debt.
CHARTER OPERATING CREDIT FACILITIES
On March 18, 1999, all of our then-existing senior debt, consisting of
seven separate credit facilities, was refinanced with proceeds of the sale of
the original notes and proceeds of our initial senior secured credit facilities.
The borrower under our initial senior secured credit facilities is Charter
Operating. The initial senior secured credit facilities were arranged by The
Chase Manhattan Bank, NationsBank, N.A., Toronto Dominion (Texas), Inc., Fleet
Bank, N.A. and Credit Lyonnais New York Branch. The initial senior secured
credit facilities provided for borrowings of up to $2.75 billion.
The initial senior secured credit facilities were increased on April 30,
1999 by $1.35 billion of additional senior secured credit facilities.
Obligations under the credit facilities are guaranteed by Charter Operating's
parent, Charter Holdings, and by Charter Operatings' subsidiaries. The
obligations under the credit facilities are secured by pledges by Charter
Operating of inter-company 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 guarantees are secured by pledges of
inter-company 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 initial senior secured credit facilities of $4.1 billion consist 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 $1.85 billion.
The 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 of September 18, 2007. The amortization of the principal amount of
the Tranche B term loan facility is substantially "back-ended," with more than
ninety percent of the principal balance due in the year of maturity. The credit
facilities also provide for an incremental term facility, of up to $500 million
which is conditioned upon receipt of additional new commitments from lenders. If
the incremental term facility becomes available, 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 the
Tranche B term loan. The 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.
Interest rate margins depend upon performance measured by a "leverage
ratio," or, the ratio of indebtedness to annualized operating cash flow.
Annualized operating cash flow is defined as the immediately preceding quarter's
operating cash flow, before management fees, multiplied by four. This leverage
ratio is based on the debt of Charter Operating and its subsidiaries, exclusive
of the outstanding notes and other debt for money borrowed, of Charter Holdings.
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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 London InterBank Offered Rate. The Charter Operating credit facilities
contain representations and warranties, affirmative and negative covenants,
information requirements, events of default and financial 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.
Under most circumstances, acquisitions and investments may be made without
the consent of the lenders as long as our operating cash flow for the four
complete quarters preceding the acquisition or investment equals or exceeds 1.75
times the sum of our cash interest expense plus any restricted payments, on a
pro forma basis after giving effect to the acquisition or investment.
The Charter Operating credit facilities also contain a change of control
provision, making it an event of default, and permitting acceleration of the
indebtedness, in the event that either:
(1) Mr. Allen, including his estate, heirs and certain other related
entities, fails to maintain a 51% direct or indirect voting and economic
interest in Charter Operating, provided that after the consummation of an
initial public offering by Charter Holdings or an affiliate of Charter Holdings,
the economic interest percentage may be reduced to 25%, or
(2) a change of control occurs under the indentures governing the notes.
The various negative covenants place limitations on our ability and the
ability of our subsidiaries to, among other things, incur debt, pay dividends,
incur liens, make acquisitions, investments or asset sales, or enter into
transactions with affiliates. Distributions by Charter Operating under the
credit facilities to Charter Holdings to pay interest on the notes are generally
permitted, except during the existence of a default under such credit
facilities. If the 8.250% notes are not refinanced prior to six months before
their maturity date, the entire amount outstanding of the Charter Operating
credit facilities will become due and payable.
RENAISSANCE NOTES
The original Renaissance notes and new Renaissance notes were issued by
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation, with Renaissance Media Group LLC as the
guarantor, and the United States Trust Company of New York as the trustee. The
Renaissance 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 10%
senior discount notes due 2008 for an equivalent value of 10% senior discount
notes due April 15, 2008. Renaissance Media Group LLC, which is the direct or
indirect parent company of each other issuer, is a now subsidiary of Charter
Operating. The form and terms of the new Renaissance notes are the same in all
material respects as the form and terms of the original Renaissance notes except
that the issuance of the new Renaissance notes have been registered under the
Securities Act.
There will not be any payment of interest in respect of the Renaissance
notes prior to October 15, 2003. Interest on the new Renaissance notes shall be
paid semi-annually in
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cash at a rate of 10% per annum beginning on October 15, 2003. The new
Renaissance 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 aggregate principal amount at maturity of the new
Renaissance notes with the proceeds of one or more sales of capital stock at
110% of their accreted value on the redemption date, provided that after any
such redemption at least $106 million aggregate principal amount at maturity of
Renaissance notes remains outstanding.
Upon a change of control, the issuers will be required to make an offer to
purchase the new Renaissance notes at a purchase price equal to 101% of their
accreted value on the date of the purchase, plus accrued interest, if any. Our
acquisition of Renaissance triggered this requirement. In May 1999, we made an
offer to repurchase the Renaissance notes, and the holders of Renaissance,
representing 30% of the total principal amount outstanding tendered their
Renaissance notes for repurchase. As of June 30, 1999, $114.4 million aggregate
principal amount of Renaissance notes with a carrying value of $82.7 million
remain outstanding.
The indenture 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 contributions in respect of their capital stock;
- redeem capital stock;
- make investments or certain other restricted payments;
- sell assets;
- issue or sell stock of restricted subsidiaries;
- enter into transactions with stockholders or affiliates; or
- effect a consolidation or merger.
HELICON NOTES
On November 3, 1993, Helicon Group, L.P. and Helicon Capital Corp. jointly
issued $115,000,000 aggregate principal amount of 11% senior secured notes due
2003. On February 3, 1994, the issuers exchanged the original Helicon notes for
an equivalent value of new Helicon notes. The form and terms of the new Helicon
notes are the same as the form and terms of the corresponding original Helicon
notes, except that the new Helicon notes were registered under the Securities
Act of 1933 and, therefore, the new Helicon notes do not bear legends
restricting their transfer.
The Helicon notes are senior obligations of the issuers and are secured by
substantially all of the cable assets, subject to a number of exceptions. The
Helicon notes may be redeemed at the option of the issuers specified in whole or
in part at any time at specified redemption prices plus accrued interest to the
date of redemption. Notwithstanding the foregoing, at any time on or before
November 1, 1996, the issuers
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may redeem up to 33 1/3% of the aggregate principal amount of the Helicon notes
with the proceeds of one or more equity offerings within 120 days of such equity
offering at a redemption price equal to 111% of the accreted value of the
Helicon notes, plus accrued interest to the date of redemption. The Helicon
notes were issued with original issue discount.
The issuers are required to redeem $25 million principal amount of the
Helicon notes on each of November 1, 2001 and November 1, 2002. Upon specified
change of control events, the issuers are required to make an offer to purchase
all of the Helicon notes at a price equal to 101% of their accreted value until
November 1, 1996, and at a price equal to 101% of their principal amount
thereafter, plus, in each case, accrued interest to the date of purchase. Our
acquisition of Helicon triggered this obligation. We are required under the
terms of our credit facilities to use our best efforts to repurchase the Helicon
notes within 120 days of the acquisition.
The indenture governing the Helicon notes restrict, among other things, the
ability of the issuers and some of their subsidiaries to:
- incur additional debt;
- make specified distributions;
- redeem equity interests;
- enter into transactions with affiliates; and
- merge or consolidate with or sell substantially all of the assets of the
issuers.
DEBT TO BE ASSUMED IN CONNECTION WITH OUR PENDING ACQUISITIONS.
RIFKIN NOTES
The Rifkin notes were issued by Rifkin Acquisition Partners, L.L.L.P. and
Rifkin Acquisition Capital Corp. as issuers, subsidiaries of the partnership
other than Rifkin Acquisition Capital Corp. as guarantors, and Marine Midland
Bank as trustee. In March 1996, the issuers exchanged $125 million aggregate
principal amount of the originally issued and outstanding 11 1/8% senior
subordinated notes due 2006 for an equivalent value of new 11 1/8% senior
subordinated notes due 2006. The form and terms of the new Rifkin notes are
substantially identical to the form and terms of the original Rifkin notes
except that the new Rifkin notes have been registered under the Securities Act
and, therefore, do not bear legends restricting the transfer thereof. Interest
on the Rifkin notes accrues at the rate of 11 1/8% per annum and is payable in
cash semi-annually in arrears on January 15 and July 15 of each year, commencing
July 15, 1996.
The Rifkin notes are redeemable at the issuers' option, in whole or in
part, at any time on or after January 15, 2001, at 105.563% of the principal
amount together with accrued and unpaid interest, if any, to the date of the
redemption. This redemption premium declines over time to 100% of the principal
amount, plus accrued and unpaid interest, if any, on or after 2005. In addition,
at any time prior to January 15, 1999, the issuers, at their option, may redeem
up to 25% of the aggregate principal amount of the Rifkin notes with the net
proceeds of one or more public equity offerings or strategic equity investments
in which the issuers receive proceeds of not less than $25 million, at a
redemption price equal to 111 1/8% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of redemption. Following
any such redemption, the aggregate principal amount of the Rifkin notes
outstanding must equal at least 75% of the aggregate principal amount of the
Rifkin notes originally issued.
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Upon the occurrence of a change of control, each holder of Rifkin notes
will have the right to require the issuers to purchase all or a portion of such
holder's notes at 101% of the principal amount thereof, together with accrued
and unpaid interest, to the date of purchase. Our acquisition of Rifkin will
trigger this requirement. We are also required by the terms of our credit
facilities to repurchase the Rifkin notes within 90 days of the Rifkin
acquisition.
The Rifkin notes are jointly and severally guaranteed on a senior
subordinated basis by specified subsidiaries of the issuers. The guarantees of
the Rifkin notes will be general unsecured obligations of the guarantors and
will be subordinated in right of to all existing and future senior debt of the
guarantors. As of March 31, 1999, $229.5 million aggregate principal amount
accrued interest remain outstanding on the Rifkin notes.
Among other restrictions, the indentures governing the Rifkin notes contain
covenants which limit the ability of the issuers and specified subsidiaries to:
- assume additional debt and issue specified additional equity interests;
- make restricted payments;
- enter into transactions with affiliates;
- incur liens;
- make specified contributions and payments to Rifkin Acquisition Partners,
L.L.L.P.;
- transfer specified assets to subsidiaries; and
- merger, consolidate, and transfer all or substantially all of the assets
of Rifkin Acquisition Partners, L.L.L.P. to another person.
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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 March 17, 1999, among the issuers, Marcus
Cable Operating, LLC, Marcus Holdings, as guarantor 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 original notes were sold prior to our merger with Marcus Holdings. At
the sale of the original notes, Marcus Holdings guaranteed the notes and issued
a promissory note to Charter Holdings for certain amounts loaned by Charter
Holdings to subsidiaries of Marcus Holdings. When we merged with Marcus Holdings
both the guarantee and the promissory note issued automatically became, under
the terms of the indentures, ineffective. Consequently, all references in the
indentures and the notes to the guarantor, the guarantee or the promissory note,
and all matters related thereto, including, without limitation, the pledges of
any collateral are no longer applicable.
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 these 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.
PRINCIPAL, MATURITY AND INTEREST OF NOTES
8.250% NOTES
The 8.250% notes are limited in aggregate principal amount to $600 million,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 8.250% notes will mature on April 1, 2007.
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Interest on the 8.250% notes will accrue at the rate of 8.250% per annum
and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 1999. The issuers will make each interest payment to
the holders of record of these 8.250% notes on the immediately preceding March
15 and September 15.
Interest on the 8.250% notes will accrue from the date of original 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.
8.625% NOTES
The 8.625% notes are limited in aggregate principal amount to $1.5 billion,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 8.625% notes will mature on April 1, 2009.
Interest on the 8.625% notes will accrue at the rate of 8.625% per annum
and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 1999. The issuers will make each interest payment to
the holders of record of these 8.625% notes on the immediately preceding March
15 and September 15.
Interest on the 8.625% notes will accrue from the date of original 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.
9.920% NOTES
The 9.920% notes are limited in aggregate principal amount at maturity to
$1.475 billion and originally were issued at an issue price of $613.94 per
$1,000 principal amount at maturity, representing a yield to maturity of 9.920%,
calculated on a semi-annual bond equivalent basis, calculated from March 17,
1999. The issuers will issue 9.920% notes, in denominations of $1,000 principal
amount at maturity and integral multiples of $1,000 principal amount at
maturity. The 9.920% notes will mature on April 1, 2011.
Cash interest on the 9.920% notes will not accrue prior to April 1, 2004.
Thereafter, cash interest on the 9.920% notes will accrue at a rate of 9.920%
per annum and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 2004. The issuers will make each interest payment to
the holders of record of the 9.920% notes on the immediately preceding March 15
and September 15. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The 9.920% notes will accrete at a rate of 9.920% per year to an aggregate
amount of $1.475 billion as of April 1, 2004. For United States federal income
tax purposes, holders of the 9.920% 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 Federal Tax Considerations."
RANKING
As a holding company, Charter Holdings does not hold substantial assets
other than its direct or indirect investments in and advances to its operating
subsidiaries. Our subsidiaries conduct all of our consolidated operations and
own substantially all of our consolidated assets. As a result, our cash flow and
our ability to meet our debt service obligations on the notes will depend upon
the cash flow of our subsidiaries and the
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payment of funds by our subsidiaries to us in the form of loans, equity
distributions or otherwise. Our subsidiaries are not obligated to make funds
available to us for payment on the notes. In addition, our subsidiaries' ability
to make any such loans or distributions to us will depend on their earnings, the
terms of their indebtedness, business and tax considerations and legal
restrictions. Our credit facilities place limitations on the ability of our
subsidiaries to pay dividends and enter into certain transactions with
affiliates. Our credit facilities also contain financial covenants that could
limit the payment of dividends. However distributions generally will be
permitted by the credit facilities to pay interest on the notes except during
the existence of a default under the credit facilities.
Because of our holding company structure, the notes will be subordinate to
all liabilities of our subsidiaries. Creditors of our subsidiaries will have the
right to be paid before holders of the notes from any assets of our
subsidiaries. At March 31, 1999, on a pro forma basis giving effect to the
acquisitions and our credit facilities, all of our outstanding indebtedness,
including our credit facilities, was incurred by our subsidiaries. At that date,
our subsidiaries' liabilities totaled approximately $4.0 billion and all such
liabilities would have ranked senior to the new notes. In the event of
bankruptcy, liquidation or dissolution of a subsidiary, following payment by the
subsidiary of its liabilities, such subsidiary may not have sufficient assets
remaining to make payments to us as a shareholder or otherwise.
OPTIONAL REDEMPTION
8.250% NOTES
The 8.250% notes are not redeemable at the issuers' option prior to
maturity.
8.625% NOTES
At any time prior to April 1, 2002, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the 8.625%
notes on a pro rata basis or nearly as pro rata as practicable, at a redemption
price of 108.625% 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 8.625% notes
remains outstanding immediately after the occurrence of such redemption
excluding 8.625% 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 8.625% notes will not be
redeemable at the issuers' option prior to April 1, 2004.
On or after April 1, 2004, the issuers may redeem all or a part of the
8.625% 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,
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if any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 1 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2004........................................................ 104.313%
2005........................................................ 102.875%
2006........................................................ 101.438%
2007 and thereafter......................................... 100.000%
9.920% NOTES
At any time prior to April 1, 2002, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount at maturity of the
9.920% notes on a pro rata basis or nearly as pro rata as practicable, at a
redemption price of 109.920% 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
9.920% notes remains outstanding immediately after the occurrence of such
redemption, excluding 9.920% 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 9.920% notes will not be
redeemable at the issuers' option prior to April 1, 2004.
On or after April 1, 2004, the issuers may redeem all or a part of the
9.920% 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 April 1 of the
years indicated below:
YEAR PERCENTAGE
- ---- ----------
2004........................................................ 104.960%
2005........................................................ 103.307%
2006........................................................ 101.653%
2007 and thereafter......................................... 100.000%
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each holder of 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 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 8.250% notes and the 8.625% 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 9.920% notes, 101% of the Accreted Value plus, for
any Change of Control offer occurring after the Full Accretion Date, accrued and
unpaid
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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 to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount at maturity 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 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.
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, another Person or group may be
uncertain.
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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 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
(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 $25.0 million, the issuers will make
an Asset Sale Offer to all holders of notes and all holders of other
Indebtedness that is pari passu 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 pari passu Indebtedness
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 8.250% notes and the 8.625% notes, 100% of
principal amount plus accrued and unpaid interest, if any, to the date of
purchase, and
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(y) with respect to the 9.925% 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 pari passu Indebtedness tendered into such Asset Sale Offer
exceeds the amount of Excess Proceeds, the applicable trustee shall select the
notes and such other pari passu Indebtedness 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.
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,
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- 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;
- 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,
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- 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.
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 at the issue date or
after the issue date if the percentage fees are not higher than
those under agreements existing on the issue date.
- Limitations on sale and leaseback transactions exceeding three years.
- Prohibitions against consent payments to holders of notes unless paid to
all consenting holders.
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During any period of time that
(a) either the 8.250% notes, the 8.625% notes or the 9.920% 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 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 be subject again 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 upon issuance. 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 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
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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;
(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 indentures, 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 combined Consolidated EBITDA of
Charter Holdings since the date of the indentures 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 indentures 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
"Incurrence of Indebtedness and Issuance of preferred stock," plus
(c) $100.0 million.
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;
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(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
their 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 Charter Holdings preferred stock or
the redemption, repurchase, retirement or other acquisition of Charter
Holdings 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
indentures; 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, the Charter Holdings shall deliver to the trustee an
officers' certificate stating that such Restricted Payment is permitted and
setting forth the 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.
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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:
(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, 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 the Credit Facilities; provided that the aggregate
principal amount of all Indebtedness of Charter Holdings and its Restricted
Subsidiaries outstanding under the 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 indentures to repay Indebtedness under the Credit Facilities,
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 issue date by Charter Holdings and its
Restricted Subsidiaries of Indebtedness represented by the notes;
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(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, as the case may be, 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 Charter
Holdings or 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
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under the subheading "-- Restricted Payments" or to make Permitted
Investments pursuant to clause (6) of the definition thereof;
(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
(a) meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (12) 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.
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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 any of its Restricted Subsidiaries; or
(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;
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(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 "-- 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 the issue date; and
(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:
(1) either:
(a) such issuer, is the surviving corporation; or
(b) 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;
(2) 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, in the case of Charter Holdings, and the indentures pursuant to
agreements reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of
Default exists; and
(4) 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
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transactions as if the same had occurred at the beginning of the
applicable four-quarter period, either
(A) 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
(B) 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.
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
$15.0 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
$50.0 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) 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;
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(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 the issue date or
(B) entered into after the issue date,
to the extent that such management agreements provide for percentage
fees no higher than the percentage fees existing under the management
agreements existing on the issue date;
(5) Restricted Payments that are permitted by the provisions of the
indentures described above under the caption "-- Restricted Payments"; and
(6) Permitted Investments.
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 of Charter Holdings 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
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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.
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.
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EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(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
(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 $100.0 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
$100.0 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;
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(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 with respect to that
series. 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 then
outstanding of each series by notice to the trustee may on behalf of the holders
of all of the notes of such series 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.
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, 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;
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(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 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
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(b) or 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 may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount 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 waived with the consent of the holders of
a majority in principal amount 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
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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,
Charter Holdings 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 Charter Holdings' obligations to
holders of notes in the case of a merger or consolidation or sale of all or
substantially all of Charter Holdings' 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 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
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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 Investment, Inc., 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 this offering. 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.
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
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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.
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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
Set forth below are 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.
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"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 9.920% 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....................................... $ 613.94
October 1, 1999.................................. 646.88
April 1, 2000.................................... 678.96
October 1, 2000.................................. 712.64
April 1, 2001.................................... 747.99
October 1, 2001.................................. 785.09
April 1, 2002.................................... 824.03
October 1, 2002.................................. 864.90
April 1, 2003.................................... 907.80
October 1, 2003.................................. 952.82
April 1, 2004.................................... $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) $613.94 and
(b) an amount equal to the product of
(x) the Accreted Value for the first Semi-Annual Accrual Date
less $613.94 multiplied by
(y) a fraction, the numerator of which is the number of days
from the issue date of the notes 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 of the notes 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
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(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.
"AFFILIATE TRANSACTION" is set forth above under the caption "-- Certain
Covenants -- Transaction with Affiliates."
"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 Restricted 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.
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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;
(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 "-- Restricted Payments" and a Restricted
Investment that is permitted by the covenant described above under the
caption "-- 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
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(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 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.
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"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, 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 of Mr. Allen;
(2) the adoption of a plan relating to the liquidation or dissolution
of Charter Holdings;
(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 the principal and Related Parties
and any entity formed for the purpose of owning Capital Stock of Charter
Holdings, becomes the Beneficial Owner, directly or indirectly, of more
than 35% of the Voting Stock of Charter Holdings, measured by voting power
rather than number of shares, unless the principal or a Related Party
Beneficially Owns, directly or indirectly a greater percentage of Voting
Stock of Charter Holdings, measured by voting power rather than the number
of shares, than such person;
(4) after Charter Holdings' initial public offering, the first day on
which a majority of the members of the board of directors of Charter
Holdings are not Continuing Directors; or
(5) Charter Holdings consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into, Charter
Holdings, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of Charter Holdings is converted into or exchanged
for cash, securities or other property, other than any such transaction
where the Voting Stock of Charter Holdings 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.
"COMPANY PREFERRED STOCK" means the 10% cumulative convertible redeemable
preferred equity of Charter Holdings with an aggregate liquidation value of $25
million.
"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 Charter Holdings and its Restricted Subsidiaries in
conformity with GAAP;
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(6) amounts actually paid during such period pursuant to a deferred
compensation plan; and
(7) for purposes of the covenant "-- 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
(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 indenture 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, and
(b) such terms are determined by such Person to be customary
in comparable financings and such restrictions are determined by
the issuers 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
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(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.
"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 at the time of such nomination or election or whose
election or appointment was previously so approved.
"COVENANT DEFEASANCE" is set forth above under the caption "-- Legal
Defeasance and Covenant Defeasance."
"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
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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."
"EVENTS OF DEFAULT" are set forth above under the caption "-- Events of
Default and Remedies."
"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 which the gross proceeds to Charter
Holdings are at least $25 million.
"EXCESS PROCEEDS" means any Net Proceeds from Asset Sales that are not
applied to repay debt under the Credit Facilities or other Indebtedness or
invested in Productive Assets, in accordance with the indenture.
"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 April 1, 2004, the first date on which the
Accreted Value of the 9.920% notes has accreted to an amount equal to the
principal amount at maturity of the 9.920% 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 the issue date.
"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.
"GUARANTEED INDEBTEDNESS" is set forth above under the caption "-- Certain
Covenants -- Limitations on Issuances of Guarantees of Indebtedness."
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"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.
"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.
"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,
purchases or 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.
"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.
"LEGAL DEFEASANCE" is set forth above under the caption "-- Legal
Defeasance and Covenant Defeasance."
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"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 combined 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 or 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, 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 fee payable to Charter Investment pursuant to
the management agreement between Charter Investment and Charter Operating, as
such agreement exists on the issue date, 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 agreement existing on the issue date.
"MARCUS COMBINATION" means the consolidation or merger of the Guarantor
with and into Charter Holdings or any of its Restricted Subsidiaries.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
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"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.
"PAYMENT DEFAULT" is set forth above under the caption "-- Events of
Default and Remedies."
"PERMITTED DEBT" is set forth above under the caption "-- Certain
Covenants -- Incurrence of indebtedness and Issuance of preferred stock."
"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
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described above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales";
(5) Investment made out of the net cash proceeds of the issue and
sale, 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 subheading "-- 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
subheading "-- 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 is value, when taken together with all
other Investments made pursuant to this clause (6) since the 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 date of the
indentures, not to exceed $50 million;
(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; and
(9) Charter Holdings' investment in Marcus Cable Holdings, LLC, as
outstanding on the Issue Date.
"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 and Liens on the assets of any
Restricted Subsidiary of Charter Holdings in favor of any other Restricted
Subsidiary 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;
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(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 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 or the Guarantor or any of
its Restricted Subsidiaries;
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(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;
(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;
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(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.
"RELATED PARTY" means:
(1) the spouse or an immediate family member, estate or heir of Mr.
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 Mr. 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 Issue Date, 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.
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"SUBORDINATED DEBT FINANCING" means, with respect to any restricted
subsidiary of Charter Holdings or the guarantor, 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 or the guarantor.
"SUBORDINATED NOTES" are set forth above under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of preferred stock."
"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.
"SUBSIDIARY GUARANTEE" is set forth above under the caption "-- Certain
Covenants -- Limitations on Issuances of Guarantees of Indebtedness."
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of Charter Holdings that is
designated by the board of directors 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 heading
"-- Investments";
(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
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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 "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.
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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.
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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 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 8.250% NOTES AND THE 8.625% NOTES.
Interest on the 8.250% notes and the 8.625% notes, 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 9.920% NOTES
The 9.920% 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 October
1, 2004. Each U.S. holder will be required to include in income in each year, in
advance of receipt of cash payments on such notes to which such income is
attributable, original issue discount income as described below.
The amount of original issue discount with respect to the 9.920% notes will
be equal to the excess of
(1) the note's "stated redemption price at maturity" over
(2) its "issue price."
The issue price of the 9.920% 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 9.920% notes, 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
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the holder holds the 9.920% notes. Accrual periods with respect to such a note
may be of any length and may vary in length over the term of the 9.920% 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.
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 9.920% 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 9.920%
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 9.920%
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 9.920% 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 8.625% notes and up
to 35% of the aggregate principal amount at maturity of the 9.920% notes,
provided that at least 65% of the aggregate principal amount of the 8.625% notes
and of the aggregate principal amount at maturity of the 9.920% notes remain
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 the issue date, 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 8.625% notes and the 9.920% notes, in whole or in part,
at any time on or after April 1, 2004, at redemption prices specified plus
accrued and unpaid
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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.
U.S. holders may wish to consult their own tax advisors regarding the
treatment of such contingencies.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange, retirement or other taxable disposition of a note,
a U.S. 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 8.250% notes and
the 8.625% 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 9.920% 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
amortized bond premium applied to reduce interest on the notes, and in the case
of a 9.920% note by any payments received on such note.
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
currently is 20%. The deductibility of capital losses is subject to certain
limitations.
MARKET DISCOUNT
A holder receives a "market discount" when it
(1) purchases an 8.250% note or an 8.625% note for an amount below the
issue price, or
(2) purchases a 9.920% 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
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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 an 8.250% note or an 8.625% note for an amount in excess of
the principal amount, or
(2) purchases a 9.920% 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 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 9.920% note for an amount that is greater
than the adjusted issue price of such note on the date of purchase, as
determined in accordance with the original issue discount rules, above, will be
considered to have purchased such note at an "acquisition premium." A holder of
a 9.920% note that is purchased at an acquisition premium may reduce the amount
of the original issue discount otherwise includible in income with respect to
such 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 such note immediately after its acquisition over the
adjusted issue price of such note, and the denominator of which is the excess of
the sum of all amounts payable on such note after the purchase date over the
adjusted issue price of such note. Alternatively, a holder of a 9.920% note that
is purchased at an acquisition premium may elect to compute the original issue
discount accrual on such note by treating the purchase as a purchase of such
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 United States federal withholding tax pursuant to the "portfolio interest
exception," provided that
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(1) the non-U.S. holder does not actually or constructively own 10% or more
of the capital or profits interest in us and is not a "controlled foreign
corporation" that is related to us within the meaning of the Internal Revenue
Code and
(2) either
(A) the beneficial owner of the notes certifies to us or our agent,
under penalties of perjury, that it is not a U.S. holder and provides its
name and address on United States 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 United States 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 original
issue discount, made to such non-U.S. holder will 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 United States
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, exchange, redemption, retirement or
other taxable disposition of a note by a non-U.S. holder generally will not be
subject to United States 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
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(3) the non-U.S. holder is not subject to tax pursuant to the provisions of
United States 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
United States federal estate tax if the interest on the notes qualifies for the
portfolio interest exemption from United States federal withholding 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, including 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 under the indentures governing the notes, 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 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
of such note or coupon, 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 periods 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 United States 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 United States
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.
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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 federal
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.
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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 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 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.
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EXPERTS
The consolidated financial statements of Charter 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 the
financial statements of Long Beach Acquisition Corp., 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
report.
The consolidated financial statements of Marcus Cable Company, L.L.C. as of
December 31, 1997, and for the periods from April 23, 1998 to December 23, 1998
and from January 1, 1998 to April 22, 1998 and for each of the years in the
two-year period ended December 31, 1997, 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 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. and the consolidated
financial statements of R/N South Florida Cable Management Limited Partnership,
included in this prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere in this
prospectus, and are included herein in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
The combined financial statements of InterMedia Cable Systems (comprised of
components of InterMedia Partners and InterMedia Capital Partners IV, L.P.), the
financial statements of Rifkin Cable Income Partners L.P., and the consolidated
financial statements of Rifkin Acquisition Partners, L.L.L.P., included in this
prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants. The entities and periods covered by these audits are indicated in
their reports. Such financial statements have been so included in reliance on
the reports of PricewaterhouseCoopers LLP given on the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
The legality of the notes offered hereby and certain other matters will be
passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New York.
208
212
CHARTER COMMUNICATIONS HOLDINGS, LLC
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Separate financial statements of Charter Communications
Holdings Capital Corporation have not been presented as
this entity had no operations and substantially no
assets or equity.
Report of Independent Public Accountants.................. F-6
Consolidated Balance Sheet as of December 31, 1998........ F-7
Consolidated Statement of Operations for the Period from
December 24, 1998, Through December 31, 1998........... F-8
Consolidated Statement of Cash Flows for the Period from
December 24, 1998, Through December 31, 1998........... F-9
Notes to Consolidated Financial Statements................ F-10
Report of Independent Public Accountants.................. F-27
Consolidated Balance Sheet as of December 31, 1997........ F-28
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-29
Consolidated Statements of Shareholder's Investment for
the Period From January 1, 1998 Through December 23,
1998 and for the Years Ended December 31, 1997 and
1996................................................... F-30
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-31
Notes to Consolidated Financial Statements................ F-32
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES:
Independent Auditors' Report.............................. F-43
Consolidated Balance Sheet as of December 31, 1997........ F-44
Consolidated Statements of Operations for the Periods From
April 23 to December 23, 1998 and January 1 to April
22, 1998 and for the Years in the Two-Year Period Ended
December 31, 1997...................................... F-45
Consolidated Statements of Partners' Capital (Deficit) for
the Period From January 1, 1998 to April 22, 1998 and
for Each of the Years in the Two-Year Period Ended
December 31, 1997...................................... F-46
Consolidated Statement of Members' Equity from April 23,
1998 to December 23, 1998.............................. F-47
Consolidated Statements of Cash Flows for the Period from
April 23, 1998 to December 23, 1998, From January 1,
1998 to April 22, 1998 and for the Years Ended December
31, 1997 and 1996...................................... F-48
Notes to Consolidated Financial Statements................ F-49
CCA GROUP:
Report of Independent Public Accountants.................. F-61
Combined Balance Sheet as of December 31, 1997............ F-62
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-63
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-64
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-65
Notes to Combined Financial Statements.................... F-66
F-1
213
PAGE
----
CHARTERCOMM HOLDINGS, L.P.:
Report of Independent Public Accountants.................. F-81
Consolidated Balance Sheet as of December 31, 1997........ F-82
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-83
Consolidated Statements of Partner's Capital for the
Period From January 1, 1998 Through December 23, 1998
and for the Years Ended December 31, 1997 and 1996..... F-84
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-85
Notes to Consolidated Financial Statements................ F-86
GREATER MEDIA CABLEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-100
Combined Balance Sheets as of March 31, 1999 (unaudited),
September 30, 1998 and 1997............................ F-101
Combined Statements of Income for the Six Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years
Ended September 30, 1998, 1997 and 1996................ F-102
Combined Statements of Changes in Net Assets for the Six
Months Ended March 31, 1999 (unaudited) and for the
Years Ended September 30, 1996, 1997 and 1998.......... F-103
Combined Statements of Cash Flows for the Six Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years
Ended September 30, 1998, 1997 and 1996................ F-104
Notes to Combined Financial Statements.................... F-105
RENAISSANCE MEDIA GROUP LLC:
Report of Independent Auditors............................ F-111
Consolidated Balance Sheet as of December 31, 1998........ F-112
Consolidated Statement of Operations for the Year Ended
December 31, 1998...................................... F-113
Consolidated Statement of Changes in Members' Equity for
the Year Ended December 31, 1998....................... F-114
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998...................................... F-115
Notes to Consolidated Financial Statements for the Year
Ended December 31, 1998................................ F-116
PICAYUNE MS, LAFOURCHE, LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA AND JACKSON TN CABLE TELEVISION SYSTEMS:
Report of Independent Auditors............................ F-126
Combined Balance Sheet as of April 8, 1998................ F-127
Combined Statement of Operations for the Period from
January 1, 1998 through April 8, 1998.................. F-128
Combined Statement of Changes in Net Assets for the Period
from January 1, 1998 through April 8, 1998............. F-129
Combined Statement of Cash Flows for the Period from
January 1, 1998 through April 8, 1998.................. F-130
Notes to Combined Financial Statements.................... F-131
Report of Independent Auditors............................ F-138
Combined Balance Sheets as of December 31, 1996 and
1997................................................... F-139
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997....................... F-140
Combined Statements of Changes in Net Assets for the Years
Ended December 31, 1996 and 1997....................... F-141
Combined Statements of Cash Flows for the Years Ended
1995, 1996 and 1997.................................... F-142
Notes to Combined Financial Statements.................... F-143
F-2
214
PAGE
----
HELICON PARTNERS I, L.P. AND AFFILIATES:
Independent Auditors' Report.............................. F-151
Combined Balance Sheets as of December 31, 1997 and
1998................................................... F-152
Combined Statements of Operations for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-153
Combined Statements of Changes in Partners' Deficit for
Each of the Years in the Three-Year Period Ended
December 31, 1998...................................... F-154
Combined Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-155
Notes to Combined Financial Statements.................... F-156
INTERMEDIA CABLE SYSTEMS (comprised of components of
InterMedia Partners and InterMedia Capital Partners IV,
L.P.):
Report of Independent Accountants......................... F-169
Combined Balance Sheets at December 31, 1998 and 1997..... F-170
Combined Statements of Operations for the Years Ended
December 31, 1998 and 1997............................. F-171
Combined Statement of Changes in Equity for the Years
Ended December 31, 1998 and 1997....................... F-172
Combined Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997............................. F-173
Notes to Combined Financial Statements.................... F-174
RIFKIN CABLE INCOME PARTNERS L.P.:
Report of Independent Accountants......................... F-187
Balance Sheet at December 31, 1997 and 1998............... F-188
Statement of Operations for Each of the Three Years in the
Period Ended December 31, 1998......................... F-189
Statement of Partners' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998...... F-190
Statement of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998......................... F-191
Notes to Financial Statements............................. F-192
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Report of Independent Accountants......................... F-196
Consolidated Balance Sheet at December 31, 1998 and
1997................................................... F-197
Consolidated Statement of Operations for Each of the Three
Years in the Period Ended December 31, 1998............ F-198
Consolidated Statement of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............ F-199
Consolidated Statement of Partners' Capital (Deficit) for
Each of the Three Years in the Period Ended December
31, 1998............................................... F-200
Notes to Consolidated Financial Statements................ F-201
INDIANA CABLE ASSOCIATES, LTD.:
Report of Independent Auditors............................ F-215
Balance Sheet as December 31, 1997 and 1998............... F-216
Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998.................................... F-217
Statement of Partners' Deficit for the Years Ended
December 31, 1996, 1997 and 1998....................... F-218
Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998.................................... F-219
Notes to Financial Statements............................. F-220
F-3
215
PAGE
----
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP:
Report of Independent Auditors............................ F-225
Consolidated Balance Sheet as of December 31, 1997 and
1998................................................... F-226
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998....................... F-227
Consolidated Statement of Partners' Equity (Deficit) for
the Years Ended December 31, 1996, 1997 and 1998....... F-228
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998....................... F-229
Notes to Consolidated Financial Statements................ F-230
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-234
Statement of Operations and Changes in Net Assets for the
Period from April 1, 1998, through May 20, 1998........ F-235
Statement of Cash Flows for the Period from April 1, 1998,
through May 20, 1998................................... F-236
Notes to Financial Statements............................. F-237
LONG BEACH ACQUISITION CORP.:
Report of Independent Public Accountants.................. F-240
Statement of Operations for the Period from April 1, 1997,
through May 23, 1997................................... F-241
Statement of Stockholder's Equity for the Period from
April 1, 1997, through May 23, 1997.................... F-242
Statement of Cash Flows for the Period from April 1, 1997,
through May 23, 1997................................... F-243
Notes to Financial Statements............................. F-244
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998...................... F-249
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-250
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-251
Notes to Condensed Consolidated Financial Statements...... F-252
RENAISSANCE MEDIA GROUP LLC:
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998...................... F-258
Consolidated Statement of Operations for the Three Months
Ended March 31, 1999 (unaudited)....................... F-259
Consolidated Statement of Changes in Members' Equity for
the Three Months Ended March 31, 1999 (unaudited)...... F-260
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999 (unaudited)....................... F-261
Notes to Consolidated Financial Statements................ F-262
HELICON PARTNERS I, L.P. AND AFFILIATES:
Unaudited Condensed Combined Balance Sheet as of March 31,
1999................................................... F-265
Unaudited Condensed Combined Statements of Operations for
the Three-Month Periods Ended March 31, 1998 and
1999................................................... F-266
Unaudited Condensed Combined Statements of Changes in
Partners' Deficit for the Three-Month Period Ended
March 31, 1999......................................... F-267
Unaudited Condensed Combined Statements of Cash Flows for
the Three-Month Periods Ended March 31, 1998 and
1999................................................... F-268
Notes to Unaudited Condensed Combined Financial
Statements............................................. F-269
F-4
216
PAGE
----
INTERMEDIA CABLE SYSTEMS (comprised of components of
InterMedia Partners and InterMedia Capital Partners IV,
L.P.):
Combined Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998.................................. F-271
Combined Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-272
Combined Statement of Changes in Equity for the Three
Months Ended March 31, 1999 (unaudited) and for the
Year Ended December 31, 1998........................... F-273
Combined Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-274
Notes to Condensed Combined Financial Statements
(unaudited)............................................ F-275
RIFKIN CABLE INCOME PARTNERS L.P.:
Balance Sheet at December 31, 1998 and March 31, 1999
(unaudited)............................................ F-282
Statement of Operations for the Quarters Ended March 31,
1998 and 1999 (unaudited).............................. F-283
Statement of Partners' Equity for the Quarters Ended March
31, 1998 and 1999 (unaudited).......................... F-284
Statement of Cash Flows for the Quarters Ended March 31,
1998 and 1999 (unaudited).............................. F-285
Notes to Financial Statements............................. F-286
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Consolidated Balance Sheet at March 31, 1999 (unaudited)
and December 31, 1998.................................. F-288
Consolidated Statement Of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-289
Consolidated Statement of Cash Flow for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-290
Consolidated Statements of Partners' Capital (Deficit) for
the Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-291
Notes to Consolidated Financial Statements................ F-292
INDIANA CABLE ASSOCIATES, LTD.:
Balance Sheet as of March 31, 1999 (unaudited)............ F-294
Statement of Operations for the Three Months Ended March
31, 1998 and 1999 (unaudited).......................... F-295
Statement of Cash Flows for the Three Months Ended March
31, 1998 and 1999 (unaudited).......................... F-296
Notes to Financial Statement (unaudited).................. F-297
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
Consolidated Balance Sheet as of March 31, 1999
(unaudited)............................................ F-298
Consolidated Statement of Operations for the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-299
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-300
Notes to Consolidated Financial Statement (unaudited)..... F-301
F-5
217
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheet of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations and cash flows for the period from
December 24, 1998, through December 31, 1998. We did not audit the balance sheet
of Marcus Cable Company, L.L.C. and subsidiaries as of December 31, 1998, that
is included in the consolidated balance sheet of Charter Communications
Holdings, LLC and subsidiaries and reflects total assets of 40% of the
consolidated totals. This balance sheet was audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Marcus Cable Company, L.L.C. and subsidiaries, is based
solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, 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, 1998, and the results of their operations and their cash
flows for the period from December 24, 1998, through December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999 (except with respect to the
matters discussed in Notes 1 and 12,
as to which the date is April 19, 1999)
F-6
218
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
-----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,386
Accounts receivable, net of allowance for doubtful
accounts of $3,528..................................... 31,163
Prepaid expenses and other................................ 8,613
----------
Total current assets................................... 50,162
----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 1,473,727
Franchises, net of accumulated amortization of $112,122... 5,705,420
----------
7,179,147
----------
OTHER ASSETS................................................ 6,347
----------
$7,235,656
==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 87,950
Accounts payable and accrued expenses..................... 199,831
Payable to related party.................................. 20,000
Payables to manager of cable television systems -- related
party.................................................. 7,675
----------
Total current liabilities.............................. 315,456
----------
LONG-TERM DEBT.............................................. 3,435,251
----------
DEFERRED MANAGEMENT FEES -- RELATED PARTY................... 15,561
----------
OTHER LONG-TERM LIABILITIES................................. 40,097
----------
MEMBERS' EQUITY -- 100 UNITS ISSUED AND OUTSTANDING......... 3,429,291
----------
$7,235,656
==========
The accompanying notes are an integral part of this consolidated statement.
F-7
219
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
1998, THROUGH
DECEMBER 31,
1998
-------------
REVENUES.................................................... $23,450
-------
OPERATING EXPENSES:
Operating costs........................................... 9,957
General and administrative................................ 2,722
Depreciation and amortization............................. 13,811
Corporate expense charges -- related party................ 766
-------
27,256
-------
Loss from operations................................... (3,806)
-------
OTHER INCOME (EXPENSE):
Interest income........................................... 133
Interest expense.......................................... (5,051)
-------
(4,918)
-------
Net loss............................................... $(8,724)
=======
The accompanying notes are an integral part of this consolidated statement.
F-8
220
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
1998, THROUGH
DECEMBER 31,
1998
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (8,724)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 13,811
Changes in assets and liabilities --
Receivables, net..................................... (8,753)
Prepaid expenses and other........................... (587)
Accounts payable and accrued expenses................ 4,961
Payables to manager of cable television systems...... 473
Other operating activities........................... 2,021
----------
Net cash provided by operating activities......... 3,202
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (13,672)
----------
Net cash used in investing activities............. (13,672)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 15,620
----------
Net cash provided by financing activities......... 15,620
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,150
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,236
----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 10,386
==========
CASH PAID FOR INTEREST...................................... $ 6,155
==========
NONCASH TRANSACTION -- Transfer of cable television
operating subsidiaries from the parent company (see Note
1)........................................................ $3,438,015
==========
The accompanying notes are an integral part of this consolidated statement.
F-9
221
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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), formerly Charter Communications, Inc.
Charter, through its wholly owned cable television operating subsidiary, Charter
Communications Properties, LLC (CCP), commenced operations with the acquisition
of a cable television system on September 30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter 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, Charter acquired
100% 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 television
operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed
from unrelated third parties for fair value. Charter 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 from the date of acquisition. In February 1999, Charter transferred
all of its cable television operating subsidiaries to a wholly owned subsidiary
of Charter Holdings, Charter Communications Operating, LLC (Charter Operating).
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 CCP, CharterComm Holdings and CCA
Group, Charter Holdings has applied push-down accounting in the preparation of
the consolidated financial statements. Accordingly, Charter Holdings increased
its members' equity by $2.2 billion to reflect the amounts paid by Paul G. Allen
and Charter. 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. The allocation of the purchase price is based, in
part, on preliminary information which is subject to adjustment upon obtaining
complete valuation information of intangible assets. The valuation information
is expected to be finalized in the third quarter of 1999. Management believes
that finalization of the purchase price will not have a material impact on the
results of operations or financial position of Charter Holdings.
On April 7, 1999, the cable television operating subsidiaries of Marcus
Cable Company, L.L.C. (Marcus) were transferred to Charter Operating. The
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests since Paul G. Allen and a company controlled
by Paul G. Allen purchased substantially all of the outstanding partnership
interests in Marcus in April 1998, and purchased the remaining interest in
Marcus in March 1999.
F-10
222
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements of Charter Holdings include the
accounts of Charter Operating and CCP and the accounts of CharterComm Holdings
and CCA Group and their subsidiaries since December 23, 1998 (date acquired by
Charter), and the accounts of Marcus since December 23, 1998 (date Paul G. Allen
controlled both Charter and Marcus), and are collectively referred to as the
"Company" herein. All subsidiaries are wholly owned. All material intercompany
transactions and balances have been eliminated. The Company derives its primary
source of revenues by providing various levels of cable television programming
and services to residential and business customers. As of December 31, 1998, the
Company provided cable television services to customers in 22 states in the U.S.
The consolidated financial statements of Charter Holdings for periods prior
to December 24, 1998, are not presented herein since, as a result of the Paul
Allen Transaction and the application of push down accounting, the financial
information as of December 31, 1998, and for the period from December 24, 1998,
through December 31, 1998, is presented on a different cost basis than the
financial information as of December 31, 1997, and for the periods prior to
December 24, 1998. Such information is not comparable.
The accompanying financial statements have been retroactively restated to
include the accounts of Marcus beginning December 24, 1998, using historical
carrying amounts. Previously reported revenues and net loss of the Company,
excluding Marcus, was $13,713 and $4,432, respectively, for the period from
December 24, 1998, through December 31, 1998. Revenues and net loss of Marcus
for the period from December 24, 1998 through December 31, 1998, included in the
accompanying financial statements, was $9,737 and $4,292, respectively.
Previously reported members' equity of the Company, excluding Marcus, was $2.1
billion as of December 31, 1998.
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,
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
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, and equipment replacement and betterments are capitalized.
F-11
223
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems................................ 3-15 years
Buildings and leasehold improvements...................... 5-15 years
Vehicles and equipment.................................... 3-5 years
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. 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.
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, 1998, no installation revenue has
been deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Company's customers and are periodically remitted to local
franchises. Franchise fees collected and paid are reported as revenues.
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
F-12
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
Income taxes are the responsibility of the individual members or partners
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.
SEGMENTS
In 1998, Charter Holdings adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." Segments have been identified based
upon management responsibility. Charter Holdings 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. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
In addition to the acquisitions by Charter of CharterComm Holdings and CCA
Group, the Company acquired cable television systems for an aggregate purchase
price, net of cash acquired, of $291,800 and $342,100 in 1998 and 1997,
respectively, and completed the sale of certain former Marcus cable television
systems for an aggregate sales price of $405,000 in 1998, all prior to December
24, 1998. The Company also refinanced substantially all of its long-term debt in
March 1999 (see Note 12).
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma operating results as though the acquisitions and
refinancing discussed above, including the Paul Allen Transaction and the
combination with Marcus, had occurred on January 1, 1997, with adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments are as follows:
YEAR ENDED
DECEMBER 31
-----------------------
1998 1997
---------- ---------
Revenues....................................... $1,059,882 $ 971,924
Loss from operations........................... (143,557) (185,051)
Net loss....................................... (599,953) (631,592)
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations or financial position of the Company had these transactions been
completed as of the assumed date or which may be obtained in the future.
3. MEMBERS' EQUITY:
For the period from December 24, 1998, through December 31, 1998, members'
equity consisted of the following:
Balance, December 24, 1998................................. $3,438,015
Net loss................................................... (8,724)
----------
Balance, December 31, 1998................................. $3,429,291
==========
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1998:
Cable distribution systems................................. $1,439,182
Land, buildings and leasehold improvements................. 41,321
Vehicles and equipment..................................... 61,237
----------
1,541,740
Less -- Accumulated depreciation........................... (68,013)
----------
$1,473,727
==========
For the period from December 24, 1998, through December 31, 1998,
depreciation expense was $5,029.
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1998:
Accrued interest............................................ $ 34,561
Franchise fees.............................................. 21,441
Programming costs........................................... 21,395
Capital expenditures........................................ 17,343
Accrued income taxes........................................ 15,205
Accounts payable............................................ 7,439
Other accrued liabilities................................... 82,447
--------
$199,831
========
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1998:
Charter:
Credit Agreements (including CCP, CCA Group and
CharterComm Holdings)................................. $1,726,500
Senior Secured Discount Debentures....................... 109,152
11 1/4% Senior Notes..................................... 125,000
Marcus:
Senior Credit Facility................................... 808,000
13 1/2% Senior Subordinated Discount Notes............... 383,236
14 1/4% Senior Discount Notes............................ 241,183
----------
3,393,071
Current maturities....................................... (87,950)
Unamortized net premium.................................. 130,130
----------
$3,435,251
==========
CCP CREDIT AGREEMENT
CCP maintains a credit agreement (the "CCP Credit Agreement"), which
provides for two term loan facilities, one with the principal amount of $60,000
that matures on June 30, 2006, and the other with the principal amount of
$80,000 that matures on June 30, 2007. The CCP Credit Agreement also provides
for a $90,000 revolving credit facility with a maturity date of June 30, 2006.
Amounts under the CCP Credit Agreement bear interest at the LIBOR Rate or Base
Rate, as defined, plus a margin up to 2.88%. The variable interest rates ranged
from 7.44% to 8.19% at December 31, 1998.
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CC-I, CC-II COMBINED CREDIT AGREEMENT
Charter Communications, LLC and Charter Communications II, LLC,
subsidiaries of CharterComm Holdings, maintains 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 up to 2.0%. The variable interest rates ranged from 6.69% to 7.31% at
December 31, 1998. A quarterly commitment fee of between 0.25% and 0.375% per
annum is payable on the unborrowed balance of the revolving credit facility.
CHARTERCOMM HOLDINGS -- SENIOR SECURED DISCOUNT DEBENTURES
CharterComm Holdings issued $146,820 of Senior Secured Discount Debentures
(the "Debentures") for proceeds of $75,000. The Debentures are effectively
subordinated to the claims and creditors of CharterComm Holdings' subsidiaries,
including the lenders under the Combined Credit Agreement. The Debentures are
redeemable at the Company's 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 issuer is 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.
CHARTERCOMM HOLDINGS -- 11 1/4% SENIOR NOTES
CharterComm Holdings issued $125,000 aggregate principal amount of 11 1/4%
Senior Notes (the "11 1/4% Notes"). The Notes are effectively subordinated to
the claims of creditors of CharterComm Holdings' subsidiaries, including the
lenders under the Combined Credit Agreements. The 11 1/4% Notes are redeemable
at the Company's option at amounts decreasing from 106% to 100% of principal,
plus accrued and unpaid interest to the date of redemption, beginning on March
15, 2001. The issuer is required to make an offer to purchase all of the 11 1/4%
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 11 1/4%
Notes indenture. Interest is payable semiannually on March 15 and September 15
until maturity on March 15, 2006.
As of December 24, 1998, the Debentures and 11 1/4% Notes were recorded at
their estimated fair values resulting in an increase in the carrying values of
the debt and an unamortized net premium as of December 31, 1998. The premium
will be amortized to interest expense over the estimated remaining lives of the
debt using the interest method. As of December 31, 1998, the effective interest
rates on the Debentures and 11 1/4% Notes were 10.7% and 9.6%, respectively.
F-16
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CCE-I CREDIT AGREEMENT
Charter Communications Entertainment I LLC, a subsidiary of CCA Group,
maintains a credit agreement (the "CCE-I Credit Agreement"), which provides for
a $280,000 term loan that matures on September 30, 2006, and $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
up to 2.75%. The variable interest rates ranged from 6.88% to 8.06% at December
31, 1998. A quarterly commitment fee of between 0.375% and 0.5% per annum is
payable on the unborrowed balance of the revolving credit facility.
CCE-II COMBINED CREDIT AGREEMENT
Charter Communications Entertainment II, LLC and Long Beach LLC,
subsidiaries of CCA Group, maintain a credit agreement (the "CCE-II 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 CCE-II
Combined Credit Agreement also provides for a $185,000 revolving credit
facility, with a maturity date of March 31, 2005. Amounts under the CCE-II
Combined Credit Agreement bear interest at either the LIBOR Rate or Base Rate,
as defined, plus a margin up to 2.5%. The variable rates ranged from 6.56% to
7.59% at December 31, 1998. A quarterly commitment fee of between 0.25% and
0.375% per annum is payable on the unborrowed balance of the revolving credit
facility.
CCE CREDIT AGREEMENT
Charter Communications Entertainment, LLC, a subsidiary of CCA Group,
maintains a credit agreement (the "CCE 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 Credit Agreement bear interest at the
LIBOR Rate or Base Rate, as defined, plus a margin up to 3.25%. The variable
interest rate at December 31, 1998, was 8.62%.
CCE-II HOLDINGS CREDIT AGREEMENT
CCE-II Holdings, LLC, a subsidiary of CCA Group, entered into a credit
agreement (the "CCE-II Holdings Credit Agreement"), 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 up to 3.25%. The variable
rate at December 31, 1998, was 8.56%.
MARCUS -- SENIOR CREDIT FACILITY
Marcus maintains a senior credit facility (the "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 that matures on April 30, 2004 (Tranche B). The
Senior Credit Facility provides for
F-17
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 up to 2.25%, which is subject to certain quarterly
adjustments based on the ratio of the issuer's total debt to annualized
operating cash flow, as defined. The variable interest rates ranged from 6.23%
to 7.75% at December 31, 1998. A quarterly commitment fee ranging from 0.250% to
0.375% per annum is payable on the unused commitment under the Senior Credit
Facility.
MARCUS -- 13 1/2% SENIOR SUBORDINATED DISCOUNT NOTES
Marcus 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 Marcus and are redeemable, at the
option of Marcus, 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 semiannually until maturity. The discount
on the 13 1/2% Notes is being accreted using the effective interest method and
the effective interest rate as of December 31, 1998 was 10.0%. The unamortized
discount was $30,225 at December 31, 1998.
MARCUS -- 14 1/4% SENIOR DISCOUNT NOTES
Marcus 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 are redeemable at the option of Marcus 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 semiannually until maturity.
The discount on the 14 1/4% Notes is being accreted using the effective interest
method and the effective interest rate as of December 31, 1998 was 14.1%. The
unamortized discount was $53,545 at December 31, 1998.
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.
F-18
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based upon outstanding indebtedness at December 31, 1998, and the
amortization of term and fund loans, and scheduled reductions in available
borrowings of the revolving credit facilities, aggregate future principal
payments on the total borrowings under all debt agreements at December 31, 1998,
are as follows:
YEAR AMOUNT
- ---- ----------
1999....................................................... $ 87,950
2000....................................................... 110,245
2001....................................................... 148,950
2002....................................................... 393,838
2003....................................................... 295,833
Thereafter................................................. 2,482,193
----------
$3,519,009
==========
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1998, is as follows:
CARRYING NOTIONAL FAIR
DEBT VALUE AMOUNT VALUE
- ---- ---------- ---------- ----------
Charter:
Charter Credit Agreements (including
CCP, CCA Group and CharterComm
Holdings)........................... $1,726,500 $ -- $1,726,500
Senior Secured Discount Debentures..... 138,102 -- 138,102
11 1/4% Senior Notes................... 137,604 -- 137,604
Marcus:
Senior Credit Facility................. 808,000 -- 808,000
13 1/2% Senior Subordinated Discount
Notes............................... 425,812 -- 418,629
14 1/4% Senior Discount Notes.......... 287,183 -- 279,992
INTEREST RATE HEDGE AGREEMENTS
Swaps.................................... (22,092) 1,505,000 (28,977)
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,
1998. The fair values of the 11 1/4% Notes, the Debentures, the 13 1/2% Notes
and the 14 1/2% Notes are based on quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.1% at December 31, 1998. The weighted average interest rate for
the Company's interest rate cap agreements was 8.45% at December 31, 1998. The
weighted
F-19
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
average interest rates for the Company's interest rate collar agreements were
8.63% and 7.31% for the cap and floor components, 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.
8. RELATED-PARTY TRANSACTIONS:
Charter 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 $128 for the period from December
24, 1998, through December 31, 1998. All other costs incurred by Charter on
behalf of the Company are recorded as expenses in the accompanying consolidated
financial statements and are included in corporate expense charges -- related
party. Management believes that costs incurred by Charter on Charter Holdings
behalf and included in the accompanying financial statements are not materially
different than costs Charter Holdings would have incurred as a stand alone
entity.
Charter utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to Charter Holdings as determined by independent
actuaries at the present value of the actuarially computed present and future
liabilities for such benefits. Medical coverage provides for $2,435 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.
The Company is charged a management fee based on percentages of revenues or
a flat fee plus additional fees based on percentages of operating cash flows, as
stipulated in the management agreements between Charter and the operating
subsidiaries. To the extent management fees charged to the Company are greater
(less) than the corporate expenses incurred by Charter, the Company will record
distributions to (capital contributions from)
F-20
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Charter. 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 on behalf of the Company. As of December 31, 1998,
management fees currently payable of $7,675 are included in payables to manager
of cable television systems-related party. Beginning in 1999, the management fee
will be based on 3.5% of revenues as permitted by the new debt agreements of the
Company (see Note 12).
The payable to related party represents the reimbursement of costs incurred
by Paul G. Allen in connection with the acquisition of Marcus by Paul G. Allen.
Charter, Paul G. Allen and certain affiliates of Mr. Allen own equity
interests or warrants to purchase equity interests in various entities which
provide services or programming to the Company, including High Speed Access
Corp. (High Speed Access), WorldGate Communications, Inc. (WorldGate), Wink
Communications, Inc. (Wink), ZDTV, USA Networks, Inc. (USA Networks) and Oxygen
Media Inc. (Oxygen Media). In addition, certain officers or directors of the
Company 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 television subscribers receive cable
modem-based internet access through High Speed Access and TV-based internet
access through WorldGate. 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 television
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 period from December 24, 1998, through
December 31, 1998, were less than 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 period from December 24, 1998, through
December 31, 1998, were less than 1% of total revenues.
9. 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
December 24, 1998, through December 31, 1998, were $144. Future minimum lease
payments are as follows:
1999........................................................ $5,898
2000........................................................ 4,070
2001........................................................ 3,298
2002........................................................ 1,305
2003........................................................ 705
Thereafter.................................................. 3,395
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
F-21
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense incurred for pole rental attachments for the period from December 24,
1998, through December 31, 1998, was $226.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable 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 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 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, deregulates rates on the cable
programming service tier
F-22
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 consolidated
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.
10. 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 made contributions to
the 401(k) Plans totaling $30 for the period from December 24, 1998, through
December 31, 1998.
11. 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).
F-23
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PARENT COMPANY ONLY FINANCIAL STATEMENTS
As a result of the limitations on and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company. Charter
Holdings (parent company only) financial statements are presented below.
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
-----------------
ASSETS
INVESTMENT IN CHARTER OPERATING............................ $3,429,291
==========
MEMBER'S EQUITY
MEMBERS' EQUITY............................................ $3,429,291
==========
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24, 1998,
THROUGH
DECEMBER 31, 1998
------------------
EQUITY IN LOSS OF CHARTER OPERATING....................... $ (8,724)
==========
Net loss................................................ $ (8,724)
==========
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
STATEMENT OF MEMBERS' EQUITY
(DOLLARS IN THOUSANDS)
Balance, December 24, 1998................................. $3,438,015
Net loss................................................... (8,724)
----------
Balance, December 31, 1998................................. $3,429,291
==========
The investment in Charter Operating is accounted for on the equity method.
No statement of cash flows has been presented as Charter Holdings (parent
company only) had no cash flow activity.
13. SUBSEQUENT EVENTS:
Through April 19, 1999, the Company has entered into definitive agreements
to purchase eight cable television companies, including a swap of cable
television systems, for approximately $4.6 billion. The swap of cable television
systems will be recorded at the fair
F-24
236
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the systems exchanged. The acquisitions are expected to close no later
than March 31, 2000. The acquisitions will be accounted for using the purchase
method of accounting, and accordingly, results of operations of the acquired
businesses will be included in the financial statements from the dates of
acquisitions.
In March 1999, concurrent with the issuance of $600.0 million 8.250% Senior
Notes due 2007, $1.5 billion 8.625% Senior Notes due 2009 and $1.475 billion
9.920% Senior Discount Notes due 2011 (collectively, the "CCH Notes"), the
Company extinguished substantially all 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
(the "CCO Credit Agreement") entered into by Charter Operating. Charter Holdings
expects to record an extraordinary loss of approximately $4 million in
conjunction with the extinguishment of substantially all long-term debt and the
refinancing of its credit agreements.
The CCO Credit Agreement provides for two term facilities, one with a
principal amount of $1.0 billion that matures September 2008 (Term A), and the
other with the principal amount of $1.85 billion that matures on March 2009
(Term B). The CCO Credit Agreement also provides for a $1.25 billion revolving
credit facility with a maturity date of September 2008. Amounts under the CCO
Credit Agreement bear interest at the Base Rate or the Eurodollar rate, as
defined, plus a margin up to 2.75%. 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. On March 17, 1999, the Company borrowed $1.75 billion
under Term B and invested the excess cash of $1.0 billion in short-term
investments.
Charter Communications Holdings Capital Corporation is a co-issuer of the
CCH Notes and is a wholly owned finance subsidiary of Charter Holdings with no
independent assets or operations.
In accordance with an employment agreement between Charter and the
President and Chief Executive Officer of Charter options to purchase 3% of the
net equity value of Charter Communications Holdings Company, LLC (CCHC), parent
of Charter Holdings, were issued to the President and Chief Executive Officer of
Charter. The option exercise price is equal to the fair market value at the date
of grant. The options vest over a four year period and expire ten years from the
date of grant.
In February 1999, the Company adopted an option plan providing for the
grant of options to purchase up to an aggregate of 10% of the equity value of
CCHC. The option plan provides for grants of options to employees, officers and
directors of CCHC and its affiliates and consultants who provide services to
CCHC. The option exercise price is equal to the fair market value at the date of
grant. Options granted vest over five years. However, if there has not been a
public offering of the equity interests of CCHC or an affiliate, vesting will
occur only upon termination of employment for any reason, other than for cause
or disability. 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.
F-25
237
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding as of March 31, 1999, are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------
EXERCISE NUMBER OF REMAINING CONTRACT NUMBER OF
PRICE OPTIONS LIFE (IN YEARS) OPTIONS
- --------------------- ------------------- ------------------- -------------------
$20.00 16,095,008 9.8 1,761,032
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" to account for the option plans. No compensation
expense is recognized because the option exercise price is equal to the fair
value of the underlying membership interests on the date of grant. Had
compensation expense for the option plans been determined based on the fair
value at the grant dates under the provisions of SFAS No. 123, the Company's net
loss would have been $10.8 million for the period from December 24, 1998,
through December 31, 1998. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, expected volatility of 44.00%, risk
free rate of 5.00%, and expected option lives of 10 years.
F-26
238
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheet of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholder's investment 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 Charter Communications
Holdings, LLC 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 (except with respect to
the matters discussed in Note 1, as to
which the date is April 7, 1999)
F-27
239
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31,
1997
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 626
Accounts receivable, net of allowance for doubtful
accounts of $52........................................ 579
Prepaid expenses and other................................ 32
-------
Total current assets................................... 1,237
-------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 25,530
Franchises, net of accumulated amortization of $3,829..... 28,195
-------
53,725
-------
OTHER ASSETS................................................ 849
-------
$55,811
=======
LIABILITIES AND SHAREHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 3,082
Payables to manager of cable television systems -- related
party.................................................. 114
-------
Total current liabilities.............................. 3,196
-------
LONG-TERM DEBT.............................................. 41,500
-------
NOTE PAYABLE TO RELATED PARTY, including accrued interest... 13,090
-------
SHAREHOLDER'S INVESTMENT:
Common stock, $.01 par value, 100 shares authorized, one
issued and outstanding................................. --
Paid-in capital........................................... 5,900
Accumulated deficit....................................... (7,875)
-------
Total shareholder's investment......................... (1,975)
-------
$55,811
=======
The accompanying notes are an integral part of these consolidated statements.
F-28
240
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1, YEAR ENDED
1998, THROUGH DECEMBER 31
DECEMBER 23, ------------------
1998 1997 1996
------------- ------- -------
REVENUES....................................... $ 49,731 $18,867 $14,881
-------- ------- -------
OPERATING EXPENSES:
Operating costs.............................. 18,751 9,157 5,888
General and administrative................... 7,201 2,610 2,235
Depreciation and amortization................ 16,864 6,103 4,593
Corporate expense allocation -- related
party..................................... 6,176 566 446
-------- ------- -------
48,992 18,436 13,162
-------- ------- -------
Income from operations.................... 739 431 1,719
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest income.............................. 44 41 20
Interest expense............................. (17,277) (5,120) (4,415)
Other, net................................... (728) 25 (47)
-------- ------- -------
(17,961) (5,054) (4,442)
-------- ------- -------
Net loss.................................. $(17,222) $(4,623) $(2,723)
======== ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-29
241
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INVESTMENT
(DOLLARS IN THOUSANDS)
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ----------- --------
BALANCE, December 31, 1995........ $-- $ 1,500 $ (529) $ 971
Capital contributions........... -- 4,400 -- 4,400
Net loss........................ -- -- (2,723) (2,723)
-- ------- -------- --------
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-30
242
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED 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............................................. $ (17,222) $(4,623) $ (2,723)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization...................... 16,864 6,103 4,593
Loss on sale of cable television system............ -- 1,363 --
Amortization of debt issuance costs, debt discount
and interest rate cap agreements................. 267 123 --
(Gain) loss on disposal of property, plant and
equipment........................................ (14) 130 --
Changes in assets and liabilities, net of effects
from acquisitions --
Receivables, net................................. 10 (227) 6
Prepaid expenses and other....................... (125) 18 312
Accounts payable and accrued expenses............ 16,927 894 3,615
Payables to manager of cable television
systems....................................... 5,288 (153) 160
Other operating activities....................... 569 -- --
--------- ------- --------
Net cash provided by operating activities........ 22,564 3,628 5,963
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........... (15,364) (7,880) (5,894)
Payments for acquisitions, net of cash acquired...... (167,484) -- (34,069)
Proceeds from sale of cable television system........ -- 12,528 --
Other investing activities........................... (486) -- 64
--------- ------- --------
Net cash provided by (used in) investing
activities.................................... (183,334) 4,648 (39,899)
--------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt......................... 217,500 5,100 31,375
Repayments of long-term debt......................... (60,200) (13,375) (1,000)
Capital contributions................................ 7,000 -- 4,400
Payment of debt issuance costs....................... (3,487) (12) (638)
--------- ------- --------
Net cash provided by (used in) financing
activities.................................... 160,813 (8,287) 34,137
--------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 43 (11) 201
CASH AND CASH EQUIVALENTS, beginning of period......... 626 637 436
--------- ------- --------
CASH AND CASH EQUIVALENTS, end of period............... $ 669 $ 626 $ 637
========= ======= ========
CASH PAID FOR INTEREST................................. $ 7,679 $ 3,303 $ 2,798
========= ======= ========
The accompanying notes are an integral part of these consolidated statements.
F-31
243
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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), formerly Charter Communications, Inc.
Charter, through its wholly owned cable television operating subsidiary, Charter
Communications Properties, LLC (CCP), commenced operations with the acquisition
of a cable television system on September 30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter 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, Charter acquired
100% 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
from unrelated third parties for fair value. Charter 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 CarterComm Holdings and CCA Group are included in the financial
statements of Charter Holdings from the date of acquisition. In February 1999,
Charter transferred all of its cable television operating subsidiaries to a
wholly owned subsidiary of Charter Holdings, Charter Communications Operating,
LLC (Charter Operating). The transfer was accounted for as a reorganization of
entities under common control similar to a pooling of interests.
On April 7, 1999, the cable television operating subsidiaries of Marcus
Cable Company, L.L.C. (Marcus) were transferred to Charter Operating. The
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests, since Paul G. Allen and a company controlled
by Paul G. Allen purchased substantially all of the outstanding partnership
interests in Marcus in April 1998, and purchased the remaining interests in
Marcus on April 7, 1999.
The accompanying financial statements include the accounts of CCP,
Charter's wholly owned cable operating subsidiary, representing the financial
statements of Charter Holdings and subsidiaries (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 prior to December
23, 1998. The accounts of Marcus are not included since both Charter and Marcus
were not owned and controlled by the same party prior to December 23, 1998.
As a result of the change in ownership of CCP, 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 financial statements of Charter Holdings for periods ended on or before
December 23, 1998, are presented on a different cost basis than the financial
statements for the periods after December 23, 1998 (not presented herein), and
are not comparable.
F-32
244
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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, 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
In 1997, the Company shortened the useful lives from 10 years to 5 years of
certain plant and equipment included in cable distribution systems associated
with costs of new customer installations. As a result, additional depreciation
of $550 was recorded during 1997. The estimated useful lives were shortened to
be more reflective of average customer lives.
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. 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.
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-33
245
CHARTER COMMUNICATIONS 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 television system. As of 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. On a monthly basis, such fees are
collected from the Company's customers and are periodically remitted to local
franchises. Franchise fees collected and paid are reported as revenues.
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 designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
The Company files a consolidated income tax return with Charter. Income
taxes are allocated to the Company in accordance with the tax-sharing agreement
between the Company and Charter.
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.
F-34
246
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS:
In 1998, the Company acquired cable television systems for an aggregate
purchase price, net of cash acquired, of $228,400, comprising $167,500 in cash
and $60,900 in a note payable to Seller. The excess of cost of properties
acquired over the amounts assigned to net tangible assets at the date of
acquisition was $207,600 and is included in franchises.
In 1996, the Company acquired cable television systems for an aggregate
purchase price, net of cash acquired, of $34,100. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets at the date
of acquisition was $24,300 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. The
purchase prices were allocated to tangible and intangible assets based on
estimated fair values at the acquisition dates.
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 YEAR ENDED
DECEMBER 23, 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
these transactions been completed as of the assumed date or which may be
obtained in the future.
3. 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
$12,500. The sale of the Ft. Hood system resulted in a loss of $1,363, which is
included in operating costs in the accompanying statement of operations for the
year ended December 31, 1997.
F-35
247
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
Cable distribution systems.................................. $29,061
Land, buildings and leasehold improvements.................. 447
Vehicles and equipment...................................... 1,744
-------
31,252
Less- Accumulated depreciation.............................. (5,722)
-------
$25,530
=======
For the period from January 1, 1998, through December 23, 1998, and for the
years ended December 31, 1997 and 1996, depreciation expense was $6,249, $3,898
and $2,371, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
Accrued interest............................................ $ 292
Capital expenditures........................................ 562
Franchise fees.............................................. 426
Programming costs........................................... 398
Accounts payable............................................ 298
Other....................................................... 1,012
------
$2,988
======
6. LONG-TERM DEBT:
The Company maintained a revolving credit agreement (the "Old Credit
Agreement") with a consortium of banks for borrowings up to $47,500, of which
$41,500 was outstanding at December 31, 1997. In 1997, the Credit Agreement was
amended to reflect the impact of the sale of a cable television system. The debt
bears interest, at the Company's option, at rates based on the prime rate of the
Bank of Montreal (the agent bank), or LIBOR, plus the applicable margin based
upon the Company's leverage ratio at the time of the borrowings. The variable
interest rates ranged from 7.44% to 7.63% at December 31, 1997.
In May 1998, the Company entered into a credit agreement (the "CCP Credit
Agreement"), which provides for two term loan facilities, one with the principal
amount of $60,000 that matures on June 30, 2006, and the other with the
principal amount of $80,000 that matures on June 30, 2007. The CCP Credit
Agreement also provides for a $90,000 revolving credit facility with a maturity
date of June 30, 2006. Amounts under the CCP Credit Agreement bear interest at
the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.88%.
F-36
248
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commencing March 31, 1999, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility shall be reduced on an
annual basis by 3.5% in 1999, 7.0% in 2000, 9.0% in 2001, 10.5% in 2002 and
16.5% in 2003. Commencing March 31, 2000, and at the end of each quarter
thereafter, available borrowings under the term loan shall be reduced on an
annual basis by 6.0% in 2000, 8.0% in 2001, 11.0% in 2002 and 16.5% in 2003.
Commencing March 31, 2000, and at the end of each quarter thereafter, available
borrowings under the other term loan shall be reduced on an annual basis by 1.0%
in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003.
The credit agreement requires the Company and/or its subsidiaries to comply
with various financial and other covenants, including the maintenance of certain
operating and financial ratios. This agreement also contains substantial
limitations on, or prohibitions of, distributions, additional indebtedness,
liens, asset sales and certain other items.
7. NOTE PAYABLE TO RELATED PARTY:
As of December 31, 1997, the Company holds a promissory note payable to CCT
Holdings Corp., a company managed by Charter and acquired by Charter effective
December 23, 1998. The promissory note bears interest at the rates paid by CCT
Holdings Corp. on a note payable to a third party. Principal and interest are
due on September 29, 2005.
8. 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
-------- -------- -------
