1 Filed Pursuant to Rule 424(b)(4) Registration No. 333-41486 5,661,117 SHARES CHARTER COMMUNICATIONS, INC. CLASS A COMMON STOCK ------------------------- All of the shares of common stock covered by this prospectus are owned by the shareholders listed in the section of this prospectus called "Selling Shareholders." The selling shareholders may sell any or all of their shares from time to time. See "Plan of Distribution." We will not receive any of the proceeds of sales by the selling shareholders. We have agreed to bear all expenses related to this offering other than stock transfer fees or expenses (including the cost of all transfer tax stamps), underwriting or brokerage discounts or commissions and fees and disbursements of counsel (other than the fees and disbursements of counsel incurred in connection with the registration of the shares) attributable to the sale of the shares. Charter Communications, Inc. agrees to indemnify each selling shareholder for any losses which arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in this registration statement, or any omission or alleged omission to state herein a material fact required to be stated herein or necessary to make the statements herein not misleading. Charter Communications, Inc. will reimburse each such selling shareholder for any reasonable legal fees and expenses incurred by him in connection with investigating or defending any such claims, except that Charter Communications, Inc. will not indemnify any selling shareholder for losses which result from an untrue statement or omission made in reliance upon and in conformity with written information provided by or on behalf of such selling shareholder for inclusion in this registration statement. Each selling shareholder, individually and not jointly, agrees to indemnify Charter Communications, Inc. and each other selling shareholder for any losses which arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in this registration statement, or any omission or alleged omission to state herein a material fact required to be stated herein or necessary to make the statements herein not misleading, if the statement or omission was made in reliance upon and in conformity with written information provided by or on behalf of such selling shareholder for inclusion in this registration statement. Our common stock is quoted on the Nasdaq National Market under the symbol "CHTR." SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF THE CLASS A COMMON STOCK. 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 date of this prospectus is September 26, 2000. 2 TABLE OF CONTENTS i
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 9 Forward-Looking Statements.................................. 23 Use of Proceeds............................................. 24 Dividend Policy............................................. 24 Capitalization.............................................. 25 Dilution.................................................... 27 Unaudited Pro Forma Financial Statements.................... 28 Selected Historical Financial Data.......................... 45 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 47 Selling Shareholders........................................ 68 Plan of Distribution........................................ 70 Market for Common Equity.................................... 71 Business.................................................... 73 Regulation and Legislation.................................. 101 Management.................................................. 109 Principal Shareholders...................................... 118 Certain Relationships and Related Transactions.............. 121 Description of Certain Indebtedness......................... 138 Description of Capital Stock and Membership Units........... 152 Shares Eligible For Future Sale............................. 163 Legal Matters............................................... 164 Experts..................................................... 164 Where You Can Find Additional Information................... 166 Index to Financial Statements............................... F-1 3 PROSPECTUS SUMMARY The following summary contains a general discussion of our business and financial information. Unless stated otherwise, the discussion of our business in this prospectus includes Charter Communications, Inc. and its direct and indirect subsidiaries. OUR BUSINESS We are the fourth largest operator of cable systems in the United States, serving approximately 6.3 million customers. We offer a full range of traditional cable television services in all of our systems and we are offering digital cable television services to customers in an increasing number of our systems. Digital technology enables cable operators to increase the number of channels a cable system can carry by permitting a significantly increased number of video signals to be transmitted over a cable system's existing bandwidth. Bandwidth is a measure of the information-carrying capacity. It is the range of usable frequencies that can be carried by a cable system. We have also started to introduce a number of other new products and services, including interactive video programming, which allows information to flow in both directions, and high-speed Internet access to the World Wide Web. We are also exploring opportunities in telephony, which will integrate telephone services with the Internet through the use of cable. The introduction of these new services represents an important step toward the realization of our Wired World(TM) vision, where cable's ability to transmit voice, video and data at high speeds will enable it to serve as the primary platform for the delivery of new services to the home and workplace. We are accelerating the upgrade of our systems to more quickly provide these new services. We have grown rapidly over the past five years. During this period, our management team has successfully completed 36 acquisitions, including sixteen acquisitions closed since January 1, 1999 and a merger with Marcus Cable Holdings, LLC in April 1999. In addition, we have expanded our customer base through significant internal growth. For the six months ended June 30, 2000, our internal customer growth, without giving effect to the cable systems we acquired in 2000, was 0.7%, compared to the national industry average of 0.4%. In 1999, our internal customer growth, without giving effect to the cable systems we acquired in 1999, was 3.1%, compared to the national industry average of 1.8%. In 1998, our internal customer growth, without giving effect to the cable systems we acquired in that year, was 4.8%, more than twice the national industry average of 1.7%. Our principal executive offices are located at 12444 Powerscourt Drive, Suite 100, St. Louis, Missouri 63131. Our telephone number is (314) 965-0555 and our web site is located at www.chartercom.com. The information on our web site is not part of this prospectus. 1 4 BUSINESS STRATEGY Our objective is to increase our operating cash flow by increasing our customer base and the amount of cash flow per customer. To achieve this objective, we are pursuing the following strategies: - rapidly integrate acquired cable systems and apply our core operating strategies to raise the financial and operating performance of these acquired systems; - expand the array of services we offer to our customers through the implementation of our Wired World vision; - upgrade the bandwidth capacity of our systems to 550 megahertz or greater to enable greater channel capacity and add two-way capability to facilitate interactive communication. Two-way capability is the ability to have bandwidth available for upstream, or two-way, communication; - maximize customer satisfaction by providing reliable, high-quality service offerings, superior customer service and attractive programming choices at reasonable rates; - employ innovative marketing programs tailored to local customer preferences to generate additional revenues; - emphasize local management autonomy to better serve our customers while providing support from regional and corporate offices and maintaining centralized financial controls; and - improve the geographic clustering of our cable systems by selectively trading or acquiring systems to increase operating efficiencies and improve operating margins. Clusters refer to cable systems under common ownership that are located within geographic proximity to each other. 2 5 CHARTER ORGANIZATIONAL STRUCTURE The chart below sets forth our organizational structure and that of our direct and indirect subsidiaries and assumes that there has been no exercise of any of the outstanding options to purchase membership units of Charter Communications Holding Company, which units are to be exchanged upon issuance for shares of Class A common stock on a one-for-one basis. See "Management -- Option Plan." Our cable systems are owned by certain of our subsidiaries. [CHARTER COMMUNICATIONS FLOW CHART] * These shares are restricted from public sale until registered. See "Shares Eligible for Future Sale." ** Includes 472,646 shares of Class A common stock recently issued in connection with the purchase of certain shares of Interactive Broadcaster Services Corporation doing business as Chat TV. See "Shares Eligible for Future Sale." *** These membership units are exchangeable at any time for shares of Class B common stock which are in turn exchangeable for Charter Communications, Inc. Class A common stock. **** These equity interests are exchangeable at any time for shares of our Class A common stock on a one-for-one basis. See "Business -- Charter Organizational Structure -- Bresnan Sellers." For a more detailed description of each entity and how it relates to us, see "Business -- Charter Organizational Structure." 3 6 RECENT EVENTS ACQUISITIONS In 1999, we completed eleven acquisitions of cable systems for an aggregate purchase price of $10.9 billion. In addition, we have closed five acquisitions in 2000. A summary of information regarding acquisitions closed in 2000 is as follows: - --------------- (a) Includes revenues of approximately $0.6 million related to the cable systems acquired by Bresnan since December 31, 1999. For additional information regarding acquisitions in 2000, see "Business -- Acquisitions." JANUARY 2000 CHARTER HOLDINGS NOTES On January 12, 2000, Charter Holdings and Charter Communications Holdings Capital Corporation issued $1.5 billion principal amount of senior notes consisting of: - $675.0 million in aggregate principal amount of 10.00% senior notes due 2009; - $325.0 million in aggregate principal amount of 10.25% senior notes due 2010; and - $532.0 million in aggregate principal amount at maturity of 11.75% senior discount notes due 2010. The net proceeds of approximately $1.3 billion were used to consummate change of control offers for certain of the Falcon, Avalon and Bresnan notes and debentures. CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY On August 14, 2000, Charter Holdings and Charter Communications Holdings Capital Corporation borrowed $1.0 billion under a senior bridge loan facility providing for increasing rate senior bridge loans. Charter Holdings used the majority of the proceeds to repay a portion of the amounts outstanding under the Charter Operating revolving credit facility. 4
AS OF AND FOR THE SIX MONTHS PURCHASE PRICE ENDED JUNE 30, 2000 (INCLUDING ----------------------------- ACQUISITION ASSUMED DEBT) REVENUES DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) ---------------- -------------- ---------- --------------- Cable system of Interlake Cablevision Enterprises, LLC..................... 2/00 $ 13 5,800 $ 896 Bresnan Communications Company Limited Partnership.................. 2/00 3,100 686,100 156,116(a) Cable systems of Falcon/Capital Cable Partners, L.P........................ 4/00 60 23,900 5,092 Cable systems of Farmington Cablevision Company.............................. 4/00 15 5,600 1,014 Cablevision of Michigan, Inc. ......... 9/00 173 48,900 10,231 ------ -------- -------- Total................................ $3,361 770,300 $173,349 ====== ======== ======== 7 UNAUDITED SUMMARY PRO FORMA DATA You should read the following unaudited summary pro forma financial data of Charter Communications, Inc. in conjunction with the historical financial statements and other financial information appearing elsewhere in this prospectus, including "Capitalization," "Unaudited Pro Forma Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 5
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 ------------------------------------------------------------- CHARTER 2000 BRIDGE COMMUNICATIONS, INC. ACQUISITIONS LOAN TOTAL -------------------- ------------ -------- ------------ (DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA) STATEMENT OF OPERATIONS: Revenues................................ $ 1,516,384 $ 47,721 $ -- $ 1,564,105 ----------- ---------- -------- ------------ Operating expenses: Operating, general and administrative...................... 778,313 31,323 -- 809,636 Depreciation and amortization......... 1,149,787 35,699 -- 1,185,486 Option compensation expense........... 26,089 -- -- 26,089 Corporate expense charges(a).......... 27,515 449 -- 27,964 Management fees....................... -- 181 -- 181 ----------- ---------- -------- ------------ Total operating expenses............ 1,981,704 67,652 -- 2,049,356 ----------- ---------- -------- ------------ Loss from operations.................... (465,320) (19,931) -- (485,251) Interest expense........................ (482,042) (24,381) (32,555) (538,978) Interest income......................... 6,110 46 -- 6,156 Other expense........................... (2,504) (92) -- (2,596) ----------- ---------- -------- ------------ Loss before minority interest in loss of subsidiary and extraordinary item..... (943,756) (44,358) (32,555) (1,020,669) Minority interest in loss of subsidiary(b)......................... 566,221 16,671 19,289 602,181 ----------- ---------- -------- ------------ Loss before extraordinary item.......... $ (377,535) $ (27,687) $(13,266) $ (418,488) =========== ========== ======== ============ Loss per common share, basic and diluted(c)............................ $ (1.79) ============ Weighted average common shares outstanding, basic and diluted(d)..... 233,263,122 ============ OTHER FINANCIAL DATA: EBITDA(e)............................... $ 681,963 $ 15,676 $ 697,639 EBITDA margin(f)........................ 45.0% 32.8% 44.6% Adjusted EBITDA(g)...................... $ 738,071 $ 16,398 $ 754,469 Cash flows from operating activities.... 606,832 90,020 696,852 Cash flows used in investing activities............................ (1,051,136) (38,924) (1,090,060) Cash flows from financing activities.... (2,701,287) (79,321) (2,780,608) Cash interest expense................... 444,304 Capital expenditures.................... 1,049,991 102,805 1,152,796 Total debt to estimated annual EBITDA(h)............................. 8.3x Total debt to estimated annual adjusted EBITDA(i)............................. 7.7 EBITDA to cash interest expense......... 1.6 EBITDA to interest expense.............. 1.3 BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................ $22,025,157 $ 170,846 $ 37,463 $ 22,233,466 Total debt.............................. 11,605,328 -- 43,000 11,648,328 Minority interest(j).................... 4,689,263 (2,076) -- 4,687,187 Redeemable securities(k)................ 1,846,176 -- -- 1,846,176 Shareholders' equity.................... 2,703,188 169,226 -- 2,872,414 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGE): Homes passed(l)......................... 8,911,200 1,155,600 10,066,800 Basic customers(m)...................... 5,492,700 770,300 6,263,000 Basic penetration(n).................... 61.6% 66.7% 62.2% Premium units(o)........................ 2,952,700 373,800 3,326,500 Premium penetration(p).................. 53.8% 48.5% 53.1% Average monthly revenue per basic customer(q)........................... $ 41.62 8 6
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------------------- CHARTER BRIDGE COMMUNICATIONS, INC. ACQUISITIONS LOAN TOTAL -------------------- ------------ ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA) STATEMENT OF OPERATIONS: Revenues................................ $ 1,553,424 $1,397,611 $ -- $ 2,951,035 ----------- ---------- ----------- ------------ Operating expenses: Operating, general and administrative....................... 806,941 703,712 -- 1,510,653 Depreciation and amortization.......... 808,981 887,586 -- 1,696,567 Option compensation expense............ 79,979 -- -- 79,979 Corporate expense charges(a)........... 51,428 59,202 -- 110,630 Management fees........................ -- 16,224 -- 16,224 ----------- ---------- ----------- ------------ Total operating expenses............. 1,747,329 1,666,724 -- 3,414,053 ----------- ---------- ----------- ------------ Loss from operations.................... (193,905) (269,113) -- (463,018) Interest expense........................ (536,218) (487,724) (65,111) (1,089,053) Interest income......................... 4,329 1,335 -- 5,664 Other income (expense).................. 285 (646) -- (361) ----------- ---------- ----------- ------------ Loss before income taxes, minority interest in loss of subsidiary and extraordinary item..................... (725,509) (756,148) (65,111) (1,546,768) Income tax expense...................... (1,030) (2,717) -- (3,747) Minority interest in loss of subsidiary(b).......................... 430,474 444,498 38,578 913,550 ----------- ---------- ----------- ------------ Loss before extraordinary item.......... $ (296,065) $ (314,367) $ (26,533) $ (636,965) =========== ========== =========== ============ Loss per common share, basic and diluted(c)............................. $ (2.73) ============ Weighted average common shares outstanding, basic and diluted(d)...... 233,263,122 ============ OTHER FINANCIAL DATA: EBITDA(e)............................... $ 615,361 $ 617,827 $ 1,233,188 EBITDA margin(f)........................ 39.6% 44.2% 41.8% Adjusted EBITDA(g)...................... $ 746,483 $ 693,899 $ 1,440,382 Cash flows from operating activities.... 479,916 485,751 965,667 Cash flows used in investing activities............................. (768,263) (641,724) (1,409,987) Cash flows from financing activities.... 412,480 243,024 655,504 Cash interest expense................... 882,702 Capital expenditures.................... 741,508 545,322 1,286,830 Total debt to EBITDA.................... 9.1x Total debt to adjusted EBITDA........... 7.8 EBITDA to cash interest expense......... 1.4 EBITDA to interest expense.............. 1.1 BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................ $19,016,789 $3,304,446 $ 37,463 $ 22,358,698 Total debt.............................. 9,002,877 2,128,009 43,000 11,173,886 Minority interest(j).................... 5,381,331 (151,622) -- 5,229,709 Redeemable securities(k)................ 750,937 1,095,239 -- 1,846,176 Shareholders' equity.................... 3,011,079 237,643 -- 3,248,722 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGE): Homes passed(l)......................... 8,706,400 1,146,400 9,852,800 Basic customers(m)...................... 5,452,500 768,100 6,220,600 Basic penetration(n).................... 62.6% 67.0% 63.1% Premium units(o)........................ 2,800,800 343,700 3,144,500 Premium penetration(p).................. 51.4% 44.7% 50.5% Average monthly revenue per basic customer(q)............................ $ 39.53 9 (a) From November 12, 1999, the date of the initial public offering of Charter Communications, Inc., Charter Investment, Inc. provided management services to subsidiaries of Charter Operating. Since the initial public offering, Charter Communications, Inc. has provided such management services. See "Certain Relationships and Related Transactions." (b) Represents the allocation of losses to the minority interest in loss of subsidiary based on ownership of Charter Communications Holding Company and the 2% accretion of the preferred membership units of an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers. These membership units are exchangeable on a one-for-one basis for shares of Class A common stock of Charter Communications, Inc. (c) Basic and diluted loss per common share assumes none of the membership units of Charter Communications Holding Company or preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of June 30, 2000, are exchanged for Charter Communications, Inc. Class A common stock and none of the outstanding options to purchase membership units of Charter Communications Holding Company that are automatically exchanged for Charter Communications, Inc. Class A common stock are exercised. Basic and diluted loss per common share equals net loss divided by weighted average common shares outstanding. If the membership units were exchanged or options exercised, the effects would be antidilutive. Converted loss per common share assumes all common membership units of Charter Communications Holding Company and preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of June 30, 2000, are exchanged for Charter Communications, Inc. Class A common stock. If all these shares are converted, minority interest would equal zero. Converted loss per common share is calculated by dividing loss before minority interest by the weighted average common shares outstanding -- converted. Weighted average common shares outstanding -- converted assumes the total common membership units in Charter Communications Holding Company totaling 339,096,474 and 24,215,749 preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers are exchanged for Charter Communications, Inc. Class A common stock. (d) Represents all shares outstanding as of January 1, 2000 (195,550,000 shares) plus additional shares issued under the respective acquisition agreements to the Rifkin and Falcon sellers through June 30, 2000 (26,539,746 shares) and shares issued to sellers in the Kalamazoo transaction (11,173,376 shares). (e) EBITDA represents earnings (loss) before extraordinary item, interest, income taxes, depreciation and amortization, and minority interest. EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. Management's discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. (f) EBITDA margin represents EBITDA as a percentage of revenues. (g) Adjusted EBITDA means EBITDA before option compensation expense, corporate expense charges, management fees and other expenses. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service its indebtedness. However, adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. Adjusted EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by adjusted EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. (h) Estimated annual EBITDA represents EBITDA for the six months ended June 30, 2000 multiplied by 2. (i) Estimated annual adjusted EBITDA represents adjusted EBITDA for the six months ended June 30, 2000 multiplied by 2. (j) Minority interest consists primarily of (1) total members' equity of Charter Communications Holding Company multiplied by 59.2% on a pro forma basis at June 30, 2000, the ownership percentage of Charter Communications Holding Company not 7
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED JUNE 30, 2000 DECEMBER 31, 1999 ------------- ----------------- Converted loss per Class A common share.................... $ (1.71) $ (2.60) Weighted average Class A common shares outstanding -- converted................................................ 596,575,345 596,575,345 10 owned by us and (2) preferred equity in a subsidiary of Charter Holdings held by certain Bresnan sellers less a portion of redeemable securities. Gains (losses) arising from the issuance by Charter Communications Holding Company of its membership units are recorded as capital transactions, thereby increasing/(decreasing) shareholders' equity and (decreasing)/increasing minority interest. (k) The Rifkin, Falcon, Helicon and Bresnan sellers who own equity interests in Charter Communications, Inc. and certain subsidiaries may have rescission rights arising out of possible violations of Section 5 of the Securities Act of 1933, as amended, in connection with the offers and sales of those equity interests. Accordingly, the maximum cash obligation related to the possible rescission rights, estimated at $1.8 billion, has been excluded from shareholders' equity and minority interest, and classified as redeemable securities. One year after the date of issuance of these equity interests (when these possible rescission rights will have expired), we will reclassify the respective amounts to shareholders' equity and minority interest. See "Certain Trends and Uncertainties -- Possible Rescission Liability." (l) 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. (m) Basic customers are customers who receive basic cable service. (n) Basic penetration represents basic customers as a percentage of homes passed. (o) Premium units represent the total number of subscriptions to premium channels. (p) Premium penetration represents premium units as a percentage of basic customers. (q) 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 the end of the period. 8 11 RISK FACTORS An investment in our Class A common stock entails the following risks. You should carefully consider these risk factors, as well as the other information contained in this prospectus. OUR STRUCTURE MR. ALLEN HAS THE ABILITY TO CONTROL MATTERS ON WHICH ALL OF CHARTER COMMUNICATIONS, INC.'S SHAREHOLDERS MAY VOTE AND HAS THE EXCLUSIVE RIGHT TO VOTE ON SPECIFIC MATTERS. Mr. Allen controls approximately 93.5% of the voting power of Charter Communications, Inc.'s capital stock. Accordingly, Mr. Allen controls Charter Communications, Inc. Class A common shareholders have very limited voting interest in Charter Communications, Inc. and a limited indirect equity interest in Charter Communications Holding Company, although Class A common shareholders have an equity interest in Charter Communications, Inc. of more than 96.5%, excluding Mr. Allen's Class A equity interest. The purposes of our structure are, among other things, to enable Mr. Allen to take advantage for tax purposes of the losses expected to be generated by Charter Communications Holding Company and to enable him to maintain control of our business. Mr. Allen has the ability to control fundamental corporate transactions requiring equity holder approval, including, but not limited to, the election of all of our directors, approval of merger transactions involving us and the sale of all or substantially all of our assets. Mr. Allen's control may continue in the future through the high vote Class B common stock even if Mr. Allen owns a minority economic interest in our business. As the owner of all of our Class B common stock, Mr. Allen is entitled to elect all but one member of Charter Communications, Inc.'s board of directors. As an owner of 3.5% of our Class A common stock and owner of all of our Class B common stock, Mr. Allen presently has voting control in the election by holders of Class A common stock of the remaining member of our board of directors. In addition, because of the exclusive voting rights granted to holders of Class B common stock for specific matters, he has the sole power to amend a number of important provisions of Charter Communications, Inc.'s certificate of incorporation, including provisions restricting the scope of our business activities. See "Description of Capital Stock and Membership Units." MR. ALLEN MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS. Mr. Allen's control over our management and affairs could create conflicts of interest if he is faced with decisions that could have implications for both him and for us and the holders of Class A common stock. Further, through his effective control, Mr. Allen could cause us to enter into contracts with another entity in which he owns an interest or cause us to decline a transaction that he or an entity in which he owns an interest ultimately enters into. Mr. Allen may engage in other businesses involving the operation of cable television systems, video programming, high-speed Internet access, telephony or electronic commerce, which is business and financial transactions conducted through broadband interactivity and Internet services. Mr. Allen may also engage in other businesses that compete or may in the future compete with us. In addition, Mr. Allen currently engages and may engage in the future in businesses that are complementary to our cable television business. Accordingly, conflicts could arise with respect to the allocation of corporate opportunities between us and Mr. Allen. Current or future agreements between us and Mr. Allen or his affiliates may not be the result of arm's-length negotiations. Consequently, such agreements may be less favorable to us than agreements that we could otherwise have entered into with unaffiliated third parties. Further, many past and future transactions with Mr. Allen or his affiliates are informal in 9 12 nature. As a result, there will be some discretion left to the parties, who are subject to the potentially conflicting interests described above. We cannot assure you that the interests of either Mr. Allen or his affiliates will not conflict with interests of the holders of our Class A common stock. We have not instituted any formal plans to address conflicts of interest that may arise. WE ARE NOT PERMITTED TO ENGAGE IN ANY BUSINESS ACTIVITY OTHER THAN THE CABLE TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR. ALLEN AUTHORIZES US TO PURSUE THAT PARTICULAR BUSINESS ACTIVITY. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW PRODUCTS AND SERVICES OUTSIDE OF THE CABLE TRANSMISSION BUSINESS AND ENTER INTO NEW BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Charter Communications, Inc.'s certificate of incorporation and Charter Communications Holding Company's limited liability company agreement provide that Charter Communications, Inc. and Charter Communications Holding Company and their subsidiaries cannot engage in any business activity outside the cable transmission business except for the joint venture through Digeo Broadband, Inc., incidental businesses engaged in as of the closing of Charter Communications, Inc.'s initial public offering in November 1999 and as an owner and operator of the business of Chat TV. This will be the case unless the opportunity to pursue the particular business activity is first offered to Mr. Allen, he decides not to pursue it and he consents to our engaging in the business activity. The cable transmission business means the business of transmitting video, audio, including telephone services, and data over cable television systems owned, operated or managed by us from time to time. These provisions may limit our ability to take advantage of attractive business opportunities. Consequently, our ability to offer new products and services outside of the cable transmission business and enter into new businesses could be adversely affected, resulting in an adverse effect on our growth, financial condition and results of operations. See "Certain Relationships and Related Transactions -- Allocation of Business Opportunities with Mr. Allen." MR. ALLEN'S CONTROL AND CHARTER COMMUNICATIONS, INC.'S ORGANIZATIONAL DOCUMENTS MAY INHIBIT OR PREVENT A TAKEOVER OR A CHANGE IN MANAGEMENT THAT COULD RESULT IN A CHANGE OF CONTROL PREMIUM OR FAVORABLY IMPACT THE MARKET PRICE OF THE CLASS A COMMON STOCK. As a result of his controlling voting interest, Mr. Allen will have the ability to delay or prevent a change of control or changes in our management that our other shareholders, including the holders of our Class A common stock, may consider favorable or beneficial. Provisions in our organizational documents may also have the effect of delaying or preventing these changes, including provisions: - authorizing the issuance of "blank check" preferred stock; - restricting the calling of special meetings of shareholders; and - requiring advanced notice for proposals for shareholder meetings. If a change of control or change in management is delayed or prevented, the market price of our Class A common stock could suffer or holders may not receive a change of control premium over the then-current market price of the Class A common stock. CHARTER COMMUNICATIONS, INC. IS A HOLDING COMPANY WHICH HAS NO OPERATIONS AND WILL DEPEND ON ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED IN THEIR ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF OUR DEBT AND OTHER OBLIGATIONS. As holding companies, Charter Communications, Inc. and Charter Communications Holding Company depend entirely on cash from our operating subsidiaries to satisfy their obligations. These operating subsidiaries may not be able to make funds available to Charter Communications, Inc. and Charter Communications Holding Company. 10 13 Charter Communications, Inc. is a holding company whose principal asset is an approximate 40.8% equity interest and a 100% voting interest in Charter Communications Holding Company. Charter Communications Holding Company is also a holding company whose operations are conducted through its indirect subsidiaries. Neither Charter Communications, Inc. nor Charter Communications Holding Company holds any significant assets other than their direct and indirect interests in our subsidiaries. Charter Communications, Inc.'s and Charter Communications Holding Company's cash flow depends upon the cash flow of our operating subsidiaries and the payment of funds by these operating subsidiaries to Charter Communications Holding Company and Charter Communications, Inc. This will affect the ability of Charter Communications, Inc. and Charter Communications Holding Company to meet their obligations, including: - debt or preferred equity obligations that we may issue in the future; - obligations under employment and consulting agreements; - obligations under the mutual services agreement with Charter Investment under which Charter Investment provides Charter Communications, Inc. with personnel and services; and - dividends or other distributions to holders of Class A common stock. Our operating subsidiaries are not obligated to make funds available for payment of these obligations in the form of loans, distributions or otherwise. In addition, our operating subsidiaries' ability to make any such loans, distributions or other payments to Charter Communications Holding Company or to us will depend on their earnings, business and tax considerations and legal restrictions. Covenants in the indentures and credit agreements governing the indebtedness of Charter Communications Holding Company's operating subsidiaries restrict their ability to make loans, distributions or other payments to Charter Communications Holding Company or to us. WE COULD BE DEEMED AN "INVESTMENT COMPANY" UNDER THE INVESTMENT COMPANY ACT OF 1940. THIS WOULD IMPOSE SIGNIFICANT RESTRICTIONS ON US AND WOULD BE LIKELY TO HAVE A MATERIAL ADVERSE IMPACT ON OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATION. If anything were to happen which would cause us to be deemed an investment company, the Investment Company Act would impose significant restrictions on us, including severe limitations on our ability to borrow money, to issue additional capital stock and to transact business with affiliates. In addition, because our operations are very different from those of the typical registered investment company, regulation under the Investment Company Act could affect us in other ways that are extremely difficult to predict. In sum, if we were deemed to be an investment company it could become impractical for us to continue our business as currently conducted and our growth, our financial condition and our results of operations could suffer materially. Our principal asset is our equity interest in Charter Communications Holding Company. If our membership interest in Charter Communications Holding Company were to constitute less than 50% of the voting securities issued by Charter Communications Holding Company, then our interest in Charter Communications Holding Company could be deemed an "investment security" for purposes of the Investment Company Act. This may occur, for example, if a court determines that the Class B common stock is no longer entitled to special voting rights and, in accordance with the terms of the Charter Communications Holding Company limited liability company agreement, our membership units in this company were to lose their special voting privileges. A determination that such investment was an investment security could cause us to be deemed to be an investment company under the Investment Company Act, unless an exclusion from registration were available or we were to obtain an order of the Securities and Exchange Commission excluding or exempting us from registration under this Act. 11 14 IF A COURT DETERMINES THAT THE CLASS B COMMON STOCK IS NO LONGER ENTITLED TO SPECIAL VOTING RIGHTS, WE WOULD LOSE OUR RIGHTS TO MANAGE CHARTER COMMUNICATIONS HOLDING COMPANY. IN ADDITION TO THE INVESTMENT COMPANY RISKS DISCUSSED ABOVE, THIS COULD MATERIALLY IMPACT THE VALUE OF YOUR INVESTMENT IN THE CLASS A COMMON STOCK. If a court determines that the Class B common stock is no longer entitled to special voting rights, we would no longer have a controlling voting interest in, and would lose its right to manage, Charter Communications Holding Company. If this were to occur: - We would retain our proportional equity interest in Charter Communications Holding Company but would lose all of our powers to direct the management and affairs of Charter Communications Holding Company and its subsidiaries; - Class A common shareholders would lose any right they had at that time or might have had in the future to direct, through equity ownership in us, the management and affairs of Charter Communications Holding Company; and - We would become strictly a passive investment vehicle. This result, as well as the impact of being treated by investors as an investment company, could materially adversely impact: - the liquidity of the Class A common stock; - how it trades in the marketplace; - the price that purchasers would be willing to pay for the Class A common stock in a change of control transaction or otherwise; and - the market price of the Class A common stock which could experience a significant decline as a result. Uncertainties that may arise with respect to the nature of our management role and voting power and organizational documents, including legal actions or proceedings relating thereto, may also materially adversely impact the value of the Class A common stock. WE ARE DEPENDENT ON CHARTER INVESTMENT, INC. FOR NECESSARY PERSONNEL AND SERVICES. We have only fourteen executive officers, all of whom are also executive officers of Charter Investment. We receive from Charter Investment other personnel and services necessary to perform our obligations as Charter Communications Holding Company's sole manager, pursuant to a mutual services agreement. As we are restricted from holding any significant assets other than Charter Communications Holding Company membership units, we are substantially dependent upon Charter Investment for personnel and support services. The termination or breach by Charter Investment of the mutual services agreement could adversely affect our ability to manage Charter Communications Holding Company and, in turn, our cable systems. THE SPECIAL TAX ALLOCATION PROVISIONS OF THE CHARTER COMMUNICATIONS HOLDING COMPANY LIMITED LIABILITY COMPANY AGREEMENT MAY CAUSE US IN SOME CIRCUMSTANCES TO PAY MORE TAXES THAN IF THE SPECIAL TAX ALLOCATION PROVISIONS WERE NOT IN EFFECT. Charter Communications Holding Company's limited liability company agreement provides that through the end of 2003, tax losses of Charter Communications Holding Company that would otherwise have been allocated to us based generally on our percentage of outstanding membership units of Charter Communications Holding Company will instead be allocated to the membership units held by Vulcan Cable III Inc. and Charter Investment. The purpose of these special tax allocation provisions is to allow Mr. Allen to take advantage for tax purposes of the losses expected to be generated by Charter Communications Holding Company. The limited liability company 12 15 agreement further provides that beginning at the time that Charter Communications Holding Company first becomes profitable (as determined under the applicable federal income tax rules for determining book profits), tax profits that would otherwise have been allocated to us based generally on our percentage of outstanding membership units of Charter Communications Holding Company will instead be allocated to membership units held by Vulcan Cable III Inc. and Charter Investment. In some situations, the special tax allocation provisions could result in our having to pay taxes in an amount that is more than if Charter Communications Holding Company had allocated losses and profits to us based generally on our percentage of outstanding membership units from the time of the completion of the offering. See "Description of Capital Stock and Membership Units -- Special Allocation of Losses." OUR MANAGEMENT MAY BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND MAY NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD GIVE RISE TO CONFLICTS OF INTEREST AND IMPAIR OUR OPERATING RESULTS. Mr. Allen and certain other of our affiliates may from time to time in the future acquire cable systems in addition to those owned by us. We, as well as some of our officers who currently manage our cable systems, may have a substantial role in managing outside cable systems that may be acquired in the future. As a result, the time we devote to managing Charter Communications Holding Company's systems may be correspondingly reduced. This could adversely affect our growth, financial condition and results of operations. Moreover, allocating our managers' time and other resources and those of Charter Communications Holding Company between our systems and outside systems that may be held by our affiliates could give rise to conflicts of interest. Neither we nor Charter Communications Holding Company have or plan to create formal procedures for determining whether and to what extent outside cable television systems acquired in the future will receive priority with respect to personnel requirements. 13 16 OUR ACQUISITIONS SPECIFIED FORMER OWNERS OF RIFKIN, FALCON, BRESNAN AND HELICON WHO ACQUIRED EQUITY INTERESTS MAY BE ENTITLED TO CAUSE US TO REPURCHASE THEIR EQUITY INTERESTS BECAUSE OF POSSIBLE VIOLATIONS OF SECTION 5 OF THE SECURITIES ACT OF 1933, AS AMENDED. IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND ANY OR ALL OF THESE REPURCHASES, ANY OF THE OWNERS OF THESE EQUITY INTERESTS COULD INITIATE LEGAL PROCEEDINGS AGAINST US. THIS COULD LEAD TO DEFAULTS UNDER OUR OTHER OBLIGATIONS. We acquired Helicon I, L.P. and affiliates (Helicon) in July 1999, Rifkin Acquisition Partners L.L.L.P. and InterLink Communications Partners, LLLP (collectively, Rifkin) in September 1999, Falcon Communications, L.P. (Falcon) in November 1999 and Bresnan in February 2000. The Rifkin, Falcon and Bresnan sellers who acquired Charter Communications Holding Company membership units or, in the case of Bresnan, additional equity interests in an indirect subsidiary of Charter Holdings, in connection with these respective acquisitions and the Helicon sellers who acquired shares of Class A common stock in our initial public offering may have rescission rights against us and Charter Communications Holding Company arising out of possible violations of Section 5 of the Securities Act of 1933, as amended, in connection with the offers and sales of these equity interests. If all of these equity holders successfully exercised their possible rescission rights, we or Charter Communications Holding Company would become obligated to repurchase all such equity interests, and the total repurchase obligation could be as much as approximately $1.8 billion as follows: - up to a maximum of $144.0 million to repurchase all of the Rifkin sellers' equity interests; - up to a maximum of $594.0 million to repurchase all of the Falcon sellers' equity interests; - up to a maximum of $1.095 billion to repurchase all of the Bresnan sellers' equity interests; and - up to a maximum of $13.0 million to repurchase the shares of Class A common stock purchased by Helicon sellers in our directed share program. We cannot assure you that we would be able to obtain capital sufficient to fund any required repurchases. If we failed to satisfy these obligations, these acquisition-related equity holders, as general unsecured creditors, could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW CABLE SYSTEMS THAT WE ACQUIRE AND THE CUSTOMERS THEY SERVE WITH OUR EXISTING CABLE SYSTEMS. THIS COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND GROWTH STRATEGY. We have grown rapidly through acquisitions of cable systems, and now own and operate cable systems serving approximately 6.3 million customers. We may acquire more cable systems in the future, through direct acquisition, system swaps or otherwise. The integration of the cable systems we have recently acquired poses a number of significant risks, including: - our acquisitions may not have a positive impact on our cash flows from operations; - the integration of these new systems and customers will place significant demands on our management and our operations, information services, and financial, legal and marketing resources. Our current operating and financial systems and controls and information services 14 17 may not be adequate, and any steps taken to improve these systems and controls may not be sufficient; - acquired businesses sometimes result in unexpected liabilities and contingencies which could be significant; and - our continued growth will also increase our need for qualified personnel. We may not be able to hire such additional qualified personnel. We cannot assure you that we will successfully integrate any acquired systems into our operations. OUR BUSINESS WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL ADDITIONAL DEBT, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND OUR ABILITY TO OBTAIN FINANCING IN THE FUTURE AND REACT TO CHANGES IN OUR BUSINESS. We have a significant amount of debt. As of June 30, 2000, pro forma for the Kalamazoo transaction, borrowings under the Charter Holdings senior bridge loan facility and the application of a portion of such borrowings to repay a portion of the Charter Operating revolving credit facility, our total debt would have been approximately $11.6 billion, and our total shareholders' equity would have been approximately $2.9 billion. Our significant amount of debt could have important consequences to you. For example, it could: - make it more difficult for us to satisfy our obligations under our credit facilities and to our noteholders; - increase our vulnerability to general adverse economic and cable industry conditions, including interest rate increases, because a significant portion 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 and other general corporate expenses; - limit our flexibility in planning for, or reacting to, changes in our business and the cable industry; - place us at a disadvantage compared to our competitors that have proportionately less debt; and - limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our debt. The agreements and instruments governing our debt do not prohibit us from incurring additional debt, although they do place certain limitations on such additional debt. Further, the agreements and instruments governing our debt allow for the incurrence of debt by our subsidiaries. We anticipate incurring significant additional debt in the future to fund the expansion, maintenance and upgrade of our cable systems. If new debt is added to our current debt levels, the related risks that we and you now face could intensify. 15 18 THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND LIMITATIONS THAT COULD SIGNIFICANTLY IMPACT OUR ABILITY TO OPERATE OUR BUSINESS. The credit facilities and the indentures governing the notes of our subsidiaries contain a number of significant covenants that could adversely impact our business. These covenants, among other things, restrict our ability and the ability of our subsidiaries to: - pay dividends or make other distributions; - make certain investments or acquisitions; - dispose of assets or merge; - incur additional debt; - issue equity; - repurchase or redeem equity interests and debt; - create liens; and - pledge assets. Furthermore, in accordance with our credit facilities, a number of our subsidiaries are required to maintain specified financial ratios and meet financial tests. The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants will result in a default under the applicable debt agreement or instrument. 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 and to fund our planned capital expenditures for upgrading our cable systems and our ongoing operations will depend on our ability to generate cash and to secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If our business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to us under our credit facilities or from other sources of financing, we may not be able to repay our debt, 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. As of June 30, 2000, after giving effect to the acquisition of the Kalamazoo system completed since that date, our systems served approximately 400% more customers than were served as of December 31, 1998. As a result, historical financial information about us may not be indicative of the future or of results that we can achieve with the cable systems which will be under our control. Our recent growth in revenue over our short operating history is not necessarily indicative of future performance. WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES. CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE FUTURE OPERATIONS. We have had a history of net losses and expect to continue to report net losses for the foreseeable future. We expect our net losses to increase as a result of acquisitions. We reported losses before minority interest of $5 million for 1997, $22 million for 1998, $639 million for 1999 and $944 million for the six months ended June 30, 2000. On a pro forma basis, giving effect to the merger of Charter Holdings and Marcus Holdings, acquisitions completed in 1999 and 2000, the sale of the March 1999 and January 2000 Charter Holdings notes and the drawdown on the Charter Holdings senior bridge loan facility, we had net losses before minority interest in loss of subsidiary and 16 19 extraordinary item of $1.5 billion for 1999 and $1.0 billion for the six months ended June 30, 2000. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future. IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. If we are unable to grow our cash flow sufficiently, we may be unable to repay our debt, to grow our business or to fund our other liquidity needs. We expect that a substantial portion of our future growth will be achieved through revenues from new products and services. 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. OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOW AND OPERATING MARGINS. Programming has been, and is expected to continue to be, our largest single expense item. In recent years, the cable industry has experienced a rapid escalation in the cost of programming, particularly sports programming. This escalation may continue, and we may not be able to pass programming cost increases on to our customers. The inability to pass these programming cost increases on to our customers would have an adverse impact on our cash flow and operating margins. In addition, as we upgrade the channel capacity of our systems and add programming to our basic, expanded basic and premium programming tiers, we may face additional market constraints on our ability to pass programming costs on to our customers. Basic programming includes a variety of entertainment and local programming. Expanded basic programming offers more services than basic programming. Premium service includes unedited, commercial-free movies, sports and other special event entertainment programming. WE MAY NOT BE ABLE TO OBTAIN CAPITAL SUFFICIENT TO FUND OUR PLANNED UPGRADES AND OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW PRODUCTS AND SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We intend to upgrade a significant portion of our cable systems over the coming years and make other capital investments. For the three years ending December 31, 2002, we plan to spend approximately $6.4 billion for capital expenditures, approximately $3.2 billion of which will be used to upgrade and rebuild our systems to bandwidth capacity of 550 megahertz or greater and add two-way capability so that we may offer advanced services. The remaining $3.2 billion will be used for extensions of systems, development of new products and services, purchases of converters and system maintenance. We cannot assure you that these amounts will be sufficient to accomplish our planned system upgrades, maintenance and expansion. If we cannot obtain the necessary funds from increases in our operating cash flow, additional borrowings or other sources, we may not be able to fund our planned upgrades and expansion and offer new products and services on a timely basis. Consequently, our growth, financial condition and results of operations could suffer materially. WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS AND SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY. CONSEQUENTLY, OUR GROWTH, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER MATERIALLY. The cable business is characterized by rapid technological change and the introduction of new products and services. We cannot assure you that we will be able to fund the capital expenditures 17 20 necessary to keep pace with technological developments, or that we will successfully anticipate the demand of our customers for products and services requiring new technology. This type of rapid technological change could adversely affect our plans to upgrade or expand our systems and respond to competitive pressures. Our inability to upgrade, maintain and expand our systems and provide enhanced services in a timely manner, or to anticipate the demands of the market place, could adversely affect our ability to compete. Consequently, our growth, financial condition and results of operations could suffer materially. WE MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON FAVORABLE TERMS AND OUR CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY. THIS COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The expansion and upgrade of our existing systems and the systems we plan to acquire will require us to hire contractors and enter into a number of construction agreements. We may have difficulty hiring civil contractors, and the contractors we hire may encounter cost overruns or delays in construction. Our construction costs may increase significantly over the next few years as existing contracts expire and as demand for telecommunications 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. WE DEPEND ON THIRD-PARTY EQUIPMENT AND SOFTWARE SUPPLIERS. IF WE ARE UNABLE TO PROCURE THE NECESSARY EQUIPMENT, OUR ABILITY TO OFFER OUR SERVICES COULD BE IMPAIRED. THIS COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We depend on vendors to supply the set-top converter boxes for analog and digital cable services. This equipment is available from a limited number of suppliers. We typically purchase set-top converter boxes under purchase orders placed from time to time and do not carry significant inventories of set-top converter boxes. If demand for set-top converter boxes exceeds our inventories and we are unable to obtain required set-top converter boxes on a timely basis and at an acceptable cost, our ability to recognize additional revenue from digital services could be delayed or impaired. In addition, if there are no suppliers who are able to provide converter devices that comply with evolving Internet and telecommunications standards or that are compatible with other products or components we use, our business would be impaired. THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR OBLIGATIONS IN THE FUTURE. In the past, Mr. Allen and his affiliates have contributed funds to us and our subsidiaries. There should be no expectation that Mr. Allen or his affiliates will contribute funds to us or to our subsidiaries in the future. A SALE BY MR. ALLEN OF HIS DIRECT OR INDIRECT EQUITY INTERESTS COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR BUSINESS. Mr. Allen is not prohibited by any agreement from selling the shares of Class A or Class B common stock he holds in Charter Communications, Inc. or causing Charter Investment, Inc. or Vulcan Cable III Inc. to sell their membership units in Charter Communications Holding Company. We cannot assure you that Mr. Allen or any of his affiliates will maintain all or any portion of his direct or indirect ownership interests in Charter Communications, Inc. or Charter Communications Holding Company. In the event he sells all or any portion of his direct or indirect ownership interest in Charter Communications, Inc. or Charter Communications Holding Company, we cannot assure you that he would continue as Chairman of Charter Communications, Inc.'s board of directors or otherwise participate in our management. The disposition by Mr. Allen or any of his affiliates of these 18 21 equity interests or the loss of his services by Charter Communications, Inc. and/or Charter Communications Holding Company could adversely affect our growth, financial condition and results of operations, or adversely impact the market price of our Class A common stock. WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS. The industry in which we operate is highly competitive. In some instances, we compete against companies with fewer regulatory burdens, easier access to financing, greater personnel resources, greater brand name recognition and long-standing relationships with regulatory authorities. Mergers, joint ventures and alliances among any of the following businesses could result in providers capable of offering cable television, Internet and other telecommunications services in direct competition with us: - cable television operators; - regional telephone companies; - long distance telephone service providers; - electric utilities; - local exchange carriers, which are local phone companies that provide local area telephone services and access to long distance services to customers; - providers of cellular and other wireless communications services; and - Internet service providers. We face competition within the subscription television industry, which includes providers of paid television service employing technologies other than cable, such as direct broadcast satellite or DBS, and excludes broadcast companies that transmit their signal to customers without assessing a subscription fee. We also face competition from broadcast companies distributing television broadcast signals without assessing a subscription fee and from other communications and entertainment media, including conventional off-air television and radio broadcasting services, newspapers, movie theaters, the Internet, live sports events and home video products. We cannot assure you that upgrading our cable systems will allow us to compete effectively. Additionally, as we expand and introduce new and enhanced services, including Internet and telecommunications services, we will be subject to competition from telecommunications providers and Internet service providers. We cannot predict the extent to which competition may affect our business and operations in the future. See "Business -- Competition." THE LOSS OF KEY EXECUTIVES COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR BUSINESS. Our success is substantially dependent upon the retention and the continued performance of Mr. Allen, Chairman of Charter Communications, Inc.'s board of directors, and Jerald L. Kent, Charter Communications, Inc.'s President and Chief Executive Officer. The loss of the services of Mr. Allen or Mr. Kent could adversely affect our growth, financial condition and results of operations. 19 22 REGULATORY AND LEGISLATIVE MATTERS OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION. THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES. Regulation of the cable industry has increased the administrative and operational expenses and limited the revenues of cable systems. Cable operators are subject to, among other things: - limited rate regulation; - requirements that, under specified circumstances, a cable system carry a local broadcast station or obtain consent to carry a local or distant broadcast station; - rules for franchise renewals and transfers; and - other requirements covering a variety of operational areas such as equal employment opportunity, technical standards and customer service requirements. Additionally, many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. There are also ongoing efforts to amend or expand the state and local regulation of some of our cable systems, which may compound the regulatory risks we already face. Certain states and localities, led by Florida, are considering new telecommunications taxes that could increase operating expenses. We cannot predict whether in response to these efforts any of the states or localities in which we now operate will expand regulation of our cable systems in the future or how they will do so. WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE PROVIDERS. THIS COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY AFFECT THE UPGRADE OF OUR SYSTEMS OR OUR ABILITY TO PROVIDE NEW PRODUCTS AND SERVICES. Recently, a number of companies, including telephone companies and Internet service providers, have requested local authorities and the Federal Communications Commission to require cable operators to provide access to cable's broadband infrastructure, which allows cable to deliver a multitude of channels and/or services, so that these companies may deliver Internet services directly to customers over cable facilities. For example, Broward County, Florida granted open access to an Internet service provider as a condition to a cable operator's transfer of its franchise for cable service. The cable operator has commenced legal action at the federal district level. A federal district court in Virginia and a federal circuit court in California recently struck down as unlawful open access requirements imposed by two different franchising authorities. The federal circuit court ruling, which is now the leading decision, reversed an earlier district court decision that had upheld an open access requirement. We believe that allocating a portion of our bandwidth capacity to other Internet service providers: - would impair our ability to use our bandwidth in ways that would generate maximum revenues; - would strengthen our Internet service provider competitors; and - may cause us to decide not to upgrade our systems which would prevent us from introducing our planned new products and services. In addition, we cannot assure you that if we were required to provide access in this manner, it would not have a significant adverse impact on our profitability. This could impact us in many ways, including by: - increasing competition; - increasing the expenses we incur to maintain our systems; and/or - increasing the expense of upgrading and/or expanding our systems. 20 23 OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR BUSINESS IN A KEY MARKET. Our cable systems generally operate pursuant to franchises, permits or licenses typically granted by a municipality or other state or local government controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with material provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal, which have been and may continue to be costly to us. In some instances, franchises have not been renewed at expiration, and we have operated under either temporary operating agreements or without a license while negotiating renewal terms with the local franchising authorities. We cannot assure you that we will be able to comply with all material provisions of our franchise agreements or that we will be able to renew our franchises in the future. A termination of and/or a sustained failure to renew a franchise could adversely affect our business in the affected geographic area. WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY. Our cable systems are operated under franchises granted by local franchising authorities. These franchises are non-exclusive. Consequently, such local franchising authorities can grant additional franchises to competitors in the same geographic area. As a result, competing operators may build systems in areas in which we hold franchises. In some cases municipal utilities may legally compete with us without obtaining a franchise from the local franchising authority. The existence of more than one cable system operating in the same territory is referred to as an overbuild. These overbuilds could adversely affect our growth, financial condition and results of operations by increasing competition or creating competition where none existed previously. As of June 30, 2000, pro forma for the Kalamazoo transaction, we are aware of overbuild situations impacting 140,500 of our customers and potential overbuild situations in areas servicing another 161,500 basic customers, together representing a total of 302,000 customers. Additional overbuild situations may occur in other systems. LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY CONSTRAINTS ON OUR BUSINESS. THIS COULD FURTHER INCREASE OUR EXPENSES. In addition to the franchise document, cable authorities have also adopted in some jurisdictions cable regulatory ordinances that further regulate the operation of cable systems. This additional regulation increases our expenses in operating our business. We cannot assure you that the local franchising authorities will not impose new and more restrictive requirements. Local franchising authorities also have the power to reduce rates and order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. Basic service tier rates are the prices charged for basic programming services. As of June 30, 2000, we have refunded a total of approximately $847,000 since our inception. We may be required to refund additional amounts in the future. 21 24 DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS COULD CAUSE US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS OR IMPAIR OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS. On March 31, 1999, the pricing of expanded basic cable programming packages was deregulated, permitting cable operators to set their own rates. This deregulation was not applicable to basic services. However, the Federal Communications Commission and the United States Congress continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the Federal Communications Commission or the United States Congress will again restrict the ability of cable system operators to implement rate increases. Should this occur, it would impede our ability to raise our rates. If we are unable to raise our rates in response to increasing costs, our financial condition and results of operations could be materially adversely affected. IF WE OFFER TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL REGULATORY BURDENS CAUSING US TO INCUR ADDITIONAL COSTS. If we enter the business of offering telecommunications services, we may be required to obtain federal, state and local licenses or other authorizations to offer these services. We may not be able to obtain such authorizations in a timely manner, or at all, and conditions could be imposed upon such licenses or authorizations that may not be favorable to us. Furthermore, telecommunications companies, including Internet protocol telephony companies, generally are subject to significant regulation as well as higher fees for pole attachments. Internet protocol telephony companies are companies that have the ability to offer telephone services over the Internet. Pole attachments are cable wires that are attached to poles. In particular, cable operators who provide telecommunications services and cannot reach agreement with local utilities over pole attachment rates in states that do not regulate pole attachment rates will be subject to a methodology prescribed by the Federal Communications Commission for determining the rates. These rates may be higher than those paid by cable operators who do not provide telecommunications services. The rate increases are to be phased in over a five- year period beginning on February 8, 2001. If we become subject to telecommunications regulation or higher pole attachment rates, we may incur additional costs which may be material to our business. A recent court decision suggests that the provision of Internet service may subject cable systems to higher pole attachment rates. 22 25 FORWARD-LOOKING STATEMENTS This prospectus includes forward-looking statements regarding, among other things, our plans, strategies and prospects, both business and financial. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Many of the forward-looking statements contained in this prospectus may be identified by the use of forward-looking words such as "believe," "expect," "anticipate," "should," "planned," "estimated" and "potential," among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in this prospectus and in other reports or documents that we file from time to time with the SEC and include, but are not limited to: - Our plans to achieve growth by offering new products and services and through acquisitions and swaps; - Our anticipated capital expenditures for our planned upgrades and the ability to fund these expenditures; - Our beliefs regarding the effects of governmental regulation on our business; and - Our ability to effectively compete in a highly competitive environment. All forward-looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by those cautionary statements. 23 26 USE OF PROCEEDS We will not receive any proceeds from the sales of common stock by the selling shareholders pursuant to this prospectus. DIVIDEND POLICY We have never paid and do not expect to pay any cash dividends on our Class A common stock in the foreseeable future. Charter Communications Holding Company is required under certain circumstances to pay distributions pro rata to all its common members to the extent necessary for any common member to pay taxes incurred with respect to its share of taxable income attributed to Charter Communications Holding Company. Covenants in the indentures and credit agreements governing the indebtedness of Charter Communications Holding Company's subsidiaries restrict their ability to make distributions to us and, accordingly, limit our ability to declare or pay cash dividends. We intend to cause Charter Communications Holding Company and its subsidiaries to retain future earnings, if any, to finance the expansion of the business of Charter Communications Holding Company and its subsidiaries. 24 27 CAPITALIZATION The following table sets forth as of June 30, 2000 on a consolidated basis: - the actual capitalization of Charter Communications, Inc.; and - the pro forma capitalization of Charter Communications, Inc., assuming completion as of June 30, 2000 of: (1) the Kalamazoo transaction; and (2) borrowings under the Charter Holdings senior bridge loan facility and the application of a portion of such borrowings to repay a portion of the Charter Operating revolving credit facility. The impact of the Chat TV transaction is not presented below because the effect was not significant. This table should be read in conjunction with the "Unaudited Pro Forma Financial Statements" and the accompanying notes included elsewhere in this prospectus. - ------------------------- (a) The decrease in the Charter Operating credit facilities is related to the use of a portion of the proceeds from the borrowings under the Charter Holdings senior bridge loan facility to repay a portion of the amounts outstanding offset by an increase in the credit facilities to fund the Farmington and Capital Cable acquisitions. 25
AS OF JUNE 30, 2000 -------------------------- ACTUAL PRO FORMA ----------- ----------- (DOLLARS IN THOUSANDS) LONG-TERM DEBT: Credit facilities: Charter Holdings senior bridge loan.................... $ -- $ 1,000,000 Charter Operating(a)................................... 4,232,000 3,275,000 CC V -- Avalon......................................... 170,000 170,000 CC VI -- Fanch......................................... 850,000 850,000 CC VII -- Falcon....................................... 1,059,500 1,059,500 CC VIII Operating -- Bresnan........................... 638,900 638,900 8.250% senior notes due 2007.............................. 598,657 598,657 8.625% senior notes due 2009.............................. 1,496,016 1,496,016 9.920% senior discount notes due 2011..................... 1,026,029 1,026,029 10.00% senior notes due 2009.............................. 675,000 675,000 10.25% senior notes due 2010.............................. 325,000 325,000 11.75% senior discount notes due 2010..................... 316,780 316,780 11.875% senior discount notes due 2008 -- Avalon.......... 124,977 124,977 Other notes(b)............................................ 92,469 92,469 ----------- ----------- Total long-term debt................................... 11,605,328 11,648,328 MINORITY INTEREST(c)........................................ 4,689,263 4,687,187 REDEEMABLE SECURITIES(d).................................... 1,846,176 1,846,176 SHAREHOLDERS' EQUITY: Class A common stock; $.001 par value; 1.75 billion shares authorized; 222,039,746 and 233,213,122 shares issued and outstanding, respectively.......................... 195 206 Class B common stock; $.001 par value; 750 million shares authorized; 50,000 shares issued and outstanding....... -- -- Preferred stock; $.001 par value; 250 million shares authorized; no shares issued and outstanding........... -- -- Additional paid-in capital................................ 3,145,798 3,315,013 Accumulated deficit....................................... (443,766) (443,766) Accumulated other comprehensive income.................... 961 961 ----------- ----------- Total shareholders' equity............................. 2,703,188 2,872,414 ----------- ----------- Total capitalization................................... $20,843,955 $21,054,105 =========== =========== 28 (b) Primarily represents outstanding notes of our Renaissance subsidiary. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financing Activities" and "Description of Certain Indebtedness." (c) Minority interest consists primarily of (1) total members' equity of Charter Communications Holding Company multiplied by 60.4% at June 30, 2000 and 59.2% on a pro forma basis at June 30, 2000, the ownership percentage of Charter Communications Holding Company not owned by us and (2) preferred equity in a subsidiary of Charter Holdings held by certain Bresnan sellers less a portion of redeemable securities. Gains (losses) arising from the issuance by Charter Communications Holding Company of its membership units are recorded as capital transactions, thereby increasing/(decreasing) shareholders' equity and (decreasing)/increasing minority interest. (d) The Rifkin, Falcon, Helicon and Bresnan sellers who own equity interests in Charter Communications, Inc. and certain subsidiaries may have rescission rights arising out of possible violations of Section 5 of the Securities Act of 1933, as amended, in connection with the offers and sales of those equity interests. Accordingly, the maximum cash obligation related to the possible rescission rights, estimated at $1.8 billion, has been excluded from shareholders' equity and minority interest, and classified as redeemable securities. One year after the date of issuance of these equity interests (when these possible recission rights will have expired), we will reclassify the respective amounts to shareholders' equity and minority interest. See "Certain Trends and Uncertainties -- Possible Rescission Liability." 26 29 DILUTION The sales of Class A common stock by the selling shareholders as described in this prospectus do not dilute the shares of Class A common stock because the shares of Class A common stock sold under this prospectus are already issued and outstanding. 27 30 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The following Unaudited Pro Forma Financial Statements of Charter Communications, Inc. are based on the historical financial statements of Charter Communications, Inc. Since January 1, 1999, Charter Communications Holding Company and Charter Holdings have closed numerous acquisitions. In addition, Charter Holdings merged with Marcus Holdings in March 1999. The consolidated financial statements are adjusted on a pro forma basis to illustrate the estimated effects of the Kalamazoo transaction, including the impact of amounts allocated to minority interest, and borrowings under the Charter Holdings senior bridge loan facility, as if such transactions had occurred on June 30, 2000 for the unaudited pro forma balance sheet and to illustrate the estimated effects of the following transactions as if they had occurred on January 1, 1999 for the unaudited pro forma statements of operations: (1) the acquisition of Marcus Cable by Mr. Allen and Marcus Holdings' merger with and into Charter Holdings effective March 31, 1999; (2) the acquisitions by Charter Communications Holding Company, Charter Holdings and their subsidiaries completed since January 1, 1999, including the Kalamazoo transaction and the transfer of an Indiana cable system in connection with the acquisition of InterMedia Capital Partners IV, L.P., InterMedia Partners and affiliates; (3) the refinancing of the previous credit facilities of the Charter companies and certain acquired companies; (4) the sale of the March 1999 Charter Holdings notes and the January 2000 Charter Holdings notes, and the repurchase of certain of the Falcon Communications, L.P., Avalon Cable of Michigan Holdings, Inc., and Bresnan notes and debentures; and (5) borrowings under the Charter Holdings senior bridge loan facility and the application of a portion of such borrowings to repay a portion of the Charter Operating revolving credit facility. The impact of the Chat TV transaction is not presented in the unaudited pro forma financial statements because the effect was not significant. The Unaudited Pro Forma Financial Statements reflect the application of the principles of purchase accounting to the transactions listed in items (1) and (2) above. The allocation of certain purchase prices is based, in part, on preliminary information, which is subject to adjustment upon obtaining complete valuation information of intangible assets and is subject to post-closing purchase price adjustments. We believe that finalization of the purchase prices and the allocation will not have a material impact on the results of operations or financial position of Charter Communications, Inc. Immediately after the closing of the Kalamazoo transaction, Charter Communications, Inc. contributed 100% of the equity interest of the direct owner of the Kalamazoo system to Charter Communications Holding Company in exchange for 11,173,376 Class B common membership units of Charter Communications Holding Company. As a result, the economic interest of Charter Communications, Inc. in Charter Communications Holding Company, increased to 40.8% from 39.6%. The unaudited pro forma financial statements reflect a minority interest of 59.2%. The Unaudited Pro Forma Financial Statements of Charter Communications, Inc. 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. 28 31 29
UNAUDITED PRO FORMA DATA AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 ------------------------------------------------------------------- 2000 BRIDGE CHARTER ACQUISITIONS LOAN COMMUNICATIONS, INC. (NOTE A) (NOTE B) TOTAL -------------------- ------------ ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA) STATEMENT OF OPERATIONS: Revenues.............................................. $ 1,516,384 $ 47,721 $ -- $ 1,564,105 ----------- ---------- ----------- ------------ Operating expenses: Operating, general and administrative............... 778,313 31,323 -- 809,636 Depreciation and amortization....................... 1,149,787 35,699 -- 1,185,486 Option compensation expense......................... 26,089 -- -- 26,089 Corporate expense charges (Note C).................. 27,515 449 -- 27,964 Management fees..................................... -- 181 -- 181 ----------- ---------- ----------- ------------ Total operating expenses.......................... 1,981,704 67,652 -- 2,049,356 ----------- ---------- ----------- ------------ Loss from operations.................................. (465,320) (19,931) -- (485,251) Interest expense...................................... (482,042) (24,381) (32,555) (538,978) Interest income....................................... 6,110 46 -- 6,156 Other income (expense)................................ (2,504) (92) -- (2,596) ----------- ---------- ----------- ------------ Loss before income taxes, minority interest in loss of subsidiary and extraordinary item................... (943,756) (44,358) (32,555) $ (1,020,669) Minority interest in loss of subsidiary (Note D)...... 566,221 16,671 19,289 602,181 ----------- ---------- ----------- ------------ Loss before extraordinary item........................ $ (377,535) $ (27,687) $ (13,266) $ (418,488) =========== ========== =========== ============ Loss per common share, basic and diluted (Note E)..... $ (1.79) ============ Weighted average common shares outstanding, basic and diluted (Note F).................................... 233,263,122 ============ OTHER FINANCIAL DATA: EBITDA (Note G)....................................... $ 681,963 $ 15,676 $ 697,639 EBITDA margin (Note H)................................ 45.0% 32.8% 44.6% Adjusted EBITDA (Note I).............................. $ 738,071 $ 16,398 $ 754,469 Cash flows from operating activities.................. 606,832 90,020 696,852 Cash flows from investing activities.................. (1,051,136) (38,924) (1,090,060) Cash flows from financing activities.................. (2,701,287) (79,321) (2,780,608) Cash interest expense................................. 444,304 Capital expenditures.................................. 1,049,991 102,805 1,152,796 Total debt to estimated annual EBITDA (Note J)........ 8.3x Total debt to estimated annual adjusted EBITDA (Note K).................................................. 7.7 EBITDA to cash interest expense....................... 1.6 EBITDA to interest expense............................ 1.3 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGE): Homes passed (Note L)................................. 8,911,200 1,155,600 10,066,800 Basic customers (Note M).............................. 5,492,700 770,300 6,263,000 Basic penetration (Note N)............................ 61.6% 66.7% 62.2% Premium units (Note O)................................ 2,952,700 373,800 3,326,500 Premium penetration (Note P).......................... 53.8% 48.5% 53.1% Average monthly revenue per basic customer (Note Q)... $ 41.62 32 NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS NOTE A: Pro forma operating results for our acquisitions completed since January 1, 2000 consist of the following (dollars in thousands):
SIX MONTHS ENDED JUNE 30, 2000 ------------------------------------------------- 2000 ACQUISITIONS -- HISTORICAL ------------------------------------------------- BRESNAN(A) KALAMAZOO(B) OTHER(C) TOTAL ---------- ------------ -------- -------- Revenues........................................ $37,102 $10,231 $ 3,187 $ 50,520 ------- ------- ------- -------- Operating expenses: Operating, general and administrative......... 24,925 6,349 2,759 34,033 Depreciation and amortization................. 8,095 1,215 777 10,087 Corporate expense charges..................... -- 231 3 234 Management fees............................... 1,389 -- 109 1,498 ------- ------- ------- -------- Total operating expenses................... 34,409 7,795 3,648 45,852 ------- ------- ------- -------- Income (loss) from operations................... 2,693 2,436 (461) 4,668 Interest expense................................ (9,566) -- (1,565) (11,131) Interest income................................. 44 2,343 2 2,389 Other income (expense).......................... (106) (86) (1) (193) ------- ------- ------- -------- Loss before income taxes and extraordinary item.......................................... $(6,935) $ 4,693 $(2,025) $ (4,267) ======= ======= ======= ======== - ------------------------- (a) Represents the results of operations of Bresnan for period from January 1, 2000 to February 14, 2000, the date of acquisition. (b) Represents the historical results of operations of Kalamazoo for the six months ended June 30, 2000. 30
SIX MONTHS ENDED JUNE 30, 2000 -------------------------------------------------------------------------- 2000 ACQUISITIONS -------------------------------------------------------------------------- PRO FORMA ------------------------------------------------------------- HISTORICAL ACQUISITIONS(D) DISPOSITIONS(E) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- -------- Revenues.......................... $ 50,520 $556 $(3,355) $ -- $ 47,721 -------- ---- ------- -------- -------- Operating expenses: Operating, general and administrative............... 34,033 415 (1,507) (1,618)(f) 31,323 Depreciation and amortization... 10,087 107 (10) 25,515(g) 35,699 Corporate expense charges....... 234 47 -- 168(f) 449 Management fees................. 1,498 -- (117) (1,200)(h) 181 -------- ---- ------- -------- -------- Total operating expenses........ 45,852 569 (1,634) 22,865 67,652 -------- ---- ------- -------- -------- Income (loss) from operations..... 4,668 (13) (1,721) (22,865) (19,931) Interest expense.................. (11,131) (8) -- (13,242)(i) (24,381) Interest income................... 2,389 -- -- (2,343)(j) 46 Other income (expense)............ (193) 10 (5) 96(k) (92) -------- ---- ------- -------- -------- Income (loss) before income taxes, minority interest in loss of subsidiary and extraordinary item............................ (4,267) (11) (1,726) (38,354) (44,358) Income tax benefit................ -- (5) -- 5(l) -- Minority interest in loss of subsidiary...................... -- -- -- 16,671(m) 16,671 -------- ---- ------- -------- -------- Income (loss) before extraordinary item............................ $ (4,267) $ (6) $(1,726) $(21,688) $(27,687) ======== ==== ======= ======== ======== 33 (c) Represents the historical results of operations of Capital Cable and Farmington for the period from January 1, 2000 through April 1, 2000, the date of acquisitions. (d) Represents the historical results of operations for the period from January 1, 2000 through the date of purchase for an acquisition completed by Bresnan. This acquisition was accounted for using the purchase method of accounting. The purchase price was $36.2 million and the transaction closed in January 2000. (e) Represents the operating results related to an Indiana cable system that we did not transfer at the time of the InterMedia closing because some of the necessary regulatory approvals were still pending. This system was transferred in March 2000. No material gain or loss occurred on the disposition as these systems were recently acquired and recorded at fair value at that time. (f) Reflects a reclassification of expenses representing corporate expenses that would have occurred at Charter Investment, Inc. totaling $0.2 million. The remaining adjustment primarily relates to the elimination of divestiture costs of $0.8 million and the adjustment for Bresnan loss contracts of $0.6 million that were included in operating, general and administrative expense. (g) Represents additional depreciation and amortization as a result of our acquisitions completed in 1999 and 2000. A large portion of the purchase price was allocated to franchises ($2.9 billion) that are amortized over 15 years. The adjustment to depreciation and amortization expense consists of the following (dollars in millions): (h) Represents the elimination of termination benefits paid in connection with the Bresnan acquisition. (i) Reflects additional interest expense on borrowings, which were used to finance the 2000 acquisitions as follows (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/ FAIR VALUE USEFUL LIFE AMORTIZATION ---------- ---------------- ------------- Franchises................................... $2,882.0 15 $27.0 Cable distribution systems................... 325.7 8 7.6 Land, buildings and improvements............. 10.2 10 0.2 Vehicles and equipment....................... 16.8 3 0.9 ----- Total depreciation and amortization..................................... 35.7 Less -- historical depreciation and amortization........................ (10.2) ----- Adjustment......................................................... $25.5 ===== An increase in the interest rate of 0.125% on all variable rate debt would result in an increase in interest expense of $4.4 million. (j) Represents interest income on a historical related party receivable that will be retained by the seller. (k) Represents the elimination of gain (loss) on sale of cable systems whose results of operations have been eliminated in (e) above. 31
$631.2 million of credit facilities at a composite current rate of 8.4% -- Bresnan................................... $ 6.6 January 2000 Charter Holdings notes used to refinance Bresnan 8.0% senior notes and 9.25% senior discount notes at composite rate of 10.55%............................... 4.7 Interest expense on additional borrowings used to finance other acquisitions at a composite current rate of 8.8%.... 13.0 ------ Total pro forma interest expense....................... 24.3 Less -- historical interest expense from acquired companies............................................. (11.1) ------ Adjustment........................................... $ 13.2 ====== 34 (l) Represents an adjustment to eliminate income tax benefit as a result of expected recurring future losses. The losses will not be tax benefited, and a net deferred tax asset will not be recorded. (m) Represents the allocation of losses to the minority interest in loss of subsidiary based on ownership of Charter Communications Holding Company and the 2% accretion of the preferred membership units in an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers. NOTE B: Represents an increase in interest expense related to borrowings under the Charter Holdings senior bridge loan facility and the application of a portion of such borrowings to repay a portion of the Charter Operating revolving credit facility (dollars in millions). Also represents an adjustment to minority interest in loss of subsidiary to reflect the allocation of 59.2% of the pro forma loss to minority interest. NOTE C: From November 12, 1999, the date of the initial public offering of Charter Communications, Inc., Charter Investment, Inc. provided management services to subsidiaries of Charter Operating. From and after the initial public offering of Charter Communications Inc., such management services were provided by Charter Communications, Inc. See "Certain Relationships and Related Transactions." NOTE D: Represents the allocation of losses to the minority interest in loss of subsidiary based on ownership of Charter Communications Holding Company and the 2% accretion of the preferred membership units in an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers. These membership units are exchangeable on a one-for-one basis for shares of Class A common stock of Charter Communications, Inc. NOTE E: Basic and diluted loss per common share assumes none of the membership units of Charter Communications Holding Company or preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of June 30, 2000, are exchanged for Charter Communications, Inc. Class A common stock and none of the outstanding options to purchase membership units of Charter Communications Holding Company that are automatically exchanged immediately after issuance for Charter Communications, Inc. Class A common stock are exercised. Basic and diluted loss per common share equals net loss divided by weighted average common shares outstanding. If the membership units were exchanged or options exercised, the effects would be antidilutive.
$1.0 billion of Charter Holdings senior bridge loan at a weighted average rate of 14.52%........................... $ 72.6 Amortization of debt issuance costs associated with the Charter Holdings senior bridge loan....................... 1.3 Less -- historical interest expense on $957.0 million Charter Operating credit facilities at a composite rate of 8.6%......................................... (41.3) ------ $ 32.6 ====== Converted loss per common share assumes all common membership units of Charter Communications Holding Company and preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of June 30, 2000, are exchanged for Charter Communications, Inc. Class A common stock. If all these shares are converted, minority interest would equal zero. Converted loss per common share is calculated by dividing loss before minority interest by the weighted average common shares outstanding -- converted. Weighted average common shares outstanding -- converted assumes the total common membership units in Charter Communications Holding Company totaling 339,096,474 and 24,215,749 preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers are exchanged for Charter Communications, Inc. Class A common stock. 32
FOR THE SIX MONTHS ENDED JUNE 30, 2000 ------------- Converted loss per common share........................ $ (1.71) Weighted average common shares outstanding -- converted............................. 596,575,345 35 NOTE F: Represents all shares outstanding as of January 1, 2000 (195,550,000 shares) plus shares issued to the Rifkin and Falcon sellers through June 30, 2000 (26,539,746 shares) and shares issued in the Kalamazoo transaction (11,173,376 shares). NOTE G: EBITDA represents earnings (loss) before extraordinary item, interest, income taxes, depreciation and amortization, and minority interest. EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE H: EBITDA margin represents EBITDA as a percentage of revenues. NOTE I: Adjusted EBITDA means EBITDA before option compensation expense, corporate expense charges, management fees and other expenses. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. Adjusted EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by adjusted EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE J: Estimated annual EBITDA represents EBITDA for the six months ended June 30, 2000 multiplied by 2. NOTE K: Estimated annual adjusted EBITDA represents EBITDA for the six months ended June 30, 2000 multiplied by 2. NOTE L: Homes passed are the number of living units, such as single residence homes, apartments and condominium units, passed by the cable distribution network in a given cable system service area. NOTE M: Basic customers are customers who receive basic cable service. NOTE N: Basic penetration represents basic customers as a percentage of homes passed. NOTE O: Premium units represent the total number of subscriptions to premium channels. NOTE P: Premium penetration represents premium units as a percentage of basic customers. NOTE Q: Average monthly revenue per basic customer represents revenues divided by six divided by the number of basic customers at June 30, 2000. 33 36 34
UNAUDITED PRO FORMA DATA AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------------- CHARTER BRIDGE COMMUNICATIONS, INC. ACQUISITIONS LOAN (NOTE A) (NOTE B) (NOTE C) TOTAL -------------------- ------------ -------- ------------- (DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA) STATEMENT OF OPERATIONS: Revenues............................................. $1,553,424 $1,397,611 $ -- $ 2,951,035 ---------- ---------- -------- ------------- Operating expenses: Operating, general and administrative.............. 806,941 703,712 -- 1,510,653 Depreciation and amortization...................... 808,981 887,586 -- 1,696,567 Option compensation expense........................ 79,979 -- -- 79,979 Corporate expense charges (Note D)................. 51,428 59,202 -- 110,630 Management fees.................................... -- 16,224 -- 16,224 ---------- ---------- -------- ------------- Total operating expenses......................... 1,747,329 1,666,724 -- 3,414,053 ---------- ---------- -------- ------------- Loss from operations................................. (193,905) (269,113) -- (463,018) Interest expense..................................... (536,218) (487,724) (65,111) (1,089,053) Interest income...................................... 4,329 1,335 -- 5,664 Other income (expense)............................... 285 (646) -- (361) ---------- ---------- -------- ------------- Loss before income taxes, minority interest in loss of subsidiary and extraordinary item............... (725,509) (756,148) (65,111) (1,546,768) Income tax expense................................... (1,030) (2,717) -- (3,747) Minority interest in loss of subsidiary (Note E)..... 430,474 444,498 38,578 913,550 ---------- ---------- -------- ------------- Loss before extraordinary item....................... $ (296,065) $ (314,367) $(26,533) $ (636,965) ========== ========== ======== ============= Loss per common share, basic and diluted (Note F).... $(2.73) ============= Weighted average common shares outstanding, basic and diluted (Note G)................................... 233,263,122 ============= OTHER FINANCIAL DATA: EBITDA (Note H)...................................... $ 615,361 $ 617,827 $1,233,188 EBITDA margin (Note I)............................... 39.6% 44.2% 41.8% Adjusted EBITDA (Note J)............................. $ 746,483 $ 693,899 $1,440,382 Cash flows from operating activities................. 479,916 485,751 965,667 Cash flows used in investing activities.............. (768,263) (641,724) (1,409,987) Cash flows from financing activities................. 412,480 243,024 655,504 Cash interest expense................................ 882,702 Capital expenditures................................. 741,508 545,322 1,286,830 Total debt to EBITDA................................. 9.1x Total debt to adjusted EBITDA........................ 7.8 EBITDA to cash interest expense...................... 1.4 EBITDA to interest expense........................... 1.1 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGE): Homes passed (Note K)................................ 8,706,400 1,146,400 9,852,800 Basic customers (Note L)............................. 5,452,500 768,100 6,220,600 Basic penetration (Note M)........................... 62.6% 67.0% 63.1% Premium units (Note N)............................... 2,800,800 343,700 3,144,400 Premium penetration (Note O)......................... 51.4% 44.7% 50.5% Average monthly revenue per basic customer (Note P)................................................. $39.53 37 NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS NOTE A: Pro forma operating results for Charter Communications, Inc. consist of the following (dollars in thousands): - ------------------------- (a) Marcus Holdings represents the results of operations of Marcus Holdings through March 31, 1999, the date of its merger with Charter Holdings. (b) As a result of Mr. Allen acquiring the controlling interest in Marcus Cable, a large portion of the purchase price was recorded as franchises ($2.5 billion) that are amortized over 15 years. This resulted in additional amortization for the period from January 1, 1999 through March 31, 1999. The adjustment to depreciation and amortization expense consists of the following (dollars in millions):
HISTORICAL ----------------------------------- 1/1/99 YEAR ENDED THROUGH 12/31/99 3/31/99 CHARTER MARCUS PRO FORMA COMMUNICATIONS, INC. HOLDINGS(A) ADJUSTMENTS TOTAL -------------------- ----------- ----------- ---------- Revenues........................................... $1,428,244 $125,180 $ -- $1,553,424 ---------- -------- --------- ---------- Operating expenses: Operating, general and administrative............ 737,957 68,984 -- 806,941 Depreciation and amortization.................... 745,315 51,688 11,978(b) 808,981 Option compensation expense...................... 79,979 -- -- 79,979 Corporate expense charges........................ 51,428 -- -- 51,428 Management fees.................................. -- 4,381 (4,381)(c) -- ---------- -------- --------- ---------- Total operating expenses....................... 1,614,679 125,053 7,597 1,747,329 ---------- -------- --------- ---------- Income (loss) from operations...................... (186,435) 127 (7,597) (193,905) Interest expense................................... (477,799) (27,067) (31,352)(d) (536,218) Interest income.................................... 34,467 104 (30,242)(e) 4,329 Other expense...................................... (8,039) (158) 8,482(f) 285 ---------- -------- --------- ---------- Loss before income taxes, minority interest in loss of subsidiary and extraordinary item............. $ (637,806) $(26,994) $ (60,709) $ (725,509) Income tax expense................................. 1,030 -- -- 1,030 Minority interest in loss of subsidiary............ 572,607 -- (142,133)(g) 430,474 ---------- -------- --------- ---------- Loss before extraordinary item..................... $ (66,229) $(26,994) $(202,842) $ (296,065) ========== ======== ========= ========== (c) Reflects the elimination of management fees. (d) Represents the issuance of the following January 2000 Charter Holdings notes and the reduction of interest expense in connection with the extinguishment of substantially all of our long-term 35
WEIGHTED AVERAGE USEFUL LIFE DEPRECIATION/ FAIR VALUE (IN YEARS) AMORTIZATION ---------- ---------------- ------------- Franchises.................................................. $2,500.0 15 $ 40.8 Cable distribution systems.................................. 720.0 8 21.2 Land, buildings and improvements............................ 28.3 10 0.7 Vehicles and equipment...................................... 13.6 3 1.0 ------ Total depreciation and amortization....................... 63.7 Less -- historical depreciation and amortization of Marcus Cable................................................... (51.7) ------ Adjustment.............................................. $ 12.0 ====== 38 debt in March 1999, excluding borrowings under our previous credit facilities, and the refinancing of all previous credit facilities (dollars in millions): (e) Reflects the elimination of interest income on excess cash since we assumed substantially all such cash was used to finance a portion of the acquisitions completed in 1999. (f) Reflects the elimination of expenses related to the March 1999 extinguishment and refinancing of debt. (g) Adjusts minority interest in loss of subsidiary to reflect the allocation of 59.2% of pro forma losses to minority interest. 36
INTEREST DESCRIPTION EXPENSE - ----------- -------- $675.0 million of 10.00% senior notes....................... $ 67.5 $325.0 million of 10.25% senior notes....................... 33.3 $532.0 million of 11.75% senior discount notes.............. 36.3 Reduction of interest expense in connection with the issuance of March 1999 Charter Holding notes.............. (2.8) Amortization of debt issuance costs......................... 5.0 ------- Total pro forma interest expense.......................... 139.3 Less -- historical interest expense....................... (107.9) ------- Adjustment............................................. $ 31.4 ======= 39 NOTE B: Pro forma operating results for our acquisitions completed since January 1, 1999 consist of the following (dollars in thousands):
YEAR ENDED DECEMBER 31, 1999 ACQUISITIONS -- HISTORICAL --------------------------------------------------------------------------------------------------- GREATER AMERICAN MEDIA INTERMEDIA RENAISSANCE(A) CABLE(A) SYSTEMS(A) HELICON(A) RIFKIN(A) SYSTEMS(A) FALCON(A) FANCH(A) -------------- -------- ---------- ---------- --------- ---------- --------- -------- Revenues............... $20,396 $12,311 $42,348 $ 49,564 $152,364 $152,789 $ 371,617 $185,917 ------- ------- ------- -------- -------- -------- --------- -------- Operating expenses: Operating, general and administrative...... 9,382 6,465 26,067 31,563 95,077 84,174 218,308 85,577 Depreciation and amortization........ 8,912 5,537 5,195 16,617 77,985 79,325 196,260 62,097 Equity-based deferred compensation........ -- -- -- -- -- -- 46,400 -- Corporate expense charges............. -- -- -- -- -- -- -- -- Management fees....... -- 369 -- 2,511 2,513 2,356 -- 6,162 ------- ------- ------- -------- -------- -------- --------- -------- Total operating expenses.......... 18,294 12,371 31,262 50,691 175,575 165,855 460,968 153,836 ------- ------- ------- -------- -------- -------- --------- -------- Income (loss) from operations............ 2,102 (60) 11,086 (1,127) (23,211) (13,066) (89,351) 32,081 Interest expense....... (6,321) (3,218) (565) (20,682) (34,926) (17,636) (114,993) -- Interest income........ 122 32 -- 124 -- 187 -- -- Other income (expense)............. -- 2 (398) -- (12,742) (2,719) 8,021 (7,796) ------- ------- ------- -------- -------- -------- --------- -------- Income (loss) before income taxes and extraordinary item.... (4,097) (3,244) 10,123 (21,685) (70,879) (33,234) (196,323) 24,285 Income tax expense (benefit)............. (65) 5 4,535 -- (1,975) (2,681) 2,509 197 ------- ------- ------- -------- -------- -------- --------- -------- Income (loss) before extraordinary item.... $(4,032) $(3,249) $ 5,588 $(21,685) $(68,904) $(30,553) $(198,832) $24,088 ======= ======= ======= ======== ======== ======== ========= ======== YEAR ENDED DECEMBER 31, 1999 ACQUISITIONS -- HISTORICAL ------------------------------------------------------------- AVALON(A) BRESNAN(B) KALAMAZOO(B) OTHER(B) TOTAL --------- ---------- ------------ -------- ---------- Revenues............... $ 94,383 $283,574 $20,259 $24,826 $1,410,348 -------- -------- ------- ------- ---------- Operating expenses: Operating, general and administrative...... 53,089 176,611 12,321 14,232 812,866 Depreciation and amortization........ 39,943 59,752 3,534 6,792 561,949 Equity-based deferred compensation........ -- -- 1,868 -- 48,268 Corporate expense charges............. -- -- 501 -- 501 Management fees....... -- -- -- 910 14,821 -------- -------- ------- ------- ---------- Total operating expenses.......... 93,032 236,363 18,224 21,934 1,438,405 -------- -------- ------- ------- ---------- Income (loss) from operations............ 1,351 47,211 2,035 2,892 (28,057) Interest expense....... (40,162) (67,291) -- (6,180) (311,974) Interest income........ 764 -- 4,120 (20) 5,329 Other income (expense)............. 4,499 (344) (189) (30) (11,696) -------- -------- ------- ------- ---------- Income (loss) before income taxes and extraordinary item.... (33,548) (20,424) 5,966 (3,338) (346,398) Income tax expense (benefit)............. (13,936) -- -- -- (11,411) -------- -------- ------- ------- ---------- Income (loss) before extraordinary item.... $(19,612) $(20,424) $ 5,966 $(3,338) $ (334,987) ======== ======== ======= ======= ========== - ------------------------- (a) Renaissance represents the results of operations of Renaissance Media Group, LLC through April 30, 1999, the date of acquisition by Charter Holdings. American Cable represents the results of operations of American Cable Entertainment, LLC through May 7, 1999, the date of acquisition by Charter Holdings. Greater Media Systems 37
YEAR ENDED DECEMBER 31, 1999 -------------------------------------------------------------------------- ACQUISITIONS -------------------------------------------------------------------------- PRO FORMA ------------------------------------------------------------- HISTORICAL ACQUISITIONS(C) DISPOSITIONS(D) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- ---------- Revenues............................................. $1,410,348 $43,859 $(53,626) $ (2,970)(e) $1,397,611 ---------- ------- -------- --------- ---------- Operating expenses: Operating, general and administrative............... 812,866 25,370 (25,493) (109,031)(f) 703,712 Depreciation and amortization....................... 561,949 11,166 (22,850) 337,321(g) 887,586 Equity-based deferred compensation.................. 48,268 -- -- (48,268)(h) -- Corporate expense charges........................... 501 1,280 -- 57,421(f) 59,202 Management fees..................................... 14,821 1,403 -- -- 16,224 ---------- ------- -------- --------- ---------- Total operating expenses............................ 1,438,405 39,219 (48,343) 237,443 1,666,724 ---------- ------- -------- --------- ---------- Income (loss) from operations........................ (28,057) 4,640 (5,283) (240,413) (269,113) Interest expense..................................... (311,974) (2,402) 37 (173,385)(i) (487,724) Interest income...................................... 5,329 126 -- (4,120)(j) 1,335 Other income (expense)............................... (11,696) 49,024 (2,576) (35,398)(k) (646) ---------- ------- -------- --------- ---------- Income (loss) before income taxes, minority interest in loss of subsidiary and extraordinary item........ (346,398) 51,388 (7,822) (453,316) (756,148) Income tax expense (benefit)......................... (11,411) (47) -- 14,175(l) 2,717 Minority interest in loss of subsidiary.............. -- -- -- 444,498(m) 444,498 ---------- ------- -------- --------- ---------- Income (loss) before extraordinary item.............. $ (334,987) $51,435 $ (7,822) $ (22,993) $ (314,367) ========== ======= ======== ========= ========== 40 represents the results of operations of cable systems of Greater Media Cablevision, Inc. through June 30, 1999, the date of acquisition by Charter Holdings. Helicon represents the results of operations of Helicon Partners I, L.P. and affiliates through July 30, 1999, the date of acquisition by Charter Holdings. InterMedia represents the results of operations of cable systems of Intermedia Capital Partners IV, L.P., InterMedia Partners and affiliates through October 1, 1999, the date of acquisition by Charter Holdings. Falcon represents the results of operations of cable systems of Falcon Communications, L.P. through November 12, 1999, the date of acquisition by Charter Communications Holding Company. Fanch represents the results of operations of cable systems of Fanch Cablevision L.P. and affiliates through November 15, 1999, the date of acquisition by Charter Communications Holding Company. Avalon represents the results of operations of cable systems of Avalon Cable of Michigan Holding, Inc. through November 15, 1999, the date of acquisition by Charter Communications Holding Company. Rifkin includes the results of operations of Rifkin Acquisition Partners, L.L.L.P., Rifkin Cable Income Partners L.P., Indiana Cable Associates, Ltd. and R/N South Florida Cable Management Limited Partnership, all under common ownership through September 13, 1999, the date of acquisition by Charter Holdings, as follows (dollars in thousands): (b) Bresnan represents the results of operations of cable systems of Bresnan for the year ended December 31, 1999. Kalamazoo represents the results of operations of cable systems of Cablevision of Michigan, Inc., the indirect owner of a cable system in Kalamazoo, Michigan, for the year ended December 31, 1999. Other represents the results of operations of Vista Broadband Communications, L.L.C. through July 30, 1999, the date of acquisition by Charter Holdings, the results of operations of cable systems of Cable Satellite of South Miami, Inc. through August 4, 1999, the date of acquisition by Charter Holdings and the results of operations of cable systems of Capital Cable and Farmington for the year ended December 31, 1999. (c) Represents the historical results of operations for the period from January 1, 1999 through the date of purchase for acquisitions completed by Bresnan before December 31, 1999 and the historical results of operations for the year ended December 31, 1999 for acquisitions completed after December 31, 1999. These acquisitions were accounted for using the purchase method of accounting. The purchase price in millions and closing dates for significant acquisitions are as follows:
RIFKIN RIFKIN INDIANA SOUTH ACQUISITION CABLE INCOME CABLE FLORIDA OTHER TOTAL ----------- ------------ ------- -------- -------- -------- Revenues........................ $ 68,829 $3,807 $ 6,034 $ 17,516 $ 56,178 $152,364 Income (loss) from operations... (6,954) 146 (3,714) (14,844) 2,155 (23,211) Loss before extraordinary item.......................... (21,571) (391) (4,336) (15,605) (27,001) (68,904) (d) Represents the elimination of the operating results related to the cable systems transferred to InterMedia as part of a swap of cable systems in October 1999. The agreed value of our systems transferred to InterMedia was $420.0 million. This number includes 30,000 customers served by an Indiana cable system that we did not transfer at the time of the InterMedia closing because some of the necessary regulatory approvals were still pending. This system was transferred in March 2000. No material gain or loss occurred on the disposition as these systems were recently acquired and recorded at fair value at that time. Also represents the elimination of the operating results related to the sale of a Bresnan cable system sold in January 1999. 38
BRESNAN ACQUISITIONS ------------ Purchase price.............................................. $40.0 Closing date................................................ January 1999 Purchase price.............................................. $27.0 Closing date................................................ March 1999 Purchase price.............................................. $36.2 Closing date................................................ January 2000 41 (e) Reflects the elimination of historical revenues and expenses associated with an entity not included in the purchase by Charter. (f) Reflects a reclassification of expenses representing corporate expenses that would have occurred at Charter Investment, Inc. totaling $57.4 million. The remaining adjustment primarily relates to the elimination of severance payments of $44.2 million and the write-off of debt issuance costs of $7.4 million that were included in operating, general and administrative expense. (g) Represents additional depreciation and amortization as a result of our acquisitions completed in 1999 and 2000. A large portion of the purchase price was allocated to franchises ($12.6 billion) that are amortized over 15 years. The adjustment to depreciation and amortization expense consists of the following (dollars in millions): (h) Reflects the elimination of approximately $46.4 million of change in control payments under the terms of Falcon's equity-based compensation plans that were triggered by the acquisition of Falcon by Charter Communications Holding Company and the elimination of approximately $1.9 million of change in control payments under the terms of a stock appreciation rights plan that were triggered by the acquisition of the Kalamazoo system by Charter Communications, Inc. These plans were terminated and the employees will participate in the option plan of Charter Communications Holding Company. As such, these costs will not recur. (i) Reflects additional interest expense on borrowings, which were used to finance the acquisitions as follows (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/ FAIR VALUE USEFUL LIFE AMORTIZATION ---------- ---------------- ------------- Franchises................................................. $12,583.4 15 $ 681.8 Cable distribution systems................................. 1,754.9 8 180.1 Land, buildings and improvements........................... 54.7 10 4.2 Vehicles and equipment..................................... 90.4 3 21.5 ------- Total depreciation and amortization................................................... 887.6 Less -- historical depreciation and amortization...................................... (550.3) ------- Adjustment....................................................................... $ 337.3 ======= An increase in the interest rate of 0.125% on all variable rate debt would result in an increase in interest expense of $8.7 million. (j) Represents interest income on a historical related party receivable, that was retained by the seller. 39
$170.0 million of credit facilities at a composite current rate of 8.6% -- Avalon.................................... $ 12.2 $150.0 million 9.375% senior subordinated notes -- Avalon... 12.3 $196.0 million 11.875% senior discount notes -- Avalon...... 11.6 $850.0 million of credit facilities at a composite current rate of 8.5% -- Fanch..................................... 62.0 $1.0 billion of credit facilities at a composite current rate of 8.0% -- Falcon.................................... 71.9 $375.0 million 8.375% senior debentures -- Falcon........... 27.2 $435.3 million 9.285% senior discount debentures -- Falcon...................................... 26.0 $631.2 million of credit facilities at a composite current rate of 8.4% -- Bresnan................................... 52.9 $170.0 million 8.0% senior notes -- Bresnan................. 13.6 $275.0 million 9.25% senior discount notes -- Bresnan....... 17.7 Interest expense on additional borrowings used to finance acquisitions at a composite current rate of 8.8%.......... 180.3 ------- Total pro forma interest expense....................... 487.7 Less -- historical interest expense from acquired companies............................................. (314.3) ------- Adjustment........................................... $ 173.4 ======= 42 (k) Represents the elimination of gain (loss) on sale of cable television systems whose results of operations have been eliminated in (d) above. (l) Represents an adjustment to eliminate income tax benefit as a result of expected recurring future losses and record income tax expense. The losses will not be tax benefited, and a net deferred tax asset will not be recorded. Income tax expense represents taxes assessed by certain state jurisdictions for certain indirect subsidiaries. (m) Represents the allocation of losses to minority interest in loss of subsidiary based on ownership of Charter Communications Holding Company and the 2% accretion of the preferred membership units of an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers. NOTE C: Represents an increase in interest expense related to borrowings under the Charter Holdings senior bridge loan facility and the application of a portion of such borrowings to repay a portion of the Charter Operating revolving credit facility (dollars in millions). Also represents an adjustment to minority interest in loss of subsidiary to reflect the allocation of 59.2% of the pro forma loss to minority interest. NOTE D: From November 12, 1999, the date of the initial public offering of Charter Communications, Inc., Charter Investment, Inc. provided management services to subsidiaries of Charter Operating. From and after the initial public offering of Charter Communications Inc., such management services were provided by Charter Communications, Inc. See "Certain Relationships and Related Transactions." NOTE E: Represents the allocation of losses to the minority interest in loss of subsidiary based on ownership of Charter Communications Holding Company and the 2% accretion of the preferred membership units in an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers. These membership units are exchangeable on a one-for-one basis for shares of Class A common stock of Charter Communications, Inc. NOTE F: Basic and diluted loss per common share assumes none of the membership units of Charter Communications Holding Company or preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of June 30, 2000, are exchanged for Charter Communications, Inc. Class A common stock and none of the outstanding options to purchase membership units of Charter Communications Holding Company that are automatically exchanged for Charter Communications, Inc. Class A common stock are exercised. Basic and diluted loss per common share equals net loss divided by weighted average common shares outstanding. If the membership units were exchanged or options exercised, the effects would be antidilutive.
$1.0 billion of Charter Holdings senior bridge loan at a weighted average rate of 14.52%........................... $145.2 Amortization of debt issuance costs associated with the Charter Holdings senior bridge loan....................... 2.5 Less -- historical interest expense on $957.0 million Charter Operating credit facilities at a composite rate of 8.6%.......................................... (82.6) ------ $ 65.1 ====== Converted loss per common share assumes all common membership unit of Charter Communications Holding Company and preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers as of June 30, 2000, are exchanged for Charter Communications, Inc. Class A common stock, if all these shares are converted, minority interest would equal zero. Converted loss per common share is calculated by dividing loss before minority interest by the weighted average common shares outstanding -- converted. Weighted average common shares outstanding -- converted assumes the total common membership units in Charter Communications 40
FOR THE YEAR ENDED DECEMBER 31, 1999 ----------------- Converted loss per common share............................ $ (2.60) Weighted average common shares outstanding -- converted.... 596,575,345 43 Holding Company totaling 339,096,474 and 24,215,749 preferred membership units in an indirect subsidiary of Charter Holdings held by certain Bresnan sellers are exchanged for Charter Communications, Inc. Class A common stock. NOTE G: Represents all shares issued in connection with initial public offering (195,550,000 shares) plus shares issued to the Rifkin and Falcon sellers through June 30, 2000 (26,539,746 shares) and shares issued to sellers in the Kalamazoo transaction (11,173,376 shares). NOTE H: EBITDA represents earnings (loss) before extraordinary item interest, income taxes, depreciation and amortization, and minority interest. EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE I: EBITDA margin represents EBITDA as a percentage of revenues. NOTE J: Adjusted EBITDA means EBITDA before option compensation expense, corporate expense charges, management fees and other expenses. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. Adjusted EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by adjusted EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE K: 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 L: Basic customers are customers who receive basic cable service. NOTE M: Basic penetration represents basic customers as a percentage of homes passed. NOTE N: Premium units represent the total number of subscriptions to premium channels. NOTE O: Premium penetration represents premium units as a percentage of basic customers. NOTE P: Average monthly revenue per basic customer represents revenues divided by twelve divided by the number of basic customers at December 31, 1999. 41 44 42
UNAUDITED PRO FORMA BALANCE SHEET AS OF JUNE 30, 2000 ----------------------------------------------------------- KALAMAZOO BRIDGE CHARTER TRANSACTION LOAN COMMUNICATIONS, INC. (NOTE A) (NOTE B) TOTAL -------------------- ----------- -------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents................... $ 74,021 $ 1 $22,463 $ 96,485 Accounts receivable, net.................... 122,869 260 -- 123,129 Prepaid expenses and other.................. 38,838 135 -- 38,973 ----------- -------- ------- ----------- Total current assets................... 235,728 396 22,463 258,587 Property, plant and equipment............... 4,233,878 27,270 -- 4,261,148 Franchises.................................. 17,338,243 143,180 -- 17,481,423 Other assets................................ 217,308 -- 15,000 232,308 ----------- -------- ------- ----------- Total assets........................... $22,025,157 $170,846 $37,463 $22,233,466 =========== ======== ======= =========== Accounts payable and accrued expenses....... $ 1,017,330 $ 3,696 $(5,537) $ 1,015,489 Payables to manager of cable systems -- related parties................ 2,751 -- -- 2,751 ----------- -------- ------- ----------- Total current liabilities.............. 1,020,081 3,696 (5,537) 1,018,240 Long-term debt.............................. 11,605,328 -- 43,000 11,648,328 Deferred management fees -- related parties................................... 13,751 -- -- 13,751 Other long-term liabilities................. 147,370 -- -- 147,370 Redeemable securities (Note C).............. 1,846,176 -- -- 1,846,176 Minority interest........................... 4,689,263 (2,076) -- 4,687,187 Shareholders' equity........................ 2,703,188 169,226 -- 2,872,414 ----------- -------- ------- ----------- Total liabilities and shareholders' equity............................... $22,025,157 $170,846 $37,463 $22,233,466 =========== ======== ======= =========== 45 NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET NOTE A: The pro forma balance sheet for the Kalamazoo transaction that closed in September 2000 consists of the following (dollars in thousands): - ------------------------- (a) Reflects assets retained by the seller. (b) Substantial amounts of the purchase price have been allocated to franchises based on estimated fair values. The allocation of the purchase price is as follows (dollars in thousands):
AS OF JUNE 30, 2000 -------------------------------------- PRO FORMA ------------------------- HISTORICAL ADJUSTMENTS TOTAL ---------- ----------- -------- Cash and cash equivalents................................... $ 1 $ -- $ 1 Accounts receivable, net.................................... 260 -- 260 Receivable from related party............................... 54,974 (54,974)(a) -- Prepaid expenses and other.................................. 135 -- 135 ------- -------- -------- Total current assets...................................... 55,370 (54,974) 396 Property, plant and equipment............................... 27,270 -- 27,270 Franchises.................................................. -- 143,180(b) 143,180 Other assets................................................ 657 (657)(c) -- ------- -------- -------- Total assets.............................................. $83,297 $ 87,549 $170,846 ======= ======== ======== Accounts payable and accrued expenses....................... $ 3,696 $ -- $ 3,696 Minority interest........................................... -- (2,076)(d) (2,076) Equity...................................................... 79,601 89,625(e) 169,226 ------- -------- -------- Total liabilities and equity.............................. $83,297 $ 87,549 $170,846 ======= ======== ======== The Kalamazoo transaction was financed through the issuance of 11,173,376 shares of Class A common stock in Charter Communications, Inc. to the Kalamazoo sellers. After the merger, Charter Communications, Inc. contributed 100% of the equity interests of the direct owner of the Kalamazoo system to Charter Communications Holding Company in exchange for membership units. (c) Represents the elimination of the unamortized historical cost of goodwill. (d) Adjusts minority interest to reflect the gain of $2.1 million related to the issuance of equity by Charter Communications Holding Company (See (e) below). (e) Represents the elimination of the historical equity of $79.6 million related to the Kalamazoo system, the issuance of $167.1 million of Class A common stock in Charter Communications, Inc. and the gain of $2.1 million related to the issuance of equity by Charter Communications Holding Company. NOTE B: Represents additional long-term debt of $1.0 billion resulting from borrowings under the Charter Holdings senior bridge loan facility, the application of a portion of such borrowings to repay a portion of the Charter Operating revolving credit facility and related accrued interest, the addition to other assets of the estimated expenses paid in connection with the new borrowings which were capitalized and will be amortized over ten years and the application of remaining proceeds to cash. 43
KALAMAZOO --------- Working capital............................................. $ (3,300) Property, plant and equipment............................... 27,270 Franchises.................................................. 143,180 -------- $167,150 ======== 46 NOTE C: The Rifkin, Falcon, Helicon and Bresnan sellers who own equity interests in Charter Communications, Inc. and certain subsidiaries may have rescission rights arising out of possible violations of Section 5 of the Securities Act of 1933, as amended, in connection with the offers and sales of those equity interests. Accordingly, the maximum cash obligation related to the possible rescission rights, estimated at $1.8 billion, has been excluded from shareholders' equity and minority interest, and classified as redeemable securities. One year after the date of issuance of these equity interests (when these possible rescission rights will have expired), we will reclassify the respective amounts to shareholders' equity and minority interest. See "Certain Trends and Uncertainties -- Possible Rescission Liability." 44 47 SELECTED HISTORICAL FINANCIAL DATA On July 22, 1999, Charter Investment, Inc., a company controlled by Mr. Allen, formed Charter Communications, Inc. with a nominal initial investment. On November 12, 1999, Charter Communications, Inc. sold 195.5 million shares of Class A common stock in an initial public offering and 50,000 shares of high vote Class B common stock to Mr. Allen. The net proceeds from these sales were used to purchase membership units of Charter Communications Holding Company, representing an approximate 40.6% economic interest and a 100% voting interest, before giving effect to the Bresnan acquisition that occurred on February 14, 2000. Charter Communications, Inc.'s purchase of 50,000 membership units of Charter Communications Holding Company was accounted for as a reorganization of entities under common control similar to a pooling of interests. Accordingly, beginning December 23, 1998, the date Mr. Allen first controlled Charter Communications Holding Company, the assets and liabilities of Charter Communications Holding Company are reflected in the consolidated financial statements of Charter Communications, Inc. at Mr. Allen's basis. Minority interest is recorded representing that portion of the economic interests in Charter Communications Holding Company not owned by Charter Communications, Inc. Consolidated financial statements of Charter Communications, Inc. do not exist for periods prior to December 23, 1998. Instead, for the periods from October 1, 1995 through December 23, 1998, the consolidated financial statements of Charter Communications Properties Holdings, LLC (CCPH), a wholly owned subsidiary of Charter Investment, Inc. and predecessor to Charter Communications, Inc., are presented. CCPH commenced operations with the acquisition of a cable system on September 30, 1995. The selected historical financial data for the period from January 1, 1995 through September 30, 1995 are derived from unaudited financial statements of CCPH's predecessor business and are not included elsewhere in this prospectus. The selected historical financial data below for the period from October 1, 1995 through December 31, 1995, for the years ended December 31, 1996 and 1997, and for the period from January 1, 1998 through December 23, 1998, are derived from the consolidated financial statements of CCPH, which have been audited by Arthur Andersen LLP, independent public accountants, and are included herein. The selected historical financial data for the period from December 24, 1998 through December 31, 1998 and the year ended December 31, 1999 are derived from the consolidated financial statements of Charter Communications, Inc., which have been audited by Arthur Andersen LLP and are included herein. The selected historical financial data for the period from January 1, 2000 through June 30, 2000 are derived from the consolidated financial statements of Charter Communications, Inc. 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 and related notes included elsewhere in this prospectus. 45 48 SELECTED HISTORICAL FINANCIAL DATA 46
PREDECESSOR OF CHARTER COMMUNICATIONS CHARTER COMMUNICATIONS PROPERTIES HOLDINGS PROPERTIES HOLDINGS CHARTER COMMUNICATIONS, INC. ------------------- --------------------------------------- ------------------------------------------ YEAR ENDED 1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98 YEAR ENDED SIX MONTHS THROUGH THROUGH ----------------- THROUGH THROUGH DECEMBER 31, ENDED 9/30/95 12/31/95 1996 1997 12/23/98 12/31/98 1999 JUNE 30, 2000 ------------------- -------- ------- ------- -------- ---------- ------------ -------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS: Revenues................ $ 5,324 $ 1,788 $14,881 $18,867 $ 49,731 $ 13,713 $ 1,428,244 $ 1,516,384 ------- ------- ------- ------- -------- ---------- ----------- ------------ Operating expenses: Operating, general and administrative...... 2,581 931 8,123 11,767 25,952 7,134 737,957 778,313 Depreciation and amortization........ 2,137 648 4,593 6,103 16,864 8,318 745,315 1,149,787 Option compensation expense............. -- -- -- -- -- 845 79,979 26,089 Management fees/ corporate expense charges............. 224 54 446 566 6,176 473 51,428 27,515 ------- ------- ------- ------- -------- ---------- ----------- ------------ Total operating expenses.......... 4,942 1,633 13,162 18,436 48,992 16,770 1,614,679 1,981,704 ------- ------- ------- ------- -------- ---------- ----------- ------------ Income (loss) from operations............ 382 155 1,719 431 739 (3,057) (186,435) (465,320) Interest expense........ -- (691) (4,415) (5,120) (17,277) (2,353) (477,799) (482,042) Interest income......... -- 5 20 41 44 133 34,467 6,110 Other income (expense)............. 38 -- (47) 25 (728) -- (8,039) (2,504) ------- ------- ------- ------- -------- ---------- ----------- ------------ Income (loss) before income taxes and minority interest in loss of subsidiary and extraordinary item.... 420 (531) (2,723) (4,623) (17,222) (5,277) (637,806) (943,756) Income tax expense...... -- -- -- -- -- -- 1,030 -- ------- ------- ------- ------- -------- ---------- ----------- ------------ Income (loss) before minority interest..... 420 (531) (2,723) (4,623) (17,222) (5,277) (638,836) (943,756) Minority interest in loss of subsidiary.... -- -- -- -- -- 5,275 572,607 566,221 ------- ------- ------- ------- -------- ---------- ----------- ------------ Net income (loss)....... $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (2) $ (66,229) $ (377,535) ------- ------- ------- ------- -------- ---------- ----------- ------------ Loss per common share, basic and diluted..... N/A N/A N/A N/A N/A $ (0.04) $ (2.22) $ (1.70) ======= ======= ======= ======= ======== ========== =========== ============ Weighted-average common shares outstanding.... N/A N/A N/A N/A N/A 50,000 29,811,202 222,003,415 ======= ======= ======= ======= ======== ========== =========== ============ BALANCE SHEET DATA (AT END OF PERIOD): Total assets............ $26,342 $31,572 $67,994 $55,811 $281,969 $4,335,527 $18,966,507 $ 22,025,157 Total debt.............. 10,480 28,847 59,222 41,500 274,698 2,002,206 8,936,455 11,605,328 Minority interest....... -- -- -- -- -- 2,146,549 5,381,331 4,689,263 Redeemable securities... -- -- -- -- -- -- 750,937 1,846,176 Member's equity (deficit)/ Shareholders' equity................ 15,311 971 2,648 (1,975) (8,397) 830 3,011,079 2,703,188 49 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the "Certain Trends and Uncertainties" section below in this Management's Discussion and Analysis for a discussion of important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements as of and for the three and six month periods ended June 30, 2000 and 1999, and the audited consolidated financial statements of Charter Communications, Inc. as of December 31, 1999 and 1998 and for the year ended December 31, 1999 and for the period from December 24, 1998 through December 31, 1998 and the audited consolidated financial statements of Charter Communications Property Holdings, LLC (CCPH) for the period from January 1, 1998 through December 23, 1998 and for the year ended December 31, 1997. INTRODUCTION We do not believe that our historical financial condition and results of operations are accurate indicators of future results because of certain past significant events, including: (1) the acquisition by Mr. Allen of CCA Group, CCPH and CharterComm Holdings, LLC, referred to together with their subsidiaries as the Charter companies; (2) the merger of Marcus Holdings with and into Charter Holdings; (3) the acquisitions by Charter Communications Holding Company and its direct and indirect subsidiaries completed since January 1, 1999; (4) the refinancing or replacement of the previous credit facilities of the Charter companies and certain of our subsidiaries acquired in 1999 and 2000; (5) the purchase of publicly held notes that had been issued by several of the direct and indirect subsidiaries of Charter Holdings; and (6) the allocation of losses to minority interest. Provided below is a discussion of our organizational history consisting of: (1) the operations and development of the Charter companies prior to the acquisition by Mr. Allen, together with the acquisition of the Charter companies by Mr. Allen; (2) the merger of Marcus Holdings with and into Charter Holdings; (3) the acquisitions by Charter Communications Holding Company and its direct and indirect subsidiaries; (4) our formation; and (5) our initial public offering of Class A common stock. ORGANIZATIONAL HISTORY Prior to the acquisition of the Charter companies by Mr. Allen on December 23, 1998 and the merger of Marcus Holdings with and into Charter Holdings effective April 7, 1999, the cable systems of the Charter and Marcus companies were operated under four groups of companies. Three of these groups were comprised of companies that were managed by Charter Investment and in which Charter Investment had an ownership interest. The fourth group was comprised of companies that were subsidiaries of Marcus Holdings which Charter Investment began managing in October 1998. The following is an explanation of how: (1) CCPH, the operating companies that formerly comprised CCA Group and CharterComm Holdings, and the Marcus companies became wholly owned subsidiaries of Charter Operating; 47 50 (2) Charter Operating became a wholly owned subsidiary of Charter Holdings; (3) Charter Holdings became a wholly owned subsidiary of Charter Communications Holding Company; (4) Charter Communications Holding Company became a wholly owned subsidiary of Charter Communications, Inc.; and (5) we became the sole voting member and the sole manager of Charter Communications Holding Company. THE CHARTER COMPANIES Prior to Charter Investment acquiring the remaining interests that it did not previously own in two of the three groups of Charter companies, namely CCA Group and CharterComm Holdings, as described below, the operating subsidiaries of the three groups of Charter companies were parties to separate management agreements with Charter Investment, pursuant to which Charter Investment provided management and consulting services. Prior to the acquisition by Mr. Allen, the Charter companies were as follows: (1) CCPH CCPH was a wholly owned subsidiary of Charter Investment. The primary subsidiary of CCPH, which owned the cable systems, was Charter Communications Properties, LLC. On May 20, 1998, CCPH acquired certain cable systems from Sonic Communications, Inc. for a total purchase price, net of cash acquired, of $228.4 million, including $60.9 million of assumed debt. In connection with Mr. Allen's acquisition on December 23, 1998, CCPH was merged out of existence, and Charter Communications Properties became a direct, wholly owned subsidiary of Charter Investment. (2) CCA Group The controlling interests in CCA Group were held by affiliates of Kelso & Co., and Charter Investment had only a minority interest. Effective December 23, 1998, prior to Mr. Allen's acquisition, Charter Investment acquired from the Kelso affiliates the interests the Kelso affiliates held in CCA Group. Consequently, the companies comprising CCA Group became wholly owned subsidiaries of Charter Investment. CCA Group consisted of the following three sister companies: (a) CCT Holdings, LLC; (b) CCA Holdings, LLC; and (c) Charter Communications Long Beach, LLC. The cable systems were owned by the various subsidiaries of these three sister companies. The financial statements for these three sister companies historically were combined and the term "CCA Group" was assigned to these combined entities. In connection with Mr. Allen's acquisition on December 23, 1998, the three sister companies and some of the non-operating subsidiaries were merged out of existence, leaving certain of the operating subsidiaries owning all of the cable systems under this former group. These operating subsidiaries became indirect, wholly owned subsidiaries of Charter Investment. (3) CharterComm Holdings, LLC The controlling interests in CharterComm Holdings were held by affiliates of Charterhouse Group International Inc., and Charter Investment had only a minority interest. Effective December 23, 1998, prior to Mr. Allen's acquisition, Charter Investment acquired from the 48 51 Charterhouse Group affiliates the interests the Charterhouse Group affiliates held in CharterComm Holdings. Consequently, CharterComm Holdings became a wholly owned subsidiary of Charter Investment. The cable systems were owned by the various subsidiaries of CharterComm Holdings. In connection with Mr. Allen's acquisition on December 23, 1998, some of the non-operating subsidiaries were merged out of existence, leaving certain of the operating subsidiaries owning all of 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. The acquisition of Charter Investment by Mr. Allen became effective on December 23, 1998, through a series of transactions in which Mr. Allen acquired approximately 94% of the equity interests of Charter Investment for an aggregate purchase price of $2.2 billion, excluding $2.0 billion in assumed debt. CCPH and the operating companies that formerly comprised CCA Group and CharterComm Holdings were contributed to Charter Operating subsequent to Mr. Allen's acquisition. CCPH is deemed to be our predecessor. Consequently, the contribution of CCPH was accounted for as a reorganization under common control. The contributions of the operating companies that formerly comprised CCA Group and CharterComm Holdings were accounted for in accordance with purchase accounting. Accordingly, our results of operations for periods after December 23, 1998 include the accounts of CCPH, CCA Group and CharterComm Holdings. In February 1999, Charter Holdings was formed as a wholly owned subsidiary of Charter Investment, and Charter Operating was formed as a wholly owned subsidiary of Charter Holdings. All of Charter Investment's direct interests in the entities described above were transferred to Charter Operating. All of the prior management agreements were terminated, and a single new management agreement was entered into between Charter Investment and Charter Operating to cover all of the subsidiaries. In May 1999, Charter Communications Holding Company was formed as a wholly owned subsidiary of Charter Investment. All of Charter Investment's interests in Charter Holdings were transferred to Charter Communications Holding Company. In July 1999, Charter Communications, Inc. was formed as a wholly owned subsidiary of Charter Investment. In November 1999, Charter Communications, Inc. conducted its initial public offering. In our initial public offering, substantially all of our equity interests were sold to the public, and less than 1% of our equity interests were sold to Mr. Allen. We contributed substantially all of the proceeds of our initial public offering to Charter Communications Holding Company, which issued membership units to us. In November 1999, the management agreement between Charter Investment and Charter Operating was amended and assigned from Charter Investment to us. Also in November 1999, Charter Communications Holding Company sold membership units to Vulcan Cable III. THE MARCUS COMPANIES In April 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable, and agreed to acquire the remaining interests. The owner of the remaining partnership interests retained voting control of Marcus Cable. In October 1998, Marcus Cable entered into a management consulting agreement with Charter Investment, pursuant to which Charter Investment provided management and consulting services to Marcus Cable and its subsidiaries which own cable systems. This agreement placed the Marcus cable systems under common management with the cable systems of the Charter companies acquired by Mr. Allen in December 1998. In March 1999, all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings, a then newly formed company. Later in March 1999, Mr. Allen acquired the remaining 49 52 interests in Marcus Cable, including voting control, which interests were transferred to Marcus Holdings. In April 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable systems they owned came under the ownership of Charter Holdings and, in turn, Charter Operating. For financial reporting purposes, the merger of Marcus Holdings with and into Charter Holdings was accounted for as an acquisition of Marcus Holdings effective March 31, 1999, and accordingly, the results of operations of Marcus Holdings have been included in our consolidated financial statements since that date. ACQUISITIONS In 1999, we completed eleven acquisitions of cable systems for an aggregate purchase price of $10.9 billion, including assumed debt of $2.3 billion. On February 14, 2000, Charter Communications Holding Company and Charter Holdings completed the acquisition of Bresnan. The Bresnan cable systems acquired are located primarily in Michigan, Minnesota, Wisconsin and Nebraska. Prior to the acquisition, Charter Communications Holding Company assigned a portion of its rights to purchase Bresnan to Charter Holdings. Charter Communications Holding Company and Charter Holdings purchased 52% of Bresnan from certain sellers for cash, and certain sellers contributed 18% of Bresnan to Charter Communications Holding Company for 14.8 million Class C common membership units of Charter Communications Holding Company, a 2.6% equity interest in Charter Communications Holding Company. Charter Communications Holding Company then transferred its ownership interest in Bresnan to Charter Holdings. Thereafter, Charter Holdings and certain other sellers contributed all of the outstanding interests in Bresnan to CC VIII, LLC (CC VIII), a subsidiary of Charter Holdings, and Bresnan was dissolved. In exchange for the contribution of their interests in Bresnan, the other sellers received 24.2 million Class A preferred membership units in CC VIII, representing 30% of the equity of CC VIII, and are entitled to a 2% annual return on their preferred membership units. The purchase price for Bresnan was $3.1 billion, subject to adjustment, and was comprised of $1.1 billion in cash, $384.6 million in equity in Charter Communications Holding Company, $629.5 million in equity of CC VIII, and approximately $963.3 million in assumed debt. All of the membership units received by the sellers are exchangeable on a one-for-one basis for our Class A common stock. In September 2000, the merger of Cablevision of Michigan, Inc., the owner of a cable system in Kalamazoo, Michigan, with and into us was completed. The merger consideration was paid in 11,173,376 shares of our Class A common stock valued at approximately $170.6 million. After the merger, we contributed 100% of the equity interests of the direct owner of the Kalamazoo system to Charter Communications Holding Company in exchange for membership units. The Kalamazoo cable system had revenues of approximately $20.3 million for the year ended December 31, 1999. In addition, we have closed three smaller acquisitions in 2000. A summary of information regarding acquisitions closed in 2000 is as follows: 50
AS OF AND FOR THE SIX MONTHS PURCHASE PRICE ENDED JUNE 30, 2000 (INCLUDING ----------------------------- ACQUISITION ASSUMED DEBT) REVENUES DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) ----------- -------------- ---------- --------------- Interlake Cablevision Enterprises............. 2/00 $ 13 5,800 $ 896 Bresnan....................................... 2/00 3,100 686,100 156,116 Capital Cable................................. 4/00 60 23,900 5,092 Farmington.................................... 4/00 15 5,600 1,014 Kalamazoo..................................... 9/00 173 48,900 10,231 ------ -------- -------- Total....................................... $3,361 770,300 $173,349 ====== ======== ======== 53 Acquisitions in 1999 and 2000 were funded through excess cash from the issuance by Charter Holdings of the March 1999 Charter Holdings notes and the January 2000 Charter Holdings notes, borrowings under our credit facilities, the assumption of the outstanding Renaissance, Helicon, Rifkin, Avalon, Falcon and Bresnan notes and debentures, equity issued to specified sellers in the Helicon, Rifkin, Falcon and Bresnan acquisitions, the net proceeds of our Class A common stock initial public offering and equity contributions to Charter Communications Holding Company by Mr. Allen through Vulcan Cable III. OVERVIEW OF OPERATIONS Approximately 88% and 87% of our historical revenues for the six months ended June 30, 2000, and for the year ended December 31, 1999, respectively, are attributable to monthly subscription fees charged to customers for our basic, expanded basic and premium cable programming services, equipment rental and ancillary services provided by our cable systems. In addition, we derive other revenues from installation and reconnection fees charged to customers to commence or reinstate service, pay-per-view programming, where users are charged a fee for individual programs requested, advertising revenues and commissions related to the sale of merchandise by home shopping services. We have generated increased revenues in each of the past three fiscal years, primarily through internal customer growth, basic and expanded tier rate increases, customer growth from acquisitions and revenues from new services and products. These new services and products are expected to significantly contribute to our future revenues provided that the necessary equipment is available from our vendors. One of these services is digital cable, which provides customers with additional programming options. We are also offering high-speed Internet access to the World Wide Web through cable modems. In addition, we are launching video on demand service in certain systems. Our television-based Internet access allows us to offer users TV-based e-mail and other Internet access. Finally, we continue to work together with several equipment vendors in a field trial of telephony. Our expenses primarily consist of operating costs, general and administrative expenses, depreciation and amortization expense, interest expense and management fees/corporate expense charges. Operating costs primarily include programming costs, cable service related expenses, marketing and advertising costs, franchise fees and expenses related to customer billings. Programming costs accounted for approximately 45% and 44% of our operating, general and administrative expenses for the six months ended June 30, 2000 and for the year ended December 31, 1999, respectively. Programming costs have increased in recent years and are expected to continue to increase due to additional programming being provided to customers and increased cost to produce or purchase cable programming due to inflation and other factors affecting the cable television industry. As we continue to upgrade and rebuild our cable systems, additional channel capacity will be available, resulting in increased programming costs. In each year we have operated, our costs to acquire programming have exceeded customary inflationary increases. Significant factors with respect to increased programming costs are the rate increases and surcharges imposed by national and regional sports networks directly tied to escalating costs to acquire programming for professional sports packages in a competitive market. We have benefited in the past from our membership in an industry cooperative that provided members with volume discounts from programming networks. This industry cooperative no longer exists. However, we believe our increased size gives us substantially equivalent buying power. Also, we have been able to negotiate favorable terms with premium networks in conjunction with the premium packages we offer, 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. 51 54 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 (both increase with the closing of acquisitions). Corporate expense charges are fees paid or charges for management services. Pursuant to a mutual services agreement between Charter Communications, Inc. and Charter Investment, each entity provides services to the other in order to manage Charter Communications Holding Company and to manage and operate the cable systems owned by its subsidiaries. We record actual expenses incurred by Charter Investment on our behalf. All expenses and costs incurred by Charter Investment with respect to the services provided are paid by us. Our credit facilities limit the amount of such reimbursements. We have had a history of net losses and expect to continue to report net losses for the foreseeable future. The principal reasons for our prior and anticipated net losses include depreciation and amortization expenses associated with our acquisitions and capital expenditures related to construction and upgrading of our systems, and interest costs on borrowed money. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future. RESULTS OF OPERATIONS The following discusses the results of operations for: (1) Charter Communications, Inc., comprised of the Charter companies and the following for the six months ended June 30, 1999: - Marcus Holdings for the period from March 31, 1999, the date Mr. Allen acquired voting control, through June 30, 1999; - Renaissance Media Group LLC for the period from April 30, 1999, the acquisition date, through June 30, 1999; and - American Cable Entertainment, LLC for the period from May 7, 1999, the acquisition date, through June 30, 1999. (2) Charter Communications, Inc., comprised of the Charter companies, all acquisitions closed during 1999 and the following for the six months ended June 30, 2000: - Cable system of Interlake from February 1, 2000, the acquisition date, through June 30, 2000; - Bresnan from February 14, 2000, the acquisition date, through June 30, 2000; - Cable system of Farmington from April 1, 2000, the acquisition date, through June 30, 2000; and - Cable system of Capital Cable from April 1, 2000, the acquisition date, through June 30, 2000. 52 55 The following table sets forth the percentages of revenues that items in the statements of operations constitute for the indicated periods (dollars in thousands, except per share data): SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999 Since January 1, 1999, Charter Communications Holding Company and Charter Holdings have closed numerous acquisitions. In addition, Charter Holdings merged with Marcus Holdings in April 1999. As of June 30, 2000, our cable systems served approximately 400% more customers than we served as of December 31, 1998. Thus, amounts for the six months ended June 30, 2000, are not comparable to those for the six months ended June 30, 1999. REVENUES. Revenues increased by $1,047.4 million, from $469.0 million for the six months ended June 30, 1999, to $1,516.4 million for the six months ended June 30, 2000. The increase in revenues primarily resulted from acquisitions. OPERATING COSTS. Operating costs increased by $358.5 million, from $160.3 million for the six months ended June 30, 1999, to $518.8 million for the six months ended June 30, 2000. This increase was due primarily to acquisitions. GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs increased by $178.5 million, from $81.1 million for the six months ended June 30, 1999, to $259.5 million for the six months ended June 30, 2000. This increase was due primarily to acquisitions. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $899.8 million, from $250.0 million for the six months ended June 30, 1999, to $1,149.8 million for the six months ended June 30, 2000. This increase was due primarily to acquisitions and franchises acquired. In addition, capital expenditures for system upgrades have increased, resulting in greater property, plant and equipment balances and a corresponding increase in depreciation expense. OPTION COMPENSATION EXPENSE. Option compensation expense decreased by $12.1 million, from $38.2 million for the six months ended June 30, 1999, to $26.1 million for the six months ended 53
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1999 JUNE 30, 2000 ------------------ ------------------- STATEMENTS OF OPERATIONS: Revenues........................................... $ 468,993 100.0% $1,516,384 100.0% --------- ----- ---------- ----- Operating expenses: Operating costs.................................. 160,285 34.2% 518,804 34.2% General and administrative costs................. 81,056 17.3% 259,509 17.1% Depreciation and amortization.................... 249,952 53.3% 1,149,787 75.9% Option compensation expense...................... 38,194 8.1% 26,089 1.7% Corporate expense charges........................ 11,073 2.4% 27,515 1.8% --------- ----- ---------- ----- Total operating expenses........................... 540,560 115.3% 1,981,704 130.7% --------- ----- ---------- ----- Loss from operations............................... (71,567) (15.3%) (465,320) (30.7%) Interest expense................................... (157,669) (33.6%) (482,042) (31.8%) Interest income.................................... 10,085 2.2% 6,110 0.4% Other income (expense)............................. (4,954) (1.1%) (2,504) (0.1) --------- ----- ---------- ----- Loss before minority interest...................... (224,105) (47.8%) (943,756) (62.2%) Minority interest in loss of subsidiary............ 224,015 47.8% 566,221 37.3% --------- ----- ---------- ----- Net loss........................................... $ (90) -- $ (377,535) (24.9%) ========= ===== ========== ===== Loss per common share, basic and diluted........... $ (1.80) $ (1.70) ========= ========== 56 June 30, 2000. This expense results from granting options to employees prior to Charter's initial public offering at exercise prices less than the estimated fair values of the underlying membership units at time of grant, resulting in compensation expense being accrued over the vesting period of each grant. CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $16.4 million, from $11.1 million for the six months ended June 30, 1999, to $27.5 million for the six months ended June 30, 2000. The increase was primarily the result of increased costs incurred by the manager due to our growth from acquisitions. INTEREST EXPENSE. Interest expense increased by $324.4 million, from $157.7 million for the six months ended June 30, 1999, to $482.0 million for the six months ended June 30, 2000. This increase resulted primarily from interest on debt used to finance acquisitions. INTEREST INCOME. Interest income decreased by $4.0 million, from $10.1 million for the six months ended June 30, 1999, to $6.1 million for the six months ended June 30, 2000. This decrease is attributed to the fact that we had more excess cash for investment in 1999 (resulting from required credit facilities drawdowns and the issuance and sale of the March 1999 Charter Holdings notes) as compared to the amount available in 2000 (resulting from the issuance and sale of the January 2000 Charter Holdings notes prior to completing the change of control offers described in this prospectus). OTHER INCOME (EXPENSE). Other expense decreased by $2.5 million from $5.0 million for the six months ended June 30, 1999, to $2.5 million for the six months ended June 30, 2000. In March 1999, we extinguished all then-existing long-term debt, excluding borrowings under our then-existing credit facilities, and refinanced substantially all then-existing credit facilities at various subsidiaries with a new credit facility. The excess of the amount paid over the carrying value, net of deferred financing costs, of the then-existing long-term debt was recorded in other income (expense). The expense in 1999 was partially offset by a gain on the sale of aircraft. MINORITY INTEREST. Minority interest was $224.0 million for the six months ended June 30, 1999, and $566.2 million for the six months ended June 30, 2000. The minority interest represents the ownership in Charter Communications Holding Company by entities other than Charter Communications, Inc. For financial reporting purposes, 50,000 of the membership units Charter Communications Holding Company previously issued to companies controlled by Mr. Allen are considered held by Charter Communications, Inc. since December 24, 1998. NET LOSS. Net loss increased by $377.4 million for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. The increase in revenues that resulted from acquisitions was not sufficient to offset the increased expenses (including depreciation and amortization) associated with the acquired systems. LOSS PER COMMON SHARE. The loss per common share decreased by $0.10, from $1.80 per common share for the six months ended June 30, 1999, to $1.70 per common share for the six months ended June 30, 2000. The following discusses the results of operations for: (1) CCPH, for the year ended December 31, 1997, and for the period from January 1, 1998 through December 23, 1998; (2) Charter Communications, Inc., comprised of the Charter companies for the period from December 24, 1998 through December 31, 1998; and (3) Charter Communications, Inc., comprised of the following for the year ended December 31, 1999: - the Charter Companies for the entire period; 54 57 - Marcus Holdings for the period from March 31, 1999, the date Mr. Allen acquired voting control, through December 31, 1999; - Renaissance Media Group LLC for the period from April 30, 1999, the acquisition date, through December 31, 1999; - American Cable Entertainment, LLC for the period from May 7, 1999, the acquisition date, through December 31, 1999; - Cable systems of Greater Media Cablevision, Inc. for the period from June 30, 1999, the acquisition date, through December 31, 1999; - Helicon Partners I, L.P. and affiliates for the period from July 30, 1999, the acquisition date, through December 31, 1999; - Vista Broadband Communications, L.L.C. for the period from July 30, 1999, the acquisition date, through December 31, 1999; - Cable system of Cable Satellite of South Miami, Inc. for the period from August 4, 1999, the acquisition date, through December 31, 1999; - Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications Partners, LLLP for the period from September 13, 1999, the acquisition date, through December 31, 1999; - Cable systems of InterMedia Capital Partners IV, L.P., InterMedia Partners and affiliates for the period from October 1, 1999, the "swap" transaction date, through December 31, 1999; - Cable systems of Fanch Cablevision L.P. and affiliates from November 12, 1999, the acquisition date, through December 31, 1999; - Falcon Communications, L.P. for the period from November 12, 1999, the acquisition date, through December 31, 1999; and - Avalon Cable of Michigan Holdings, Inc. from November 15, 1999, the acquisition date, through December 31, 1999. 55 58 The following table sets forth the percentages of revenues that items in the statements of operations constitute for the indicated periods (dollars in thousands, except per share data): 1999 COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 REVENUES. Revenues increased by $1,378.5 million, from $49.7 million for the period from January 1, 1998 through December 23, 1998 to $1,428.2 million in 1999. The increase in revenues primarily resulted from the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional revenues from these entities included for the year ended December 31, 1999 were $618.8 million, $386.7 million and $350.1 million, respectively. OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and administrative costs increased by $712.0 million, from $26.0 million for the period from January 1, 1998 through December 23, 1998 to $738.0 million in 1999. This increase was due primarily to the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional operating, general and administrative expenses from these entities included for the year ended December 31, 1999 were $338.5 million, $209.3 million and $158.8 million, respectively. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $728.5 million, from $16.9 million for the period from January 1, 1998 through December 23, 1998 to $745.3 million in 1999. There was a significant increase in amortization expense resulting from the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional depreciation and amortization expense from these entities included for the year ended December 31, 1999 was $346.3 million, $203.5 million and $195.1 million, respectively. The increases were offset by the elimination of depreciation and amortization expense related to dispositions of cable systems. OPTION COMPENSATION EXPENSE. Option compensation expense in 1999 was $80.0 million due to the granting of options to employees in December 1998, February 1999 and April 1999. The exercise prices of the options on the date of grant were deemed to be less than the estimated fair values of the 56
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS CHARTER COMMUNICATIONS, INC. ------------------------------------ -------------------------------------- YEAR ENDED 1/1/98 12/24/98 YEAR ENDED DECEMBER 31, THROUGH THROUGH DECEMBER 31, 1997 12/23/98 12/31/98 1999 ---------------- ----------------- ---------------- ------------------- STATEMENTS OF OPERATIONS: Revenues.................................... $18,867 100.0% $ 49,731 100.0% $13,713 100.0% $1,428,244 100.0% ------- ------ -------- ------ ------- ------ ---------- ------ Operating expenses: Operating costs........................... 9,157 48.5% 18,751 37.7% 4,757 34.7% 500,477 35.1% General and administrative costs.......... 2,610 13.8% 7,201 14.5% 2,377 17.3% 237,480 16.6% Depreciation and amortization............. 6,103 32.4% 16,864 33.9% 8,318 60.7% 745,315 52.2% Option compensation expense............... -- -- -- -- 845 6.2% 79,979 5.6% Management fees/corporate expense charges................................. 566 3.0% 6,176 12.4% 473 3.4% 51,428 3.6% ------- ------ -------- ------ ------- ------ ---------- ------ Total operating expenses.................... 18,436 97.7% 48,992 98.5% 16,770 122.3% 1,614,679 113.1% ------- ------ -------- ------ ------- ------ ---------- ------ Income (loss) from operations............... 431 2.3% 739 1.5% (3,057) (22.3%) (186,435) (13.1%) Interest expense............................ (5,120) (27.1%) (17,277) (34.7%) (2,353) (17.2%) (477,799) (33.4%) Interest income............................. 41 0.2% 44 0.1% 133 1.0% 34,467 2.4% Other income (expense)...................... 25 0.1% (728) (1.5%) -- -- (8,039) (0.6%) ------- ------ -------- ------ ------- ------ ---------- ------ Loss before income taxes and minority interest.................................. (4,623) (24.5%) (17,222) (34.6%) (5,277) (38.5%) (637,806) (44.7%) Income tax expense.......................... -- -- -- -- -- -- (1,030) -- Minority interest in loss of subsidiary..... -- -- -- -- 5,275 38.5% 572,607 40.1% ------- ------ -------- ------ ------- ------ ---------- ------ Net loss.................................... $(4,623) (24.5%) $(17,222) (34.6%) $ (2) -- $ (66,229) (4.6%) ======= ====== ======== ====== ======= ====== ========== ====== Loss per common share, basic and diluted.... $ (0.04) $ (2.22) ======= ========== 59 underlying membership units, resulting in compensation expense accrued over the vesting period of each grant that varies from four to five years. MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate expense charges increased by $45.3 million, from $6.2 million for the period from January 1, 1998 through December 23, 1998 to $51.4 million in 1999. The increase was the result of the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. INTEREST EXPENSE. Interest expense increased by $460.5 million, from $17.3 million for the period from January 1, 1998 through December 23, 1998 to $477.8 million in 1999. This increase resulted primarily from interest on the notes and credit facilities used to finance the acquisitions of CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions. INTEREST INCOME. Interest income increased by $34.4 million, from $44,000 for the period from January 1, 1998 through December 23, 1998 to $34.5 million in 1999. The increase was primarily due to investing excess cash that resulted from required credit facilities drawdowns and the sale of the March 1999 Charter Holdings notes. MINORITY INTEREST. Minority interest was $5.3 million for the period from December 24, 1998 through December 31, 1998 and $572.6 million for the year ended December 31, 1999. The minority interest represents the ownership in Charter Communications Holding Company by entities other than us. For financial reporting purposes, 50,000 membership units in Charter Communications Holding Company previously issued to companies controlled by Mr. Allen are considered held by us since December 24, 1998. NET LOSS. Net loss increased by $49.0 million, from $17.2 million for the period from January 1, 1998 through December 23, 1998 to $66.2 million in 1999. The increase in revenues that resulted from the acquisitions of CCA Group, CharterComm Holdings and Marcus Holdings was not sufficient to offset the operating expenses associated with the acquired systems. LOSS PER COMMON SHARE. The loss per common share increased by $2.18, from $0.04 per common share for the period from December 24, 1998 through December 31, 1998, to $2.22 in 1999. PERIOD FROM DECEMBER 24, 1998 THROUGH DECEMBER 31, 1998 This period is not comparable to any other period presented. The financial statements represent eight days of operations. This period not only contains the results of operations of CCPH, but also the results of operations of those entities purchased in the acquisition of the Charter companies by Mr. Allen. As a result, no comparison of the operating results for this eight-day period is presented. PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997 REVENUES. Revenues increased by $30.9 million, or 163.6%, from $18.9 million in 1997 to $49.7 million for the period from January 1, 1998 through December 23, 1998. The increase in revenues primarily resulted from the acquisition of Sonic, which had revenues for that period of $29.8 million. OPERATING COSTS. Operating costs increased by $9.6 million, or 104.8%, from $9.2 million in 1997 to $18.8 million for the period from January 1, 1998 through December 23, 1998. This increase was due primarily to the acquisition of Sonic, which had operating costs for that period of $9.4 million, partially offset by the loss of $1.4 million on the sale of a cable system in 1997. GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs increased by $4.6 million, or 175.9%, from $2.6 million in 1997 to $7.2 million for the period from January 1, 1998 through December 23, 1998. This increase was due primarily to the acquisition of Sonic, which had general and administrative costs for that period of $6.0 million. 57 60 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 expense related to the acquisition of Sonic was $9.9 million. MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $5.6 million, or 991.2% from $0.6 million in 1997 to $6.2 million for the period from January 1, 1998 through December 23, 1998. The increase from 1997 compared to the period from January 1, 1998 through December 23, 1998 was the result of additional Charter Investment charges related to equity appreciation rights plans of $3.8 million for the period from January 1, 1998 through December 23, 1998 and an increase of $0.9 million in management services provided by Charter Investment as a result of the acquisition of Sonic. INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%, from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998 through December 23, 1998. This increase resulted primarily from the indebtedness of $220.6 million, including a note payable for $60.9 million, incurred in connection with the acquisition of Sonic, resulting in additional interest expense. NET LOSS. Net loss increased by $12.6 million, or 272.5%, from $4.6 million in 1997 to $17.2 million for the period from January 1, 1998 through December 23, 1998. The increase in revenues that resulted from cable television customer growth was not sufficient to offset the operating expenses related to the acquisition of Sonic. OUTLOOK Our business strategy emphasizes the increase of our operating cash flow by increasing our customer base and the amount of cash flow per customer. We believe that there are significant advantages in increasing the size and scope of our operations, including: - improved economies of scale in management, marketing, customer service, billing and other administrative functions; - reduced costs for our cable systems and our infrastructure in general; - increased leverage for negotiating programming contracts; and - increased influence on the evolution of important new technologies affecting our business. LIQUIDITY AND CAPITAL RESOURCES Our business requires significant cash to fund acquisitions, capital expenditures, debt service costs and ongoing operations. We have historically funded and expect to fund future liquidity and capital requirements through cash flows from operations, equity contributions, borrowings under our credit facilities and debt and equity financings. Our historical cash flows from operating activities were $606.8 million for the six months ended June 30, 2000, and $479.9 million and $30.2 million for the years ended December 31, 1999 and 1998, respectively. CAPITAL EXPENDITURES We have substantial ongoing capital expenditure requirements. We make capital expenditures primarily to upgrade, rebuild and expand our cable systems, as well as for system maintenance, the development of new products and services, and converters. Converters are set-top devices added in front of a subscriber's television receiver to change the frequency of the cable television signals to a suitable channel. The television receiver is then able to tune and to allow access to premium service. 58 61 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. We made capital expenditures, excluding acquisitions of cable systems, of $1.0 billion and $741.5 million for the six months ended June 30, 2000, and for the year ended December 31, 1999, respectively. The majority of these capital expenditures in 2000 relate to our accelerated rebuild and upgrade program and converters and were funded from cash flows from operations and borrowings under credit facilities. For the period from January 1, 2000 to December 31, 2002, we plan to spend approximately $6.4 billion for capital expenditures, approximately $3.2 billion of which will be used to upgrade and rebuild our systems to a bandwidth capacity of 550 megahertz or greater and add two-way capability, so that we may offer advanced services. The remaining $3.2 billion will be used for extensions of systems, roll-out of new products and services, converters and system maintenance. Capital expenditures for 2000 are expected to be approximately $2.7 billion, and aggregate capital expenditures for 2001 and 2002 are expected to be approximately $3.7 billion. We currently expect to finance the anticipated capital expenditures with cash generated from operations and additional borrowings under credit facilities. We cannot be assured that these amounts will be sufficient to accomplish our planned system upgrades, expansion and maintenance or that we can acquire necessary plant and equipment from vendors to complete these as scheduled. If we are not able to obtain amounts sufficient for our planned upgrades and other capital expenditures, it could adversely affect our ability to offer new products and services and compete effectively, and could adversely affect our growth, financial condition and results of operations. See "-- Certain Trends and Uncertainties" for further information. FINANCING ACTIVITIES As of June 30, 2000, our total debt was approximately $11.6 billion. Our significant amount of debt may adversely affect our ability to obtain financing in the future and react to changes in our business. Our credit facilities and other debt instruments contain various financial and operating covenants that could adversely impact our ability to operate our business, including restrictions on the ability of our operating subsidiaries to distribute cash to their parents. See "-- Certain Trends and Uncertainties -- Restrictive Covenants," for further information. MARCH 1999 CHARTER HOLDINGS NOTES. On March 17, 1999, Charter Holdings and Charter Communications Holdings Capital Corporation issued $3.6 billion principal amount of senior notes. The March 1999 Charter Holdings notes consisted of $600.0 million in aggregate principal amount of 8.250% senior notes due 2007, $1.5 billion in aggregate principal amount of 8.625% senior notes due 2009, and $1.475 billion in aggregate principal amount at maturity of 9.920% senior discount notes due 2011. The net proceeds of approximately $3.0 billion, combined with the borrowings under our credit facilities, were used to consummate tender offers for publicly held debt of several of our subsidiaries, as described below, to refinance borrowings under our previous credit facilities, for working capital purposes and to finance a number of acquisitions. As of June 30, 2000, a total of $2.1 billion was outstanding under the 8.250% notes and the 8.625% notes, and the accreted value of the outstanding 9.920% notes was $1.0 billion. NOTES OF THE CHARTER COMPANIES AND THE MARCUS COMPANIES. In February and March 1999, we commenced cash tender offers to purchase the 14% senior discount notes issued by Charter Communications Southeast Holdings, LLC, the 11.25% senior notes issued by Charter Communications Southeast, LLC, the 13.50% senior subordinated discount notes issued by Marcus Cable Operating Company, L.L.C., and the 14.25% senior discount notes issued by Marcus Cable. All such notes, except for $1.1 million in principal amount, were repaid in full for an aggregate amount of $1.0 billion. The remaining $1.1 million of such notes was repaid in September 1999. 59 62 CHARTER OPERATING CREDIT FACILITIES. The Charter Operating credit facilities provide for two term facilities, one with a principal amount of $1.0 billion that matures in September 2007 (Term A), and the other with a principal amount of $1.85 billion that matures in March 2008 (Term B). The Charter Operating credit facilities also provide for a $1.25 billion revolving credit facility with a maturity date in September 2007 and, at the option of the lenders, supplemental credit facilities in the amount of $500.0 million available until March 18, 2002. Amounts under the Charter Operating credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.28% to 9.50% as of June 30, 2000). A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. In March 2000, the credit facilities were amended to increase the amount of the supplemental credit facility to $1.0 billion. In connection with this amendment, $600.0 million of the supplemental credit facilities was borrowed, thereby increasing the Term B facility to $2.45 billion and the total borrowing capacity to $4.7 billion. The remaining $400.0 million of the supplemental credit facilities is subject to our ability to obtain additional commitments from the lenders. As of June 30, 2000, outstanding borrowings were approximately $4.2 billion, and the unused availability was $0.5 billion. RENAISSANCE NOTES. When we acquired Renaissance in April 1999, Renaissance had outstanding $163.2 million principal amount at maturity of 10% senior discount notes due 2008. The Renaissance notes do not require the payment of interest until April 15, 2003. From and after April 15, 2003, the Renaissance notes bear interest, payable semi-annually in cash, on April 15 and October 15, commencing on October 15, 2003. The Renaissance notes are due on April 15, 2008. In May 1999, $48.8 million aggregate face amount of the Renaissance notes was repurchased at 101% of the accreted value plus accrued and unpaid interest. As of June 30, 2000, the accreted value of the Renaissance notes that remain outstanding was approximately $87.2 million. HELICON NOTES. We acquired Helicon in July 1999 and assumed Helicon's $115.0 million in principal amount of 11% senior secured notes due 2003. On November 1, 1999, we redeemed all of the Helicon notes at a purchase price equal to 103% of their principal amount, plus accrued and unpaid interest, for $124.8 million. RIFKIN NOTES. We acquired Rifkin in September 1999 and assumed Rifkin's outstanding $125.0 million in principal amount of 11.125% senior subordinated notes due 2006. In October 1999, we repurchased an individually held $3.0 million Rifkin promissory note for $3.4 million and publicly held notes with a total outstanding principal amount of $124.1 million for a total of $140.6 million, including a consent fee to noteholders who delivered timely consents to amend the indenture governing those notes to eliminate substantially all of the restrictive covenants. In February 2000, we repurchased $0.5 million in principal amount of these notes. As of June 30, 2000, $0.4 million in principal amount of Rifkin notes remained outstanding. FALCON DEBENTURES. We acquired Falcon in November 1999 and assumed Falcon's outstanding $375.0 million in principal amount of 8.375% senior debentures due 2010 and 9.285% senior discount debentures due 2010 with an accreted value of approximately $319.1 million. Falcon's 11.56% subordinated notes due 2001 were paid off for a total of $16.3 million, including principal, accrued and unpaid interest and premiums, at the closing of the Falcon acquisition. In February 2000, through change of control offers and purchases in the open market, all of the Falcon 8.375% senior debentures with a principal amount of $375.0 million were repurchased for $388.0 million, and all of the Falcon 9.285% senior discount debentures with an aggregate principal amount at maturity of $435.3 million were repurchased for $328.1 million. FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the previous Falcon credit facilities were amended to provide for two term facilities, one with a principal amount of $197.0 million that matures June 2007 (Term B), and the other with the principal amount of $295.5 million that matures December 2007 (Term C). The Falcon credit facilities also provide for a $646.0 million 60 63 revolving credit facility with a maturity date of December 2006 and, at the option of the lenders, supplemental credit facilities in the amount of $700.0 million with a maturity date in December 2007. At June 30, 2000, $110.0 million was outstanding under the supplemental credit facilities. Amounts under the Falcon credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.5% (8.03% to 9.50% as of June 30, 2000). A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance. As of June 30, 2000, outstanding borrowings were $1,059.5 million, and unused availability was $189.1 million. AVALON CREDIT FACILITIES. The Avalon credit facilities have maximum borrowings of $300.0 million, consisting of a revolving facility in the amount of $175.0 million that matures May 15, 2008, and a Term B loan in the amount of $125.0 million that matures on November 15, 2008. The Avalon credit facilities also provide, at the option of the lenders, for supplemental credit facilities in the amount of $75.0 million available until December 31, 2003. Amounts under the Avalon credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin up to 2.75% (8.04% to 9.04% as of June 30, 2000). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. The Company borrowed $165.0 million under the Avalon credit facilities to fund a portion of the Avalon purchase price. As of June 30, 2000, outstanding borrowings were $170.0 million, and unused availability was $130.0 million. AVALON NOTES. We acquired Avalon in November and assumed Avalon's outstanding 11.875% senior discount notes due 2008 with an accreted value of $123.3 million and $150.0 million in principal amount of 9.375% senior subordinated notes due 2008. After December 1, 2003, cash interest on the Avalon 11.875% notes will be payable semi-annually on June 1 and December 1 of each year, commencing June 1, 2004. In January 2000, we completed change of control offers in which we repurchased $16.3 million aggregate principal amount at maturity of the 11.875% notes at a purchase price of 101% of accreted value as of January 28, 2000, for $10.5 million. As of June 30, 2000, Avalon 11.875% notes with an aggregate principal amount of $179.8 million at maturity remained outstanding with an accreted value of $121.2 million. At the same time, through change of control offers and purchases in the open market, we repurchased all of the $150.0 million aggregate principal amount of the Avalon 9.375% notes. The aggregate repurchase price was $153.7 million and was funded with equity contributions from Charter Holdings, which made the cash available from the proceeds of its sale of the January 2000 Charter Holdings notes. FANCH CREDIT FACILITIES. The Fanch credit facilities provide for two term facilities, one with a principal amount of $450.0 million that matures May 2008 (Term A), and the other with a principal amount of $400.0 million that matures November 2008 (Term B). The Fanch credit facilities also provide for a $350.0 million revolving credit facility with a maturity date in May 2008 and, at the option of the lenders, supplemental credit facilities in the amount of $300.0 million available until December 31, 2004. Amounts under the Fanch credit facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 3.0% (8.53% to 9.28% as of June 30, 2000). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. We used $850.0 million of the credit facilities to fund a portion of the Fanch purchase price. As of June 30, 2000, outstanding borrowings were $850.0 million, and unused availability was $350.0 million. BRESNAN NOTES. We acquired Bresnan in February 2000 and assumed Bresnan's outstanding $170.0 million in principal amount of 8% senior notes due 2009 and $275.0 million in principal amount at maturity of 9.25% senior discount notes due 2009 with an accreted value of $192.2 million. In March 2000, we repurchased all of the outstanding Bresnan notes at purchase prices of 101% of 61 64 the outstanding principal amounts plus accrued and unpaid interest or accreted value, as applicable, for a total of $369.7 million, using proceeds from the sale of the January 2000 Charter Holdings notes. BRESNAN CREDIT FACILITIES. Upon the closing of the Bresnan acquisition, we amended and assumed the previous Bresnan credit facilities. The Bresnan credit facilities provide for borrowings of up to $900.0 million. The Bresnan credit facilities provide for two term facilities, one with a principal amount of $403.0 million (Term A), and the other with a principal amount of $297.0 million (Term B). The Bresnan credit facilities also provide for a $200.0 million revolving credit facility with a maturity date in June 2007 and, at the option of lenders, supplemental facilities in the amount of $200.0 million. Amounts under the Bresnan credit facilities bear interest at the Base Rate or the Eurodollar Rate, as defined, plus a margin of up to 2.75% (8.27% to 9.03% as of June 30, 2000). A quarterly commitment fee of between 0.250% and 0.375% is payable on the unborrowed balance of Term A and the revolving credit facility. At the closing of the Bresnan acquisition, we borrowed approximately $599.9 million to replace the borrowings outstanding under the previous credit facilities and an additional $31.3 million to fund a portion of the Bresnan purchase price. As of June 30, 2000, $638.9 million was outstanding, and $261.1 million was available for borrowing. JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter Holdings and Charter Communications Holdings Capital Corporation issued $1.5 billion principal amount of senior notes. The January 2000 Charter Holdings notes consisted of $675.0 million in aggregate principal amount of 10.00% senior notes due 2009, $325.0 million in aggregate principal amount of 10.25% senior notes due 2010, and $532.0 million in aggregate principal amount at maturity of 11.75% senior discount notes due 2010. The net proceeds of approximately $1.3 billion were used to consummate change of control offers for certain of the Falcon, Avalon and Bresnan notes and debentures. In June 2000, Charter Holdings and Charter Communications Holdings Capital Corporation exchanged these notes for new January 2000 Charter Holdings notes, with substantially similar terms, except that the new January 2000 Charter Holdings notes are registered under the Securities Act of 1933, as amended, and, therefore, do not bear legends restricting their transfer. As of June 30, 2000, $1.0 billion of the January 2000 Charter Holdings 10.00% and 10.25% senior notes were outstanding, and the accreted value of the 11.75% senior discount notes was approximately $316.8 million. CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY. On August 4, 2000, Charter Holdings and Charter Communications Holdings Capital Corporation entered into a senior bridge loan agreement providing for senior increasing rate bridge loans in an aggregate principal amount of up to $1.0 billion. On August 14, 2000, Charter Holdings borrowed $1.0 billion under the senior bridge loan facility and used the majority of the proceeds to repay a portion of the amounts outstanding under the Charter Operating revolving credit facility. The bridge loan initially bears interest at an annual rate equal to the yield corresponding to the bid price on Charter Holdings 10.25% notes less 0.25% (10.21% as of August 14, 2000). If this loan is not repaid within 90 days following August 14, 2000, the interest rate will increase by 1.25% at the end of such 90-day period and will increase by an additional 0.50% at the end of each additional 90-day period. Unless additional default interest is assessed, the interest rate on the bridge loan will not exceed 15% annually. If the bridge loan has not been repaid in full by August 14, 2001, then it will be converted to a term loan. The term loan will bear interest at a fixed rate equal to the greater of the applicable rate of the bridge loan on the date of the conversion plus 0.50% and the yield corresponding to the bid price on Charter Holdings 10.25% notes as of the date immediately prior to the conversion. If the term loan is not repaid within 90 days after the conversion of the bridge loan, the interest rate will increase by 0.50% at the end of each 90- 62 65 day period. The interest rate on the term loan will not exceed 15% annually. The term loan will mature on the tenth anniversary of the initial senior bridge loan borrowing. CONTRIBUTIONS BY AFFILIATES. In August 1999, Vulcan Cable III Inc. contributed to Charter Communications Holding Company $500.0 million in cash and, in September 1999, an additional $825.0 million, of which approximately $644.3 million was in cash and approximately $180.7 million was in the form of equity interests acquired by Vulcan Cable III Inc. in connection with the Rifkin acquisition. Charter Communications Holding Company in turn contributed the cash and equity interests to Charter Holdings. In November 1999, in connection with Charter Communications, Inc.'s initial public offering, Vulcan Cable III contributed to Charter Communications Holding Company $750.0 million in cash. In connection with the Rifkin, Falcon and Bresnan acquisitions, Charter Communications Holding Company issued equity interests totaling approximately $1.1 billion to certain sellers in each of these acquisitions, and a subsidiary of Charter Holdings issued preferred equity interests totaling $629.5 million to certain sellers in the Bresnan acquisition. For a description of our acquisitions completed in 1999 and 2000, see "Business -- Acquisitions." CERTAIN TRENDS AND UNCERTAINTIES The following discussion highlights a number of trends and uncertainties, in addition to those discussed elsewhere in this prospectus, that could materially impact our business, results of operations and financial condition. SUBSTANTIAL LEVERAGE. As of June 30, 2000, our total debt was approximately $11.6 billion. We anticipate incurring significant additional debt in the future to fund the expansion, maintenance and upgrade of our cable systems. Our ability to make payments on our debt and to fund our planned capital expenditures for upgrading our cable systems and our ongoing operations will depend on our ability to generate cash and secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our existing credit facilities, new facilities or from other sources of financing at acceptable rates or in an amount sufficient to enable us to repay our debt, to grow our business or to fund our other liquidity and capital needs. VARIABLE INTEREST RATES. At June 30, 2000, approximately 44% of our debt bears interest at variable rates that are linked to short-term interest rates. In addition, a significant portion of our existing debt, assumed debt or debt we might arrange in the future will bear interest at variable rates. If interest rates rise, our costs relative to those obligations will also rise. At June 30, 2000, our weighted-average rate on outstanding bank commitments is approximately 8.6% and approximately 9.5% on high-yield debt, resulting in a blended weighted-average rate of 9.0%. See "-- Interest Rate Risk." RESTRICTIVE COVENANTS. Our credit facilities and the indentures governing our outstanding debt contain a number of significant covenants that, among other things, restrict our ability and the ability of our subsidiaries to: - pay dividends or make other distributions; - make certain investments or acquisitions; - dispose of assets or merge; - incur additional debt; - issue equity; 63 66 - repurchase or redeem equity interests and debt; - create liens; and - pledge assets. Furthermore, in accordance with our credit facilities we are required to maintain specified financial ratios and meet financial tests. The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants will result in a default under the applicable debt agreement or instrument, which could trigger acceleration of the debt. Any default under our credit facilities or the indentures governing our outstanding debt may adversely affect our growth, our financial condition and our results of operations. NEW SERVICES AND PRODUCTS GROWTH STRATEGY. We expect that a substantial portion of any of our future growth will be achieved through revenues from additional services. We cannot assure you that we will be able to offer new advanced services successfully to our customers or that those new advanced services will generate revenues. The amount of our capital expenditures and related roll-out of advanced services may be limited by the availability of certain equipment (in particular, digital converter boxes and cable modems) due to production capacity constraints of certain vendors and/or materials shortages. We continue to work with our primary vendors to address such problems and have been assured that we will have an adequate supply to meet our demand. If we are unable to grow our cash flow sufficiently, we may be unable to fulfill our obligations or obtain alternative financing. MANAGEMENT OF GROWTH. We have experienced rapid growth that has placed and is expected to continue to place a significant strain on our management, operations and other resources. Our future success will depend in part on our ability to successfully integrate the operations acquired and to be acquired and to attract and retain qualified personnel. No significant severance cost was incurred in conjunction with acquisitions in 1999 and 2000. The failure to retain or obtain needed personnel or to implement management, operating or financial systems necessary to successfully integrate acquired operations or otherwise manage growth when and as needed could have a material adverse effect on our business, results of operations and financial condition. REGULATION AND LEGISLATION. Cable systems are extensively regulated at the federal, state, and local level. Effective March 31, 1999, the scope of rate regulation was reduced so that it continues to impact only the lowest level of basic cable service and associated equipment. This change affords cable operators much greater pricing flexibility, although Congress could revisit this issue if confronted with substantial rate increases. Cable operators also face significant regulation of their channel capacity. They currently can be required to devote substantial capacity to the carriage of programming that they would not carry voluntarily, including certain local broadcast signals, local public, educational and government access users, and unaffiliated commercial leased access programmers. This carriage burden could increase in the future, particularly if the Federal Communications Commission (FCC)were to require cable systems to carry both the analog and digital versions of local broadcast signals. The FCC is currently conducting a proceeding in which it is considering this channel usage possibility. There is also uncertainty whether local franchising authorities, state regulators, the FCC, or the U.S. Congress will impose obligations on cable operators to provide unaffiliated Internet service providers with access to cable plant on non-discriminatory terms. If they were to do so, and the obligations were found to be lawful, it could complicate our operations in general, and our Internet operations in particular, from a technical and marketing standpoint. These access obligations could adversely impact our profitability and discourage system upgrades and the introduction of new products and services. Recently, a federal district court in Virginia and a federal circuit court in 64 67 California struck down as unlawful open access requirements imposed by two different franchising authorities. The federal circuit court ruling reversed an earlier district court decision that had upheld an open access requirement. The FCC has announced that it will soon consider how Internet service provided over cable systems should be classified for regulatory purposes and what, if any, regulations should be imposed. POSSIBLE RESCISSION LIABILITY. The Rifkin, Falcon and Bresnan sellers who acquired Charter Communications Holding Company membership units or, in the case of Bresnan, additional equity interests in one of our subsidiaries, in connection with these respective acquisitions and the Helicon sellers who acquired shares of Class A common stock in our initial public offering may have rescission rights against Charter Communications Holding Company and us arising out of possible violations of Section 5 of the Securities Act in connection with the offers and sales of these equity interests. If all of these equity holders successfully exercised their possible rescission rights, we or Charter Communications Holding Company would become obligated to repurchase all such equity interests, and the total repurchase obligation could be as much as approximately $1.8 billion as of June 30, 2000. For financial reporting purposes, this maximum potential obligation has been excluded from shareholders' equity and minority interest and has been classified as redeemable securities (temporary equity). After one year from the dates of issuance or purchase of these equity securities (when these possible rescission rights will have expired), we will reclassify the respective amounts to shareholders' equity and minority interest. We cannot assure you that we would be able to obtain capital sufficient to fund any required repurchases. This could adversely affect our financial condition and results of operations. INTEREST RATE RISK The use of interest rate risk management instruments, such as interest rate exchange agreements, interest rate cap agreements and interest rate collar agreements, is required under the terms of the credit facilities of our subsidiaries. Our policy is to manage interest costs using a mix of fixed and variable rate debt. Using interest rate swap agreements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Interest rate cap agreements are used to lock in a maximum interest rate should variable rates rise, but enable us to otherwise pay lower market rates. Collars limit our exposure to and benefits from interest rate fluctuations on variable rate debt to within a certain range of rates. Our participation in interest rate hedging transactions involves instruments that have a close correlation with our debt, thereby managing our risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. At June 30, 2000, we had outstanding $2.4 billion, $15.0 million and $760.0 million in notional amounts of interest rate swaps, caps and collars, respectively. The notional amounts of interest rate instruments are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. While swaps, caps and collars represent an integral part of our interest rate risk management program, their incremental effect on interest expense for the six months ended June 30, 2000, and for the year ended December 31, 1999, was not significant. The fair value of fixed-rate debt at June 30, 2000, was $4.0 billion. The fair value of fixed-rate debt is based on quoted market prices. The fair value of variable-rate debt approximates the carrying value of $6.95 billion at June 30, 2000, since this debt bears interest at current market rates. 65 68 OPTIONS In accordance with an employment agreement and a related option agreement with Jerald L. Kent, our President and Chief Executive Officer, Mr. Kent was issued an option to purchase 7,044,127 membership units in Charter Communications Holding Company in December 1998. The option vests over a four-year period from the date of grant and expires ten years from the date of grant. In February 1999, Charter Holdings adopted an option plan, which was assumed by Charter Communications Holding Company in May 1999, providing for the grant of options to employees, consultants and directors of Charter Communications Holding Company and its affiliates to purchase up to 25,009,798 Charter Communications Holding Company membership units. Options granted under the plan will be fully vested after five years from the date of grant. Options not exercised accumulate and are exercisable, in whole or in part, in any subsequent period, but not later than ten years from the date of grant. Membership units received upon exercise of the options issued to Mr. Kent and to optionees under the plan are automatically exchanged for shares of our Class A common stock on a one-for-one basis. The following chart sets forth the number of options outstanding and the exercise price of such options as of August 31, 2000: - --------------- (1) Granted to Jerald L. Kent pursuant to his employment agreement and related option agreement. (2) Granted pursuant to the option plan. (3) Weighted average. (4) As of August 31, 2000. (5) The weighted average exercise price for options exercisable was $20.00 and $19.21 at December 31, 1998 and August 31, 2000, respectively. The weighted average fair value of options granted was $12.59 and $12.50 at December 31, 1999 and 1998, respectively. 66
OPTIONS OPTIONS OUTSTANDING EXERCISABLE -------------------------------- REMAINING ----------- NUMBER OF EXERCISE TOTAL LIFE NUMBER OF OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS(4) ---------- ------------ ------------- ---------- ----------- Outstanding as of January 1, 1999(1)..................... 7,044,127 $ 20.00 $ 140,882,540 10.0(3) 2,935,053(5) Granted: February 9, 1999(2)......... 9,111,681 20.00 182,233,620 2,647,599 April 5, 1999(2)............ 473,000 20.73 9,805,290 99,850 November 8, 1999(2)......... 4,781,400 19.00 90,846,600 240,000 February 15, 2000(2)........ 5,566,600 19.47 108,375,022 -- May 1, 2000(2).............. 1,469,200 15.03 22,083,986 -- July 26, 2000(2)............ 1,469,800 14.31 21,036,513 -- Cancelled..................... (2,072,523) 15.03-20.73 (40,479,503) -- ---------- ------------ ------------- ---- --------- Outstanding as of August 31, 2000............. 27,843,285 $ 19.21(3) $ 534,784,068 8.9(3) 5,922,502(5) ========== ============ ============= ==== ========= 69 We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for options issued under the option plan and the options held by Mr. Kent. We recorded option compensation expense of $845,000 for the period from December 24, 1998 through December 31, 1998, $80.0 million for the year ended December 31, 1999 and $26.1 million for the six months ended June 30, 2000, in the financial statements since the exercise prices were less than the estimated fair values of the underlying membership units on the date of grant. The estimated fair value was determined using the valuation inherent in Mr. Allen's acquisition of Charter Investment and valuations of public companies in the cable industry adjusted for factors specific to us. Compensation expense is accrued over the vesting period of each grant that varies from four to five years. As of June 30, 2000, deferred compensation remaining to be recognized in future periods totaled $49.6 million. ACCOUNTING STANDARDS RECENTLY IMPLEMENTED FASB Interpretation No. 44 (FIN No. 44), Accounting for Certain Transactions Involving Stock Compensation, provides guidance for applying APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN No. 44 applies prospectively, with certain exceptions, to new awards, exchanges of awards in a business combination, modifications to outstanding awards and changes in grantee status on or after July 1, 2000. Management believes that the adoption of FIN No. 44 will not have a significant effect on our financial condition or results of operations. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which summarizes certain of the SEC staff's views on applying generally accepted accounting principles to revenue recognition in financial statements. We adopted the accounting provisions of SAB 101 effective April 1, 2000. Management believes that the implementation of SAB 101 has not had a significant effect on our financial condition or results of operations. ACCOUNTING STANDARD NOT YET IMPLEMENTED SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB No. 133" has delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We have not yet quantified the impacts of adopting SFAS No. 133 on our consolidated financial statements, nor have we determined the timing or method of our adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (losses). 67 70 SELLING SHAREHOLDERS The following table sets forth information regarding the number of shares of Class A common stock held by each selling shareholder as of the date of this prospectus and the shares being offered from time to time by each selling shareholder. The table indicates the nature of any position, office or other material relationship that the selling shareholder has had within the past three years with us or any of our affiliates. This prospectus relates to the offer and sale by the selling shareholders of up to 5,661,117 shares of common stock. Information with respect to shares owned after this offering assumes the sale of all of the shares offered and no other purchases or sales of shares of Class A common stock. All or part of the shares of Class A common stock offered by this prospectus may be offered from time to time by the selling shareholders named below. 68
NUMBER OF NUMBER OF SHARES OF SHARES TO NUMBER CLASS A BE OF COMMON OFFERED FOR SHARES TO STOCK THE ACCOUNT BE OWNED OF THE OWNED BEFORE THIS SELLING AFTER THIS NAME OFFERING SHAREHOLDER OFFERING ---- ----------- -------------- ---------- Paul A. Bambei....................................... 6,819 6,819 0 R & A Management, LLC(1) BancBoston Capital, Inc.(2).......................... 81,778 81,778 0 Jeffrey D. Bennis(a)................................. 148,971 148,971 0 R & A Management, LLC(1) Ruth Rifkin Bennis(b)................................ 190,536 190,536 0 5570 Preserve Drive Greenwood Village, Colorado 80121 Chatham Investments LLLP............................. 276,591 276,591 0 R & A Management, LLC(1) CRM II Limited Partnership, LLLP..................... 180,300 180,300 0 c/o Charles R. Morris III(3) Stephen E. Hattrup(c)................................ 18,158 18,158 0 R & A Management, LLC(1) Lucille A. Maun(d)................................... 5,020 5,020 0 R & A Management, LLC(1) Morris Children Trust................................ 52,045 52,045 0 c/o Charles R. Morris III(3) James Pinto(4)....................................... 20,444 20,444 0 Monroe M. Rifkin(e).................................. 267,388 267,388 0 R & A Management, LLC(1) Rifkin & Associates, Inc............................. 1,633,281 1,633,281 0 c/o Monroe M. Rifkin R & A Management, LLC(1) Rifkin Children's Trust.............................. 162,186 162,186 0 c/o Monroe M. Rifkin, Co-Trustee R & A Management, LLC(1) 71 - --------------- (1) The address for these persons is 360 South Monroe Street, Suite 600, Denver, Colorado 80209. (2) The address for BancBoston Capital, Inc., is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110-2003. (3) The address for these persons is 4875 South El Camino Drive, Englewood, Colorado 80111. (4) The address for James Pinto is 520 Madison Avenue, 40th Floor, New York, New York 10022. (5) The address for William L. Rogers is 1601 Moore Road, Santa Barbara, California 93108. (a) Jeffrey D. Bennis was an officer of (i) RT Investment Corp., which is the general partner of Rifkin Acquisition Management L.P., which is the general partner of Rifkin Acquisition Partners, L.L.L.P. and (ii) Rifkin, Co., the general partner of Interlink Communications Partners, LLLP. (b) Ruth Rifkin Bennis is the wife of Jeffrey D. Bennis and the daughter of Monroe M. Rifkin. (c) Stephen E. Hattrup was an officer of (i) Rifkin Acquisition Management, L.P., the general partner of Rifkin Acquisition Partners, L.L.L.P. and (ii) Rifkin, Co., the general partner of Interlink Communications Partners, LLLP. (d) Lucille Maun was an officer of (i) Rifkin Acquisition Management, L.P., the general partner of Rifkin Acquisition Partners, L.L.L.P. and (ii) Rifkin, Co., the general partner of Interlink Communications Partners, LLLP. (e) Monroe M. Rifkin is an officer and director of (i) Rifkin, Co., the general partner of Interlink Communications Partners, LLLP and Rifkin Acquisition Management, L.P., the general partner of Rifkin Acquisition Partners L.L.L.P. and (ii) Indiana Cablevision Management Corp. 69
NUMBER OF NUMBER OF SHARES OF SHARES TO NUMBER CLASS A BE OF COMMON OFFERED FOR SHARES TO STOCK THE ACCOUNT BE OWNED OF THE OWNED BEFORE THIS SELLING AFTER THIS NAME OFFERING SHAREHOLDER OFFERING ---- ----------- -------------- ---------- Rifkin Children Trust-II............................. 86,822 86,822 0 c/o Monroe M. Rifkin, Co-Trustee R & A Management, LLC(1) Rifkin Children's Trust-III.......................... 344,486 344,486 0 c/o Monroe M. Rifkin, Co-Trustee R & A Management, LLC(1) Rifkin Family Investment Company, L.L.L.P............ 2,148,045 2,148,045 0 c/o Monroe M. Rifkin, General Partner R & A Management, LLC(1) Cameron Rogers Trust(5).............................. 4,091 4,091 0 William L. Rogers(5)................................. 16,355 16,355 0 Peter N. Smith....................................... 17,801 17,801 0 R & A Management, LLC(1) --------- ---------- -- Total................................................ 5,661,117 5,661,117 0 ========= ========== == 72 PLAN OF DISTRIBUTION The shares of Class A common stock covered by this prospectus are owned by the selling shareholders. As used in the rest of this section of the prospectus, the term "selling shareholders" includes the named selling shareholders and any of their pledgees, donees, transferees or other successors in interest selling shares received from a named selling shareholder after the date of this prospectus. The selling shareholders may offer and sell, from time to time, some or all of the shares of common stock registered hereby. We have registered the shares for sale by the selling shareholders so that the shares will be freely tradeable by them. Registration of the shares does not mean, however, that the shares necessarily will be offered or sold. We will not receive any proceeds from any offering or sale by the selling shareholders of the shares. We will pay all costs, expenses and fees in connection with the registration of the shares. The selling shareholders will pay all stock transfer fees or expenses (including the cost of all transfer tax stamps), underwriting or brokerage discounts or commissions and fees and disbursements of counsel (other than the fees and disbursements of counsel incurred in connection with the registration of the shares), attributable to the sale of the shares. The selling shareholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. The shares may be sold by or for the account of the selling shareholders from time to time in transactions at prices quoted on the Nasdaq National Market. These sales may be at fixed prices or prices that may be changed, at market prices prevailing at the time of sale, at prices related to these prevailing market prices or at negotiated prices. The shares may be sold by means of one or more of the following methods. - in a block trade in which a broker-dealer will attempt to sell a block of shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; - purchases by broker-dealer as principal and resale by that broker-dealer for its account pursuant to this prospectus; - on markets where our common stock is traded or in an exchange distribution in accordance with the rules of the exchange; - through broker-dealers, that may act as agents or principals; - directly to one or more purchasers; - through agents; - in connection with the loan or pledge of shares to a broker-dealer, and the sale of the shares so loaned or the sale of the shares so pledged upon a default; - in connection with put or call option transactions, in hedge transactions, and in settlement of other transactions in standardized or over-the-counter options; - through short sales of the shares by the selling shareholders or counterparties to those transactions, in privately negotiated transactions; or - in any combination of the above. In effecting sales, brokers or dealers engaged by the selling shareholders may arrange for other brokers or dealers to participate. The broker-dealer transactions may include: - purchases of the shares by a broker-dealer as principal and resales of the shares by the broker-dealer for its account pursuant to this prospectus; - ordinary brokerage transactions; or - transactions in which the broker-dealer solicits purchasers. If a material arrangement with any broker-dealer or other agent is entered into for the sale of any shares of common stock through a block trade, special offering, exchange distribution, secondary 70 73 distribution, or a purchase by a broker or dealer, a prospectus supplement will be filed, if necessary, pursuant to Rule 424(b) under the Securities Act disclosing the material terms and conditions of these arrangements. The selling shareholders and any broker-dealers or agents participating in the distribution of the shares may be deemed to be "underwriters" within the meaning of the Securities Act, and any profit on the sale of the shares of common stock by the selling shareholders and any commissions received by a broker-dealer or agents, acting in this capacity, may be deemed to be underwriting commissions under the Securities Act. Charter Communications, Inc. agrees to indemnify each selling shareholder for any losses which arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in this prospectus, or any omission or alleged omission to state herein a material fact required to be stated herein or necessary to make the statements herein not misleading. Charter Communications, Inc. will reimburse each such selling shareholder for any reasonable legal fees and expenses incurred by him in connection with investigating or defending any such claims, except that Charter Communications, Inc. will not indemnify any selling shareholder for losses which result from an untrue statement or omission made in reliance upon and in conformity with written information provided by or on behalf of such selling shareholder for inclusion in this prospectus. Each selling shareholder, individually and not jointly, agrees to indemnify Charter Communications, Inc. and each other selling shareholder for any losses which arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in this registration statement, or any omission or alleged omission to state herein a material fact required to be stated herein or necessary to make the statements herein not misleading, if the statement or omission was made in reliance upon and in conformity with written information provided by or on behalf of such selling shareholder for inclusion in this prospectus. The selling shareholders are not restricted as to the price or prices at which they may sell their shares of common stock. Sales of such shares may have an adverse effect on the market price of the common stock. Moreover, the selling shareholders are not restricted as to the number of shares that may be sold at any time, and it is possible that a significant number of shares could be sold at the same time, which may have an adverse effect on the market price of the common stock. MARKET FOR COMMON EQUITY MARKET INFORMATION Our Class A common stock is quoted on the NASDAQ National Market under the symbol "CHTR." The following table sets forth, for the periods indicated, the range of high and low bid information per share of the common stock as included for quotation on the Nasdaq National Market.
2000 HIGH LOW - ---- ---- --- First Quarter.............................................. $22 5/8 $14 Second Quarter............................................. $16 9/16 $10 Third Quarter (through September 21, 2000)................. $17 1/16 $12 3/8 - --------------- * We completed our initial public offering of Class A common stock on November 12, 1999. The initial public offering price per share was $19.00. 71
1999 HIGH LOW - ---- ---- --- Period Ended December 31, 1999*............................ $27 3/4 $19 1/2 74 HOLDERS As of August 31, 2000, there were 2,161 holders of our Class A common stock of record and one holder of our Class B common stock. No preferred stock is outstanding. DIVIDEND INFORMATION There have been no stock dividends paid on any of our equity securities. We do not intend to pay cash dividends in the foreseeable future. We intend to retain future earnings, if any, to finance the expansion of our business. Charter Communications Holding Company is required under certain circumstances to pay distributions pro rata to all holders of its common membership units, including us, to the extent necessary for any holder of common membership units to pay income taxes incurred with respect to its share of taxable income attributed to Charter Communications Holding Company. Covenants in the indentures governing the debt obligations of Charter Communications Holding Company's subsidiaries restrict their ability to make distributions to us, and, accordingly, limit our ability to declare or pay cash dividends. 72 75 BUSINESS OVERVIEW We are the fourth largest operator of cable television systems in the United States serving approximately 6.3 million customers. We offer a full range of traditional cable television services in all of our systems. Our service offerings include the following programming packages: - basic programming; - expanded basic programming; - premium service; and - pay-per-view television programming. As part of our Wired World vision, we are also beginning to offer an array of new services including: - digital television; - interactive video programming; - high-speed Internet access; and - television-based Internet access. We are also exploring opportunities in telephony. The new products and services described above will take advantage of the significant bandwidth of our cable systems. We are accelerating the upgrade of our cable systems to more quickly provide these products and services. For the year ended December 31, 1999, pro forma for our merger with Marcus Holdings and the acquisitions completed since the beginning of 1999, our revenues would have been approximately $3.0 billion. For the six months ended June 30, 2000, pro forma for acquisitions closed since January 1, 2000, our revenues would have been approximately $1.6 billion. Mr. Allen, the principal owner of Charter Communications, Inc. and one of the computer industry's visionaries, has long believed in a Wired World in which cable technology will facilitate the convergence of television, computers and telecommunications. We believe cable's ability to deliver voice, video and data at high speeds will enable it to serve as the primary platform for the delivery of new services to the home and workplace. BUSINESS STRATEGY Our objective is to increase our operating cash flow by increasing our customer base and the amount of cash flow per customer. To achieve this objective, we are pursuing the following strategies: INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate acquired cable systems and apply our core operating strategies to raise the financial and operating performance of these acquired systems. Our integration process occurs in three stages: System Evaluation. We conduct an extensive evaluation of each system we acquire. This process begins prior to reaching an agreement to purchase the system and focuses on: - the system's demographic profile of the market, the number of homes passed and the customers currently using the system; - business plan; - customer service standards; - management capabilities; and - technological capacity and compatibility. 73 76 We also evaluate opportunities to consolidate headends and billing and other administrative functions. Based upon this evaluation, we formulate plans for customer service centers, plant upgrades, market positioning, new product and service launches and human resource requirements. IMPLEMENTATION OF OUR CORE OPERATING STRATEGIES. To achieve our high standards for customer satisfaction and financial and operating performance, we: - attract and retain high quality local management; - empower local managers with a high degree of day-to-day operational autonomy; - set key financial and operating benchmarks for management to meet, such as revenue and cash flow per subscriber, subscriber growth, customer service and technical standards; and - provide incentives to all employees through grants of cash bonuses and equity options. ONGOING SUPPORT AND MONITORING. We provide local managers with regional and corporate management guidance, marketing and other support for implementation of their business plans. We monitor performance of our acquired cable systems on a frequent basis to ensure that performance goals can be met. The turn-around in our Fort Worth system, which our management team began to manage in October 1998, is an example of our success in integrating newly acquired cable systems into our operations. We introduced a customer care team that has worked closely with city governments to improve customer service and local government relations, and each of our customer service representatives attended a training program. We also conducted extensive training programs for our technical and engineering, dispatch, sales and support, and management personnel. We held a series of sales events and service demonstrations to increase customer awareness and enhance our community exposure and reputation. We reduced the new employee hiring process from two to three weeks to three to five days. As a result of these and other actions taken by the Charter management team, relations with local franchising authorities are greatly improved, customer service has been significantly enhanced, and the number of customers and operating cash flow have increased. Under our management team's direction, the Marcus Cable systems reported 1.6% internal customer growth, 11.9% revenue growth and 20.4% adjusted EBITDA growth for the six months ended June 30, 2000 as compared to the same period in 1999. Prior to our management team overseeing their operations the Marcus Cable systems had virtually no customer growth, 8.4% revenue growth and less than 5% adjusted EBITDA growth for the year ended December 31, 1998. In addition, the Marcus Cable systems average monthly adjusted EBITDA per customer has increased from $17.38 to $20.60. OFFER NEW PRODUCTS AND SERVICES. We offer an array of products and services to our customers implementing our Wired World vision. Using digital technology, we 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 offer digital music services and interactive program guides that are comprehensive guides to television program listings that can be accessed by network, time, date or programming genre. In addition, we offer 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 High Speed Access Corp., EarthLink Network, Inc., Excite@Home Corporation, Convergence.com, WorldGate Communications, Inc. and Wink Communications, Inc. We have recently entered into a joint venture with Vulcan Ventures Inc. and Go2Net, Inc. to deliver high-speed Internet portal services to our customers. UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. We plan to spend approximately $6.4 billion from 2000 to 2002 for capital expenditures. Approximately $3.2 billion will be used to upgrade our 74 77 systems to bandwidth capacity of 550 megahertz or greater. Upgrading to at least 550 megahertz of bandwidth capacity will allow us to: - offer advanced services, such as digital television, Internet access and other interactive services; - increase channel capacity up to 82 analog channels, or even more programming channels if some of our bandwidth is used for digital services; and - permit two-way communication which will give our customers the ability to send and receive signals over the cable system so that high-speed cable services, such as Internet access, will not require a separate telephone line and will enable our systems to provide telephony services. The remaining capital will be spent on plant extensions, new services, converters and system maintenance. As of June 30, 2000, pro forma for the Kalamazoo transaction, approximately 57.2% of our customers were served by cable systems with at least 550 megahertz bandwidth capacity, and approximately 41.2% of our customers had two-way communication capability. By year-end 2003, we expect that approximately 97.3% of our customers will be served by cable systems with at least 550 megahertz bandwidth capacity, and approximately 91.5% of our customers will be served by cable systems with at least 750 megahertz bandwidth and two-way communication capability. Our planned upgrades are designed to reduce the number of headends from 1,295 at June 30, 2000, including the Kalamazoo transaction, to 484 at year-end 2003. Reducing the number of headends will reduce headend equipment and maintenance expenditures and, together with other upgrades, will provide enhanced picture quality and system reliability. In addition, by year-end 2003, we expect that approximately 89% of our customers will be served by headends serving at least 10,000 customers. MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we operate our business to provide reliable, high-quality products and services, superior customer service and attractive programming choices at reasonable rates. We have implemented stringent customer service standards which we believe meet or exceed those established by the National Cable Television Association, the Washington, D.C.-based trade association for the cable industry. We believe that our customer service efforts have contributed to our superior customer growth and will strengthen the Charter brand name and increase acceptance of our new products and services. EMPLOY INNOVATIVE MARKETING. We have developed and successfully implemented a variety of innovative marketing techniques to attract new customers and increase revenue per customer. Our marketing efforts focus on tailoring Charter-branded entertainment and information services that provide value, choice, convenience and quality to our customers. We use demographic "cluster codes" to address messages to target audiences through direct mail and telemarketing. Cluster codes identify customers by marketing type such as young professionals, retirees or families. In addition, we promote our services on radio, in local newspapers and by door-to-door selling. In many of our systems, we offer discounts to customers who purchase multiple premium services such as Home Box Office or Showtime. We also have a coordinated strategy for retaining customers that includes televised retention advertising to reinforce the link between quality service and the Charter brand name and to encourage customers to purchase higher service levels. Successful implementation of these marketing techniques has contributed to internal customer growth rates in excess of the cable industry average in each year from 1996 through 1999 for the systems we owned in each of those years. 75 78 EMPHASIZE LOCAL MANAGEMENT AUTONOMY WHILE PROVIDING REGIONAL AND CORPORATE SUPPORT AND CENTRALIZED FINANCIAL CONTROLS. Our local cable systems are organized into twelve operating regions. A regional management team oversees multiple local system operations in each region. We believe that a strong management presence at the local system level: - improves our customer service; - increases our ability to respond to customer needs and programming preferences; - reduces the need for a large centralized corporate staff; - fosters good relations with local governmental authorities; and - strengthens community relations. Our regional management teams work closely with both local managers and senior management in our corporate office to develop budgets and coordinate marketing, programming, purchasing and engineering activities. Our centralized financial management enables us to set financial and operating benchmarks and monitor performance on an ongoing basis. In order to attract and retain high quality managers at the local and regional operating levels, we provide a high degree of operational autonomy and accountability along with cash and equity-based compensation. Under the Charter Communications Option Plan directors, consultants and substantially all employees, including members of corporate management and key regional and system-level management personnel, receive options exercisable for Charter Communications Holding Company membership units that are automatically exchanged for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve operating margins and increase operating efficiencies, we regularly seek to improve the geographic clustering of our cable systems by selectively swapping our cable systems for systems of other cable operators or acquiring systems in close proximity to our systems. We believe that by concentrating our systems in clusters, we will be able to generate higher growth in revenues and operating cash flow. Clustering enables us to consolidate headends and spread fixed costs over a larger subscriber base. We are negotiating with several other cable operators whose systems we consider to be potential acquisition candidates. CHARTER ORGANIZATIONAL STRUCTURE The following is a description of the entities in our organizational structure and how they relate to us. In our discussion of the following entities, we make the same assumption as on page 3 with respect to our organizational chart. OWNERSHIP OF CHARTER COMMUNICATIONS, INC. Mr. Allen owns less than 4% of the outstanding capital stock of Charter Communications, Inc. and controls approximately 93.5% of the voting power of Charter Communications, Inc.'s capital stock. The remaining equity interest and voting control are held by the public. Mr. Allen's voting control arises from his ownership of Charter Communications, Inc.'s high vote Class B common stock, his Class A common stock, his ownership interests in Vulcan Cable III Inc. and Charter Investment, both of which own membership units in Charter Communications Holding Company that are exchangeable for shares of high vote Class B common stock of Charter Communications, Inc. VULCAN CABLE III INC. Mr. Allen owns 100% of the equity of Vulcan Cable III. Vulcan Cable III has a 18.6% equity interest and no voting rights in Charter Communications Holding Company. In August 1999, Mr. Allen, through Vulcan Cable III, contributed to Charter Communications Holding Company $500 million in cash. In September 1999, he contributed an additional $825 million to Charter Communications Holding Company through Vulcan Cable III, of which approximately $644.3 million was in cash and approximately $180.7 million was in the form of equity interests Vulcan Cable III acquired in connection with the Rifkin acquisition. Upon each of 76 79 these contributions, Vulcan Cable III received Charter Communications Holding Company membership units at a price per membership unit of $20.73. In addition, in November 1999, Mr. Allen, through Vulcan Cable III, made a $750 million cash equity contribution to Charter Communications Holding Company for which Vulcan Cable III received additional membership units at a price per membership unit of $18.24. CHARTER INVESTMENT, INC. Charter Investment, Inc. has a 38.0% equity interest and no voting rights in Charter Communications Holding Company. Mr. Allen owns approximately 96.8% of the outstanding stock of Charter Investment, Inc. The remaining 3.2% equity is beneficially owned by our founders, Jerald L. Kent, Howard L. Wood and Barry L. Babcock. FORMER OWNERS OF BRESNAN. Under the terms of the Bresnan acquisition, some of the sellers received a portion of their purchase price in Charter Communications Holding Company common membership units rather than in cash. These common membership units are exchangeable for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. In addition, certain other sellers received a portion of the purchase price in preferred membership units in an indirect subsidiary of Charter Holdings. The preferred membership units are also exchangeable for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. If all of the Bresnan sellers exchanged their membership units in Charter Communications Holding Company or such indirect subsidiary, as applicable, these equity holders as a group would have a total 14.3% equity interest in Charter Communications, Inc. CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications Holding Company is the direct 100% parent of Charter Holdings. Charter Communications Holding Company is owned 40.8% by Charter Communications, Inc., 18.6% by Vulcan Cable III Inc., 38.0% by Charter Investment, Inc. and 2.6% by certain sellers in our Bresnan acquisition. Charter Communications, Inc. controls 100% of the voting power of Charter Communications Holding Company. All of the outstanding membership units in Charter Communications Holding Company are exchangeable for shares of Class B common stock of Charter Communications, Inc. on a one-for-one basis at any time which are in turn exchangeable for Class A common stock of Charter Communications, Inc. CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer of $3.575 billion aggregate principal amount of notes issued in March 1999 and $1.532 billion aggregate principal amount of notes issued in January 2000. Charter Holdings owns 100% of Charter Communications Holdings Capital Corporation, the co-issuer of the March 1999 Charter Holdings notes and the January 2000 Charter Holdings notes. Charter Holdings also owns the various subsidiaries that conduct all of our cable operations, including the Charter, Falcon, Fanch, Avalon and Bresnan companies described below. CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Communications Holdings Capital Corporation is a wholly owned subsidiary of Charter Holdings and a co-issuer of the notes described in the preceding paragraph. CHARTER COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems originally managed by Charter Investment, Inc. (namely Charter Communications Properties Holdings, LLC, CCA Group and CharterComm Holdings, LLC), the cable systems obtained through the merger of Marcus Holdings with Charter Holdings and the cable systems we acquired in 1999 and 2000, other than the Falcon, Fanch, Avalon and Bresnan systems described below. Historical financial information is presented separately for these acquired entities. Charter Operating, a direct subsidiary of Charter Holdings, owns all of the Charter companies' operating subsidiaries and is the borrower under the Charter Operating credit facilities. The Charter companies also include the issuers of the outstanding publicly held notes of Renaissance. 77 80 FALCON COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Falcon acquisition and Falcon Cable Communications, which is the borrower under the Falcon credit facilities. FANCH COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Fanch acquisition and CC VI Operating, LLC, which is the borrower under the Fanch credit facilities. AVALON COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Avalon acquisition, including CC Michigan, LLC and CC New England, LLC, which are the borrowers under the Avalon credit facilities. CC V Holdings, LLC (formerly Avalon Cable LLC) and CC V Holdings Finance, Inc. (formerly Avalon Cable Finance Holdings, Inc.) are co-issuers of the outstanding publicly held Avalon notes. BRESNAN COMPANIES. These companies are subsidiaries of Charter Holdings and own or operate all of the cable systems acquired in the Bresnan acquisition and CC VIII Operating, LLC, which is the borrower under the Bresnan credit facilities. ACQUISITIONS Our primary criterion in considering acquisition and swapping opportunities is the financial return that we expect to ultimately realize. We consider each acquisition in the context of our overall existing and planned operations, focusing particularly on the impact on our size and scope and the ability to reinforce our clustering strategy, either directly or through future swaps or acquisitions. Other specific factors we consider in acquiring a cable system are: - the demographic profile of the market, the number of homes passed and the customers currently using the system; - the per customer revenues, operating cash flow and opportunities to increase these financial benchmarks; - the 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 the increased size and scope of our operations, including: - improved economies of scale in management, marketing, customer service, billing and other administrative functions; - reduced costs for our cable plants and our infrastructure in general; - increased leverage for negotiating programming contracts; and - increased influence on the evolution of important new technologies affecting our business. We believe that as a result of our acquisition strategy and our systems upgrade we are well positioned to have cable systems with economies of scale sufficient to allow us to execute our strategy to expand the array of products and services that we offer to our customers as we implement our Wired World vision. We will, however, continue to explore acquisitions and swaps of cable systems that would further complement our existing cable systems. ACQUISITIONS COMPLETED IN 1999 MERGER WITH MARCUS HOLDINGS. On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable Company, L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion in assumed liabilities. On February 22, 1999, Marcus Holdings was formed, and 78 81 all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests of Marcus Cable. On April 7, 1999, the holding company parent of the Marcus companies, Marcus Holdings, merged into Charter Holdings, which was the surviving entity of the merger. The subsidiaries of Marcus Holdings became subsidiaries of Charter Operating. In October 1998, during the period of obtaining the requisite regulatory approvals for the transaction, the Marcus systems came under common management with our subsidiaries, pursuant to the terms of a management agreement. The cable systems we acquired in the merger with Marcus Holdings are located in Wisconsin, Tennessee, North Carolina, Georgia, California, Alabama and Texas, have approximately 976,300 customers and are operated as part of our North Central, Southeast, Southern California, Gulf Coast and National regions. For the year ended December 31, 1999, the Marcus systems had revenues of approximately $511.9 million. For the six months ended June 30, 2000, the Marcus systems had revenues of approximately $255.5 million. RENAISSANCE. In April 1999, one of our subsidiaries purchased Renaissance Media Group LLC for approximately $459 million, consisting of $348 million in cash and $111 million of assumed debt. Renaissance owns cable systems located in Louisiana, Mississippi and Tennessee, has approximately 135,000 customers and is operated as part of our Gulf Coast and Mid-South regions. For the year ended December 31, 1999, the Renaissance systems had revenues of approximately $62.4 million. For the six months ended June 30, 2000, the Renaissance systems had revenues of approximately $33.6 million. AMERICAN CABLE. In May 1999, one of our subsidiaries purchased American Cable Entertainment, LLC for approximately $240 million. American Cable owns cable systems located in California serving approximately 68,700 customers and is operated as part of our Southern California region. For the year ended December 31, 1999, the American Cable systems had revenues of approximately $37.2 million. For the six months ended June 30, 2000, the American Cable systems had revenues of approximately $20.4 million. GREATER MEDIA SYSTEMS. In June 1999, one of our subsidiaries purchased certain cable systems of Greater Media Cablevision Inc. for approximately $500 million. The Greater Media systems are located in Massachusetts, have approximately 177,100 customers and are operated as part of our Northeast Region. For the year ended December 31, 1999, the Greater Media systems had revenues of approximately $85.9 million. For the six months ended June 30, 2000, the Greater Media systems had revenues of approximately $46.8 million. HELICON. In July 1999, one of our subsidiaries acquired Helicon Partners I, L.P. and affiliates for approximately $550 million, consisting of $410 million in cash, $115 million of assumed debt, and $25 million in the form of preferred limited liability company interest of Charter-Helicon LLC, a direct wholly owned subsidiary. The Helicon systems are located in Alabama, Georgia, New Hampshire, North Carolina, West Virginia, South Carolina, Tennessee, Pennsylvania, Louisiana and Vermont, have approximately 173,100 customers and are operated as part of our Southeast, South-Atlantic, Mid-South, Northeast, Gulf Coast and Mid-Atlantic regions. For the year ended December 31, 1999, the Helicon systems had revenues of approximately $85.2 million. For the six months ended June 30, 2000, the Helicon systems had revenues of approximately $44.2 million. VISTA AND CABLE SATELLITE. One of our subsidiaries acquired Vista Broadband Communications, LLC in July 1999 and acquired a cable system of Cable Satellite of South Miami, Inc. in August 1999. These cable systems are located in Georgia and southern Florida and serve a total of approximately 34,900 customers and are operated as part of our South-Atlantic regions. The total purchase price for these acquisitions was approximately $148 million in cash. For the year ended December 31, 1999, these systems had revenues of approximately $19.0 million. For the six months ended June 30, 2000, these systems had revenues of approximately $9.4 million. 79 82 RIFKIN. In September 1999, one of our subsidiaries acquired Rifkin Acquisition Partners L.L.L.P. and InterLink Communications Partners, LLLP for a purchase price of approximately $1.46 billion, consisting of $1.2 billion in cash, $133.3 million in equity in Charter Communications Holding Company and $128.0 million in assumed debt. The Rifkin systems are located primarily in Florida, Georgia, Illinois, Indiana, Tennessee, Virginia and West Virginia, serving approximately 458,200 customers and are operated as part of our Central, South-Atlantic, Mid-South and Mid-Atlantic regions. For the year ended December 31, 1999, Rifkin had revenues of approximately $219.9 million. For the six months ended June 30, 2000, Rifkin had revenues of approximately $116.7 million. INTERMEDIA SYSTEMS. In October 1999, one of our subsidiaries purchased certain cable systems of InterMedia Capital Partners IV, L.P., InterMedia Partners and their affiliates in exchange for approximately $873 million in cash and certain of our cable systems. The InterMedia systems serve approximately 409,800 customers in North Carolina, South Carolina, Georgia and Tennessee. As part of this transaction, we agreed to "swap" some of our non-strategic cable systems serving approximately 142,000 customers in Indiana, Montana, Utah and northern Kentucky. At the closing, we retained a cable system located in Indiana serving approximately 30,000 customers for which we were unable to timely obtain the necessary regulatory approvals of the system transfer. Such approval was subsequently obtained and the Indiana system assets were transferred in March 2000. This transaction, including the transfer of the retained Indiana system, resulted in a net increase of 265,000 customers concentrated in our Southeast and Mid-South regions. For the year ended December 31, 1999, the InterMedia systems had revenues of approximately $179.3 million ($126.2 million, net of disposed systems). For the six months ended June 30, 2000, the InterMedia systems had revenues of approximately $112.3 million ($108.9 million, net of disposed Indiana systems). FANCH. In November 1999, Charter Communications Holding Company purchased the partnership interests of Fanch Cablevision of Indiana, L.P., specified assets of Cooney Cable Associates of Ohio, Limited Partnership, Fanch-JV2 Master Limited Partnership, Mark Twain Cablevision Limited Partnership, Fanch-Narragansett CSI Limited Partnership, North Texas Cablevision, Ltd., Post Cablevision of Texas, Limited Partnership and Spring Green Communications, L.P. and the stock of Tioga Cable Company, Inc., Cable Systems, Inc. and, indirectly, Hornell Television Service, Inc. for a total combined purchase price of approximately $2.4 billion in cash. Under the Fanch purchase agreement, immediately prior to the closing of the Fanch acquisition, certain assets of TWFanch-one Co. were distributed to Fanch Cablevision of Indiana and Hornell Television Service in exchange for all of their partnership interests in TWFanch-one. In addition, immediately prior to the closing of the Fanch acquisition, certain assets of TWFanch-two Co. were distributed to Fanch-JV2 Master and Cooney Cable in exchange for all of their partnership interests in TWFanch-two. The cable systems acquired in this acquisition are primarily located in Colorado, Indiana, Kansas, Kentucky, Maryland, Michigan, New York, Oklahoma, Pennsylvania, Texas, Virginia, West Virginia and Wisconsin, serve approximately 535,300 customers and are operated as part of our Central, North Central, Michigan, National, Mid-South, Gulf Coast and Mid-Atlantic regions. For the year ended December 31, 1999, these systems had revenues of approximately $218.2 million. For the six months ended June 30, 2000, these systems had revenues of approximately $122.0 million. FALCON. In November 1999, Charter Communications Holding Company purchased partnership interests in Falcon Communications, L.P. from Falcon Holding Group, L.P. and TCI Falcon Holdings, LLC, interests in a number of Falcon entities held by Falcon Cable Trust and Falcon Holding Group, Inc., specified interests in Enstar Communications Corporation and Enstar Finance Company, LLC held by Falcon Holding Group, L.P., and specified interests in Adlink held by DHN Inc. 80 83 The purchase price for the acquisition was approximately $3.5 billion, consisting of cash, $550 million in common membership units in Charter Communications Holding Company issued to certain of the Falcon sellers and $1.7 billion in assumed debt. The Falcon cable systems are located in California and the Pacific Northwest, Missouri, North Carolina, Alabama, Arkansas, Kentucky, Georgia, Texas and Utah, serve approximately 964,800 customers and are operated as part of our Central, Southern California, Northwest, Michigan, National, Southeast, South-Atlantic, Mid-South, Northeast, Gulf Coast and Mid-Atlantic regions. For the year ended December 31, 1999, these systems had revenues of approximately $427.7 million. For the six months ended June 30, 2000, these systems had revenues of approximately $215.2 million. AVALON. In November 1999, Charter Communications Holding Company purchased directly and indirectly all of the equity interests of Avalon LLC from Avalon Cable Holdings LLC, Avalon Investors, L.L.C. and Avalon Cable of New England Holdings, Inc. for approximately $832 million, consisting of $558.2 million in cash and $273.8 million in assumed notes. The Avalon systems are located primarily in Michigan and New England, serve approximately 269,100 customers and are operated as part of our North Central, Michigan and Northeast regions. For the year ended December 31, 1999, Avalon had revenues of approximately $108.3 million. For the six months ended June 30, 2000, the Avalon systems had revenues of $57.2 million. ACQUISITIONS COMPLETED IN 2000 BRESNAN. In February 2000, we purchased Bresnan Communications Company Limited Partnership for a total purchase price of approximately $3.1 billion, consisting of approximately $1.1 billion in cash, $1.0 billion in membership units in Charter Communications Holding Company and an indirect subsidiary of Charter Communications Holding Company and $963.3 million in assumed debt. The cable systems acquired in the Bresnan acquisition are primarily located in Michigan, Minnesota, Wisconsin and Nebraska, serve approximately 686,100 customers and are operated as part of our North Central, Michigan and National regions. For the year ended December 31, 1999, these systems and systems acquired by Bresnan have revenues of approximately $290.7 million. For the six months ended June 30, 2000, these systems had revenues of $156.1 million. CAPITAL CABLE AND FARMINGTON. In April 2000, one of our subsidiaries purchased a cable system of Falcon Capital Cable Partners, L.P. and another cable system of Farmington Cablevision Company for a total purchase price of $75.0 million. These cable systems are primarily located in Illinois, Indiana and Missouri, serve approximately 29,500 customers and are operated as part of our Central region. The aggregate purchase price for these acquisitions was approximately $75.0 million and was paid in cash. For the year ended December 31, 1999, these systems had revenues of approximately $13.5 million. For the six months ended June 30, 2000, these systems had revenues of $6.1 million. KALAMAZOO. In September 2000, we completed a stock-for-stock merger with Cablevision of Michigan, Inc., the owner of a cable system in Kalamazoo, Michigan. In the merger, we acquired all of the outstanding stock of Cablevision of Michigan in exchange for 11,173,376 shares of our Class A common stock valued at approximately $170.6 million. After the merger, we contributed 100% of the equity interests acquired to Charter Communications Holding Company in exchange for membership units. Charter Communications Holding Company in turn contributed these equity interests to Charter Holdings, which in turn contributed the equity interests to a subsidiary. The Kalamazoo system has approximately 48,900 customers and had revenues of approximately $20.3 million for the year ended December 31, 1999. For the six months ended June 30, 2000, the Kalamazoo system had revenues of $10.2 million. 81 84 PRODUCTS AND SERVICES We offer our customers a full array of traditional cable television services and programming and we have begun to offer new and advanced high bandwidth services such as high-speed Internet access. We plan to continually enhance and upgrade these services, including adding new programming and other telecommunications services, and will continue to position cable television as an essential service. TRADITIONAL CABLE TELEVISION SERVICES. As of June 30, 2000, approximately 83% of our customers subscribed to both "basic" and "expanded basic" service and generally receive a line-up of between 33 and 85 channels of television programming, depending on the bandwidth capacity of the system. Customers who pay additional amounts can also subscribe to additional channels, either individually or in packages of several channels, as add-ons to the basic channels. As of June 30, 2000, more than 22% of our customers subscribed to premium channels, with additional customers subscribing to other special add-on packages. We tailor both our basic channel line-up and our additional channel offerings to each system according to demographics, programming preferences, competition, price sensitivity and local regulation. Our traditional cable television service offerings include the following: - BASIC CABLE. All of our customers receive basic cable services, which generally consist of local broadcast television, local community programming, including governmental and public access, and limited satellite programming. For the year ended December 31, 1999, the average monthly fee was $13.54 for our basic service. For the six months ended June 30, 2000, the average monthly fee for basic services was $13.54. - EXPANDED BASIC CABLE. This expanded tier includes a group of satellite-delivered or non-broadcast channels, such as Entertainment and Sports Programming Network (ESPN), Cable News Network (CNN) and Lifetime Television, in addition to the basic channel line-up. For the year ended December 31, 1999, the average monthly fee was $14.88 for our expanded basic service. For the six months ended June 30, 2000, the average monthly fee for expanded tier services was $17.45. - PREMIUM CHANNELS. These channels provide unedited, commercial-free movies, sports and other special event entertainment programming. Home Box Office, Cinemax and Showtime are typical examples. We offer subscriptions to these channels either individually or in packages. For the year ended December 31, 1999, the average monthly fee was $6.15 per premium subscription. For the six months ended June 30, 2000, the average monthly fee was $5.91 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 concert on an unedited, commercial-free basis. We currently charge a fee that ranges from $2.95 to $8.95 for movies. For special events, such as championship boxing matches, we have charged a fee of up to $54.95. We have employed a variety of targeted marketing techniques to attract new customers by focusing on delivering value, choice, convenience and quality. We employ direct mail and telemarketing, using demographic "cluster codes" to convey 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. 82 85 NEW PRODUCTS AND SERVICES. A variety of emerging technologies and the rapid growth of Internet usage have presented us with substantial opportunities to provide new or expanded products and services to our customers and to expand our sources of revenue. The desire for such new technologies and the use of the Internet by businesses in particular have triggered a significant increase in our commercial market penetration. As a result, we are in the process of introducing a variety of new or expanded products and services, beyond the traditional offerings of analog television programming, for the benefit of both our residential and commercial customers. These new products and services include: - digital television and its related enhancements; - high-speed Internet access via cable modems installed in personal computers; - WorldGate television-based Internet access, which allows customers to access the Internet through the use of our two-way capable cable plant without the need for a personal computer; - interactive services, such as Wink, which adds interactivity and electronic commerce opportunities to traditional programming and advertising; and - telephony and data transmission services, which are private network services interconnecting locations for a customer. Cable's high bandwidth allows cable to be well positioned to deliver a multitude of channels and/or new and advanced products and services. We believe that this high bandwidth will be a key factor in the successful delivery of these products and services. DIGITAL TELEVISION. As part of upgrading our systems, we are installing headend equipment capable of delivering digitally encoded cable transmissions to a two-way digital-capable set-top converter box in the customer's home. This digital connection offers significant advantages. For example, we can compress the digital signal to allow the transmission of up to twelve digital channels in the bandwidth normally used by one analog channel. This will allow us to increase both programming and service offerings, including near video-on-demand for pay-per-view customers. We expect to increase the amount of these services purchased by our customers. Digital service customers receive additional television programming, an interactive electronic programming guide, and up to 45 channels of digital music. We offer digital service to our customers in three different packages: Charter Digital Complete Basic(TM), Charter Digital Select(TM), and Charter Digital MVP(TM). All three packages include a digital set-top converter, the interactive programming guide, digital music channels, pay-per-view channels, local broadcast channels, regular cable channels and digital basic channels. Customers who select the Charter Digital Select package also receive one premium channel of their choice with "multiplexes." Multiplexes give customers access to several different versions of the same premium channel that are varied as to time of broadcast or programming content theme. Customers who select the Charter Digital MVP package receive four premium channels with multiplexes: HBO, Showtime, Cinemax and The Movie Channel. As part of our pricing strategy for digital services, we have established retail rates of $34 to $56 for the Charter Digital Complete Basic package, $57 to $69 for the Charter Digital Select package, and $64 to $76 for the Charter Digital MVP Package. As of June 30, 2000, approximately 375,000 of our customers subscribed to the digital service offered in 155 markets. As of June 30, 2000, approximately 6.5 million of our homes passed were served by cable systems capable of delivering digital services. By year-end 2000, we anticipate that digital services will be available in approximately 8.3 million homes. 83 86 VIDEO-ON-DEMAND. We are beginning to offer video-on-demand (VOD) service to some of our customers. With VOD service, customers can access hundreds of movies and other programming at any time, with digital picture quality. VOD allows customers to pause, rewind and fast-forward programs. They can also stop a program and resume watching it several hours later during the rental period. VOD service requires the use of a digital set-top converter and is offered as a standard feature of our digital service packages. Generally, customers pay for VOD on a per-selection basis. We have signed an agreement to offer VOD to the Los Angeles and Atlanta areas and other future markets with DIVA Systems Corporation (DIVA), a company providing interactive VOD products and services to the cable industry. DIVA will provide us with hardware, software, programming and operational support as part of this agreement. We have worked with DIVA for over a year on a VOD trial with more than 6,000 customers in our Gwinnett County, Georgia cable system. VOD has now been launched in this North Atlanta system, and every new digital subscriber there receives VOD service. We intend to complete testing of DIVA's VOD service in our Los Angeles service area and launch VOD there in October 2000. INTERNET ACCESS. We currently provide Internet access to our customers by two principal means: - via cable modems attached to personal computers, either directly or through an outsourcing contract with an Internet service provider; and - through television access, via a service such as WorldGate. We also provide Internet access in some markets through traditional dial-up telephone modems, using a third party service provider. The principal advantage of cable Internet connections is the high speed of data transfer over a cable system. We currently offer Internet access service to our residential customers over coaxial cable at speeds that can range up to approximately 50 times the speed of a conventional telephone modem. Furthermore, a two-way communication cable system using a hybrid fiber optic/coaxial structure can support the entire connection at cable modem speeds without the need for a separate telephone line. If the cable system only supports one-way signals from the headend to the customer, the customer must use a separate telephone line in order to send signals to the provider, although such customer still receives the benefit of high speed cable access when receiving information, which is the primary reason for using cable as an Internet connection. In addition to Internet access over our traditional coaxial system, we also provide our commercial customers fiber optic cable access. In the past, cable Internet connections have provided customers with widely varying access speeds because each customer accessed the Internet by sending and receiving data through a node. Users connecting simultaneously through a single node share the bandwidth of that node, so that users' connection speeds may diminish as additional users connect through the same node. To induce users to switch to our Internet services, we guarantee our cable modem customers the minimum access speed selected from several speed options we offer. We also provide higher guaranteed access speeds for customers willing to pay an additional cost. In order to meet these guarantees, we are increasing the bandwidth of our systems and "splitting" nodes easily and cost-effectively to reduce the number of customers per node. CABLE MODEM-BASED INTERNET ACCESS. We have deployed cable modem-based Internet access services in 119 markets including most of our significant operating clusters. 84 87 As of June 30, 2000, we provided Internet access service to approximately 149,300 residential customers. The following table indicates the projected availability of cable modem-based Internet access services in our systems, as of the dates indicated. Only a small percentage of our customers currently subscribe to these services. We have a relationship with High Speed Access Corp. to offer Internet access in some of our smaller systems. High Speed Access also provides Internet access services to our customers under the Charter Pipeline brand name. Although the Internet access service is provided by High Speed Access, the Internet "domain name" of our customer's e-mail address and web site, if any, is "Charter.net," allowing the customer to switch or expand to our other Internet services without a change of e-mail address. High Speed Access provides two different models of service to us. The network services agreement model is similar to our arrangements with EarthLink and Excite@Home described below. The full service model 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. As of June 30, 2000, we have made cable modem-based Internet access available to approximately 1,868,100 of our homes passed, and approximately 30,500 customers signed up for the service. From July 1, 2000 through the end of 2000, we anticipate making available for service approximately 1,031,900 additional homes passed. See "Certain Relationships and Related Transactions -- Business Relationships." We have an agreement with EarthLink Network, Inc., an independent Internet service provider, to provide service marketed and branded as Charter Pipeline(TM), which is a cable modem-based, high-speed Internet access service we offer. EarthLink and MindSpring Enterprises, Inc. merged in February 2000 creating the second-largest Internet service provider (ISP) in the United States. We currently charge a monthly usage fee of between $24.95 and $74.95. Our customers have the option to lease a cable modem for $3.95 to $15 a month or to purchase a modem for between $200 and $300. As of June 30, 2000, we made EarthLink Internet access available to approximately 896,800 homes passed and had approximately 18,200 customers who subscribed to this service. We have a revenue sharing agreement with Excite@Home, under which Excite@Home provides Internet service to customers in our systems serving Fort Worth, University Park and Highland Park, Texas. The Excite@Home network provides high-speed, cable modem-based Internet access using our cable infrastructure. As of June 30, 2000, we have made Excite@Home available to approximately 958,500 of our homes passed and had approximately 38,800 customers who subscribed to this service. We also have services agreements with Convergence.com under which Convergence.com provides Internet service to customers in systems acquired in the Rifkin acquisition. The Convergence.com network provides high-speed, cable modem-based Internet access using our cable infrastructure. As of 85
HOMES MADE AVAILABLE FOR ADVANCED DATA SERVICES ---------------------------------- JUNE 30, 2000 DECEMBER 31, 2000 ------------- ----------------- HIGH-SPEED INTERNET ACCESS VIA CABLE MODEMS: High Speed Access Corp...................................... 1,868,100 2,900,000 EarthLink/Charter Pipeline.................................. 896,800 772,700 Excite@Home................................................. 958,500 757,700 Convergence.com............................................. 263,200 -- In-House/Other.............................................. 600,500 523,700 --------- --------- Total cable modems........................................ 4,587,100 4,954,100 ========= ========= Internet access via WorldGate............................... 428,800 488,800 ========= ========= 88 June 30, 2000, we have made available Convergence.com service to approximately 263,200 homes passed and had approximately 8,600 customers. We actively market our cable modem service to businesses in each one of our systems where we have the capability to offer such service. Our marketing efforts are often door-to-door, and we have established a separate division whose function is to make businesses aware that this type of Internet access is available through us. We also provide several virtual local area networks for municipal and educational facilities in our Los Angeles cluster including California Institute of Technology located in Pasadena, the City of Pasadena and the City of West Covina. TV-BASED INTERNET ACCESS. We have a non-exclusive agreement with WorldGate to provide its TV-based e-mail and Internet access to our cable customers. WorldGate's technology is only available to cable systems with two-way capability. WorldGate offers easy, low-cost Internet access to customers at connection speeds ranging up to 128 kilobits per second. For a monthly fee, we provide our customers with e-mail and Internet access that does not require the use of a PC, an existing or additional telephone line, or any additional equipment. Instead, the customer accesses the Internet through the set-top box, which the customer already has on his television set, and a wireless keyboard, that is provided with the service and which interfaces with the box. WorldGate works on advanced analog and digital converters and, therefore, can be installed utilizing advanced analog converters already deployed. In contrast, other converter-based, non-PC Internet access products require a digital platform and a digital converter prior to installation. Customers who opt for television-based Internet access are generally first-time Internet users who prefer this more user-friendly interface. Although the WorldGate service bears the WorldGate brand name, the Internet domain name of the customers who use this service is "Charter.net." This allows customers to switch or expand to our other Internet services without a change of e-mail address. We first offered WorldGate to customers on the upgraded portion of our systems in St. Louis in April 1998. We are also currently offering this service in five other systems. In addition, we plan to introduce it in four additional systems during 2000. As of June 30, 2000, we provided WorldGate Internet service to approximately 7,200 customers. INTERNET PORTAL SERVICES. On October 1, 1999, Charter Communications Holding Company, Vulcan Ventures, an entity controlled by Mr. Allen, and Go2Net, Inc. entered into a joint venture to form Digeo Broadband, Inc. Digeo Broadband will provide access to the Internet through a "portal" to our customers on the digital service tier. A portal is an Internet web site that serves as a user's initial point of entry to the World Wide Web. By offering selected content, services and links to other web sites, a portal guides and directs users through the World Wide Web. In addition, the portal generates revenues from advertising on its own web pages and by sharing revenues generated by linked or featured web sites. Revenue splits and other economic terms in this arrangement will be at least as favorable to us as terms between Digeo Broadband and any other parties. Charter Communications Holding Company has agreed to use Digeo Broadband's portal services exclusively for an initial six-year period that will begin when the portal services are launched, except that Charter Communications Holding Company's existing agreements with other Internet high-speed portal services and High Speed Access may run for their current term to the extent that such agreements do not allow for the carriage of content provided by Charter Communications Holding Company or Vulcan Ventures. The joint venture is for an initial 25-year term, subject to successive five-year renewals by mutual consent. Vulcan Ventures will own 55.2%, Charter Communications Holding Company will own 24.9% and Go2Net will own 19.9% of Digeo Broadband's equity interests and Vulcan Ventures will have voting control over the Digeo Broadband entity. Digeo Broadband's board of directors will consist of three directors designated by Vulcan Ventures and one by each of Charter Communications Holding Company and Go2Net. 86 89 Each of Digeo Broadband's investors will be obligated to provide their pro rata share of funding for Digeo Broadband's operations and capital expenditures, except that Vulcan Ventures will fund our portion of Digeo Broadband's expenses for the first four years and will fund Go2Net's portion of Digeo Broadband's expenses to the extent Go2Net's portion exceeds budget for the first four years. We believe that our participation in the Digeo Broadband joint venture will facilitate the delivery of a broad array of Internet products and services to our customers over the television through the use of an advanced digital set-top box or through the personal computer. Our advanced technology team continues to work with Digeo Broadband to develop our portal service. We expect to launch the service in St. Louis before the end of 2000. We do not anticipate that our participation in the Digeo Broadband joint venture will have a material adverse impact on our financial condition or results of operations for the foreseeable future. WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which sells technology to embed interactive features, such as additional information and statistics about a program or the option to order an advertised product, into programming and advertisements. A customer with a Wink-enabled set-top box and a Wink-enabled cable provider sees an icon flash on the screen when additional Wink features are available to enhance a program or advertisement. By pressing the select button on a standard remote control, a viewer of a Wink-enhanced program is able to access additional information regarding such program, including, for example, information on prior episodes or the program's characters. A viewer watching an advertisement would be able to access additional information regarding the advertised product and may also be able to utilize the two-way transmission features to order a product. We have bundled Wink's services with our traditional cable services in both our advanced analog and digital platforms. Wink's services are provided free of charge. A company controlled by Mr. Allen has 3.8% equity interest in Wink. Various programming networks, including CNN, NBC, ESPN, HBO, Showtime, Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing over 1,000 hours of Wink-enhanced programming per week. Under certain revenue-sharing arrangements, we will modify our headend technology to allow Wink-enabled programming to be offered on our systems. We receive fees from Wink each time one of our customers uses Wink to request certain additional information or order an advertised product. TELEPHONE SERVICES. We expect to be able to offer cable telephony services in the near future in selected markets using our systems' direct, two-way connections to homes and other buildings. We are exploring technologies using Internet protocol telephony, as well as traditional switching technologies that are currently available, to transmit digital voice signals over our systems. AT&T and other telephone companies have already begun to pursue strategic partnering and other programs which make it attractive for us to acquire and develop this alternative Internet protocol technology. For the last two years, we have sold telephony services as a competitive access provider in the state of Wisconsin through one of our subsidiaries, and are currently looking to expand our services as a competitive access provider into other states. JOINT VENTURE WITH RCN CORPORATION. On October 1, 1999, Charter Communications Holding Company and RCN Corporation (RCN), in which Vulcan Ventures, an entity controlled by Mr. Allen, owns a 28.0% equity interest, entered into a binding term sheet containing the principal terms of a non-exclusive joint venture to provide a broad range of telephony services to the customers in our Los Angeles franchise territory. RCN is engaged in the businesses of bundling residential voice, video and Internet access operations, cable operations and certain long distance telephony operations. RCN is developing advanced fiber optic networks to provide a wide range of telecommunications services, including long distance telephone, video programming and data services, such as high-speed Internet access. 87 90 Charter Communications Holding Company will provide access to our Los Angeles customer base and will provide the capital necessary to develop telephony capability in Los Angeles. In addition, Charter Communications Holding Company will provide the necessary personnel to oversee and manage the telephony services. RCN will provide the necessary personnel and support services to develop and implement telephony services to be provided by Charter Communications Holding Company. We will pay RCN's fees at rates consistent with industry market compensation. We will have all rights to the telephony business and assets and will receive all revenues derived from the telephony business unless the parties expand RCN's role by mutual agreement. We believe that our telephony joint venture, together with Mr. Allen's investment in RCN, may allow us to take advantage of RCN's telephony experience as we deliver telephone services to our customers, although we cannot assure you that we will realize anticipated advantages. The term sheet contains only the principal terms of this joint venture and provides that the parties will enter into definitive agreements, which will contain, among other terms, details of the compensation to be received by RCN. To date, we have only had preliminary discussions with RCN regarding specific operational matters and have not determined a timetable for the commencement of services by the joint venture. We do not anticipate that this joint venture will have a material impact on our financial condition or results of operations in the foreseeable future. OUR SYSTEMS As of June 30, 2000, pro forma for the Kalamazoo transaction, our cable systems consisted of approximately 185,800 route miles, including approximately 19,400 sheath miles of fiber optic cable, passing approximately 10.1 million households and serving approximately 6.3 million customers. Coaxial cable is a type of cable used for broadband data and cable systems. This type of cable has excellent broadband frequency characteristics, noise immunity and physical durability. The cable is connected from each node to individual homes or buildings. A node is a single connection to a cable system's main high-capacity fiber optic cable that is shared by a number of customers. A sheath mile is the actual length of cable in miles. Fiber optic cable is a communication medium that uses hair-thin glass fibers to transmit signals over long distances with minimum signal loss or distortion. As of June 30, 2000, without giving effect to Kalamazoo transaction, approximately 57.2% of our customers were served by systems with at least 550 megahertz bandwidth capacity, approximately 41.2% had at least 750 megahertz bandwidth capacity and approximately 41.2% were served by systems capable of providing two-way interactive communication capability. Such two-way interactive communication capability includes two-way Internet connections, services provided by Wink and interactive program guides. CORPORATE MANAGEMENT. Pursuant to a services agreement between Charter Communications, Inc. and Charter Investment, Inc., Charter Investment, Inc. leases the necessary personnel and provides services to manage Charter Communications Holding Company, Charter Holdings and their subsidiaries. These personnel and services are provided to Charter Communications, Inc. on a cost reimbursement basis. Management of Charter Communications, Inc. and Charter Investment, Inc. consists of approximately 350 people led by Charter Communications, Inc.'s Chief Executive Officer Jerald L. Kent. They are responsible for coordinating and overseeing our operations, including certain critical functions, such as marketing and engineering, that are conducted by personnel at the regional and local system level. The corporate office also performs certain financial control functions such as accounting, finance and acquisitions, payroll and benefit administration, internal audit, purchasing and programming contract administration on a centralized basis. OPERATING REGIONS. To manage and operate our systems, we have established two divisions that contain a total of twelve operating regions. Each of the two divisions is managed by a Senior Vice President who reports to David G. Barford, Chief Operating Officer, and is responsible for overall supervision of the operating regions within the division. Mr. Barford reports directly to Mr. Kent. 88 91 Each region is managed by a team consisting of a Senior Vice President or a Vice President, supported by operational, marketing and engineering personnel. Within each region, certain groups of cable systems are further organized into clusters. We believe that much of our success is attributable to our operating philosophy which emphasizes decentralized management, with decisions being made as close to the customer as possible. The following table provides an overview of customer data for each of our operating regions as of June 30, 2000. CUSTOMER DATA AS OF JUNE 30, 2000 The following discussion provides a description of our operating regions as of June 30, 2000, pro forma for the Kalamazoo transaction. CENTRAL REGION. The Central region consists of cable systems serving approximately 487,700 customers, of which approximately 244,000 customers reside in and around St. Louis County or in adjacent areas in Illinois. The remaining customers primarily reside in small to medium-sized communities in Missouri, Illinois and Indiana. NORTH CENTRAL REGION. The North Central region consists of cable systems serving approximately 801,500 customers located throughout the states of Wisconsin and Minnesota. Approximately 576,000 and 225,000 customers reside in the states of Wisconsin and Minnesota, respectively. Within the state of Wisconsin, the two largest operating clusters are located in and around Madison, serving approximately 230,000 customers, and Fond du Lac, serving approximately 109,000 customers. Within the state of Minnesota, the two largest operating clusters are located in and around Rochester, serving approximately 146,000 customers, and St. Cloud, serving approximately 67,000 customers. SOUTHERN CALIFORNIA REGION. The Southern California region consists of cable systems serving approximately 635,300 customers located in California, with approximately 514,000 customers in the 89
CHARTER 2000 KALAMAZOO COMMUNICATIONS, INC. ACQUISITIONS SUBTOTAL TRANSACTION TOTAL -------------------- ------------ --------- ----------- --------- WESTERN DIVISION Central................... 459,800 27,900 487,700 -- 487,700 North Central............. 424,100 377,400 801,500 -- 801,500 Southern California....... 635,300 -- 635,300 -- 635,300 Northwest................. 476,700 -- 476,700 -- 476,700 Michigan.................. 310,400 254,900 565,300 48,900 614,200 National.................. 383,400 61,200 444,600 -- 444,600 --------- ------- --------- ------ --------- 2,689,700 721,400 3,411,100 48,900 3,460,000 EASTERN DIVISION Southeast................. 559,600 -- 559,600 -- 559,600 South-Atlantic............ 382,900 -- 382,900 -- 382,900 Mid-South................. 549,000 -- 549,000 -- 549,000 Northeast................. 359,800 -- 359,800 -- 359,800 Gulf Coast................ 419,500 -- 419,500 -- 419,500 Mid-Atlantic.............. 532,200 -- 532,200 -- 532,200 --------- ------- --------- ------ --------- 2,803,000 -- 2,803,000 -- 2,803,000 --------- ------- --------- ------ --------- Total..................... 5,492,700 721,400 6,214,100 48,900 6,263,000 ========= ======= ========= ====== ========= 92 Los Angeles metropolitan area. These customers reside primarily in the communities of Pasadena, Alhambra, Glendale, Long Beach and Riverside. We also have approximately 121,000 customers in central California, principally located in the communities of San Luis Obispo and Turlock. NORTHWEST REGION. The Northwest region was formed in connection with the Fanch and Falcon acquisitions. The Northwest region consists of cable systems serving approximately 476,700 customers in Oregon, Washington, Idaho and California. The two largest operating clusters in the Northwest region are located in and around Kennewick, Washington, serving approximately 87,000 customers, and Medford, Oregon, serving approximately 74,000 customers. MICHIGAN REGION. The Michigan region was formed in connection with the Fanch, Avalon, Falcon and Bresnan acquisitions. Pro forma for the Kalamazoo transaction, the Michigan region consists of cable systems serving approximately 614,200 customers. The largest operating cluster in the Michigan region is located in and around Bay City, Michigan, serving approximately 134,000 customers. NATIONAL REGION. The National region consists of cable systems serving approximately 444,600 customers residing in small to medium-sized communities in Nebraska, Texas, New Mexico, North Dakota, Kansas, Colorado, Oklahoma and Utah. Cable systems serving approximately 289,000 customers are located in Texas, of which approximately 190,000 are served by the Fort Worth, Texas operating cluster. SOUTHEAST REGION. The Southeast region consists of cable systems serving approximately 559,600 customers residing primarily in small to medium-sized communities in North Carolina and South Carolina. There are significant clusters of cable systems in and around the cities and counties of Greenville/Spartanburg, South Carolina, serving approximately 325,000 customers, and Hickory, North Carolina, serving approximately 126,000 customers. SOUTH-ATLANTIC REGION. The South-Atlantic region consists of cable systems serving approximately 382,900 customers residing primarily in small to medium-sized communities in Georgia and Florida. A significant cluster of cable systems is located in and around Atlanta, Georgia, serving approximately 210,000 customers. MID-SOUTH REGION. The Mid-South region consists of cable systems serving approximately 549,000 customers in Tennessee, Kentucky and Georgia. The Mid-South region has a significant cluster of cable systems in and around Kingsport, Tennessee, serving approximately 123,000 customers. NORTHEAST REGION. The Northeast region consists of cable systems serving approximately 359,800 customers residing in Connecticut, Massachusetts, New York and Vermont. The Northeast region has a significant cluster of cable systems in and around Worcester, Massachusetts, and Willimantic, Connecticut, serving approximately 166,000 customers. GULF COAST REGION. The Gulf Coast region was formed in connection with the Fanch and Falcon acquisitions. The Gulf Coast region consists of cable systems serving approximately 419,500 customers in Louisiana, Mississippi and Alabama. Within Alabama, the two largest operating clusters are located in and around Birmingham, serving approximately 119,000 customers, and Montgomery, serving approximately 26,000 customers. MID-ATLANTIC REGION. The Mid-Atlantic region consists of cable systems serving approximately 532,200 customers in Virginia, West Virginia, Ohio, Pennsylvania, New York and Maryland. The Mid-Atlantic region has significant clusters of cable systems in and around the cities of Charleston, West Virginia, serving approximately 197,000 customers, and Johnstown, Pennsylvania, serving approximately 77,000 customers. 90 93 PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to upgrade our existing cable plant over the next three years. For the period from January 1, 2000 to December 31, 2002, we plan to spend approximately $6.4 billion for capital expenditures, approximately $3.2 billion of which will be used to upgrade our systems to bandwidth capacity of 550 megahertz or greater, so that we may offer advanced services. The remaining capital will be spent on plant extensions, new services, converters and system maintenance. The following table describes the current technological state of our systems and the anticipated progress of planned upgrades through 2003, based on the percentage of our customers who will have access to the bandwidths listed below and two-way capability. We have adopted the hybrid fiber coaxial cable (HFC) architecture as the standard for our ongoing systems upgrades. HFC architecture combines the use of fiber optic cable, which can carry hundreds of video, data and voice channels over extended distances, with coaxial cable, which requires a more extensive signal amplification in order to obtain the desired transmission levels for delivering channels. In most systems, we deliver our signals via fiber optic cable to individual nodes serving a maximum of 500 homes or commercial buildings. Currently, our average node size is approximately 380 homes per node. Our HFC architecture consists of six strands of fiber to each node, with two strands activated and four strands reserved for future services. We believe that this network design provides high capacity and superior signal quality, and will enable us to provide the newest forms of telecommunications services to our customers. The primary advantages of HFC architecture over traditional coaxial cable networks include: - increased channel capacity of cable systems; - reduced number of amplifiers, which are devices to compensate for signal loss associated with coaxial cable, needed to deliver signals from the headend to the home, resulting in improved signal quality and reliability; - reduced number of homes 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 with 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 networks, which permit a network of computers to be connected together beyond an area; 91
550 MEGAHERTZ LESS THAN TO TWO-WAY 550 MEGAHERTZ 660 MEGAHERTZ 750 MEGAHERTZ 870 MEGAHERTZ CAPABILITY ------------- ------------- ------------- ------------- ---------- June 30, 2000........... 42.8% 16.0% 36.1% 5.1% 41.2% December 31, 2000....... 33.2% 9.5% 49.7% 7.6% 57.3% December 31, 2001....... 18.2% 7.3% 49.7% 24.8% 74.5% December 31, 2002....... 6.7% 5.7% 49.7% 37.9% 87.6% December 31, 2003....... 2.7% 5.8% 49.7% 41.8% 91.5% 94 - point-to-point data services, which can switch data links from one point to another; and - digital advertising insertion, which is the insertion of local, regional and national programming. The upgrades will facilitate our new services in two primary ways: - Greater bandwidth allows us to send more information through our systems. This provides us with the capacity to provide new services in addition to our current services. As a result, we will be able to roll out digital cable programming in addition to existing analog channels. - Enhanced design configured for two-way communication with the customer allows us to provide cable Internet services without telephone support and other interactive services, such as an interactive program guide, impulse pay-per-view, video-on-demand and Wink, that cannot be offered without upgrading the bandwidth capacity of our systems. This HFC architecture will also position us to offer cable telephony services in the future, using either Internet protocol technology or switch-based technology, another method of linking communications. CUSTOMER SERVICE AND COMMUNITY RELATIONS Providing a high level of service to our customers has been a central driver of our historical success. Our emphasis on system reliability, engineering support and superior customer satisfaction is key to our management philosophy. In support of our commitment to customer satisfaction, we operate a 24-hour customer service hotline for most systems and offer on-time installation and service guarantees. It is our policy that if an installer is late for a scheduled appointment the customer receives free installation, and if a service technician is late for a service call the customer receives a $20 credit. As of June 30, 2000, we maintained eighteen call centers located in our twelve regions, which are responsible for handling call volume for approximately 51% of our customers. They are staffed with dedicated personnel who provide service to our customers 24 hours a day, seven days a week. We believe operating regional call centers allows us to provide "localized" service, which also reduces overhead costs and improves customer service. We have invested significantly in both personnel and equipment to ensure that these call centers are professionally managed and employ state-of-the-art technology. As of June 30, 2000, pro forma for the Kalamazoo transaction, we employed approximately 3,100 customer service representatives. Our customer service representatives receive extensive training to develop customer contact skills and product knowledge critical to successful sales and high rates of customer retention. As of June 30, 2000, we had approximately 5,700 technical employees who are encouraged to enroll in courses and attend regularly scheduled on-site seminars conducted by equipment manufacturers to keep pace with the latest technological developments in the cable 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 92 95 also provide free cable modems and high-speed Internet access to schools and public libraries in our franchise areas. We place a special emphasis on education, and regularly award scholarships to employees who intend to pursue courses of study in the communications field. SALES AND MARKETING PERSONNEL RESOURCES. We have a centralized team responsible for coordinating the marketing efforts of our individual systems. For most of our systems with over 30,000 customers we have a dedicated marketing manager, while smaller systems are handled regionally. We believe our success in marketing comes in large part from new and innovative ideas and from good interaction between our corporate office, which handles programs and administration, and our field offices, which implement the various programs. We are also continually monitoring the regulatory arena, customer perception, competition, pricing and product preferences to increase our responsiveness to our customer base. Our customer service representatives are given the incentive to use their daily contacts with customers as opportunities to market our new service offerings. MARKETING STRATEGY. Our long-term marketing objective is to increase cash flow through deeper market penetration and growth in revenue per household. To achieve this objective and to position our service as an indispensable consumer service, we are pursuing the following strategies: - increase the number of rooms per household with cable; - introduce new cable products and services; - design product offerings to enable greater opportunity for customer choices; - utilize "tiered" packaging strategies to promote the sale of premium services and niche programming; - offer our customers more value through discounted bundling of products; - increase the number of residential consumers who use our set-top box, which enables them to obtain advanced digital services such as a greater number of television channels and interactive services; - target households based on demographic data; - develop specialized programs to attract former customers, households that have never subscribed and to convert unauthorized users of the service to paying customers; and - employ Charter branding of products to promote customer awareness and loyalty. We have innovative marketing programs which utilize market research on selected systems, compare the data to national research and tailor marketing programs for individual markets. We gather detailed customer information through our regional marketing representatives and use the Claritas geodemographic data program and consulting services to create unique packages of services and marketing programs. These marketing efforts and the follow-up analysis provide consumer information down to the city block or suburban subdivision level, which allows us to create very targeted marketing programs. We seek to maximize our revenue per customer through the use of "tiered" packaging strategies to market premium services and to develop and promote niche programming services. We regularly use targeted direct mail campaigns to sell these tiers and services to our existing customer base. We are developing an in-depth profile database that goes beyond existing and former customers to include all homes passed. This database information is expected to improve our targeted direct marketing efforts, bringing us closer toward our objective of increasing total customers as well as sales per customer for both new and existing customers. For example, using customer profile data currently available, we are able to identify customers who have children under a specified age and do 93 96 not currently subscribe to The Disney Channel. We then target our marketing efforts with respect to The Disney Channel to those households. In 1998, we were chosen by Claritas Corporation, sponsor of a national marketing competition across all industries, as the first place winner in their media division, which includes cable systems operations, telecommunications and newspapers, for our national segmenting and targeted marketing program. In 1998, we introduced a new package of premium services. Customers receive a substantial discount on bundled premium services of HBO, Showtime, Cinemax and The Movie Channel. We were able to negotiate favorable terms with premium networks, which allowed minimal impact on margins and provided substantial volume incentives to grow the premium category. The MVP package has increased our premium household penetration, premium revenue and cash flow. We are currently introducing this same premium strategy in the systems we have recently acquired. We expect to continue to invest significant amounts of time, effort and financial resources in the marketing and promotion of new and existing services. To increase customer penetration and increase the level of services used by our customers, we use a coordinated array of marketing techniques, including door-to-door solicitation, telemarketing, media advertising and direct mail solicitation. We believe we have one of the cable industry's highest success rates in attracting and retaining customers who have never before subscribed to cable services. Historically, these "nevers" are the most difficult customers to attract and retain. PROGRAMMING GENERAL. We believe that offering a wide variety of conveniently scheduled programming is an important factor influencing a customer's decision to subscribe to and retain our cable services. We devote considerable resources to obtaining access to a wide range of programming that we believe will appeal to both existing and potential basic and premium service customers. We rely on extensive market research, customer demographics and local programming preferences to determine channel offerings in each of our markets. PROGRAMMING SOURCES. We obtain basic and premium programming from a number of suppliers, usually pursuant to a written contract. Recent consolidation in the cable television industry coupled with our growth through acquisitions reduced the benefits associated with our participation in TeleSynergy. As a result of our recent acquisitions, we reviewed our programming arrangements and terminated our agreement with TeleSynergy, effective January 31, 2000. Telesynergy has since then ceased to operate. Though we no longer benefit from Telesynergy's services, such as volume discounts for purchasing programming due to Telesynergy's large buying base, we believe that our acquisitions in 1999 and 2000 and consequent increased size will significantly aid our purchasing power in the cable industry. PROGRAMMING PRICING. 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. Our programming contracts generally continue for a fixed period of time, usually from three to ten years, and are subject to negotiated renewal. Although longer contract terms are available, we prefer to limit contracts to three years so that we retain flexibility to change programming and include new channels as they become available. Some program suppliers offer marketing support or volume discount pricing structures. Some of our programming agreements with premium service suppliers offer cost incentives under which premium service unit prices decline as certain premium service growth thresholds are met. 94 97 For home shopping channels, we receive a percentage of the amount spent in home shopping purchases by our customers on channels we carry. In 1998, cash receipts from such purchases totaled approximately $220,000. In 1999, cash receipts totaled approximately $5.0 million. For the six months ended June 30, 2000, cash receipts totaled approximately $4.5 million. PROGRAMMING COSTS. Our cable programming costs have increased in recent years and are expected to continue to increase due to factors including: - system acquisitions; - additional programming being provided to customers; - increased cost to produce or purchase cable programming; and - inflationary increases. In every year we have operated, our costs to acquire programming have exceeded customary inflationary and cost-of-living type increases. Sports programming costs have increased significantly over the past several years. In addition, contracts to purchase sports programming sometimes contain built-in cost increases for programming added during the term of the contract which we may or may not have the option to add to our service offerings. Under rate regulations of the Federal Communications Commission, cable operators may increase their rates to customers to cover increased costs for programming, subject to certain limitations. See "Regulation and Legislation." We believe we will, as a general matter, be able to pass increases in our programming costs to customers, although we cannot assure you that this will be possible. RATES Pursuant to the Federal Communications Commission's rules, we have set rates for cable-related equipment, such as converter boxes, remote control devices and installation services. These rates are based on actual costs plus an 11.25% rate of return. We have unbundled these charges from the charges for the provision of cable service. Rates charged to our customers vary based on the market served and service selected, and are typically adjusted on an annual basis. As of June 30, 2000, the average monthly fee was $13.54 for basic service and $17.45 for expanded basic service tier. Regulation of the expanded basic service tier 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 a 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 95 98 are solicited in this manner become customers. Billing records are then closely monitored to guard against these new customers reverting to their status as unauthorized users. Unauthorized users who do not convert are promptly disconnected and, in certain instances, flagrant violators are referred for prosecution. In addition, we have prosecuted individuals who have sold cable converters programmed to receive our signals without proper authorization. FRANCHISES As of June 30, 2000, pro forma for the Kalamazoo transaction, our systems operated pursuant to a total of approximately 4,600 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 services under the franchise, which is the maximum amount that may be charged under the Communications Act. Our franchises have terms which range from four years to more than 32 years. Prior to the scheduled expiration of most franchises, we initiate renewal proceedings with the granting authorities. This process usually takes three years but can take a longer period of time and often involves substantial expense. The Communications Act provides for an orderly franchise renewal process in which granting authorities may not unreasonably withhold renewals. If a renewal is withheld and the granting authority takes over operation of the affected cable system or awards the cable franchise to another party, the granting authority must pay the existing cable operator the "fair market value" of the system. The Communications Act also established comprehensive renewal procedures requiring that an incumbent franchisee's renewal application be evaluated on its own merit and not as part of a comparative process with competing applications. In connection with the franchise renewal process, many governmental authorities require the cable operator to make certain commitments, such as technological upgrades to the system, which may require substantial capital expenditures. We cannot assure you that any particular franchise will be renewed or that it can be renewed on commercially favorable terms. Our failure to obtain renewals of our franchises, especially those in major metropolitan areas where we have the most customers, would have a material adverse effect on our business, results of operations and financial condition. The following table summarizes our systems' franchises by year of expiration and approximate number of basic customers as of June 30, 2000, pro forma for the Kalamazoo transaction: Under the 1996 Telecom Act, state and local authorities are prohibited from limiting, restricting or conditioning the provision of telecommunications services. They may, however, impose "competitively neutral" requirements and manage the public rights-of-way. Granting authorities may not require a cable operator to provide telecommunications services or facilities, other than institutional networks, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits franchise fees to an operator's cable-related revenues and clarifies that they do not apply to revenues that a cable operator derives from providing new telecommunications services. 96
NUMBER PERCENTAGE PERCENTAGE OF OF TOTAL TOTAL BASIC OF TOTAL YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS CUSTOMERS - ---------------------------- ---------- ---------- ----------- ---------- Prior to December 31, 2000.................... 350 8% 313,100 5% 2001 to 2002.................................. 601 13% 1,002,100 16% 2003 to 2005.................................. 1,087 23% 1,252,600 20% 2006 or after................................. 2,581 56% 3,695,200 59% ----- --- --------- --- Total....................................... 4,619 100% 6,263,000 100% ===== === ========= === 99 We believe our relations with the franchising authorities under which our systems are operated are generally good. Substantially all of the material franchises relating to our systems which are eligible for renewal have been renewed or extended at or prior to their stated expiration dates. COMPETITION We face competition in the areas of price, service offerings and service reliability. We compete with other providers of television signals and other sources of home entertainment. In addition, as we expand into additional services such as interactive services and telephony, we will face competition from other providers of each type of service. See "Risk Factors." We operate in a very competitive business environment which can adversely affect our business and operations. To date, we believe that we have not lost a significant number of customers or a significant amount of revenue to our competitors' systems. However, competition from other providers of the technologies we expect to offer in the future may have a negative impact on our business in the future. Through mergers such as the merger of Tele-Communications, Inc. and AT&T and the pending merger of America Online, Inc. (AOL) and Time Warner Inc., customers will come to expect a variety of services from a single provider. While these mergers have no direct or immediate impact on our business, they encourage providers of cable and telecommunications services to expand their service offerings. They also encourage consolidation in the cable industry as cable operators recognize the competitive benefits of a large customer base and expanded financial resources. Key competitors today include: BROADCAST TELEVISION. Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using an "off-air" antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through "off-air" reception compared to the services provided by the local cable system. The recent licensing of digital spectrum by the Federal Communications Commission will provide incumbent television licenses with the ability to deliver high definition television pictures and multiple digital-quality program streams, as well as advanced digital services such as subscription video and data transmission. DBS. Direct broadcast satellite, known as DBS, has emerged as significant competition to cable systems. The DBS industry has grown rapidly over the last several years, far exceeding the growth rate of the cable television industry, and now serves more than 13.4 million subscribers nationwide. DBS service allows the subscriber to receive video services directly via satellite using a relatively small dish antenna. Moreover, video compression technology allows DBS providers to offer more than 100 digital channels, thereby surpassing the typical analog cable system. DBS companies historically were prohibited from retransmitting popular local broadcast programming. However, a change to the copyright laws in November 1999 eliminated this legal impediment. As a result, DBS companies now need to secure retransmission consent from the popular broadcast stations they wish to carry, and they will face mandatory carriage obligations of less popular broadcast stations as of January 2002. In response to the legislation, DirecTV, Inc. and EchoStar Communications Corporation already have begun carrying the major network stations in the nation's top television markets. DBS, however, is limited in the local programming it can provide because of the current capacity limitations of satellite technology. It is, therefore, expected that DBS companies will offer local broadcast programming only in the larger U.S. markets in the foreseeable future. The same legislation providing for DBS carriage of local broadcast stations reduced the compulsory copyright fees paid by DBS companies and allows them to continue offering distant network signals to rural customers. In March 2000, both DirecTV and EchoStar announced that they would be capable of providing two-way high-speed Internet access by the end of this year. AOL, the nation's leading provider of Internet services has announced a plan 97 100 to invest $1.5 billion in Hughes Electronics Corp., DirecTV's parent company, and these companies intend to jointly market AOL's prospective Internet television service to DirecTV's DBS customers. DSL. The deployment of digital subscriber line technology, known as DSL, will allow Internet access to subscribers at data transmission speeds greater than those of modems over conventional telephone lines. Several telephone companies and other companies are introducing DSL service. The Federal Communications Commission mandates that incumbent telephone companies grant access to the high frequency portion of the local loop over which they provide voice services. This enables competitive carriers to provide DSL services over the same telephone lines simultaneously used by incumbent telephone companies to provide basic telephone service. However, the Federal Communications Commission does not mandate that incumbent telephone companies unbundle their internal packet switching functionality or related equipment for the benefit of competitive carriers. This functionality or equipment could otherwise be used by competitive carriers directly to provide DSL or other high-speed broadband services. We are unable to predict whether the Federal Communications Commission's decisions regarding access to the local loop or internal packet switching will be sustained upon administrative or judicial appeal, the likelihood of success of the Internet access offered by our competitors, or the impact on our business and operations of these competitive ventures. TRADITIONAL OVERBUILDS. Cable systems are operated under non-exclusive franchises granted by local authorities. More than one cable system may legally be built in the same area. It is possible that a franchising authority might grant a second franchise to another cable operator and that such a franchise might contain terms and conditions more favorable than those afforded us. In addition, entities willing to establish an open video system, under which they offer unaffiliated programmers non-discriminatory access to a portion of the system's cable system may be able to avoid local franchising requirements. Well financed businesses from outside the cable industry, such as public utilities that already possess fiber optic and other transmission lines in the areas they serve may over time become competitors. There has been a recent increase in the number of cities that have constructed their own cable systems, in a manner similar to city-provided utility services. There has been an increased interest in traditional overbuilds by private companies. Constructing a competing cable system is a capital intensive process which involves a high degree of risk. We believe that in order to be successful, a competitor's overbuild would need to be able to serve the homes and businesses in the overbuilt area on a more cost-effective basis than us. Any such overbuild operation would require either significant access to capital or access to facilities already in place that are capable of delivering cable television programming. As of June 30, 2000, we are aware of overbuild situations in some of our cable systems. Pro forma for the Kalamazoo transaction, approximately 140,500 basic customers, or approximately 2.2% of our total basic customers, are passed by these overbuilds. Additionally, we have been notified that franchises have been awarded, and present potential overbuild situations, in other of our systems. Approximately 161,500 or 2.6% of our total customers are located in areas with potential overbuilds. In response to such overbuilds, these systems have been designated priorities for the upgrade of cable plant and the launch of new and enhanced services. We have upgraded many of these systems to at least 750 megahertz two-way HFC architecture, and anticipate upgrading the other systems to at least 750 megahertz by December 31, 2001. TELEPHONE COMPANIES AND UTILITIES. The competitive environment has been significantly affected by both technological developments and regulatory changes enacted under 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 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. 98 101 Several telephone companies have obtained or are seeking cable franchises from local governmental authorities and are constructing cable systems. Cross-subsidization by local exchange carriers of video and telephony services poses a strategic advantage over cable operators seeking to compete with local exchange carriers that provide video services. Some local exchange carriers may choose to make broadband services available under the open video regulatory framework of the Federal Communications Commission or through wireless technology. In addition, local exchange carriers provide facilities for the transmission and distribution of voice and data services, including Internet services, in competition with our existing or potential interactive services ventures and businesses, including Internet service, as well as data and other non-video services. We cannot predict the likelihood of success of the broadband services offered by our competitors or the impact on us of such competitive ventures. Although enthusiasm on the part of local exchange carriers appears to have waned in recent months, the entry of telephone companies as direct competitors in the video marketplace may become more widespread and could adversely affect the profitability and valuation of established cable systems. As we expand our offerings to include Internet and other telecommunications services, we will be subject to competition from other telecommunications providers. The telecommunications industry is highly competitive and includes competitors with greater financial and personnel resources, who have brand name recognition and long-standing relationships with regulatory authorities. Moreover, mergers, joint ventures and alliances among franchise, wireless or private cable operators, local exchange carriers and others may result in providers capable of offering cable television, Internet, and telecommunications services in direct competition with us. Additionally, we are subject to competition from utilities which possess fiber optic transmission lines capable of transmitting signals with minimal signal distortion. PRIVATE CABLE. Additional competition is posed by satellite master antenna television systems known as "SMATV systems" serving multiple dwelling units, referred to in the cable industry as "MDU's", such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with such MDUs, which may preclude operators of franchise systems from serving residents of such private complexes. Such private cable systems can offer both improved reception of local television stations and many of the same satellite-delivered program services which are offered by cable systems. SMATV systems currently benefit from operating advantages not available to franchised cable systems, including fewer regulatory burdens and no requirement to service low density or economically depressed communities. Exemption from regulation may provide a competitive advantage to certain of our current and potential competitors. The Federal Communications Commission ruled in 1998 that private cable operators can lease video distribution capacity from local telephone companies and distribute cable programming services over public rights-of-way without obtaining a cable franchise. In 1999, both the Fifth and Seventh Circuit Courts of Appeals upheld this Federal Communications Commission policy. WIRELESS DISTRIBUTION. Cable television systems also compete with wireless program distribution services such as multi-channel multipoint distribution systems or "wireless cable," known as MMDS. MMDS uses low-power microwave frequencies to transmit television programming over-the-air to paying customers. Wireless distribution services generally provide many of the programming services provided by cable systems, and digital compression technology is likely to increase significantly the channel capacity of their systems. Both analog and digital MMDS services require unobstructed "line of sight" transmission paths. Analog MMDS has impacted our customer growth in Riverside and Sacramento, California and Missoula, Montana. Digital MMDS is a more significant competitor, presenting potential challenges to us in Los Angeles, California and Atlanta, Georgia. 99 102 PROPERTIES Our principal physical assets consist of a cable distribution plant and equipment, including signal receiving, encoding and decoding devices, headend reception facilities, distribution systems and customer drop equipment for each of our cable systems. Our cable plant and related equipment are generally attached to utility poles under pole rental agreements with local public utilities and telephone companies, and in certain locations are buried in underground ducts or trenches. We own or lease real property for signal reception sites and business offices in many of the communities served by our systems and for our principal executive offices. We own most of our service vehicles. Our subsidiaries own the real property housing a regional data center in Town & Country, Missouri, as well as the regional office for the Northeast Region in Newtown, Connecticut and additional real estate located in Hickory, North Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo, California. Our subsidiaries lease space for our regional data center located in Dallas, Texas and additional locations for business offices throughout our operating regions and generally own the towers on which our equipment is located. Our headend locations are generally located on owned or leased parcels of land, and we generally own the towers on which our equipment is located. We believe that our properties are in good operating condition and are suitable for our business operations. EMPLOYEES Pursuant to a mutual services agreement between Charter Communications, Inc. and Charter Investment, Inc., Charter Investment leases the necessary personnel and provides services to manage Charter Communications Holding Company and its subsidiaries. These personnel and services are provided to Charter Communications, Inc. on a cost reimbursement basis. Charter Communications, Inc. currently has only fifteen employees, all of whom are senior management and are also executive officers of Charter Investment, Inc. Our management and the management of Charter Investment, Inc. consists of approximately 350 people led by Charter Communications, Inc.'s Chief Executive Officer, Jerald L. Kent. They are responsible for coordinating and overseeing our operations, including certain critical functions, such as marketing and engineering, that are conducted by personnel at the regional and local system level. The corporate office also performs certain financial control functions such as accounting, finance and acquisitions, payroll and benefit administration, internal audit, purchasing and programming contract administration on a centralized basis. See "Certain Relationships and Related Transactions." As of June 30, 2000, our subsidiaries had approximately 12,700 full-time equivalent employees of which approximately 360 were represented by the International Brotherhood of Electrical Workers. We believe we have a good relationship with our employees and have never experienced a work stoppage. 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. 100 103 REGULATION AND LEGISLATION The following summary addresses the key regulatory developments and legislation affecting the cable industry. The operation of a cable system is extensively regulated by the Federal Communications Commission, some state governments and most local governments. The Federal Communications Commission has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of Federal Communications Commission licenses needed to operate certain transmission facilities used in connection with cable operations. The 1996 Telecom Act has altered the regulatory structure governing the nation's communications providers. It removed barriers to competition in both the cable television market and the local telephone market. Among other things, it also reduced the scope of cable rate regulation and encourages additional competition in the video programming industry by allowing local telephone companies to provide video programming in their own telephone service areas. The 1996 Telecom Act required the Federal Communications Commission to undertake a host of implementing rulemakings. Moreover, Congress and the Federal Communications Commission have frequently revisited the subject of cable regulation. Future legislative and regulatory changes could adversely affect our operations, and there have been calls in Congress and at the Federal Communications Commission to maintain or even tighten cable regulation in the absence of widespread effective competition. CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems were subjected to rate regulation, unless they faced "effective competition" in their local franchise area. Federal law defines "effective competition" on a community-specific basis as requiring satisfaction of conditions rarely satisfied in the current marketplace. Although the Federal Communications Commission established the underlying regulatory scheme, local government units, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable service -- the basic service tier, which typically contains local broadcast stations and public, educational, and government access channels. Before a local franchising authority begins basic service rate regulation, it must certify to the Federal Communications Commission that it will follow applicable federal rules. Many local franchising authorities have voluntarily declined to exercise their authority to regulate basic service rates. Local franchising authorities also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services. As of June 30, 2000, pro forma for the Kalamazoo transaction, approximately 17% of our local franchising authorities were certified to regulate basic tier rates. The 1992 Cable Act permits communities to certify and regulate rates at any time, so that it is possible that additional localities served by the systems may choose to certify and regulate basic rates in the future. The Federal Communications Commission historically administered rate regulation of cable programming service tiers, which are the expanded basic programming packages that offer services other than basic programming and which typically contain satellite-delivered programming. As of June 30, 2000, pro forma for the Kalamazoo transaction, we had cable programming service tier rate complaints relating to approximately 405,000 customers pending at the Federal Communications Commission. Under the 1996 Telecom Act, however, the Federal Communications Commission's authority to regulate cable programming service tier rates sunset on March 31, 1999. The Federal 101 104 Communications Commission has taken the position that it will still adjudicate pending cable programming service tier complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date. We do not believe any adjudications regarding these pre-sunset complaints will have a material adverse effect on our business. The elimination of cable programming service tier regulation affords us substantially greater pricing flexibility. Under the rate regulations of the Federal Communication Commission, most cable systems were required to reduce their basic service tier and cable programming service tier rates in 1993 and 1994, and have since had their rate increases governed by a complicated price cap scheme that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The Federal Communications Commission has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with regulatory lag. Operators also have the opportunity to bypass this "benchmark" regulatory scheme in favor of traditional "cost-of-service" regulation in cases where the latter methodology appears favorable. Cost of service regulation is a traditional form of rate regulation, under which a utility is allowed to recover its costs of providing the regulated service, plus a reasonable profit. The Federal Communications Commission and Congress have provided various forms of rate relief for smaller cable systems owned by smaller operators. Premium cable services offered on a per-channel or per-program basis remain unregulated. However, federal law requires that the basic service tier be offered to all cable subscribers and limits the ability of operators to require purchase of any cable programming service tier if a customer seeks to purchase premium services offered on a per-channel or per-program basis, subject to a technology exception which sunsets in 2002. As noted above, Federal Communications Commission regulation of cable programming service tier rates for all systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March 31, 1999. As a result, the regulatory regime just discussed is now essentially applicable only to the basic service tier and cable equipment. The 1996 Telecom Act also relaxes existing "uniform rate" requirements by specifying that uniform rate requirements do not apply where the operator faces "effective competition," and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the Federal Communications Commission. CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more favorable environment for us to provide telecommunications services beyond traditional video delivery. It provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. A cable operator is authorized under the 1996 Telecom Act to provide telecommunications services without obtaining a separate local franchise. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way and may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The favorable pole attachment rates afforded cable operators under federal law can be gradually increased by utility companies owning the poles, beginning in 2001, if the operator provides telecommunications service, as well as cable service, over its plant. The Federal Communications Commission clarified that a cable operator's favorable pole rates are not endangered by the provision of Internet access, but a recent decision by the 11th Circuit Court of Appeals disagreed and suggested that Internet traffic is neither cable service nor telecommunications service and might leave cable attachments that carry Internet traffic ineligible for Pole Attachment Act protections. This decision could lead to substantial increases in pole attachment rates. The cable industry has filed an appeal, seeking en banc review by the Eleventh Circuit. 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 102 105 of the 1996 Telecom Act to facilitate the entry of new telecommunications providers, including cable operators, is the interconnection obligation imposed on all telecommunications carriers. The Supreme Court upheld most of the Federal Communications Commission interconnection regulations but recently the Eighth Circuit Court of Appeals vacated other portions of the Federal Communication Commission's rules on slightly different grounds. We believe the Eighth Circuit's decision will be appealed, and may be overturned. Although these regulations should enable new telecommunications entrants to reach viable interconnection agreements with incumbent carriers, many issues, including which specific network elements the Federal Communications Commission can mandate that incumbent carriers make available to competitors, remain unresolved. If the Federal Communications Commission's current list of unbundled network elements is upheld on appeal, it would make it easier for us to provide telecommunications service. Similarly, if another recent Federal Communications Commission decision requiring that incumbent telephone companies permit colocation of competitors' equipment on terms favorable to competitors is sustained on administrative and judicial appeal, this decision, too, would make it easier for us to provide telecommunications service. INTERNET SERVICE. Although there is at present no significant federal regulation of cable system delivery of Internet services, and the Federal Communications Commission recently issued several reports finding no immediate need to impose such regulation, this situation may change as cable systems expand their broadband delivery of Internet services. In particular, proposals have been advanced at the Federal Communications Commission and Congress that would require cable operators to provide access to unaffiliated Internet service providers and online service providers. The Federal Communications Commission recently rejected a petition by certain Internet service providers attempting to use existing modes of access that are commercially leased to gain access to cable system delivery. Finally, some states and local franchising authorities are considering the imposition of mandatory Internet access requirements as part of cable franchise renewals or transfers and a few local jurisdictions have adopted these requirements. In June 2000, the Federal Court of Appeals for the Ninth Circuit rejected an attempt by the City of Portland, Oregon to impose mandatory Internet access requirements on the local cable operator. In reversing a contrary ruling by the lower court, the Ninth Circuit court held that Internet service was not a cable service, and therefore could not be subject to local cable franchising. At the same time, the Court suggested that at least the transport component of broadband Internet service could be subject to regulation as a "telecommunications" service. Although regulation of this form of telecommunications service would presumably be reserved for the Federal Communications Commission (which has so far resisted requests for active regulation), some states may argue that they are entitled to impose "open access" requirements pursuant to their authority over intrastate telecommunications. In addition, some local governments may argue that a cable operator must secure a local telecommunications franchise before providing Internet service. In response to the Ninth Circuit decision, the Federal Communications Commission has announced its intention to initiate a new proceeding to categorize cable-delivered Internet service and perhaps establish an appropriate regulatory scheme. The Ninth Circuit decision is the leading case on cable-delivered Internet service at this point, but the Federal District Court for the Eastern District of Virginia reached a similar deregulatory result in a May 2000 ruling, albeit using a different legal analysis. It concluded that broadband Internet service was a cable service, but that multiple provisions of the Telecommunications Act preempted local regulation. There are other instances where "open access" requirements have been imposed and judicial challenges are pending. If regulators are allowed to impose Internet access requirements on cable operators, it could burden the capacity of cable systems and complicate our own plans for providing Internet service. TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone 103 106 company/cable cross-ownership ban. Local exchange carriers, including the regional telephone companies, can now compete with cable operators both inside and outside their telephone service areas with certain regulatory safeguards. Because of their resources, local exchange carriers could be formidable competitors to traditional cable operators. Various local exchange carriers already are providing video programming services within their telephone service areas through a variety of distribution methods, including both the deployment of broadband wire facilities and the use of wireless transmission. Under the 1996 Telecom Act, local exchange carriers or any other cable competitor providing video programming to subscribers through broadband wire should be regulated as a traditional cable operator, subject to local franchising and federal regulatory requirements, unless the local exchange carrier or other cable competitor elects to deploy its broadband plant as an open video system. To qualify for favorable open video system status, the competitor must reserve two-thirds of the system's activated channels for unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of the Federal Communications Commission's open video system rules, including its preemption of local franchising. The Federal Communications Commission subsequently revised its OVS rules to eliminate this general preemption, thereby leaving franchising discretion to state and local authorities. It is unclear what effect this ruling will have on the entities pursuing open video system operation. Although local exchange carriers and cable operators can now expand their offerings across traditional service boundaries, the general prohibition remains on local exchange carrier buyouts of co-located cable systems. Co-located cable systems are cable systems serving an overlapping territory. Cable operator buyouts of co-located local exchange carrier systems, and joint ventures between cable operators and local exchange carriers in the same market are also prohibited. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition, including a carefully circumscribed "rural exemption." The 1996 Telecom Act also provides the Federal Communications Commission with the limited authority to grant waivers of the buyout prohibition. ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, including cable television, notwithstanding the Public Utility Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the Federal Communications Commission for operating authority. Like telephone companies, electric utilities have substantial resources at their disposal, and could be formidable competitors to traditional cable systems. Several such utilities have been granted broad authority by the Federal Communications Commission to engage in activities which could include the provision of video programming. ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership, including broadcast network/cable restrictions, but leaves in place existing Federal Communications Commission regulations prohibiting local cross-ownership between co-located television stations and cable systems. Pursuant to the 1992 Cable Act, the Federal Communications Commission adopted rules precluding a cable system from devoting more than 40% of its activated channel capacity to the carriage of affiliated national video program services. Also pursuant to the 1992 Cable Act, the Federal Communications Commission has adopted rules that preclude any cable operator from serving more than 30% of all U.S. domestic multichannel video subscribers, including cable and direct broadcast satellite subscribers. The D.C. District Court of Appeals recently upheld this restriction, and the Federal Communications Commission has now ruled that AT&T must divest certain cable ownership to come into compliance. 104 107 MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast signal carriage requirements. Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable customers. These requirements, among other things, allow local commercial television broadcast stations to elect once every three years between "must carry" status or "retransmission consent" status. Less popular stations typically elect must carry, which is the broadcast signal carriage requirement that allows local commercial television broadcast stations to require a cable system to carry the station. More popular stations, such as those affiliated with a national network, typically elect retransmission consent which is the broadcast signal carriage requirement that allows local commercial television broadcast stations to negotiate for payments for granting permission to the cable operator to carry the stations. Must carry requests can dilute the appeal of a cable system's programming offerings because a cable system with limited channel capacity may be required to forego carriage of popular channels in favor of less popular broadcast stations electing must carry. Retransmission consent demands may require substantial payments or other concessions. Either option has a potentially adverse effect on our business. The burden associated with must carry may increase substantially if broadcasters proceed with planned conversion to digital transmission and the Federal Communications Commission determines that cable systems must carry all analog and digital broadcasts in their entirety. This burden would reduce capacity available for more popular video programming and new internet and telecommunication offerings. A rulemaking is now pending at the Federal Communications Commission regarding the imposition of dual digital and analog must carry. ACCESS CHANNELS. Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a portion of their channel capacity, up to 15% in some cases, for commercial leased access by unaffiliated third parties. The Federal Communications Commission has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for commercial leased access use. We believe that requests for commercial leased access carriages have been relatively limited. The Federal Communications Commission recently rejected a request that unaffiliated Internet service providers be found eligible for commercial leased access. ACCESS TO PROGRAMMING. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring their cable operators over new competitors and requires such programmers to sell their programming to other multichannel video distributors. This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to cable companies. This prohibition is scheduled to expire in October 2002, unless the Federal Communications Commission determines that an extension is necessary to protect competition and diversity. There also has been interest expressed in further restricting the marketing practices of cable programmers, including subjecting programmers who are not affiliated with cable operators to all of the existing program access requirements, and subjecting terrestrially delivered programming to the program access requirements. Terrestrially delivered programming is programming delivered other than by satellite. These changes should not have a dramatic impact on us, but would limit potential competitive advantages we now enjoy. Pursuant to the Satellite Home Viewer Improvement Act, the Federal Communications Commission has adopted regulations governing retransmission consent negotiations between broadcasters and all multichannel video programming distributors, including cable and DBS. INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997, the Federal Communications Commission established rules that require an incumbent cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove "home run" wiring that was installed by the cable operator in a multiple dwelling unit building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers 105 108 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. 106 109 The Federal Communications Commission recently ruled that cable customers must be allowed to purchase cable converters from third parties and established a multi-year phase-in during which security functions, which would remain in the operator's exclusive control, would be unbundled from basic converter functions, which could then be satisfied by third party vendors. The first phase implementation was July 1, 2000. Compliance was technically and operationally difficult in some locations, so we and several other cable operators filed a request at the Federal Communications Commission that the requirement be waived in those systems. The report resulted in a temporary deferral of the compliance deadline for those systems. 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 parties recently agreed to a modest increase in the copyright royalty rates, and the matter is now pending before the U.S. copyright office. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect our ability to obtain desired broadcast programming. We cannot predict the outcome of this legislative activity. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. Cable operators distribute locally originated programming and advertising that use music controlled by the two principal major music performing rights organizations, the American Society of Composers, Authors and Publishers and Broadcast Music, Inc. The cable industry has had a long series of negotiations and adjudications with both organizations. A prior voluntarily negotiated agreement with Broadcast Music has now expired, and is subject to further proceedings. The governing rate court recently set retroactive and prospective cable industry rates for American Society of Composers music based on the previously negotiated Broadcast Music rate. Although we cannot predict the ultimate outcome of these industry proceedings or the amount of any license fees we may be required to pay for past and future use of association-controlled music, we do not believe such license fees will be significant to our business and operations. STATE AND LOCAL REGULATION. Cable systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in order to cross public rights-of-way. Federal law now prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises. Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for non-compliance and may be terminable if the franchisee fails to comply with material provisions. The specific terms and conditions of franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, service rates, franchising fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states, including Connecticut, subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system's gross cable-related revenues, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Certain states are considering the imposition of new broadly applied telecommunications taxes. 107 110 Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the local franchising authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and service or increased franchise fees as a condition of renewal. Similarly, if a local franchising authority's consent is required for the purchase or sale of a cable system or franchise, such local franchising authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, most franchises have been renewed for and consents granted to cable operators that have provided satisfactory services and have complied with the terms of their franchise. Under the 1996 Telecom Act, states and local franchising authorities are prohibited from limiting, restricting, or conditioning the provision of competitive telecommunications services, except for certain "competitively neutral" requirements and as necessary to manage the public rights-of-way. This law should facilitate entry into competitive telecommunications services, although certain jurisdictions still may attempt to impose rigorous entry requirements. In addition, local franchising authorities may not require a cable operator to provide any telecommunications service or facilities, other than institutional networks under certain circumstances, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also provides that franchising fees are limited to an operator's cable-related revenues and do not apply to revenues that a cable operator derives from providing new telecommunications services. 108 111 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The persons listed below are directors of Charter Communications, Inc. Each of the directors is elected annually. The following sets forth certain biographical information with respect to the directors listed above. PAUL G. ALLEN has been Chairman of the board of directors of Charter Communications, Inc. since July 1999, and Chairman of the Board of Directors of Charter Investment since December 1998. Mr. Allen, a co-founder of Microsoft Corporation, is and has been a private investor for more than five years, with economic interests in over 140 companies, each contributing to his Wired World vision. These companies include Vulcan Ventures Inc., USA Networks, Inc., Dreamworks SKG, Vulcan Programming, Inc., and Vulcan Cable III Inc. He is a director of Microsoft Corporation, USA Networks, Inc. and various private corporations. JERALD L. KENT has been the President, Chief Executive Officer and a director of Charter Communications, Inc. since July 1999 and of Charter Investment since April 1995. He previously held the position of Chief Financial Officer of Charter Investment. Prior to co-founding Charter Investment in 1993, Mr. Kent was Executive Vice President and Chief Financial Officer of Cencom Cable Associates, Inc. Before that, he held other executive positions at Cencom. Earlier, he was with Arthur Andersen LLP, where he attained the position of tax manager. Mr. Kent is a member of the board of directors of High Speed Access Corp., Cable Television Laboratories, Inc., Com21 Inc. and C-SPAN. He is also a member of the executive committee and the board of directors of NCTA. Mr. Kent, a certified public accountant, received his undergraduate and M.B.A. degrees from Washington University. MARC B. NATHANSON has been a director of Charter Communications, Inc. since January 2000. Mr. Nathanson is the Chairman of Mapleton Investments LLC, an investment vehicle formed in 1999. He also founded and served as Chairman and Chief Executive Officer of Falcon Holding Group, Inc., a cable operator, and its predecessors since 1975. He served as Chairman and Chief Executive Officer of Enstar Communications Corporation, a cable operator, from 1988 until November 1999. Prior to 1975, Mr. Nathanson held executive positions with Teleprompter Corporation, Warner Cable, and Cypress Communications Corporation. In 1999, he was appointed by the President of the United States, and currently serves as, Chairman of The Broadcasting Board of Governors. RONALD L. NELSON has been a director of Charter Communications, Inc. since November 1999. Mr. Nelson is a founding member of Dream Works LLC, a multi-media entertainment company, where he has served in executive management since 1994. Prior to that time, during his 15 years at Paramount Communications Inc., he served in a variety of operating and executive positions and as a member of its board of directors. He currently serves as a member of the board of directors of Advanced Tissue Sciences, Inc. and Centre Pacific L.L.C. Mr. Nelson has a B.S. degree from the University of California at Berkeley and an M.B.A. degree from the University of California at Los Angeles. 109
DIRECTORS AGE POSITION - --------- --- -------- Paul G. Allen............................. 47 Chairman of the Board of Directors Jerald L. Kent............................ 44 Director Marc B. Nathanson......................... 55 Director Ronald L. Nelson.......................... 48 Director Nancy B. Peretsman........................ 46 Director William D. Savoy.......................... 36 Director Howard L. Wood............................ 61 Director 112 NANCY B. PERETSMAN has been a director of Charter Communications, Inc. since November 1999. Ms. Peretsman has been a Managing Director and Executive Vice President of Allen & Company Incorporated, an investment bank unrelated to Mr. Allen, since 1995. From 1983 to 1995, she was an investment banker at Salomon Brothers Inc., where she was a Managing Director since 1990. She is a director of Priceline.com Incorporated and several privately held companies. She received a B.A. degree from Princeton University and an M.P.P.M. degree from Yale University. WILLIAM D. SAVOY has been a director of Charter Communications, Inc. since July 1999 and a director of Charter Investment since December 1998. Since 1990, Mr. Savoy has been an officer and a director of many affiliates of Mr. Allen, including President and a director of Vulcan Ventures Inc., Vulcan Programming, Inc. and Vulcan Cable III Inc. Mr. Savoy also serves as a director of drugstore.com, inc., Go2Net, Inc., High Speed Access Corp., Metricom, Inc., Peregrine Systems, Inc., RCN Corporation, Telescan, Inc., Ticketmaster Online -- CitySearch, Inc., USA Networks, Inc., and Value America, Inc. Mr. Savoy holds a B.S. degree in computer science, accounting and finance from Atlantic Union College. HOWARD L. WOOD has been a director of Charter Communications, Inc. since January 2000. Mr. Wood co-founded Charter Investment in 1993 and served in various executive capacities there until November 1999, when he became a consultant to Charter Communications, Inc. Prior to 1993, Mr. Wood was Chief Executive Officer of Cencom Cable Associates, Inc., where he also served in various other executive positions. Earlier he was Partner-in-Charge of the St. Louis Tax Division of Arthur Andersen LLP. He is a director of First State Community Bank, Gaylord Entertainment Company and Data Research, Inc. Mr. Wood, a certified public accountant, graduated from Washington University (St. Louis) School of Business. COMMITTEES OF THE BOARD An Audit Committee was formed by the board of directors of Charter Communications, Inc. in November 1999 to review and oversee Charter Communications, Inc.'s internal accounting and auditing procedures, to review audit and examination results and procedures with independent accountants, to oversee reporting of financial information, to review related party transactions, and to make recommendations to the board as to the appointment of independent accountants. The Audit Committee consists of directors Nancy Peretsman, Ron Nelson and Howard Wood. A Compensation Committee was formed by the board in February 2000 for the purpose of reviewing and approving Charter Communications, Inc.'s compensation and benefits programs, and approving compensation for senior management. The members of the Compensation Committee are Paul Allen, Marc Nathanson, William Savoy and Howard Wood. An Executive Committee was formed by the board in November 1999, to act in place of the full board and to exercise all powers of the full board which may lawfully be delegated when the full board of directors is not in session. The Executive Committee consists of directors Paul Allen, Jerald Kent and William Savoy. DIRECTOR COMPENSATION The employee directors of Charter Communications, Inc. do not receive any additional compensation for serving as a director, nor are they paid any fees for attendance at any meeting of the board of directors. Each non-employee director of Charter Communications, Inc., other than Mr. Allen, has been issued 40,000 fully vested options in consideration for agreeing to join the board of directors and may receive additional compensation to be determined. Directors may also be reimbursed for the actual reasonable costs incurred in connection with attendance at board meetings. 110 113 Mr. Kent has entered into an employment agreement with Charter Communications, Inc. Mr. Wood has entered into a consulting agreement with Charter Communications, Inc. and Mr. Nathanson is party to a letter agreement with Charter Communications, Inc. These agreements are summarized in this prospectus in the section entitled "Certain Relationships and Related Transactions." EXECUTIVE OFFICERS The following persons are executive officers of Charter Communications, Inc.: Information regarding our executive officers is set forth below. Our executive officers, except for Mr. Andersen, Mr. Riddle and Mr. Smith, were appointed to their positions following our formation in February 1999, and became employees of Charter Communications, Inc. in November 1999. Prior to that time, they were employees of Charter Investment. All of our executive officers simultaneously serve in the same capacity with Charter Investment. The executive officers are elected by the board of directors annually following the annual meeting of shareholders, and each officer holds his or her office until his or her successor is elected and qualified or until his or her earlier resignation or removal. JERALD L. KENT, President, Chief Executive Officer and Director of Charter Communications, Inc. Mr. Kent has held these positions with Charter Communications, Inc. since July 1999 and with Charter Investment since April 1995. He previously held the position of Chief Financial Officer of Charter Investment. Prior to co-founding Charter Investment in 1993, Mr. Kent was Executive Vice President and Chief Financial Officer of Cencom Cable Associates, Inc. Before that, he held other executive positions at Cencom. Earlier he was with Arthur Andersen LLP, where he attained the position of tax manager. Mr. Kent is a member of the board of directors of High Speed Access Corp., Cable Television Laboratories, Inc., Com21 Inc. and C-SPAN. He is also a member of the executive committee and the board of directors of NCTA. Mr. Kent, a certified public accountant, received his undergraduate and M.B.A. degrees from Washington University (St. Louis). DAVID C. ANDERSEN, Senior Vice President -- Communications. Prior to joining Charter Communications, Inc. in May 2000, Mr. Andersen served as Vice President of Communications for CNBC, the worldwide cable and satellite business news network subsidiary of NBC. Before that, 111
EXECUTIVE OFFICERS AGE POSITION - ------------------ --- -------- Jerald L. Kent......................... 44 President and Chief Executive Officer David C. Andersen...................... 51 Senior Vice President -- Communications David G. Barford....................... 42 Executive Vice President and Chief Operating Officer Mary Pat Blake......................... 45 Senior Vice President -- Marketing and Programming Eric A. Freesmeier..................... 47 Senior Vice President -- Administration Thomas R. Jokerst...................... 51 Senior Vice President -- Advanced Technology Development Kent D. Kalkwarf....................... 40 Executive Vice President and Chief Financial Officer Ralph G. Kelly......................... 43 Senior Vice President -- Treasurer David L. McCall........................ 45 Senior Vice President of Operations -- Eastern Division John C. Pietri......................... 50 Senior Vice President -- Engineering Michael E. Riddle...................... 41 Senior Vice President and Chief Information Officer Steven A. Schumm....................... 47 Executive Vice President, Assistant to the President Curtis S. Shaw......................... 51 Senior Vice President, General Counsel and Secretary Stephen E. Silva....................... 40 Senior Vice President -- Corporate Development and Technology James (Trey) H. Smith, III............. 51 Senior Vice President of Operations -- Western Division 114 starting in 1982 when he established their public relations department, Mr. Andersen served in various management positions at Cox Communications, Inc., most recently as Vice President of Public Affairs. Mr. Andersen serves on the Board of KIDSNET, and is a former Chairman of the National Captioning Institute's Cable Advisory Board. He received a B.S. degree in Journalism from the University of Kansas. DAVID G. BARFORD, Executive Vice President and Chief Operating Officer. Mr. Barford was appointed to his current position in July 2000, previously serving as Senior Vice President of Operations-Western Division. Prior to joining Charter Investment in 1995, Mr. Barford held various senior marketing and operating roles during nine years at Comcast Cable Communications, Inc. He received a B.A. degree from California State University, Fullerton, and an M.B.A. degree from National University. MARY PAT BLAKE, Senior Vice President -- Marketing and Programming. Prior to joining Charter Investment in 1995, Ms. Blake was active in the emerging business sector and formed Blake Investments, Inc. in 1993. She has 18 years of experience with senior management responsibilities in marketing, sales, finance, systems, and general management. Ms. Blake received a B.S. degree from the University of Minnesota and an M.B.A. degree from the Harvard Business School. ERIC A. FREESMEIER, Senior Vice President -- Administration. From 1986 until joining Charter Investment in 1998, Mr. Freesmeier served in various executive management positions at Edison Brothers Stores, Inc. Earlier he held management and executive positions at Montgomery Ward. Mr. Freesmeier holds a bachelor's degree from the University of Iowa and a master's degree from Northwestern University's Kellogg Graduate School of Management. THOMAS R. JOKERST, Senior Vice President -- Advanced Technology Development. Mr. Jokerst joined Charter Investment in 1994. Previously he served as a vice president of Cable Television Laboratories and as a regional director of engineering for Continental Cablevision. He is a graduate of Ranken Technical Institute and of Southern Illinois University. KENT D. KALKWARF, Executive Vice President and Chief Financial Officer. Mr. Kalkwarf was promoted to the position of Executive Vice President in July 2000, previously serving as Senior Vice President and Chief Financial Officer. Prior to joining Charter Investment in 1995, Mr. Kalkwarf was employed for 13 years by Arthur Andersen LLP, where he attained the position of senior tax manager. He has extensive experience in cable, real estate, and international tax issues. Mr. Kalkwarf has a B.S. degree from Illinois Wesleyan University and is a certified public accountant. RALPH G. KELLY, Senior Vice President --Treasurer. Prior to joining Charter Investment in 1993, Mr. Kelly was controller and then treasurer of Cencom Cable Associates. He left Charter in 1994, to become Chief Financial Officer of CableMaxx, Inc., and returned in 1996. Mr. Kelly received his bachelor's degree in accounting from the University of Missouri -- Columbia and his M.B.A. degree from Saint Louis University. DAVID L. MCCALL, Senior Vice President of Operations -- Eastern Division. Prior to joining Charter Investment in 1995, Mr. McCall was associated with Crown Cable and its predecessor, Cencom Cable Associates, Inc., from 1983 to 1994. Mr. McCall has served as a director of the South Carolina Cable Television Association for ten years and is a member of the Southern Cable Association's Tower Club. JOHN C. PIETRI, Senior Vice President -- Engineering. Prior to joining Charter Investment in 1998, Mr. Pietri was with Marcus Cable for 9 years, most recently serving as Senior Vice President and Chief Technical Officer. Earlier he was in operations with West Marc Communications and Minnesota Utility Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh. MICHAEL E. RIDDLE, Senior Vice President and Chief Information Officer. Prior to joining Charter Communications, Inc. in December 1999, Mr. Riddle was Director of Applied Technologies 112 115 of Cox Communications for 4 years. Prior to that, he held technical and management positions during 17 years at Southwestern Bell and its subsidiaries. Mr. Riddle attended Fort Hays State University. STEVEN A. SCHUMM, Executive Vice President, Assistant to the President. Prior to joining Charter Investment in 1998, Mr. Schumm was Managing Partner of the St. Louis office of Ernst & Young LLP, where he was a partner for 14 of 24 years. He served as one of 10 members of the firm's National Tax Committee. Mr. Schumm earned a B.S. degree from Saint Louis University. CURTIS S. SHAW, Senior Vice President, General Counsel and Secretary. From 1988 until he joined Charter Investment in 1997, Mr. Shaw served as corporate counsel to NYNEX. He has over 26 years of experience as a corporate lawyer, specializing in mergers and acquisitions, joint ventures, public offerings, financings, and federal securities and antitrust law. Mr. Shaw received a B.A. degree from Trinity College and a J.D. degree from Columbia University School of Law. STEPHEN E. SILVA, Senior Vice President -- Corporate Development and Technology. From 1983 until joining Charter Investment in 1995, Mr. Silva served in various management positions at U.S. Computer Services, Inc. He is a member of the board of directors of High Speed Access Corp. JAMES (TREY) H. SMITH, III, Senior Vice President of Operations -- Western Division. Mr. Smith was appointed to his current position in September 2000, previously serving as a Division President of AT&T Broadband. Before that, he was President and CEO of Rogers Cablesystems Ltd., Senior Vice President of the Western Region for MediaOne/Continental Cable and Executive Vice President of Operations for Times Mirror Cable TV, Inc. He received B.B.A. and M.B.A. degrees from Georgia State University and is a certified public accountant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Most executive officer compensation determinations have been made based upon the recommendations of Mr. Kent. Prior to November 1999, these determinations were made by the board of directors of Charter Investment, with option grant determinations being made in conjunction with the board of directors of Charter Communications Holding Company. During this period, the board of Charter Investment included Messrs. Allen, Savoy and Kent, and the board of Charter Communications Holding Company included Messrs. Savoy and Kent. Commencing in November 1999, when Charter Communications, Inc. became the successor employer of the executive officers, the board of directors of Charter Communications, Inc. took over the role of the Charter Investment board in the decision-making process. In November 1999, the board of directors of Charter Communications, Inc. was comprised of Messrs. Allen, Savoy, Kent and Nelson, and Ms. Peretsman. Commencing in February 2000, when the Charter Communications, Inc. board of directors appointed a compensation committee comprised of Messrs. Allen, Savoy, Nathanson and Wood, executive officer compensation matters, including option grants, were delegated to the committee. No Charter Communications, Inc. executive officer currently serves on a compensation committee or any similar committee of any other public company. EXECUTIVE COMPENSATION The following table sets forth information regarding the compensation paid to executive officers of Charter Communications, Inc., during the fiscal years ended December 31, 1999 and 1998, including the Chief Executive Officer, each of the other four most highly compensated executive officers as of December 31, 1999, and two other highly compensated executive officers who resigned during 1999. Through the beginning of November 1999, such executive officers had received their compensation from Charter Investment. Effective in November 1999, such officers began receiving their compensation from Charter Communications, Inc. Pursuant to a mutual services agreement between Charter Communications, Inc. and Charter Investment, each of those entities leases the necessary personnel and provides services to each other, including the knowledge and expertise of their respective officers. See "Certain Relationships and Related Transactions." 113 116 SUMMARY COMPENSATION TABLE - ------------------------- (1) Includes $55,719 paid for club membership and dues and $20,351 attributed to personal use of Charter Investment's airplane. (2) Mr. Schumm became affiliated with Charter Investment on December 16, 1998. (3) Mr. Barford was appointed Executive Vice President and Chief Operating Officer in July 2000. (4) Includes $150,000 received as a one-time bonus. (5) Received in March 1999, in connection with a one-time change of control payment under the terms of a previous equity appreciation rights plan. This payment was triggered by the acquisition of us by Mr. Allen on December 23, 1998, but was income for 1999. (6) Mr. Pietri became affiliated with Charter Investment on January 1, 1999. (7) Mr. Babcock resigned as an executive officer, terminated his employment and became a consultant in October 1999. (8) Includes a bonus of $312,500 and accrued vacation of $48,077 paid in connection with termination of Mr. Babcock's employment agreement, plus $24,516 as consulting fees. (9) Includes $500,000 earned as a one-time bonus upon signing of an employment agreement. (10) Mr. Wood resigned as an executive officer, terminated his employment and became a consultant in November 1999. (11) Includes a bonus of $468,750 and accrued vacation of $24,038 paid in connection with termination of Mr. Wood's employment agreement, plus $8,166 in consulting fees. (12) Includes $250,000 earned as a one-time bonus upon signing of an employment agreement. 114
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARD ---------------------------------------- ------------ YEAR OTHER SECURITIES ENDED ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - --------------------------- ------- --------- -------- --------------- ------------ --------------- Jerald L. Kent................... 1999 1,250,000 625,000 80,799(1) -- -- President and Chief Executive 1998 790,481 641,353 -- 7,044,127 -- Officer Steven A. Schumm(2).............. 1999 400,000 60,000 -- 782,681 -- Executive Vice President 1998 12,307 12,300 -- -- -- David G. Barford(3).............. 1999 235,000 80,000 -- 200,000 -- Senior Vice President of 1998 220,000 225,000(4) -- -- 8,390,888(5) Operations -- Western Division Curtis S. Shaw................... 1999 200,000 80,000 -- 200,000 -- Senior Vice President, General 1998 190,000 80,000 -- -- 8,178,967(5) Counsel and Secretary John C. Pietri(6)................ 1999 200,000 70,000 -- 165,000 -- Senior Vice President -- 1998 -- -- -- -- -- Engineering Barry L. Babcock(7).............. 1999 623,000 -- -- 65,000 385,093(8) Former Vice Chairman 1998 575,000 925,000(9) -- -- -- Howard L. Wood(10)............... 1999 311,300 -- 145,000 Former Vice Chairman 1998 575,000(11) 675,000(12) -- -- -- 117 JUNE 30, 2000 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE The following table sets forth for certain executive officers information concerning options exercised from January 1, 1999, including the value realized upon exercise, the number of securities for which options were held at June 30, 2000, the value of unexercised "in-the-money" options (i.e., the positive spread between the exercise price of outstanding options and the market value of Charter Communications, Inc.'s Class A common stock on June 30, 2000), the options granted through June 30, 2000 and the value of unexercised options as of June 30, 2000. - --------------- (1) No options were in-the-money as of June 30, 2000. 1999 OPTION GRANTS The following table shows individual grants of options made to certain named executive officers during 1999. All such grants were made under the Charter Communications Option Plan.
NUMBER OF VALUE OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT SECURITIES AT JUNE 30, 2000 JUNE 30, 2000(1) ACQUIRED VALUE --------------------------- --------------------------- ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- -------- ----------- ------------- ----------- ------------- Jerald L. Kent.......... -- -- 2,641,548 4,402,579 -- -- Steven A. Schumm........ -- -- 221,760 560,921 -- -- David G. Barford........ -- -- 56,667 183,333 -- -- Curtis S. Shaw.......... -- -- 56,667 168,333 -- -- John C. Pietri.......... -- -- 46,750 143,250 -- -- Barry L. Babcock........ -- -- 65,000 -- -- -- Howard L. Wood.......... -- -- 145,000 -- -- -- - --------------- (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. OPTION PLAN The Charter Communications Option Plan was adopted in February 1999. This plan provides for the grant of options to purchase up to 25,009,798 membership units in Charter Communications Holding Company. Under the terms of the plan, each membership unit acquired as a result of the exercise of options will be exchanged automatically for shares of Class A common stock of Charter Communications, Inc. on a one-for-one basis. The plan provides for grants of options to current and 115
NUMBER OF POTENTIAL REALIZABLE VALUE AT MEMBERSHIP % OF TOTAL ASSUMED ANNUAL RATES OF UNITS OPTIONS MEMBERSHIP UNIT PRICE UNDERLYING GRANTED TO APPRECIATION FOR OPTION TERM(1) OPTIONS EMPLOYEES EXERCISE EXPIRATION -------------------------------- NAME GRANTED IN 1999 PRICE DATE 5% 10% - ---- ---------- ---------- -------- ---------- -------------- --------------- Jerald L. Kent..................... -- -- -- -- -- -- Steven A. Schumm................... 782,681 5.7% $20.00 2/8/09 $9,844,478 $24,947,839 David G. Barford................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970 Curtis S. Shaw..................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970 John C. Pietri..................... 165,000 1.2% 20.00 2/8/09 2,075,352 5,259,350 Barry L. Babcock................... 65,000 0.5% 20.00 2/8/09 817,563 2,071,865 Howard L. Wood..................... 65,000 1.1% 20.00 2/8/09 817,563 2,071,865 80,000 19.00 11/8/09 955,920 2,422,488 118 prospective employees and consultants of Charter Communications Holding Company and its affiliates and current and prospective non-employee directors of Charter Communications, Inc. The plan is intended to promote the long-term financial interest of Charter Communications Holding Company and its affiliates by encouraging eligible individuals to acquire an ownership position in Charter Communications Holding Company and its affiliates and providing incentives for performance. The options expire after ten years from the date of grant. Under the plan, the plan administrator has the discretion to accelerate the vesting of any options. The following table shows options outstanding under The Charter Communications Option Plan: (1) On the 3rd day of each month, 1/45 of the remaining options vest. (2) One-fourth of the options granted on April 5, 1999 vested on July 5, 2000, the 15-month anniversary of April 5, 1999, with the remainder vesting 1/45 on each monthly anniversary for 45 months following July 5, 2000. (3) One-fourth of the options granted on November 8, 1999 will vest on February 8, 2001, the 15-month anniversary of November 8, 1999, with the remainder vesting 1/45 on each monthly anniversary for 45 months following February 8, 2001. (4) One-fourth of the options granted on February 15, 2000 will vest on May 15, 2001, the 15-month anniversary of February 15, 2000, with the remainder vesting 1/45 on each monthly anniversary for 45 months following May 15, 2001. (5) One-fourth of the options granted on May 1, 2000 vest on August 1, 2001, the 15-month anniversary of May 1, 2000, with the remainder vesting 1/45 on each monthly anniversary for 45 months following August 1, 2001. (6) One-fourth of the options granted on July 26, 2000 vest on October 26, 2001, the 15-month anniversary of July 26, 2000, with the remainder vesting 1/45 on each monthly anniversary for 45 months following October 26, 2001. Any unvested options issued under the plan vest immediately upon a change of control of Charter Communications Holding Company. Options will not vest upon a change of control, however, to the extent that any such acceleration of vesting would result in the disallowance of specified tax deductions that would otherwise be available to Charter Communications Holding Company or any of its affiliates or to the extent that any optionee would be liable for any excise tax under a specified section of the U.S. federal tax code. In the plan, a change of control includes: (1) a sale of more than 49.9% of the outstanding membership units in Charter Communications Holding Company, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company; (2) a merger or consolidation of Charter Communications Holding Company with or into any other corporation or entity, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company; or 116
OUTSTANDING EXERCISE VESTED AS OF DATE OF GRANT OPTIONS PRICE JULY 31, 2000 ------------- ----------- -------- ------------- February 9, 1999...................................... 8,162,696 $20.00 2,647,599(1) April 5, 1999......................................... 366,062 20.73 99,850(2) November 8, 1999...................................... 4,203,000 19.00 240,000(3) February 15, 2000..................................... 5,182,000 19.47 --(4) May 1, 2000........................................... 1,415,600 15.03 --(5) July 26, 2000......................................... 1,469,800 14.31 --(6) ---------- --------- Total outstanding options........................ 20,799,158 2,987,449 ========== ========= 119 (3) any other transaction or event, including a sale of the assets of Charter Communications Holding Company, that results in Mr. Allen holding less than 50.1% of the voting power of the surviving entity, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company. If an optionee's employment with or service to Charter Communications Holding Company or its affiliates is terminated other than for cause, the optionee has the right to exercise any vested options within sixty days of the termination of employment. After this sixty-day period, all vested and unvested options held by the optionee are automatically canceled. If an optionee's employment or service is terminated for cause, any unexercised options are automatically canceled. In this case, Mr. Allen, or, at his option, Charter Communications Holding Company will have the right for ninety days after termination to purchase all membership units held by the optionee for a purchase price equal to the exercise price at which the optionee acquired the membership units, or the optionee's purchase price for the membership units if they were not acquired on the exercise of an option. In the event of an optionee's death or disability, all vested options may be exercised until the earlier of their expiration and one year after the date of the optionee's death or disability. Any options not so exercised will automatically be canceled. Upon termination for any other reason, all unvested options will immediately be canceled and the optionee will not be entitled to any payment. All vested options will be automatically canceled if not exercised within ninety days after termination. LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS. Charter Communications, Inc.'s restated certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. The Delaware General Corporation Law provides that 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 shareholders; (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. Charter Communications, Inc.'s bylaws provide that we will indemnify all persons whom we may indemnify pursuant thereto to the fullest extent permitted by law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Charter Communications, Inc. 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. 117 120 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of Charter Communications, Inc. common stock and Charter Communications Holding Company common membership units as of August 31, 2000 by: - the directors of Charter Communications, Inc.; - each of the executive officers of Charter Communications, Inc. named in the summary compensation table; - all current directors and executive officers as a group; and - each person known by us to own beneficially 5% or more of the outstanding shares of Charter Communications, Inc. common stock and shares of common stock issuable upon exchange of Charter Communications Holding Company membership units that are issuable upon exercise of options that are vested or will vest within 60 days or upon exchange of membership units held in a subsidiary of Charter Holdings. With respect to the percentage of voting power of Charter Communications, Inc. set forth in the following table: - each holder of Class A common stock is entitled to one vote per share; and - each holder of Class B common stock is entitled to a number of votes based on the number of outstanding Class B common stock and outstanding membership units exchangeable for Class B common stock. For example, Mr. Allen is entitled to ten votes for each share of Class B common stock held by him or his affiliates and ten votes for each membership unit held by him or his affiliates. 118
NUMBER OF CLASS A PERCENTAGE OF NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF BENEFICIAL OWNER OWNED(1) OWNED(2) VOTING POWER(3) - ------------------- ------------------- ------------------- ------------------ Paul G. Allen(4)(5)(7)............................ 332,469,275 60.1% 93.5% Charter Investment, Inc.(6)....................... 217,585,246 48.7% * Vulcan Cable III Inc.(4)(7)....................... 106,715,233 31.8% * Jerald L. Kent(8)................................. 3,397,311 1.4% * Howard L. Wood(9)................................. 145,000 * * Marc B. Nathanson(10)............................. 9,829,806 4.1% * Ronald L. Nelson(11).............................. 57,500 * * Nancy B. Peretsman(12)............................ 50,000 * * William D. Savoy(13).............................. 602,165 * * Steven A. Schumm(14).............................. 290,682 * * David G. Barford(15).............................. 75,833 * * Curtis S. Shaw(15)................................ 78,333 * * John C. Pietri(16)................................ 65,500 * * Barry L. Babcock(17).............................. 65,000 * * All current directors and executive officers as a group (21 persons)(18).......................... 347,131,114 61.1% 93.9% Janus Capital Corporation(19)..................... 15,958,030 6.5% * TCID of Michigan, Inc.(20)........................ 15,117,743 6.1% * 121 - --------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with Rule 13d-3. The named holders of Charter Communications, Inc. Class B common stock and of Charter Communications Holding Company membership units are deemed to be beneficial owners of an equal number of shares of Charter Communications, Inc. Class A common stock because such holdings are either convertible for (in the case of Class B shares) or exchangeable into (in the case of the membership units) shares of Class A common stock on a one-for-one basis. Unless otherwise noted, the named holders have sole investment and voting power with respect to the shares listed as beneficially owned. (2) The calculation of this percentage assumes for each person that: the 50,000 shares of Class B common stock held by Mr. Allen have been converted into shares of Class A common stock; all shares of Class A common stock that such person has the right to acquire upon exchange of Charter Communications Holding Company membership units upon exercise of options that have vested or will vest within 60 days have been acquired; and that none of the other listed persons or entities has received any shares of common stock that are issuable to him or her pursuant to the exercise of options or otherwise. (3) The calculation of this percentage assumes that Mr. Allen's equity interests are retained in the form that maximizes voting power (i.e., the 50,000 shares of Class B common stock held by Mr. Allen have not been converted into shares of Class A common stock; that the membership units of Charter Communications Holding Company owned by Vulcan Cable III have not been exchanged for shares of Class A common stock; and that the membership units of Charter Communications Holding Company owned by Charter Investment have not been exchanged for shares of Class A common stock). (4) The address of these persons is 110 110th Street, NE, Suite 550, Bellevue, WA 98004. (5) The total listed is comprised of 217,585,246 membership units held by Charter Investment, Inc.; 106,715,233 membership units held by Vulcan Cable III; 8,118,796 shares of Class A common stock held directly by Mr. Allen; and 50,000 shares of Class B common stock held directly by Mr. Allen (100% of the Class B common stock issued and outstanding). (6) The address of this person is Charter Communications, Inc., 12444 Powerscourt Drive, Suite 100, St. Louis, MO 63131. (7) Of the total number of membership units in Charter Communications Holding Company held by Vulcan Cable III, 562,165 membership units are subject to options granted by Vulcan Cable III to Mr. Savoy that have vested or will vest within 60 days. (8) The total listed is comprised of 3,375,311 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon the exercise of options that have vested or will vest within 60 days, and 22,000 shares of Class A common stock held directly by Mr. Kent. (9) Represents 145,000 shares of Class A common stock issuable upon exchange of membership units that are issuable upon exercise of options that have vested. (10) The total listed includes 40,000 shares of Class A common stock issuable upon exchange of membership units that are issuable upon exercise of options that have vested. Also includes 9,789,806 shares of Class A common stock as follows: 3,951,636 shares for which Mr. Nathanson has sole investment and voting power, 5,444,861 shares for which he has shared voting and investment power; and 393,309 shares for which he has sole investment power and shared voting power. The address of this person is c/o Falcon Holding Group, Inc. and Affiliates, 10900 Wilshire Blvd., Los Angeles, CA 90024. 119 122 (11) The total listed includes 40,000 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon exercise of options that have vested, and 2,500 shares held as custodian for a minor as to which Mr. Nelson disclaims beneficial ownership. (12) The total listed includes 40,000 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon exercise of options that have vested. (13) The total listed is comprised of 40,000 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon exercise of options that have vested and 562,165 shares of Class A common stock that Mr. Savoy would receive upon exercise of options from Vulcan Cable III to purchase such shares that have vested or will vest within 60 days. (14) The total listed includes 286,982 shares of Class A common stock issuable upon the exchange of membership units that would be issued upon exercise of options that have vested or will vest within 60 days and 3,700 shares for which Mr. Schumm has shared investment and voting power. (15) The total listed includes 73,333 shares of Class A common stock issuable upon the exchange of membership units that are issuable upon exercise of options that have vested or will vest within 60 days. (16) The total listed includes 60,500 shares of Class A common stock issuable upon exchange of membership units that are issuable upon exercise of options that have vested or will vest within 60 days. (17) Represents 65,000 shares of Class A common stock issuable upon exchange of membership units that would be issued upon exercise of options that have vested. (18) The total listed is comprised of 50,000 shares of Class B common stock convertible into shares of Class A common stock on a one-for-one basis; 18,079,177 shares of Class A common stock; 324,300,479 shares of Class A common stock issuable upon the exchange of Class B common stock from outstanding Charter Communications Holding Company membership units; and 4,701,458 shares of Class A common stock issuable upon exchange of Class B common stock from membership units that are issuable upon exercise of options that have vested or will vest within 60 days. (19) As reported in Schedule 13G provided to Charter Communications, Inc. on February 16, 2000, Janus Capital Corporation is a registered investment advisor that provides investment advice to investment companies and other clients. As a result of being an investment advisor, Janus Capital may be deemed to beneficially own shares held by its clients. As indicated in the Schedule 13G, Mr. Thomas Bailey, President, Chairman of the Board and 12.2% shareholder of Janus Capital disclaims beneficial ownership with respect to such shares. The address of these persons is 100 Fillmore St., Denver, Colorado 80206-4923. (20) Represents shares of Class A common stock issuable upon exchange of preferred membership units held in an indirect subsidiary of Charter Holdings. 120 123 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following sets forth certain transactions in which we and our directors, executive officers and affiliates and the directors and executive officers of Charter Communications, Inc., are involved. We believe that each of the transactions described below was on terms no less favorable to us than could have been obtained from independent third parties. TRANSACTIONS WITH MANAGEMENT AND OTHERS MERGER WITH MARCUS On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable, and agreed to acquire the remaining interests in Marcus Cable. The aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion in assumed liabilities. On February 22, 1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests in Marcus Cable. On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of Charter Investment, Inc. for an aggregate purchase price of approximately $2.2 billion, excluding $2.0 billion in debt assumed. On February 9, 1999, Charter Holdings was formed as a wholly owned subsidiary of Charter Investment. On February 10, 1999, Charter Operating was formed as a wholly owned subsidiary of Charter Holdings. In April 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable systems they owned came under the ownership of Charter Holdings, and, in turn, Charter Operating. On May 25, 1999, Charter Communications Holding Company was formed as a wholly owned subsidiary of Charter Investment, Inc. All of Charter Investment's equity interests in Charter Holdings were transferred to Charter Communications Holding Company. In March 1999, we paid $20 million to Vulcan Northwest, an affiliate of Mr. Allen, for reimbursement of direct costs incurred in connection with Mr. Allen's acquisition of Marcus Cable. Such costs were principally comprised of financial, advisory, legal and accounting fees. At the time Charter Holdings issued $3.6 billion in principal amount of notes in March 1999, this merger had not yet occurred. Consequently, Marcus Holdings was a party to the indentures governing the March 1999 Charter Holdings notes as a guarantor of Charter Holdings' obligations. Charter Holdings loaned some of the proceeds from the sale of the March 1999 Charter Holdings notes to Marcus Holdings, which amounts were used to complete the cash tender offers for then-outstanding notes of subsidiaries of Marcus Holdings. Marcus Holdings issued a promissory note in favor of Charter Holdings. The promissory note was in the amount of $1.7 billion, with an interest rate of 9.92% and a maturity date of April 1, 2007. Marcus Holdings guaranteed its obligations under the promissory note by entering into a pledge agreement in favor of Charter Holdings pursuant to which Marcus Holdings pledged all of its equity interests in Marcus Cable as collateral for the payment and performance of the promissory note. Charter Holdings pledged this promissory note to the trustee under the indentures governing the March 1999 Charter Holdings notes as collateral for the equal and ratable benefit of the holders of the March 1999 Charter Holdings notes. Upon the closing of the merger, and in accordance with the terms of the March 1999 Charter Holdings notes and the indentures governing the March 1999 Charter Holdings notes: - the guarantee issued by Marcus Holdings was automatically terminated; - the promissory note issued by Marcus Holdings was automatically extinguished, with no interest having accrued or being paid; and - the pledge in favor of Charter Holdings of the equity interests in Marcus Cable as collateral under the promissory note and the pledge in favor of the trustee of the promissory note as collateral for the March 1999 Charter Holdings notes were automatically released. 121 124 MANAGEMENT AGREEMENTS WITH CHARTER COMMUNICATIONS, INC. PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a series of management agreements with certain of our subsidiaries, Charter Investment provided management and consulting services to those subsidiaries. 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 was 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 Charter Operating's current credit facilities, the previous management agreements were replaced by a revised management agreement. The material terms of our previous management agreements are substantially similar to the material terms of the revised management agreement. PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus Cable entered into a management consulting agreement with Charter Investment 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 Charter Holdings' merger with Marcus Holdings and the closing of Charter Operating's current credit facilities, this agreement was terminated and the subsidiaries of Marcus Cable began to receive management and consulting services from Charter Investment under the revised management agreement described below. THE REVISED MANAGEMENT AGREEMENT. On February 23, 1999, Charter Investment entered into a revised management agreement with Charter Operating, which was amended and restated as of March 17, 1999. Upon the closing of Charter Operating's credit facilities on March 18, 1999, our previous management agreements and the management consulting agreement with Marcus Cable terminated and the revised management agreement became operative. Under the revised management agreement, Charter Investment agreed to manage the operations of the cable television systems owned by Charter Operating's subsidiaries, as well as any cable television systems Charter Operating subsequently acquires. The term of the revised management agreement is ten years. The revised management agreement provided that Charter Operating would pay Charter Investment a management fee equal to its actual costs to provide these services and a management fee of 3.5% of gross revenues. Gross revenues include all revenues from the operation of Charter Operating's cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Charter Operating's cable systems. Gross revenues do not include interest income or income from investments unrelated to our cable systems. Payment of the management fee to Charter Investment is permitted under Charter Operating's current credit facilities, but ranks below Charter Operating's payment obligations under its credit facilities. In the event any portion of the management fee due and payable is not paid by Charter Operating, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. As of December 31, 1999, no interest had accrued. Pursuant to the terms of the revised management agreement, Charter Operating agreed to indemnify and hold harmless Charter Investment and its shareholders, directors, officers and employees. This indemnity extends to any and all claims or expenses, including reasonable attorneys' fees, incurred by them in connection with any action not constituting gross negligence or willful misconduct taken by them in good faith in the discharge of their duties to Charter Operating. 122 125 The total management fees, including expenses, earned by Charter Investment under all management agreements were as follows: As of June 30, 2000, approximately $19.8 million remains unpaid under all management agreements. ASSIGNMENT AND AMENDMENT OF REVISED CHARTER OPERATING MANAGEMENT AGREEMENT. On November 12, 1999, Charter Investment assigned to Charter Communications, Inc. all of its rights and obligations under the revised Charter Operating management agreement. In connection with the assignment, the revised Charter Operating management agreement was amended to eliminate the 3.5% management fee. Under the amended agreement, Charter Communications, Inc. is entitled to reimbursement from Charter Operating for all of its expenses, costs, losses, liabilities and damages paid or incurred by it in connection with the performance of its services under the amended agreement, with no cap on the amount of reimbursement. MANAGEMENT AGREEMENT WITH CHARTER COMMUNICATIONS HOLDING COMPANY. On November 12, 1999, Charter Communications, Inc. entered into a management agreement with Charter Communications Holding Company. Under this agreement, Charter Communications, Inc. manages and operates the cable television systems owned or to be acquired by Charter Communications Holding Company and its subsidiaries, to the extent such cable systems are not subject to management agreements between Charter Communications, Inc. and specific subsidiaries of Charter Communications Holding Company. The terms of this management agreement are substantially similar to the terms of the Charter Operating management agreement. Charter Communications, Inc. is entitled to reimbursement from Charter Communications Holding Company for all expenses, costs, losses, liabilities and damages paid or incurred by Charter Communications, Inc. in connection with the performance of its services, which expenses will include any fees Charter Communications, Inc. is obligated to pay under the mutual services agreement described below. There is no cap on the amount of reimbursement to which Charter Communications, Inc. is entitled. MUTUAL SERVICES AGREEMENT WITH CHARTER INVESTMENT, INC. Charter Communications, Inc. has only fifteen employees, all of whom are also executive officers of Charter Investment. Effective November 12, 1999, Charter Communications, Inc. and Charter Investment entered into a mutual services agreement pursuant to which each entity leases the necessary personnel and provides services to the other as may be reasonably requested in order to manage Charter Communications Holding Company and to manage and operate the cable systems owned by its subsidiaries, including Charter Holdings. In addition, officers of Charter Investment also serve as officers of Charter Communications, Inc. The officers and employees of each entity are available to the other to provide the services described above. All expenses and costs incurred with respect to the services provided are paid by Charter Communications, Inc. Charter Communications, Inc. will indemnify and hold harmless Charter Investment and its directors, officers and employees from and against any and all claims that may be made against any of them in connection with the mutual services agreement except due to its or their gross negligence or willful misconduct. The term of the mutual services agreement is ten years, commencing on November 12, 1999, and the agreement may be terminated at any time by either party upon thirty days' written notice to the other. 123
TOTAL FEES FEES PAID EARNED --------- ---------- (IN THOUSANDS) Six months ended June 30, 2000.............................. $33,154 $27,515 Year Ended December 31, 1999................................ 48,528 54,330 Year Ended December 31, 1998................................ 17,073 27,500 Year Ended December 31, 1997................................ 14,772 20,290 Year Ended December 31, 1996................................ 11,792 15,443 126 FALCON MANAGEMENT AGREEMENT. On November 12, 1999, Falcon Cable Communications, a parent company of the Falcon operating companies, entered into a management consulting agreement with Charter Communications, Inc. pursuant to which Charter Communications, Inc. agreed to provide certain management and consulting services to Falcon and its subsidiaries. The term of the management agreement is ten years. The management agreement provides that Falcon will pay Charter Communications, Inc. a management fee equal to its actual costs to provide these services but limited to 5% of gross revenues. Gross revenues include all revenues from the operation of Falcon's cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Falcon's cable systems. Gross revenues do not include interest income or income from investments unrelated to cable systems. Payment of the management fee is subject to certain restrictions under the Falcon credit facilities. In the event any portion of the management fee due and payable is not paid by Falcon, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. FANCH MANAGEMENT AGREEMENT. On November 12, 1999, CC VI Operating Company, LLC, the parent company of the Fanch operating companies, entered into a management consulting agreement with Charter Communications, Inc. pursuant to which Charter Communications, Inc. agreed to provide certain management and consulting services to Fanch and its subsidiaries. The term of the management agreement is ten years. The management agreement provides that Fanch will pay Charter Communications, Inc. a management fee equal to its actual costs to provide these services but limited to 5% of gross revenues. Gross revenues include all revenues from the operation of Fanch's cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Fanch's cable systems. Gross revenues do not include interest income or income from investments unrelated to cable systems. Payment of the management fee is subject to certain restrictions under the Fanch credit facilities. In the event any portion of the management fee due and payable is not paid by Fanch, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. AVALON MANAGEMENT ARRANGEMENT. Under the Avalon limited liability company agreements, Charter Communications, Inc. agreed to provide certain management and consulting services to CC Michigan, CC New England and their subsidiaries. Under these arrangements, CC Michigan and CC New England will pay Charter Communications, Inc. a management fee equal to its actual costs to provide these services but limited to 2% of gross revenues. Gross revenues include all revenues from the operation of the Avalon cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Avalon's cable systems. Gross revenues do not include interest income or income from investments unrelated to cable systems. Payment of the management fee is permitted under the current credit facilities of CC Michigan and CC New England, but ranks below the senior debt of such companies and shall not be paid except to the extent allowed under such credit facilities. In the event any portion of the management fee due and payable is not paid by CC Michigan or CC New England, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. 124 127 BRESNAN MANAGEMENT AGREEMENT. On February 14, 2000, CC VIII Operating LLC, parent of the Bresnan cable systems, and several wholly owned subsidiaries, entered into a management consulting agreement with Charter Communications, Inc. pursuant to which Charter Communications, Inc. agreed to provide certain management and consulting services to the Bresnan cable systems. The management agreement provides that Bresnan will pay Charter Communications, Inc. a management fee equal to its actual cost to provide these services without limitation as to the amount. The term of the management agreement is ten years. Payment of the management fee is subject to certain restrictions under the Bresnan credit facilities. In the event that any portion of the management fee due and payable is not paid by Bresnan, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. CONSULTING AGREEMENT On March 10, 1999, Charter Holdings entered into a consulting agreement with Vulcan Northwest and Charter Investment. Pursuant to the terms of the consulting agreement, Charter Holdings 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 Charter Holdings or by any of its affiliates. Such services include participation in the evaluation, negotiation and implementation of these acquisitions. The agreement expires on December 31, 2000, and automatically renews for successive one-year terms unless otherwise terminated. All reasonable out-of-pocket expenses incurred by Vulcan Northwest and Charter Investment are Charter Holdings' responsibility and must be reimbursed. Charter Holdings must also pay Vulcan Northwest and Charter Investment a fee for their services rendered for each acquisition made by Charter Holdings or any of its affiliates. This fee equals 1% of the aggregate value of such acquisition. Neither Vulcan Northwest nor Charter Investment received or will receive a fee in connection with the American Cable, Renaissance, Greater Media, Helicon, Vista, Cable Satellite, InterMedia, Rifkin, Avalon, Falcon, Fanch, Bresnan, Interlake, Farmington, Capital Cable and Kalamazoo acquisitions. Charter Holdings has also agreed to indemnify and hold harmless Vulcan Northwest and Charter Investment, and their respective officers, directors, shareholders, agents, employees and affiliates, for all claims, actions, demands and expenses that arise out of this consulting agreement and the services they provide to Charter Holdings. Mr. Allen owns 100% of Vulcan Northwest and is the Chairman of the board. William D. Savoy, another of Charter Communications, Inc.'s directors, is the President and a director of Vulcan Northwest. TRANSACTIONS WITH MR. ALLEN On December 21, 1998, Mr. Allen contributed approximately $431 million to Charter Investment and received non-voting common stock of Charter Investment. Such non-voting common stock was converted to voting common stock on December 23, 1998. The $431 million contribution was used to redeem stock of certain shareholders in Charter Investment. 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. The $1.3 billion and $223.5 million contributions by Mr. Allen were 125 128 used by Charter Investment to purchase the remaining interest in CCA Group and CharterComm Holdings. 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 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, Mr. Allen contributed approximately $124.8 million in cash to Charter Investment. In connection with this contribution and the contribution of the three bridge loans described above, Mr. Allen received 11,316 shares of common stock of Charter Investment. All other contributions to Charter Investment by Mr. Allen were used in operations of Charter Investment and were not contributed to Charter Holdings. On August 10, 1999, Vulcan Cable III Inc. purchased 24.1 million Charter Communications Holding Company membership units for $500 million. On September 22, 1999, Mr. Allen, through Vulcan Cable III Inc., contributed an additional $825 million, consisting of approximately $644.3 million in cash and approximately $180.7 million in equity interests in Rifkin that Vulcan Cable III Inc. had acquired in the Rifkin acquisition in exchange for 39.8 million Charter Communications Holding Company membership units. Charter Communications Holding Company in turn contributed the cash and equity interests to Charter Holdings. As part of the membership interests purchase agreement, Vulcan Ventures Incorporated, Charter Communications, Inc., Charter Investment and Charter Communications Holding Company entered into an agreement on September 21, 1999 regarding the right of Vulcan Ventures to use up to eight of our digital cable channels. Specifically, we will provide Vulcan Ventures with exclusive rights for carriage of up to eight digital cable television programming services or channels on each of the digital cable television systems with local control of the digital product now or hereafter owned, operated, controlled or managed by us of 550 megahertz or more. If the system offers digital services but has less than 550 megahertz of capacity, then the programming services will be equitably reduced. Upon request of Vulcan Ventures, we will attempt to reach a comprehensive programming agreement pursuant to which we will pay the programmer, if possible, a fee per digital subscriber. If such fee arrangement is not achieved, then we and the programmer shall enter into a standard programming agreement. We believe that this transaction is on terms at least as favorable to us as Mr. Allen would negotiate with other cable operators. In November 1999, in connection with Charter Communications, Inc.'s initial public offering, Mr. Allen, through Vulcan Cable III Inc., purchased $750 million of membership units of Charter Communications Holding Company at a per membership unit price equal to the net initial public offering price. During the second and third quarters of 1999, one of our subsidiaries sold interests in several airplanes to Mr. Allen for approximately $8 million. We believe that the purchase price paid by Mr. Allen for these interests was the fair market price. ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN As described under "-- Business Relationships," Mr. Allen and a number of his affiliates have interests in various entities that provide services or programming to a number of our subsidiaries. Given the diverse nature of Mr. Allen's investment activities and interests, and to avoid the possibility 126 129 of future disputes as to potential business, Charter Communications Holding Company and Charter Communications, Inc., under the terms of their respective organizational documents, may not, and may not allow their subsidiaries to, engage in any business transaction outside the cable transmission business except for the joint venture with Digeo Broadband, Inc., incidental businesses engaged in as of the closing of the initial public offering of Charter Communications, Inc. and as an owner and operator of the business of Chat TV. This restriction will remain in effect until all of the shares of Charter Communications, Inc.'s high-vote Class B common stock have been converted into shares of Class A common stock due to Mr. Allen's equity ownership falling below specified threshholds. Should Charter Communications, Inc. or Charter Communications Holding Company wish to pursue, or allow their subsidiaries to pursue, a business transaction outside of this scope, it must first offer Mr. Allen the opportunity to pursue the particular business transaction. If he decides not to do so and consents to Charter Communications, Inc., Charter Communications Holding Company or any of their subsidiaries engaging in the business transaction, it will be able to do so. In any such case, the respective restated certificate of incorporation and the amended and restated limited liability company agreement of Charter Communications, Inc. and Charter Communications Holding Company would be amended accordingly to appropriately modify the current restrictions on their ability to engage in any business other than the cable transmission business. The cable transmission business means the business of transmitting video, audio, including telephony, and data over cable television systems owned, operated or managed by Charter Communications, Inc., Charter Communications Holding Company or any of their subsidiaries from time to time. The businesses of RCN Corporation, a company in which Mr. Allen has made a significant investment, are not considered cable transmission businesses under these provisions. See "-- Business Relationships -- RCN Corporation." Under Delaware corporate law, each director of Charter Communications, Inc., including Mr. Allen, is generally required to present to Charter Communications, Inc. any opportunity he or she may have to acquire any cable transmission business or any company whose principal business is the ownership, operation or management of cable transmission businesses so that we may determine whether we wish to pursue such opportunities. However, Mr. Allen and the other directors generally will not have an obligation to present to Charter Communications, Inc. other business opportunities and they may exploit such opportunities for their own account. 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 May 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 June 1999. On April 26, 1999, Charter Investment entered into a purchase and sale agreement with InterLink Communications Partners, LLLP and the other sellers listed on the signature pages of the agreement. On June 30, 1999, Charter Investment assigned its rights and obligations under this agreement to Charter Operating. The acquisition contemplated by these agreements was completed in September 1999. On April 26, 1999, Charter Investment entered into a purchase and sale agreement with Rifkin Acquisition Partners L.L.L.P and the other sellers listed on the signature pages of the agreement. On 127 130 June 30, 1999, Charter Investment assigned its rights and obligations under this agreement to Charter Operating. The acquisition contemplated by these agreements was completed in September 1999. On April 26, 1999, Charter Investment entered into the RAP indemnity agreement with InterLink Communications Partners, LLLP and the other sellers and InterLink partners listed on the signature pages of the agreement. On June 30, 1999, Charter Investment assigned its rights and obligations under this agreement to Charter Operating. In May 1999, Charter Investment entered into the Falcon purchase agreement. As of June 22, 1999, pursuant to the first amendment to the Falcon purchase agreement, Charter Investment assigned its rights under the Falcon purchase agreement to Charter Communications Holding Company. In May 1999, Charter Investment entered into the Fanch purchase agreement. On September 21, 1999, Charter Investment assigned its rights and obligations to purchase stock interests under this agreement to Charter Communications Holding Company and its rights and obligations to purchase partnership interests and assets under this agreement to Charter Communications VI, LLC, an indirect wholly owned subsidiary of Charter Communications Holding Company. In June 1999, Charter Communications Holding Company entered into the Bresnan purchase agreement. In February 2000, Charter Communications Holding Company assigned its rights under the Bresnan purchase agreement to purchase certain assets to Charter Holdings and Charter Holdings accepted such assignment and assumed all obligations of Charter Communications Holding Company under the Bresnan purchase agreement with respect to those assets. INTERCOMPANY LOANS In November 1999, Charter Communications Holding Company loaned $856.0 million to Charter Operating. In January 2000, Charter Communications Holding Company loaned an additional $66.0 million to Charter Operating. In February and March 2000, Charter Operating repaid $890 million. The remaining balance of $32.0 million was repaid in May 2000. In November 1999, Charter Communications Holding Company loaned $21.0 million to CC VI Operating Company, LLC, maturing November 30, 2009. The funds were used by CC VI Operating Company to pay down a portion of amounts outstanding under the Fanch credit facilities. Effective December 31, 1999, Charter Communications Holding Company forgave the amounts outstanding, including accrued and unpaid interest of approximately $314,000, and contributed such amounts to CC VI Holdings, LLC, the parent company of the Fanch companies. In November 1999, Charter Communications Holding Company loaned $173.0 million to Falcon Cable Communications, LLC. In January 2000, Charter Communications Holding Company loaned an additional $373.0 million to Falcon Cable Communications with an interest rate of 7.54%. In February 2000, Falcon Cable Communications repaid all outstanding balances. In November and December 1999, Charter Communications Holding Company loaned $12.0 million to Charter Operating. As of June 30, 2000, $5.0 million with an interest rate of 7.830% remained outstanding. In July 2000, $1.0 million was repaid, and the remaining $4.0 million was repaid in August 2000. EMPLOYMENT AND CONSULTING AGREEMENTS Effective as of December 23, 1998, Jerald L. Kent entered into an employment agreement with Mr. Allen for a three-year term with automatic one-year renewals. Mr. Allen assigned the employment agreement to Charter Investment as of December 23, 1998. Charter Investment subsequently assigned Mr. Kent's employment agreement to Charter Communications, Inc. and Charter Communications, Inc. has assumed all rights and obligations of Charter Investment under the agreement, except with respect to the grant of options which were granted by Charter Communications Holding Company. 128 131 Under this agreement, Mr. Kent has agreed to serve as President and Chief Executive Officer of Charter Communications, Inc., with responsibility for the nationwide general management, administration and operation of all present and future business of Charter Communications, Inc. and its subsidiaries. During the initial term of the agreement, Mr. Kent receives an annual base salary of $1,250,000, or such higher rate as may from time to time be determined by Charter Communications, Inc.'s board of directors in its discretion. In addition, Mr. Kent is eligible to receive an annual bonus in an aggregate amount not to exceed $625,000, to be determined by the board based on an assessment of the performance of Mr. Kent as well as the achievement of certain financial targets. Under the agreement, Mr. Kent is entitled to participate in any disability insurance, pension, or other benefit plan afforded to employees generally or executives of Charter Communications, Inc. Mr. Kent will be reimbursed by Charter Communications, Inc. for life insurance premiums up to $30,000 per year, and is granted personal use of the corporate airplane. Mr. Kent also is entitled to the use of a car valued at up to $100,000 and the fees and dues for his membership in a country club of his choice. Mr. Kent did not avail himself of the use of a car, nor was he reimbursed for life insurance premiums, in 1999. Also under this agreement and a related agreement with Charter Communications Holding Company, Mr. Kent received options to purchase 7,044,127 Charter Communications Holding Company membership units with an exercise price of $20.00. The options have a term of ten years and vested 25% on December 23, 1998. The remaining 75% vest 1/36 on the first day of each of the 36 months commencing January 1, 2000. The terms of these options provide that immediately following the issuance of membership units received upon exercise of such options, these units will be automatically exchanged for shares of Charter Communications, Inc. Class A common stock on a one-for-one basis. The agreement further provides that Charter Communications, Inc. will indemnify and hold harmless Mr. Kent to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses in connection with or arising out of the performance by Mr. Kent of his duties. If the agreement expires because Charter Communications, Inc. gives Mr. Kent notice of its intention not to extend the initial term, or if the agreement is terminated by Mr. Kent for good reason or by Charter Communications, Inc. without cause: - Charter Communications, Inc. will pay to Mr. Kent an amount equal to the aggregate base salary due to Mr. Kent for the remaining term and the board of directors will consider additional amounts, if any, to be paid to Mr. Kent; and - any unvested options of Mr. Kent shall immediately vest. Effective as of November 12, 1999, Charter Communications, Inc. entered into a consulting agreement with Howard L. Wood. In connection with this agreement, Mr. Wood received options to purchase 40,000 membership units of Charter Communications Holding Company, which vested immediately and have an exercise price of $19.00. Upon exercise of such options, the membership units received are immediately exchanged for shares of Charter Communications, Inc. Class A common stock on one-for-one basis. The consulting agreement has a one-year term with automatic one-year renewals. Under this agreement, Mr. Wood provides consulting services to Charter Communications, Inc. and will also be responsible for such other duties as the Chief Executive Officer determines. During the term of this agreement, Mr. Wood will receive annual cash compensation initially at a rate of $60,000. In addition, Mr. Wood is entitled to receive health benefits as well as use of an office and a full-time secretary. Charter Communications, Inc. will indemnify and hold harmless Mr. Wood to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by him of his duties. 129 132 Effective as of December 23, 1998, Howard L. Wood entered into an employment agreement with Charter Investment for a one-year term with automatic one-year renewals. Under this agreement, Mr. Wood agreed to serve as an officer of Charter Investment. During the initial term of the agreement, Mr. Wood was entitled to receive a base salary for the remaining month of the term of $312,500, or such higher rate as determined by the Chief Executive Officer in his discretion. In addition, Mr. Wood was eligible to receive an annual bonus to be determined by the board of directors in its discretion. Mr. Wood received a one-time payment as part of his employment agreement of $250,000. Under the agreement, Mr. Wood was entitled to participate in any disability insurance, pension or other benefit plan afforded to employees generally or executives of Charter Investment. Charter Investment agreed to indemnify and hold harmless Mr. Wood to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by Mr. Wood of his duties. Effective on November 12, 1999, this employment agreement ceased to be effective. Mr. Wood received an amount equal to his base salary for the remaining month of the term plus a bonus of $312,500. In addition, the options then held by Mr. Wood vested in full. A company controlled by Mr. Wood occasionally leases an airplane to Charter Communications, Inc. and its subsidiaries and affiliates for business travel. Charter Communications, Inc. or its subsidiaries or affiliates, as applicable, in turn, pays to such company market rates for such use. Mr. Wood reimburses Charter Communications, Inc. for the full annual cost of two individuals qualified to operate the plane and who are otherwise available to Charter in connection with its own flight operations. In addition, Mr. Wood's daughter, a Vice President of Charter Investment, received a bonus in the form of a three-year promissory note bearing interest at 7% per year. One-third of the original outstanding principal amount of the note and interest are forgiven as long as she remains employed by Charter Investment at the end of each of the first three anniversaries of the issue date in February 1999. The outstanding balance on the note as of June 30, 2000 was $150,000. Effective as of May 25, 1999, Marc B. Nathanson entered into a letter agreement with Charter Communications, Inc. for a three-year term. Under this agreement, Mr. Nathanson agreed to serve as Vice-Chairman and as a director of Charter Communications, Inc. During the term of this agreement, Mr. Nathanson will receive a benefit equal to $193,197 per year, which amount is being paid by Charter Communications, Inc. to a company controlled by Mr. Nathanson. In addition, Mr. Nathanson is entitled to the rights and benefits provided to other directors of Charter Communications, Inc. Charter Communications, Inc. will indemnify and hold harmless Mr. Nathanson to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by Mr. Nathanson of his duties. Effective as of December 23, 1998, Barry L. Babcock entered into an employment agreement with Charter Investment for a one-year term with automatic one-year renewals. Under this agreement, Mr. Babcock agreed 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 was entitled to receive a base salary of $625,000, or such higher rate as may have been determined by the Chief Executive Officer in his discretion. This employment agreement was terminated in October 1999. Pursuant to the termination agreement, Mr. Babcock received an amount equal to his base salary for the remaining month of the term plus a $312,500 bonus. In addition, the options held by Mr. Babcock vested in full. Effective as of November 12, 1999, Charter Communications, Inc. entered into a consulting agreement with Mr. Babcock which expired in March 2000. During the term of this agreement, Mr. Babcock received monthly cash compensation at a rate of $10,000 per month, disability and health benefits and the use of an office and secretarial services, upon request. Charter 130 133 Communications, Inc. agreed to indemnify and hold harmless Mr. Babcock to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by Mr. Babcock of his duties. OTHER RELATIONSHIPS David L. McCall, Senior Vice President of Operations -- Eastern Division of Charter Communications, Inc., is a partner in a partnership that leases office space to us. The partnership has received approximately $177,500 pursuant to such lease and related agreements for the year ended December 31, 1999. In addition, approximately $646,000 was paid in 1999 to a construction company controlled by Mr. McCall's brother, Marvin A. McCall for construction services. In January 1999, Charter Investment issued bonuses to executive officers in the form of three-year promissory notes. One-third of the original outstanding principal amount of each of these notes and interest is forgiven, as long as the employee is still employed by Charter Investment or any of its affiliates, at the end of each of the first three anniversaries of the issue date. The promissory notes bear interest at 7% per year. In April 2000, upon commencement of employment with Charter Communications, Inc., David C. Andersen, Senior Vice President -- Communications, received a bonus of $150,000 in the form of a three-year promissory note. One-third of the original outstanding principal amount and interest are forgiven, as long as Mr. Andersen is still employed by Charter Communications, Inc. or any of its affiliates at the end of each of the first three anniversaries of the issue date in April 2000. The promissory note bears interest at 7% per year. The outstanding principal amounts of such notes as of June 30, 2000 are as follows: In September 2000, upon commencement of employment with Charter Communications, Inc. James (Trey) H. Smith, III, Senior Vice President of Operations -- Western Division, received a bonus of $200,000 in the form of a three-year promissory note. One-third of the original outstanding principal amount and interest are forgiven, as long as Mr. Smith is still employed by Charter Communications, Inc. or any of its affiliates at the end of each of the first three anniversaries of the issue date in September 2000. The promissory note bears interest at 7% per year. Marc B. Nathanson was the Chairman of the board of directors of Falcon Holding Group, Inc., which was the general partner of Falcon Holding Group, L.P. from whom the Falcon cable systems were acquired. BUSINESS RELATIONSHIPS Mr. Allen or certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interests in various entities which provide a number of our affiliates with services or programming. 131
INDIVIDUAL AMOUNT ---------- -------- David C. Andersen................................. $150,000 David G. Barford.................................. $300,000 Mary Pat Blake.................................... $300,000 Eric A. Freesmeier................................ $300,000 Thomas R. Jokerst................................. $300,000 Kent D. Kalkwarf.................................. $300,000 Ralph G. Kelly.................................... $300,000 David L. McCall................................... $300,000 John C. Pietri.................................... $150,000 Steven A. Schumm.................................. $600,000 Curtis S. Shaw.................................... $300,000 Stephen E. Silva.................................. $200,000 134 Among these entities are High Speed Access Corp., WorldGate Communications, Inc., Wink Communications, Inc., ZDTV, L.L.C. operating as techtv, USA Networks, Oxygen Media, Inc., Digeo Broadband, Inc., Go2Net, Inc. and RCN Corporation. These affiliates include Charter Investment and Vulcan Ventures, Inc. Mr. Allen owns 100% of the equity of Vulcan Ventures, and is its Chief Executive Officer. Mr. Savoy is also a Vice President and a director of Vulcan Ventures. The various cable, Internet and telephony companies that Mr. Allen has invested in may mutually benefit one another. The Digeo Broadband Internet portal joint venture announced in the fourth quarter of 1999 is an example of a cooperative business relationship among his affiliated companies. We can give no assurance, nor should you expect, that this joint venture will be successful, that we will realize any benefits from this or other relationships with Mr. Allen's affiliated companies or that we will enter into any joint ventures or business relationships in the future with Mr. Allen's affiliated companies. Mr. Allen and his affiliates have made, and in the future likely will make, numerous investments outside of us and our business. We cannot assure you that, in the event that we or any of our subsidiaries enter into transactions in the future with any affiliate of Mr. Allen, such transactions will be on terms as favorable to us as terms we might have obtained from an unrelated third party. Also, conflicts could arise with respect to the allocation of corporate opportunities between us and Mr. Allen and his affiliates. We have not instituted any formal plan or arrangement to address potential conflicts of interest. HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet access over cable modems. In November 1998, Charter Investment entered into a systems access and investment agreement with Vulcan Ventures and High Speed Access and a related network services agreement with High Speed Access. Additionally, Vulcan Ventures and High Speed Access entered into a programming content agreement. Charter Investment's rights and obligations under these agreements were assigned by Charter Investment to Charter Communications Holding Company upon closing of Charter Communications, Inc.'s initial public offering. These agreements provided High Speed Access with exclusive access to at least 750,000 of our homes either that have an installed cable drop from our cable system or that are eligible for a cable drop by virtue of our cable system passing the home. The term of the systems access and investment agreement continues until the earlier of termination of the network services agreement or midnight of the day High Speed Access ceases to provide High Speed Access services to cable subscribers in a geographic area or region. The term of the network services agreement is, as to a particular cable system, five years from the date revenue billing commences for that cable system. Following the five-year initial term, the network services agreement automatically renews on a year-to-year basis unless Charter Communications Holding Company provides notice of termination prior to the end of the five-year term in accordance with the terms of the agreement. Additionally, Charter Communications Holding Company can terminate High Speed Access' exclusivity rights, on a system-by-system basis, if High Speed Access fails to meet performance benchmarks or otherwise breaches the agreements including a 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. Under the terms of the network services agreement, we split revenue with High Speed Access based on set percentages of gross revenues in each category of service. The programming content agreement provides each of Vulcan Ventures and High Speed Access with a license to use certain content and materials of the other on a non-exclusive, royalty-free basis. Operations began in the first quarter of 1999. Net receipts from High Speed Access for the year ended December 31, 1999 were approximately $461,000. Net receipts from High Speed Access for the six months ended June 30, 2000 were approximately $901,000. Concurrently with entering into these agreements, High Speed Access issued 8 million shares of series B convertible preferred stock to Vulcan Ventures at a purchase price of $2.50 per share. Vulcan Ventures also subscribed to purchase 2.5 million shares of series C convertible preferred stock, at a 132 135 purchase price of $5.00 per share on or before November 25, 2000, and received an option to purchase an additional 2.5 million shares of series C convertible preferred stock at a purchase price of $5.00 per share. In April 1999, Vulcan Ventures purchased the entire 5 million shares of series C convertible preferred stock for $25 million in cash. The shares of series B and series C convertible preferred stock issued to Vulcan Ventures automatically converted at a price of $3.23 per share into 22,224,688 million shares of common stock upon completion of High Speed Access' initial public offering in June 1999. Additionally, High Speed Access granted Vulcan Ventures warrants to purchase up to 5,006,500 shares of common stock at a purchase price of $5.00 per share. These warrants were converted to warrants to purchase up to 7,750,000 shares of common stock at a purchase price of $3.23 per share upon completion of High Speed Access' initial public offering. The warrants were subsequently assigned to Charter Communications Holding Company. On May 12, 2000, the warrants were amended and restated. The amended and restated warrant gives Charter Communications, Inc. the right to purchase up to 12,000,000 shares of common stock at an exercise price of $3.23 per share. A portion of the amended and restated warrant relates to warrants that may be earned under the agreements described above, and the other portion relates to warrants that may be earned under an agreement entered into with High Speed Access on May 12, 2000, described below. Warrants earned under the agreements described above become vested at the time systems are committed by us and are based upon the number of homes passed. Warrants under these agreements can only be earned until July 31, 2003, and are earned at the rate of 1.55 shares of common stock for each home passed in excess of 750,000. Warrants earned under the agreements described above are exercisable until May 25, 2006. Such warrants may be forfeited in certain circumstances, generally if we withdraw a committed system. As of June 30, 2000, Charter Communications, Inc. has earned 869,650 warrants under the agreements described above. On May 12, 2000, Charter Communications, Inc. entered into a separate agreement with High Speed Access. Charter Communications, Inc.'s rights and obligations under this agreement were assigned by Charter Communications, Inc. to Charter Communications Holding Company on August 1, 2000. Under the agreement, we agreed to commit homes passed by our cable television systems to High Speed Access for which High Speed Access will provide residential Tier 2 and above technical support and network operations center support. Such systems will be in locations where we have formally launched or intend to launch cable modem-based Internet access to residential customers. Tier 2 support is customer service support beyond the initial screening of a problem. We have agreed to commit an aggregate of 5,000,000 homes passed, including all homes passed in systems previously committed by us to High Speed Access (other than full turnkey systems), on or prior to May 12, 2003. We may also commit additional homes passed in excess of the initial 5,000,000. With respect to each system launched or intended to be launched, we will pay a per customer fee to High Speed Access according to agreed pricing terms. In addition, we will also compensate High Speed Access for services that exceed certain minimum thresholds. Warrants that may be earned under the new agreement become vested at the time an authorization to proceed is delivered to High Speed Access with respect to a system, and will be based upon the number of homes passed in such system. With respect to the initial aggregate 5,000,000 homes passed, the warrant provides that Charter Communications Holding Company will have the right to purchase 0.775 shares of common stock for every home passed. With respect to any additional homes passed in excess of 5,000,000, the warrant provides that Charter Communications Holding Company will have the right to purchase 1.55 shares of common stock for every home passed. Warrants earned under the new agreement are exercisable until 7 1/2 years from the date they are earned. Such warrants are generally not subject to forfeiture, even if the new agreement is terminated. 133 136 The new agreement governing the services to be provided by High Speed Access has a term of five years. Charter Communications Holding Company has the option to renew the agreement for additional successive 5-year terms on similar terms. On each renewal date, High Speed Access will issue Charter Communications Holding Company an additional warrant for each renewal term. These renewal warrants will grant Charter Communications Holding Company the right to purchase additional shares of common stock at a price of $10.00 per share. The number of shares of common stock subject to a renewal warrant will be determined based upon 0.50 shares of common stock for every home passed in each system committed to High Speed Access during the initial 5-year term and each 5-year renewal term. Either party may terminate the new agreement, in whole or in part, if the other party defaults. Either party may also terminate the new agreement if the other party becomes insolvent or files for bankruptcy. Charter Communications Holding Company may terminate the new agreement if High Speed Access merges with another party or experiences a change of control. If High Speed Access terminates the new agreement, Charter Communications Holding Company may, in certain circumstances, be required to pay a termination fee. High Speed Access has agreed to increase the number of shares of common stock subject to the amended and restated warrant, upon Charter Communications Holding Company's request, if the number of warrants earned exceeds 11,500,000. High Speed Access also granted Charter Communications Holding Company certain registration rights with respect to shares of common stock held by Charter Communications Holding Company and its direct and indirect subsidiaries, including shares of common stock issuable upon exercise of the amended and restated warrant. Vulcan Ventures owns 37.1% of the outstanding stock of High Speed Access. Jerald L. Kent, our President and Chief Executive Officer and a director of Charter Communications Holding Company and Charter Communications, Inc., Stephen E. Silva, Senior Vice President -- Corporate Development and Technology of Charter Communications, Inc., and Mr. Savoy, a member of the boards of directors of Charter Holdings, Charter Communications Holding Company and Charter Communications, Inc., are all members of the board of directors of High Speed Access. WORLDGATE. WorldGate is a provider of Internet access through cable 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. This agreement was assigned by Charter Investment to Charter Communications Holding Company upon the closing of our initial public offering. The term of the agreement is five years unless terminated by either party for failure of the other party to perform any of its obligations or undertakings required under the agreement. The agreement automatically renews for additional successive two-year periods upon expiration of the initial five-year term. Pursuant to the agreement, we have agreed to use our reasonable best efforts to deploy the WorldGate Internet access service within a portion of our cable systems and to install the appropriate headend equipment in all of our major markets in those systems. Major markets for purposes of this agreement include those in which we have more than 25,000 customers. We incur the cost for the installation of headend equipment. In addition, we have agreed to use our reasonable best efforts to deploy such service in all non-major markets that are technically capable of providing interactive pay-per-view service, to the extent we determine that it is economically practical. When WorldGate has a telephone return path service available, we will, if economically practical, use all reasonable efforts to install the appropriate headend equipment and deploy the WorldGate service in our remaining markets. Telephone return path service is the usage of telephone lines to connect to the Internet to transmit data or receive data. We have also agreed to market the WorldGate service within our market areas. We pay a monthly subscriber access fee to WorldGate based on the number of subscribers to the WorldGate service. We have the discretion to determine what fees, if any, we will charge our subscribers for access to the WorldGate service. We started offering WorldGate 134 137 service in 1998. For the six months ended June 30, 2000, we paid WorldGate approximately $386,000. For the year ended December 31, 1999, we paid to WorldGate approximately $1,661,000. For the year ended December 31, 1998, we paid to WorldGate approximately $276,000. We charged our subscribers approximately $200,000 for the six months ended June 30, 2000, $263,000 for the year ended December 31, 1999 and approximately $22,000 for the year ended December 31, 1998. On November 24, 1997, Charter Investment acquired 70,423 shares of WorldGate's series B preferred stock at a purchase price of $7.10 per share and was issued warrants exercisable for 394,880 shares of WorldGate series B preferred stock at a price of $7.10 per share. These shares of WorldGate's series B preferred stock and warrants to purchase WorldGate series B preferred stock were assigned to Charter Communications Holding Company upon the closing of our initial public offering. On February 3, 1999, a subsidiary of Charter Holdings acquired 90,909 shares of series C preferred stock at a purchase price of $11.00 per share. As a result of a stock split and WorldGate's initial public offering, each share of series B preferred stock converted into two-thirds of a share of WorldGate's common stock, and each share of series C preferred stock converted into two-thirds of a share of WorldGate's common stock. On July 25, 2000, Charter Communications Holding Company entered into a joint venture, named TV Gateway LLC, with WorldGate and several other cable operators to develop and deploy a server-based interactive program guide. Charter Communications Holding Company invested $850,000, providing it a 16.25% ownership in the joint venture. For the first four years after the formation of TV Gateway, Charter Communications Holding Company will earn additional ownership units, up to a maximum of 750,000 ownership units, as the interactive program guide is deployed to our customers. In connection with the formation of the joint venture, on August 15, 2000, Charter Communications Holding Company purchased 31,211 shares of common stock of WorldGate at $16.02 per share for an aggregate purchase price of $500,000. As a result of this purchase, Charter Communications Holding Company received a $125,000 credit from WorldGate against future equipment purchases relating to the deployment of its service. Additionally, WorldGate granted Charter Communications Holding Company warrants to purchase up to 500,000 shares of WorldGate common stock for a period of seven years at a purchase price of $24.78. For a period of three years from the date of closing, Charter Communications Holding Company will also be issued warrants to purchase common stock of WorldGate based on the number of two-way digital homes passed in the systems in which Charter Communications Holding Company has deployed WorldGate service. 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. This agreement was assigned by Charter Investment to Charter Communications Holding Company upon the closing of our initial public offering. The term of the agreement is three years. Either party has the right to terminate the agreement for the other party's failure to comply with any of its respective material obligations under the agreement. Pursuant to the agreement, Wink granted us the non-exclusive license to use their software to deliver the enhanced broadcasting to all of our cable systems. We pay a fixed monthly license fee to Wink. We also supply all server hardware required for deployment of Wink services. In addition, we agreed to promote and market the Wink service to our customers within the area of each system in which such service is being provided. We share in the revenue Wink generates from all fees collected by Wink for transactions generated by our customers. The amount of revenue shared is based on the number of transactions per month. As of June 30, 2000, minimal revenue and expenses have been recognized as a result of this agreement. 135 138 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, owns an equity interest in Wink. TECHTV. techtv operates a cable television channel which broadcasts shows about technology and the Internet. Pursuant to a carriage agreement which Charter Communications Holding Company intends to enter into with techtv. techtv has currently agreed to provide us with programming for broadcast via our cable television systems at no cost. The term of the proposed carriage agreement, with respect to each of our cable systems, is from the date of launch of techtv on that cable system until April 30, 2008. The carriage agreement grants us a limited non-exclusive right to receive and to distribute techtv to our subscribers in digital or analog format. The carriage agreement does not grant us the right to distribute techtv over the Internet. Effective May 1, 2001, we will pay a monthly per subscriber fee to techtv for cable systems that distribute techtv on a level of service received by fewer than 50% of the total system's customers. Additionally, we agreed to use commercially reasonable efforts to publicize the programming schedule of techtv in each of our cable systems that offers or will offer techtv. Upon reaching a specified threshold number of techtv subscribers, then, in the event techtv inserts any infomercials, advertorials and/or home shopping into the techtv programming, we receive from techtv a percentage of net product revenues resulting from our distribution of these services. techtv may not offer its services to any other cable operator which serves the same or fewer number of subscribers at a more favorable rate or on more favorable carriage terms. On February 5, 1999, Vulcan Programming, which is 100% owned by Mr. Allen, acquired an approximate one-third interest in techtv. Mr. Savoy is the president and director of Vulcan Programming. In January 2000, Vulcan Ventures acquired an additional 64% in techtv for $204.8 million bringing its interest in techtv to 97%. The remaining 3% of techtv is owned by its management and employees. Mr. Allen and Mr. Savoy are each directors of techtv and Mr. Savoy is Vice President of techtv. 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, we signed an affiliation agreement with USA Networks. This agreement was assigned by Charter Investment to Charter Communications Holding Company upon the closing of our initial public offering. Pursuant to this affiliation agreement, USA Networks has agreed to provide their programming for broadcast via our cable television systems. The term of the affiliation agreement was until December 30, 1999, however, it has been extended to December 31, 2000. The affiliation agreement grants us the nonexclusive right to cablecast the USA Network programming service. We pay USA Networks a monthly fee for the USA Network programming service based on the number of subscribers in each of our systems and the number and percentage of such subscribers receiving the USA Network programming service. Additionally, we agreed to use best efforts to publicize the schedule of the USA Network programming service in the television listings and program guides which we distribute. We have paid to USA Networks for programming approximately $12,879,000 for the six months ended June 30, 2000, $16,740,000 for the year ended December 31, 1999, approximately $556,000 for the year ended December 31, 1998, and approximately $204,000 for the year ended December 31, 1997. In addition, we received commissions from Home Shopping Network for sales generated by our customers totaling approximately $1,649,000 for the six months ended June 30, 2000, $1,826,000 for the year ended December 31, 1999, approximately $121,000 for the year ended December 31, 1998 and approximately $62,000 for the year ended December 31, 1997. 136 139 Mr. Allen and Mr. Savoy are also directors of USA Networks. As of April 2000, Mr. Allen owned approximately 8.8% and Mr. Savoy owned less than 1% of the capital stock of USA Networks. OXYGEN MEDIA, LLC. Oxygen Media provides programming content aimed at the female audience for distribution over the Internet and cable television systems. Vulcan Ventures invested $50 million in 1999 in Oxygen Media. In addition, Charter Communications Holding Company plans to enter into a carriage agreement with Oxygen Media pursuant to which we will carry Oxygen Media programming content on certain of our cable systems. Mr. Savoy, a director of Charter Communications, Inc., and Charter Communications Holding Company serves on the board of directors of Oxygen Media. Mr. Allen owns an approximate 7% interest in Oxygen. PORTLAND TRAIL BLAZERS. On October 7, 1996, the former owner of our Falcon cable systems entered into a letter agreement and a cable television agreement with Trail Blazers Inc. for the cable broadcast in the metropolitan area surrounding Portland, Oregon of pre-season, regular season and playoff basketball games of the Portland Trail Blazers, a National Basketball Association basketball team. Mr. Allen is the 100% owner of the Portland Trail Blazers and Trail Blazers Inc. We continue to operate under the terms of these agreements since our acquisition of the Falcon cable systems in November 1999. Under the letter agreement, Trail Blazers Inc. is paid a fixed fee for each subscriber in areas directly served by the Falcon cable systems. Under the cable television agreement, we share subscription revenues with Trail Blazers Inc. Trail Blazers Inc. provides technical facilities and services in connection with the cable broadcast of the Portland Trail Blazers basketball games. The letter agreement and the cable television agreement will terminate on September 30, 2001. We expensed approximately $241,000 for the year ended December 31, 1999 and approximately $727,000 for the six months ended June 30, 2000 in connection with the cable broadcast of Portland Trail Blazers basketball games under the cable television agreement. DIGEO BROADBAND, INC. Charter Communications Holding Company has entered into a joint venture with Vulcan Ventures and Go2Net to provide broadband portal services. See "Business -- Products and Services." Mr. Allen owns approximately 33% of the outstanding equity of Go2Net. Mr. Savoy, a director of Charter Communications, Inc. and Charter Communications Holding Company, is also a director of Go2Net. RCN CORPORATION. On February 28, 2000, Vulcan Ventures purchased shares of convertible preferred stock of RCN Corporation for an aggregate purchase price of approximately $1.65 billion. Vulcan Ventures owns a 28.0% equity interest in RCN Corporation as of June 30, 2000. None of Charter Communications, Inc., Charter Communications Holding Company, Charter Holdings or their respective shareholders, members or subsidiaries, other than Vulcan Ventures, has any interest in the RCN investment and none of them is expected to have any interest in any subsequent investment in RCN that Vulcan Ventures may make. Charter Communications, Inc.'s certificate of incorporation and Charter Communications Holding Company's limited liability company agreement provide that the businesses of RCN are not deemed to be "cable transmission businesses." Mr. Savoy, a director of Charter Communications, Inc. is also a director of RCN. 137 140 DESCRIPTION OF CERTAIN INDEBTEDNESS The following description of our indebtedness is qualified in its entirety by reference to the relevant credit facilities, indentures and related documents governing the debt. EXISTING CREDIT FACILITIES CHARTER OPERATING CREDIT FACILITIES. On March 18, 1999, Charter Operating entered into senior secured credit facilities arranged by Chase Securities Inc., NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc. Obligations under the Charter Operating credit facilities are guaranteed by Charter Operating's parent, Charter Holdings, and by Charter Operating's subsidiaries. The obligations under the Charter Operating credit facilities are secured by pledges by Charter Operating of intercompany obligations and the ownership interests of Charter Operating and its subsidiaries, but are not secured by the other assets of Charter Operating or its subsidiaries. The obligations under the Charter Operating credit facilities are also secured by pledges of intercompany obligations and the ownership interests of Charter Holdings in Charter Operating, but are not secured by the other assets of Charter Holdings or Charter Operating. The Charter Operating credit facilities provide for borrowings of up to $4.7 billion consisting of: - an eight and one-half year reducing revolving loan in the amount of $1.25 billion; - an eight and one-half year Tranche A term loan in the amount of $1.0 billion; and - a nine-year Tranche B term loan in the amount of $2.45 billion. The Charter Operating credit facilities provide for the amortization of the principal amount of the Tranche A term loan facility and the reduction of the revolving loan facility beginning on June 30, 2002 with respect to the Tranche A term loan and on March 31, 2004 with respect to the revolving credit facility, with a final maturity date, in each case, of September 18, 2007. The amortization of the principal amount of the Tranche B term loan facility is substantially "back-ended," with more than 90% of the principal balance due in the year of maturity. The final maturity date of the Tranche B term loan facility is March 18, 2008. The Charter Operating credit facilities also provide for an incremental term facility of up to $1.0 billion conditioned upon receipt of additional new commitments from lenders. Up to 50% of the borrowings under it may be repaid on terms substantially similar to that of the Tranche A term loan and the remaining portion on terms substantially similar to that of the Tranche B term loan. In March 2000, $600.0 million of the incremental term facility was drawn down, thereby increasing the Tranche B term loan. The maturity date for this term loan is September 18, 2008. The Charter Operating credit facilities also contain provisions requiring mandatory loan prepayments under some circumstances, such as when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of Charter Operating. In the event that any existing 8.250% Charter Holdings notes remain outstanding on the date which is six months prior to the scheduled final maturity, the term loans under the Charter Operating credit facility will mature and the revolving credit facility will terminate on such date. The Charter Operating credit facilities provide Charter Operating with two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rate margins for the Charter Operating credit facilities depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of Charter Operating and its subsidiaries, exclusive of outstanding notes and other debt for money borrowed, 138 141 including guarantees by Charter Operating and by Charter Holdings. The interest rate margins for the Charter Operating credit facilities are as follows: - with respect to the revolving loan and the Tranche A term loan, the margin ranges from 1.5% to 2.25% for eurodollar loans and from 0.5% to 1.25% for base rate loans; and - with respect to the Tranche B term loan, the margin ranges from 2.25% to 2.75% for eurodollar loans and from 1.25% to 1.75% for base rate loans. The Charter Operating credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default include a cross-default provision that is triggered by the failure of Charter Operating, Charter Holdings or Charter Operating's subsidiaries to make payment on debt with an outstanding total principal amount exceeding $50.0 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Charter Operating credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that either: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in Charter Operating; or - a change of control occurs under the indentures governing the March 1999 Charter Holdings notes or the January 2000 Charter Holdings notes. The various negative covenants place limitations on the ability of Charter Holdings, Charter Operating and their subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Charter Operating credit facilities to Charter Holdings to pay interest on the March 1999 Charter Holdings notes are generally permitted. Distributions under the Charter Operating credit facilities to Charter Holdings to pay interest on the January 2000 Charter Holdings notes are generally permitted, provided Charter Operating's cash flow for the four complete quarters preceding the distribution exceeds 1.75 times its cash interest expense, including the amount of such distribution. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Charter Operating credit facilities. As of June 30, 2000, $4.2 billion was outstanding and $0.5 billion was available for borrowing under the Charter Operating credit facilities. CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY. On August 4, 2000, Charter Holdings and Charter Communications Holdings Capital Corporation entered into a senior bridge loan agreement providing for senior increasing rate bridge loans in an aggregate principal amount of up to $1.0 billion. On August 14, 2000, Charter Holdings borrowed $1.0 billion under the senior bridge loan facility and used the majority of the proceeds to repay a portion of the amounts outstanding under the 139 142 Charter Operating revolving credit facility. The bridge loan initially bears interest at an annual rate equal to the yield corresponding to the bid price on Charter Holdings 10.25% notes less 0.25% (10.21% as of August 14, 2000). If this loan is not repaid within 90 days following August 14, 2000, the interest rate will increase by 1.25% at the end of such 90-day period and will increase by an additional 0.50% at the end of each additional 90-day period. Unless additional default interest is assessed, the interest rate on the bridge loan will not exceed 15% annually. If the bridge loan has not been repaid in full by August 14, 2001, then it will be converted to a term loan. The term loan will bear interest at a fixed rate equal to the greater of the applicable rate of the bridge loan on the date on the conversion plus 0.50% and the yield corresponding to the bid price on Charter Holdings 10.25% notes as of the date immediately prior to the conversion. If the term loan is not repaid within 90 days after the conversion from the bridge loans, the interest rate thereon will increase by 0.50% at the end of each 90-day period. The interest rate on the term loan will not exceed 15% annually. The term loan will mature on the tenth anniversary of the initial senior bridge loan borrowing. Charter Holdings and Charter Communications Holdings Capital Corporation must use the net cash proceeds of any of the following to pay back the loans in full plus any accrued and unpaid interest: - any direct or indirect public offering or private placement of any debt or equity securities by Charter Communications, Inc., Charter Communications Holding Company, Charter Holdings and Charter Communications Holdings Capital Corporation or any subsidiary; - any future bank borrowings other than under any of the existing credit facilities of Charter Communications, Inc., Charter Communications Holding Company, Charter Holdings and Charter Communications Holdings Capital Corporation or any subsidiary; and - any future asset sales by Charter Communications, Inc., Charter Communications Holding Company, Charter Holdings and Charter Communications Holdings Capital Corporation or any subsidiary. FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the required percentage of lenders under the senior secured credit facilities of Falcon Cable Communications agreed to amend and restate the Falcon credit agreement, which amendment and restatement was effective as of November 12, 1999, the date that Charter Communications Holding Company closed the Falcon acquisition. The obligations under the Falcon credit facilities are guaranteed by the direct parent of Falcon Cable Communications, Charter Communications VII, LLC, and by the subsidiaries of Falcon Cable Communications. The obligations under the Falcon credit facilities are secured by pledges of the ownership interests and intercompany obligations of Falcon Cable Communications and its subsidiaries, but are not secured by other assets of Falcon Cable Communications or its subsidiaries. The Falcon credit facilities have maximum borrowing availability of $1.25 billion consisting of the following: - a revolving facility in the amount of approximately $646.0 million; - a term loan B in the amount of approximately $197.0 million; - a term loan C in the amount of approximately $295.5 million; and - a supplemental revolving facility of $110.0 million. 140 143 In addition to the above, the Falcon credit facilities provide for, at the option of the lenders, supplemental credit facilities for a total of $700.0 million, less the $110.0 million outstanding under the supplemental revolving facility above. These supplemental credit facilities are available, subject to the borrower's ability to obtain additional commitments from the lenders. The terms of such additional borrowings are subject to certain restrictions that may be no more materially restrictive than the provisions of the Falcon credit facilities and will be determined at the time of borrowing. The revolving facility and the supplemental revolving facility amortize beginning in 2001 and 2003, respectively, and ending on December 29, 2006 and December 31, 2007, respectively. The term loan B and term loan C facilities amortize beginning in 1999 and ending on June 29, 2007 and December 31, 2007, respectively. The Falcon credit facilities also contain provisions requiring mandatory loan prepayments under certain circumstances, such as when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of Falcon Cable Communications. The Falcon credit facilities provide Falcon Cable Communications with two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rates for these credit facilities, as well as a fee payable on unborrowed amounts available thereunder, depend upon performance measured by a "leverage ratio" which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of Falcon Cable Communications and its subsidiaries, exclusive of the Falcon debentures described below. The interest rate margins for the Falcon credit facilities are as follows: - with respect to the revolving loan facility, the margin ranges from 1.0% to 2.0% for eurodollar loans and from 0.0% to 1.0% for base rate loans; - with respect to Term Loan B, the margin ranges from 1.75% to 2.25% for eurodollar loans and from 0.75% to 1.25% for base rate loans; and - with respect to Term Loan C, the margin ranges from 2.0% to 2.5% for eurodollar loans and from 1.0% to 1.5% for base rate loans. The Falcon credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Falcon credit facilities include a cross-default provision that is triggered by, among other things, the failure to make payment relating to specified outstanding debt of Falcon Cable Communications, its direct and indirect parent companies, CC VII Holdings, LLC and Charter Communications VII, or specified subsidiary guarantors in a total amount of principal and accrued interest exceeding $10.0 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Falcon credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that either: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in Falcon Cable Communications; or - a change of control occurs under the terms of other specified debt of Falcon. 141 144 The various negative covenants place limitations on the ability of Falcon Cable Communications and its subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Falcon credit facilities to pay interest on the Falcon debentures are generally permitted, except during the existence of a default under the Falcon credit facilities. Distributions to Charter Holdings to pay interest on the January 2000 Charter Holdings notes and the March 1999 Charter Holdings notes will generally be permitted, provided Falcon Cable Communications' cash flow for the most recent fiscal quarter preceding the distribution exceeds 1.75 times its cash interest expense, including the amount of such distribution. Distributions to Charter Holdings will also be permitted if Falcon Cable Communications meets specified financial ratios. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Falcon credit facilities. As of June 30, 2000, $1,059.5 million was outstanding and $189.1 million was available for borrowing under the Falcon credit facilities. FANCH CREDIT FACILITIES. On November 12, 1999, the Fanch acquisition was closed and CC VI Operating Company, LLC, the parent company of the Fanch cable systems, entered into senior secured credit facilities arranged by Chase Securities Inc. and Banc of America Securities LLC. The obligations under the Fanch credit facilities are guaranteed by CC VI Operating's parent, CC VI Holdings, LLC, and by the subsidiaries of CC VI Operating. The obligations under the Fanch credit facilities are secured by pledges of the ownership interests and intercompany obligations of CC VI Operating and its subsidiaries, but are not secured by other assets of CC VI Operating or its subsidiaries. The Fanch credit facilities have maximum borrowings of $1.2 billion, consisting of: - a revolving facility in the amount of approximately $350.0 million; - a term loan A in the amount of approximately $450.0 million; and - a term loan B in the amount of approximately $400.0 million. The revolving facility amortizes beginning in 2004 and ending in May 2008. The term loan A and term loan B facilities amortize beginning in 2003 and ending in May 2008 and November 2008, respectively. In addition to the foregoing, the Fanch credit facilities provide for supplemental credit facilities in the maximum amount of $300.0 million. These supplemental credit facilities may be in the form of an additional term loan or an aggregate increase in the amount of the term loan A or the revolving facility. These supplemental credit facilities are available, subject to the borrower's ability to obtain additional commitments from lenders. The amortization of the additional term loans under the supplemental credit facilities prior to May 2009 is limited to 1% per annum of the aggregate principal amount of such additional term loans. 142 145 The Fanch credit facilities also contain provisions requiring mandatory loan prepayments under specific circumstances, including when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of CC VI Operating. The Fanch credit facilities provide CC VI Operating with the following two interest rate options, to which a margin is added: a base rate option, generally the prime rate of interest; and an interest rate option rate based on the interbank Eurodollar rate. Interest rates for the Fanch credit facilities, as well as a fee payable on unborrowed amounts available thereunder, depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of CC VI Operating and its subsidiaries. The interest rate margins for the Fanch credit facilities are as follows: - with respect to the revolving loan facility and term loan A, the margin ranges from 1.0% to 2.25% for eurodollar loans and from 0.0% to 1.25% for base rate loans; and - with respect to term loan B, the margin ranges from 2.50% to 3.00% for eurodollar loans and from 1.50% to 2.00% for base rate loans. The Fanch credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Fanch credit facilities include a cross-default provision that is triggered by the failure to make payment on debt of CC VI Operating, CC VI Holdings and the subsidiaries of CC VI Operating in a total amount of $25.0 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Fanch credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event of any of the following: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in CC VI Operating; - CC VI Operating is no longer a direct or indirect subsidiary of Charter Communications Holding Company; or - A change of control occurs under specified indebtedness of CC VI Holdings, CC VI Operating or CC VI Operating's subsidiaries. Various negative covenants place limitations on the ability of CC VI Operating and its subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Fanch credit facilities to Charter Holdings to pay interest on the January 2000 Charter Holdings notes and the March 1999 Charter Holdings notes are generally permitted, provided CC VI Operating's cash flow for the four complete quarters preceding the distribution exceeds 1.75 times its cash interest expense, including the amount of such distribution. Distributions to Charter Holdings will also be permitted if CC VI Operating meets specified financial ratios. In 143 146 each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Fanch credit facilities. As of June 30, 2000, approximately $850.0 million was outstanding and $350.0 million was available for borrowing under the Fanch credit facilities. AVALON CREDIT FACILITIES. On November 15, 1999, the Avalon acquisition was closed and CC Michigan, LLC and CC New England, LLC (formerly Avalon Cable of Michigan, Inc. and Avalon Cable of New England LLC, respectively) entered into senior secured credit facilities arranged by Bank of Montreal. The obligations under the Avalon credit facilities are guaranteed by the parent of the Avalon borrowers, CC V Holdings, LLC (formerly Avalon Cable LLC) and by the subsidiaries of the Avalon borrowers. The obligations under the Avalon credit facilities are secured by pledges of the ownership interests and intercompany obligations of the Avalon borrowers and their subsidiaries, but are not secured by other assets of the Avalon borrowers or their subsidiaries. The Avalon credit facilities are also secured by a pledge of CC V Holdings' equity interest in the Avalon borrowers and intercompany obligations with respect to the Avalon borrowers. The Avalon credit facilities have maximum borrowings of $300.0 million, consisting of: - a revolving facility in the amount of approximately $175.0 million; and - a term loan B in the amount of approximately $125.0 million. We borrowed $165.0 million under the Avalon credit facilities to fund a portion of the Avalon purchase price. Amounts available under the revolving facility reduce annually in specified percentages beginning in the fourth year following the closing date of the facility. The term loan B facility amortizes beginning in the fourth year following the closing date. In addition to the foregoing, the Avalon credit facilities provide for supplemental credit facilities in the maximum amount of $75.0 million. These supplemental credit facilities may be in the form of an additional term loan or an aggregate increase in the amount of the revolving facility. These supplemental credit facilities will be available, subject to the borrowers' ability to obtain additional commitments from lenders. These supplemental credit facilities are available to the Avalon borrowers until December 31, 2003, and, if borrowed, the weighted average life and final maturity will not be less than that of the revolving facility. The Avalon credit facilities also contain provisions requiring mandatory loan prepayments under specific circumstances, including when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of the Avalon borrowers. The Avalon credit facilities provide the following two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rates for the Avalon credit facilities, as well as a fee payable on unborrowed amounts available thereunder, will depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. This leverage ratio is based on the debt of the Avalon borrowers and their subsidiaries. The interest rate margins for the Avalon credit facilities are as follows: - with respect to the revolving loan facility, the margin ranges from 1.0% to 1.875% for eurodollar loans and from 0.0% to 0.875% for base rate loans; and - with respect to term loan B, the margin ranges from 2.50% to 2.75% for eurodollar loans and from 1.50% to 1.750% for base rate loans. 144 147 The Avalon credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Avalon credit facilities include a cross-default provision that is triggered by the failure to make payment on debt of the Avalon borrowers, CC V Holdings and specified subsidiaries of the Avalon borrowers in a total amount of $20.0 million, the acceleration of debt of this amount prior to its maturity or the failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Avalon credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in the Avalon borrowers. Various negative covenants place limitations on the ability of the Avalon borrowers and their subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions under the Avalon credit facilities to pay interest on certain indebtedness of CC V Holdings are generally permitted, except during the existence of a default under the Avalon credit facilities. Distributions under the Avalon credit facilities to Charter Holdings to pay interest on the January 2000 Charter Holdings notes and the March 1999 Charter Holdings notes are generally permitted, provided the Avalon borrowers' consolidated cash flow for the four complete quarters preceding the distribution exceeds 2.1 times their combined cash interest expense, including the amount of such distribution. Distributions to Charter Holdings will also be permitted if the Avalon borrowers meet specified financial ratios. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Avalon credit facilities. As of June 30, 2000, there was approximately $170.0 million outstanding and $130.0 million was available for borrowing under the Avalon credit facilities. BRESNAN CREDIT FACILITIES. In connection with the Bresnan acquisition, our subsidiary, CC VIII Operating, LLC (formerly Bresnan Telecommunications Company) amended and restated its previous senior secured credit facilities and increased the available borrowings under the facilities. At the closing of the Bresnan acquisition, we borrowed approximately $599.9 million to replace the borrowings outstanding under the previous credit facilities and an additional $31.3 million to fund a portion of the Bresnan purchase price. The obligations under the Bresnan credit facilities are guaranteed by the parent company of the Bresnan borrower, CC VIII Holdings, LLC (formerly Bresnan Communications Group LLC), and by the subsidiaries of the Bresnan borrower. The obligations under the Bresnan credit facilities are secured by pledges of the ownership interests and intercompany obligations of the Bresnan borrower and its subsidiaries, but are not secured by other assets of the Bresnan borrower or its subsidiaries. The Bresnan credit facilities are also secured by a pledge of CC VIII Holdings' equity interest in the Bresnan borrower and intercompany obligations with respect to the Bresnan borrower. 145 148 The Bresnan credit facilities provide for borrowings of up to $900.0 million, consisting of: - a reducing revolving loan facility in the amount of $200.0 million; - a term loan A facility in the amount of $403.0 million; and - a term loan B facility in the amount of $297.0 million. The Bresnan credit facilities provide for the amortization of the principal amount of the term loan A facility and the reduction of the revolving loan facility beginning March 31, 2002, with a final maturity date of June 30, 2007. The amortization of the term loan B facility is substantially "back-ended", with more than ninety percent of the principal balance due on the final maturity date of February 2, 2008. The Bresnan credit facilities also provide for an incremental facility of up to $200.0 million, which is conditioned upon receipt of additional commitments from lenders. If the incremental facility becomes available, it may be in the form of revolving loans or term loans, but may not amortize more quickly than the reducing revolving loan facility or the term loan A facility, and may not have a final maturity date earlier than six calendar months after the maturity date of the term loan B facility. The Bresnan credit facilities provide the following two interest rate options, to which a margin is added: a base rate, generally the "prime rate" of interest; and an interest rate option based on the interbank eurodollar rate. Interest rate margins for the Bresnan credit facilities depend upon performance measured by a leverage ratio, which is the ratio of total debt to annualized operating cash flow. The leverage ratio is based on the debt of the Bresnan borrower and its subsidiaries. The interest rate margins for the Bresnan credit facilities are as follows: - with respect to the term loan A facility and the revolving loan facility, the margin ranges from 0.75% to 2.25% for eurodollar loans and from 0.0% to 1.25% for base rate loans; and - with respect to the term loan B facility, the margin ranges from 2.5% to 2.75% for eurodollar loans and from 1.5% to 1.75% for base rate loans. The Bresnan credit facilities contain various representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Bresnan credit facilities include a cross-default provision that is triggered by, among other things, the failure to make payment on the debt of the Bresnan borrower, its subsidiaries and CC VIII Holdings in a total amount in excess of $25.0 million, the acceleration of debt of this amount prior to its maturity or failure to comply with specified covenants. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. Certain negative covenants place limitations on the ability of the Bresnan borrower and its restricted subsidiaries to, among other things: - incur debt; - pay dividends or make other distributions; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. 146 149 The Bresnan credit facilities contain a change in control provision making it an event of default permitting acceleration of the debt in the event of any of the following: - Mr. Allen, including his estate, heirs and related entities, fails to maintain, directly or indirectly, at least 51% voting interest in the Bresnan borrower, or ceases to own of record or beneficially, directly or indirectly, at least 25% of the equity interests of the Bresnan borrower; - a change of control or similar defined term shall occur in any agreement governing debt of CC VIII Holding or the Bresnan borrower, and such debt is at least in the amount of $25.0 million; - Charter Communications Holding Company shall cease to own, directly or indirectly, at least 51% of the equity interests in the Bresnan borrower; or - the Bresnan borrower shall cease to be a direct wholly owned subsidiary of CC VIII Holdings. Distributions under the Bresnan credit facilities to pay interest on certain indebtedness of CC VIII Holdings are generally permitted, except during the existence of a default. Distributions under the Bresnan credit facilities to Charter Holdings to pay interest on the January 2000 Charter Holdings notes and the March 1999 notes are generally permitted provided the Bresnan borrower's consolidated cash flow for the four complete quarters preceding the distribution exceeds 1.75 times the consolidated interest expense of the Bresnan borrower, including the amount of such distribution. In each case, such distributions to Charter Holdings are not permitted during the existence of a default under the Bresnan credit facilities. As of June 30, 2000, there was $638.9 million outstanding and $261.1 million was available for borrowing under the Bresnan credit facilities. EXISTING PUBLIC DEBT MARCH 1999 CHARTER HOLDINGS NOTES. The March 1999 Charter Holdings notes were issued under three separate indentures, each dated as of March 17, 1999, among Charter Holdings and Charter Communications Holdings Capital Corporation, as the issuers, and Harris Trust and Savings Bank, as trustee. Charter Holdings and Charter Communications Holdings Capital Corporation exchanged these notes for new March 1999 Charter Holdings notes with substantially similar terms, except that the new March 1999 Charter Holdings notes are registered under the Securities Act and, therefore, do not bear legends restricting their transfer. The March 1999 Charter Holdings notes are general unsecured obligations of Charter Holdings and Charter Communications Holdings Capital Corporation. The March 1999 8.250% Charter Holdings notes mature on April 1, 2007 and as of June 30, 2000, there was $600.0 million in total principal amount outstanding. The March 1999 8.625% Charter Holdings notes mature on April 1, 2009 and as of June 30, 2000, there was $1.5 billion in total principal amount outstanding. The March 1999 9.920% Charter Holdings notes mature on April 1, 2011 and as of June 30, 2000, the total accreted value was $1.0 billion. Cash interest on the March 1999 9.920% Charter Holdings notes will not accrue prior to April 1, 2004. The March 1999 Charter Holdings notes are senior debts of Charter Holdings and Charter Communications Holdings Capital Corporation. They rank equally with the current and future unsecured and unsubordinated debt of Charter Holdings, including the January 2000 Charter Holdings notes. Charter Holdings and Charter Communications Holdings Capital Corporation will not have the right to redeem the March 1999 8.250% Charter Holdings notes prior to their maturity date on April 1, 2007. Before April 1, 2002, Charter Holdings and Charter Communications Holdings Capital 147 150 Corporation may redeem up to 35% of each of the March 1999 8.625% Charter Holdings notes and the March 1999 9.920% Charter Holdings notes, in each case, at a premium with the proceeds of certain offerings of equity securities. In addition, on or after April 1, 2004, Charter Holdings and Charter Communications Holdings Capital Corporation may redeem some or all of the March 1999 8.625% Charter Holdings notes and the March 1999 9.920% Charter Holdings notes at any time, in each case, at a premium. The optional redemption price declines to 100% of the principal amount of March 1999 Charter Holdings notes redeemed, plus accrued and unpaid interest, if any, for redemption on or after April 1, 2007. In the event of a specified change of control event, Charter Holdings and Charter Communications Holdings Capital Corporation must offer to repurchase any then outstanding March 1999 Charter Holdings notes at 101% of their principal amount or accreted value, as applicable, plus accrued and unpaid interest, if any. The indentures governing the March 1999 Charter Holdings notes contain certain covenants that restrict the ability of Charter Holdings and Charter Communications Holdings Capital Corporation and their restricted subsidiaries to: - incur additional debt; - create specified 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 restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to us; and - engage in certain transactions with affiliates. RENAISSANCE NOTES. The 10% senior discount notes due 2008 were issued by Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation, with Renaissance Media Group LLC as guarantor and the United States Trust Company of New York as trustee. Renaissance Media Group LLC, which is the direct or indirect parent company of these issuers, is now a subsidiary of Charter Operating. The Renaissance notes and the Renaissance guarantee are unsecured, unsubordinated debt of the issuers and the guarantor, respectively. In October 1998, the issuers of the Renaissance notes exchanged $163.2 million of the original issued and outstanding Renaissance notes for an equivalent value of new Renaissance notes. 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 was 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 Renaissance notes shall be paid semi-annually in cash at a rate of 10% per annum beginning on October 15, 2003. The Renaissance notes are redeemable at the option of the issuers thereof, 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 of the Renaissance notes may redeem up to 35% of the original total principal amount at maturity of the Renaissance notes with the proceeds of one or more sales of equity interests at 110% of their accreted value on the redemption date, provided that after any such 148 151 redemption at least $106.0 million total principal amount at maturity of Renaissance notes remains outstanding. Our acquisition of Renaissance triggered change of control provisions of the Renaissance notes that required us to offer to purchase the Renaissance notes at a purchase price equal to 101% of their accreted value on the date of the purchase, plus accrued interest, if any. In May 1999, we made an offer to repurchase the Renaissance notes, and holders of Renaissance notes representing 30% of the total principal amount outstanding at maturity tendered their Renaissance notes for repurchase. The indentures governing the Renaissance notes contains certain covenants that restrict the ability of the issuers of the Renaissance notes and their restricted subsidiaries to: - incur additional debt; - create liens; - engage in sale-leaseback transactions; - pay dividends or make other distributions in respect of their equity interests; - redeem capital stock; - make investments or certain other restricted payments; - sell assets; - issue or sell capital stock of restricted subsidiaries; - enter into transactions with shareholders or affiliates; and - effect a consolidation or merger. The Renaissance notes contain events of default that include a cross-default provision triggered by the failure of Renaissance Media Group LLC or any of its specified subsidiaries to make payment on debt at maturity with a total principal amount of $10.0 million or more or the acceleration of debt of this amount prior to maturity. As of June 30, 2000, there was outstanding $114.4 million total principal amount at maturity of Renaissance notes, with an accreted value of $87.2 million. THE AVALON 11.875% NOTES. On December 10, 1998, CC V Holdings, LLC, formerly known as Avalon Cable LLC, and CC V Holdings Finance, Inc. (formerly Avalon Cable Holdings Finance, Inc.) jointly issued $196.0 million total principal amount at maturity of 11.875% senior discount notes due 2008. On July 22, 1999, the issuers exchanged $196.0 million of the original issued and outstanding Avalon notes for an equivalent amount of new Avalon notes. The form and terms of the new Avalon notes are substantially identical to the original Avalon notes except that they are registered under the Securities Act and, therefore, are not subject to the same transfer restrictions. The Avalon notes are guaranteed by certain subsidiaries of CC V Holdings. There will be no current payments of cash interest on the Avalon notes before December 1, 2003. The Avalon notes accrete in value at a rate of 11.875% per annum, compounded semi-annually, to an aggregate principal amount of $196.0 million on December 1, 2003. After December 1, 2003, cash interest on the Avalon notes: - will accrue at the rate of 11.875% per year on the principal amount at maturity; and - will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing June 1, 2004. On December 1, 2003, the issuers of the Avalon notes will be required to redeem an amount equal to $369.79 per $1,000 in principal amount at maturity of each Avalon note, on a pro rata basis, at a redemption price of 100% of the principal amount then outstanding at maturity of the Avalon notes so redeemed. 149 152 On or after December 1, 2003, the issuers of the Avalon notes may redeem the Avalon notes, in whole or in part, at a specified premium. The optional redemption price declines to 100% of the principal amount of the Avalon notes redeemed, plus accrued and unpaid interest, if any, for redemptions on or after December 1, 2006. Before December 1, 2001, the issuers may redeem up to 35% of the total principal amount at maturity of the Avalon notes with the proceeds of one or more equity offerings and/or equity investments. In the event of specified change of control events, holders of the Avalon notes have the right to sell their Avalon notes to the issuers of the Avalon notes at 101% of: - the accreted value of the Avalon notes in the case of repurchases of Avalon notes prior to December 1, 2003; or - the total principal amount of the Avalon notes in the case of repurchases of Avalon notes on or after December 1, 2003, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. Our acquisition of Avalon triggered this right. On December 3, 1999, we commenced a change of control repurchase offer with respect to the Avalon notes. In January 2000, we completed change of control offers in which we repurchased $16.3 million aggregate principal amount of the 11.875% notes at a purchase price of 101% of accreted value as of January 28, 2000. The aggregate repurchase price of $10.5 million was funded with proceeds of the sale of the January 2000 Charter Holdings notes. Among other restrictions, the indenture governing the Avalon notes limits the ability of the issuers and their specified subsidiaries to: - incur additional debt; - pay dividends or make specified other restricted payments; - enter into transactions with affiliates; - make certain investments; - sell assets or subsidiary stock; - engage in sale-leaseback transactions; - create liens; - create or permit to exist restrictions dividends or other payments from restricted subsidiaries; - redeem equity interests; - merge, consolidate or sell all or substantially all of their combined assets; and - with respect to restricted subsidiaries, issue capital stock. The Avalon notes contain events of default that include a cross-default provision triggered by the failure of CC V Operating, CC V Holdings Finance, Inc. or any specified subsidiary to make payment on debt with a total principal amount of $5.0 million or more or the acceleration of debt of this amount prior to maturity. As of June 30, 2000, the total principal amount at maturity of the outstanding Avalon notes was $179.8 million, with an accreted value of $121.2 million. JANUARY 2000 CHARTER HOLDINGS NOTES. The January 2000 Charter Holding notes were issued under three separate indentures, each dated as of January 12, 2000 among Charter Holdings and Charter Communications Holdings Capital Corporation, as the issuers, and Harris Trust and Savings Bank, as trustee. In June 2000, Charter Holdings and Charter Communications Holdings Capital Corporation exchanged these notes for new January 2000 Charter Holdings notes, with substantially similar terms, except that the new January 2000 Charter Holdings notes are registered under the Securities Act of 1933, as amended, and, therefore, do not bear legends restricting their transfer. 150 153 The January 2000 Charter Holdings notes are general unsecured obligations of Charter Holdings and Charter Communications Holdings Capital Corporation. The January 2000 10% Charter Holdings notes mature on April 1, 2009 and as of June 30, 2000, there was $675.0 million in total principal amount of these notes outstanding. The January 2000 10.25% Charter Holdings notes mature on January 15, 2010 and as of June 30, 2000, there was $325.0 million in total principal amount of these notes outstanding. The January 2000 11.75% Charter Holdings notes mature on January 15, 2010 and as of June 30, 2000, the total accreted value of these notes was approximately $316.8 million. Cash interest on the January 2000 11.75% Charter Holdings notes will not accrue prior to January 15, 2005. The January 2000 Charter Holdings notes are senior debts of Charter Holdings and Charter Communications Holdings Capital Corporation. They rank equally with the current and future unsecured and unsubordinated debt of Charter Holdings. Charter Holdings and Charter Communications Holdings Capital Corporation will not have the right to redeem the January 2000 10.00% Charter Holdings notes prior to their maturity date on April 1, 2009. Before January 15, 2003, Charter Holdings and Charter Communications Holdings Capital Corporation may redeem up to 35% of the January 2000 10.25% Charter Holdings notes and the January 2000 11.75% Charter Holdings notes, in each case, at a premium with the proceeds of certain offerings of equity securities. In addition, on or after January 15, 2005, Charter Holdings and Charter Communications Holdings Capital Corporation may redeem some or all of the January 2000 10.25% Charter Holdings notes and the January 2000 11.75% Charter Holdings notes at any time, in each case, at a premium. The optional redemption price declines to 100% of the principal amount of the January 2000 Charter Holdings notes redeemed, plus accrued and unpaid interest, if any, for redemption on or after January 15, 2008. In the event of a specified change of control event, Charter Holdings and Charter Communications Holdings Capital Corporation must offer to repurchase any then outstanding January 2000 Charter Holdings notes at 101% of their aggregate principal amount or accreted value, as applicable, plus accrued and unpaid interest, if any. The indentures governing the January 2000 Charter Holdings notes contain substantially identical events of default, affirmative covenants and negative covenants as those contained in the indentures governing the March 1999 Charter Holdings notes. INTERCOMPANY LOANS For a description of certain intercompany loans made by Charter Communications, Inc. and Charter Communications Holding Company to certain of their subsidiaries, see "Certain Relationships and Related Transactions -- Transactions with Management and Others -- Intercompany Loans." 151 154 DESCRIPTION OF CAPITAL STOCK AND MEMBERSHIP UNITS GENERAL Our capital stock and the provisions of our restated certificate of incorporation and bylaws are as described below. These summaries are qualified by reference to the restated certificate of incorporation and the bylaws, copies of which have been filed with the Securities and Exchange Commission and are incorporated by reference hereto. Our authorized capital stock consists of 1.750 billion shares of Class A common stock, par value $.001 per share, 750 million shares of Class B common stock, par value $.001 per share, and 250 million shares of preferred stock, par value $.001 per share. Our restated certificate of incorporation and Charter Communications Holding Company's amended and restated limited liability company agreement contain provisions that are designed to cause the number of shares of our common stock that are outstanding to equal the number of common membership units of Charter Communications Holding Company owned by Charter Communications, Inc. and to cause the value of a share of common stock to be equal to the value of a common membership unit. These provisions are meant to allow a holder of our common stock to easily understand the economic interest that such holder's common shares represent of Charter Communications Holding Company's business. In particular, provisions in our restated certificate of incorporation provide that: (1) at all times the number of shares of our common stock outstanding will be equal to the number of Charter Communications Holding Company common membership units owned by Charter Communications, Inc.; (2) Charter Communications, Inc. will not hold any assets other than, among other allowable assets: - working capital and cash held for the payment of current obligations and receivables from Charter Communications Holding Company; - common membership units of Charter Communications Holding Company; and - obligations and equity interests of Charter Communications Holding Company that correspond to obligations and equity interests issued by Charter Communications, Inc.; (3) Charter Communications, Inc. will not borrow any money or enter into any capital lease unless Charter Communications Holding Company enters into the same arrangements with Charter Communications, Inc. so that Charter Communications, Inc.'s liability flows through to Charter Communications Holding Company. Provisions in Charter Communications Holding Company's amended and restated limited liability company agreement provide that upon the contribution by Charter Communications, Inc. of assets acquired through the issuance of common stock by Charter Communications, Inc., Charter Communications Holding Company will issue to Charter Communications, Inc. an equal number of common membership units as Charter Communications, Inc. issued shares of common stock. In the event of the contribution by Charter Communications, Inc. of assets acquired through the issuance of indebtedness or preferred interests of Charter Communications, Inc., Charter Communications Holding Company will issue to Charter Communications, Inc. a corresponding obligation to allow Charter Communications, Inc. to pass through to Charter Communications Holding Company these liabilities or preferred interests. 152 155 COMMON STOCK There are 233,735,768 shares of Class A common stock issued and outstanding and 50,000 shares of Class B common stock issued and outstanding. If, as described below, all shares of Class B common stock convert to shares of Class A common stock as a result of dispositions by Mr. Allen and his affiliates, the holders of Class A common stock will be entitled to elect all members of the board of directors, other than any members elected separately by the holders of any preferred shares. VOTING RIGHTS. The holders of Class A common stock and Class B common stock generally have identical rights, except: - each Class A common shareholder is entitled to one vote per share; and - each Class B common shareholder is entitled to a number of votes based on the number of outstanding Class B common stock and Charter Communications Holding Company membership units exchangeable for Class B common stock. For example, Mr. Allen is entitled to ten votes for each share of Class B common stock held by him or his affiliates and ten votes for each membership unit held by him or his affiliates; and - the Class B common shareholders have the sole power to vote to amend or repeal the provisions of our restated certificate of incorporation relating to: (1) the activities in which Charter Communications, Inc. may engage; (2) the required ratio of outstanding shares of common stock to outstanding membership units owned by Charter Communications, Inc.; and (3) the restrictions on the assets and liabilities that Charter Communications, Inc. may hold. The effect of the provisions described in the final bullet point is that holders of Class A common stock have no right to vote on these matters. These provisions allow Mr. Allen, for example, to amend the restated certificate of incorporation to permit Charter Communications, Inc. to engage in currently prohibited business activities without having to seek the approval of holders of Class A common stock. The voting rights relating to the election of Charter Communications, Inc.'s board of directors are as follows: - The Class B common shareholders, voting separately as a class, are entitled to elect all but one member of our board of directors. - Class A and Class B common shareholders, voting together as one class, are entitled to elect the remaining member of our board of directors who is not elected by the Class B common shareholders. - Class A common shareholders and Class B common shareholders are not entitled to cumulate their votes in the election of directors. - In addition, Charter Communications, Inc. may issue one or more series of preferred stock that entitle the holders of such preferred stock to elect directors. Other than the election of directors and any matters where Delaware law or Charter Communications, Inc.'s restated certificate of incorporation or bylaws requires otherwise, all matters to be voted on by shareholders must be approved by a majority of the votes cast by the holders of shares of Class A common stock and Class B common stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any preferred stock. Amendments to Charter Communications, Inc.'s restated certificate of incorporation that would adversely alter or change the powers, preferences or special rights of the Class A common stock or 153 156 the Class B common stock must be approved by a majority of the votes entitled to be cast by the holders of the outstanding shares of the affected class, voting as a separate class. In addition, the following actions by Charter Communications, Inc. must be approved by the affirmative vote of the holders of at least a majority of the voting power of the outstanding Class B common stock, voting as a separate class: - the issuance of any Class B common stock other than to Mr. Allen and his affiliates and other than pursuant to specified stock splits and dividends; - the issuance of any stock other than Class A common stock (and other than Class B common stock as described above); and - the amendment, modification or repeal of any provision of its restated certificate of incorporation relating to capital stock or the removal of directors. Charter Communications, Inc. will lose its rights to manage the business of Charter Communications Holding Company and Charter Investment will become the sole manager of Charter Communications Holding Company if at any time a court holds that the holders of the Class B common stock no longer: - have the number of votes per share of Class B common stock described above; - have the right to elect, voting separately as a class, all but one member of Charter Communications Inc.'s board of directors, except for any directors elected separately by the holders of preferred stock; or - have the right to vote as a separate class on matters that adversely affect the Class B common stock with respect to: (1) the issuance of equity securities of Charter Communications, Inc. other than the Class A common stock; or (2) the voting power of the Class B common stock. These provisions are contained in the amended and restated limited liability company agreement of Charter Communications Holding Company. The Class B common stock could lose these rights if a holder of Class A common stock successfully challenges in a court proceeding the voting rights of the Class B common stock. In any of these circumstances, Charter Communications, Inc. would also lose its 100% voting control of Charter Communications Holding Company as provided in Charter Communications Holding Company's amended and restated limited liability company agreement. These provisions exist to assure Mr. Allen that he will be able to control Charter Communications Holding Company in the event he was no longer able to control Charter Communications, Inc. through his ownership of Class B common stock. These events could have a material adverse impact on our business and the market price of the Class A common stock. See "Risk Factors -- Our Structure." DIVIDENDS. Holders of Class A common stock and Class B common stock will share ratably (based on the number of shares of common stock held) in any dividend declared by our board of directors, subject to any preferential rights of any outstanding preferred stock. Dividends consisting of shares of Class A common stock and Class B common stock may be paid only as follows: - shares of Class A common stock may be paid only to holders of Class A common stock; - shares of Class B common stock may be paid only to holders of Class B common stock; and - the number of shares of each class of common stock payable per share of such class of common stock shall be equal in number. 154 157 Our restated certificate of incorporation provides that we may not pay a stock dividend unless the number of outstanding Charter Communications Holding Company common membership units are adjusted accordingly. This provision is designed to maintain the equal value between shares of common stock and membership units and the one-to-one exchange ratio. CONVERSION OF CLASS B COMMON STOCK. Each share of outstanding Class B common stock will automatically convert into one share of Class A common stock if, at any time, Mr. Allen or any of his affiliates sells any shares of common stock of Charter Communications, Inc. or membership units of Charter Communications Holding Company and as a result of such sale, Mr. Allen and his affiliates no longer own directly and indirectly common stock and other equity interests in Charter Communications, Inc. and membership units in Charter Communications Holding Company that in total represent at least: - 20% of the sum of the values, calculated as of November 12, 1999, of the shares of Class B common stock directly or indirectly owned by Mr. Allen and his affiliates and the shares of Class B common stock for which outstanding Charter Communications Holding Company membership units directly or indirectly owned by Mr. Allen and his affiliates were exchangeable on that date, and - 5% of the sum of the values, calculated as of the measuring date, of shares of outstanding common stock and other equity interests in Charter Communications, Inc. and the shares of Charter Communications, Inc. common stock for which outstanding Charter Communications Holding Company membership units are exchangeable on such date. These provisions exist to assure that Mr. Allen will no longer be able to control Charter Communications, Inc. if after sales of his equity interests he owns an insignificant economic interest in our business. The conversion of all Class B common stock in accordance with these provisions would not trigger Charter Communications Holding Company's limited liability company agreement provisions described above whereby Charter Communications, Inc. would lose its management rights and special voting rights relating to Charter Communications Holding Company in the event of an adverse determination of a court affecting the rights of the Class B common stock. Each holder of a share of Class B common stock has the right to convert such share into one share of Class A common stock at any time on a one-for-one basis. If a Class B common shareholder transfers any shares of Class B common stock to a person other than an authorized Class B common shareholder, these shares of Class B common stock will automatically convert into shares of Class A common stock. Authorized Class B common shareholders are Paul G. Allen, entities controlled by Mr. Allen, Mr. Allen's estate, any organization qualified under Section 501(c)(3) of the Internal Revenue Code that is Mr. Allen's beneficiary upon his death and certain trusts established by or for the benefit of Mr. Allen. In this context, "controlled" means the ownership of more than 50% of the voting power and economic interest of an entity and "transfer" means the transfer of record or beneficial ownership of any such share of Class B common stock. OTHER RIGHTS. Shares of Class A common stock and Class B common stock will be treated equally in the event of any merger or consolidation of Charter Communications, Inc. so that: - each class of common shareholders will receive per share the same kind and amount of capital stock, securities, cash and/or other property received by any other class of common shareholders, provided that any shares of capital stock so received may differ in a manner similar to the manner in which the shares of Class A common stock and Class B common stock differ; or 155 158 - each class of common shareholders, to the extent they receive a different kind (other than as described above) or different amount of capital stock, securities, cash and/or other property than that received by any other class of common shareholders, will receive for each share of common stock they hold, stock, securities, cash and/or other property having a value substantially equivalent to that received by such other class of common shareholders. Upon Charter Communications, Inc.'s liquidation, dissolution or winding up, after payment in full of the amounts required to be paid to preferred shareholders, if any, all common shareholders, regardless of class, are entitled to share ratably in any assets and funds available for distribution to common shareholders. No shares of any class of common stock are subject to redemption or have preemptive rights to purchase additional shares of common stock. PREFERRED STOCK Charter Communications, Inc.'s board of directors is authorized, subject to the approval of the holders of the Class B common stock, to issue from time to time up to an aggregate of 250 million shares of preferred stock in one or more series and to fix the numbers, powers, designations, preferences, and any special rights of the shares of each such series thereof, including: - dividend rights and rates; - conversion rights; - voting rights; - terms of redemption (including any sinking fund provisions) and redemption price or prices; - liquidation preferences; and - the number of shares constituting and the designation of such series. There are no shares of preferred stock outstanding. Charter Communications, Inc. has no present plans to issue any shares of preferred stock. OPTIONS As of August 31, 2000, options to purchase a total of 20,799,158 membership units in Charter Communications Holding Company are outstanding pursuant to the Charter Communications Option Plan. Of these options, 2,987,449 have vested. In addition, an option to purchase 7,044,127 membership units in Charter Communications Holding Company is outstanding pursuant to an employment agreement and a related agreement with Mr. Kent, Charter Communications, Inc.'s chief executive officer. Of Mr. Kent's options, 2,935,053 have vested as of August 31, 2000. The membership units received upon exercise of any of the options described in this paragraph are automatically exchanged for shares of our Class A common stock on a one-for-one basis. In addition, a portion of the unvested options will vest each month. See "Management -- Option Plan" and "Certain Relationships and Related Transactions -- Employment and Consulting Agreements." ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER COMMUNICATIONS, INC.'S RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS Provisions of Charter Communications, Inc.'s restated certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or 156 159 takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. SPECIAL MEETING OF SHAREHOLDERS. Our bylaws provide that, subject to the rights of holders of any series of preferred stock, special meetings of our shareholders may be called only by the chairman of our board of directors, our chief executive officer or a majority of our board of directors. ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. Our bylaws provide that shareholders seeking to bring business before an annual meeting of shareholders, or to nominate candidates for election as directors at an annual meeting of shareholders, must provide timely prior written notice of their proposals. To be timely, a shareholder's notice must be received at our principal executive offices not less than 45 days nor more than 70 days prior to the first anniversary of the date on which we first mailed our proxy statement for the prior year's annual meeting. If, however, the date of the annual meeting is more than 30 days before or after the anniversary date of the prior year's annual meeting, notice by the shareholder must be received not less than 90 days prior to the annual meeting or by the 10th day following the public announcement of the date of the meeting, whichever occurs later, and not more than 120 days prior to the annual meeting. Our bylaws specify requirements as to the form and content of a shareholder's notice. These provisions may limit shareholders in bringing matters before an annual meeting of shareholders or in making nominations for directors at an annual meeting of shareholders. AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of Class A common stock are available for future issuance without shareholder approval and, subject to approval by the holders of the Class B common stock, the authorized but unissued shares of Class B common stock and preferred stock are available for future issuance. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. MEMBERSHIP UNITS The Charter Communications Holding Company limited liability company agreement provides for three separate classes of common membership units designated Class A, Class B and Class C and one class of preferred membership units designated Class A. There are 572,832,242 Charter Communications Holding Company common membership units issued and outstanding and 3,006,202 preferred membership units issued and outstanding as described below. CLASS A COMMON MEMBERSHIP UNITS. There are a total of 324,300,479 issued and outstanding Class A common membership units consisting of 217,585,246 units owned by Charter Investment and 106,715,233 units owned by Vulcan Cable III, Inc. CLASS B COMMON MEMBERSHIP UNITS. There are a total of 233,735,768 issued and outstanding Class B common membership units all of which are owned by Charter Communications, Inc. In addition, as of August 31, 2000, there were 27,843,285 Class B common membership units underlying options issued under the Charter Communications Option Plan and under agreements with Mr. Kent. 5,922,502 of these units are subject to options that vested as of that date. CLASS C COMMON MEMBERSHIP UNITS. There are a total of 14,795,995 issued and outstanding Class C common membership units. These units are owned by some of the sellers in the Bresnan acquisition. 157 160 CLASS A PREFERRED MEMBERSHIP UNITS. There are a total of 3,006,202 issued and outstanding Class A preferred membership units. These units are owned by some of the sellers in the Rifkin acquisition. Any matter requiring a vote of the members of Charter Communications Holding Company requires the affirmative vote of a majority of the Class B common membership units. Charter Communications, Inc. owns all Class B common membership units and therefore controls Charter Communications Holding Company. Because Mr. Allen owns high vote Class B common stock of Charter Communications, Inc. that entitles him to approximately 95% of the voting power of the outstanding common stock of Charter Communications, Inc., Mr. Allen controls Charter Communications, Inc. and through this company has voting control of Charter Communications Holding Company. The net cash proceeds that Charter Communications, Inc. receives from any issuance of shares of common stock will be immediately transferred to Charter Communications Holding Company in exchange for membership units equal in number to the number of shares of common stock issued by Charter Communications, Inc. EXCHANGE AGREEMENTS Charter Communications, Inc. is a party to an agreement permitting Vulcan Cable III Inc., Charter Investment and any other affiliate of Mr. Allen to exchange at any time on a one-for-one basis any or all of their Charter Communications Holding Company common membership units for shares of Class B common stock. This exchange may occur directly or, at the election of the exchanging holder, indirectly through a tax-free reorganization such as a share exchange or a statutory merger of any Allen-controlled entity with and into Charter Communications, Inc. or a wholly owned subsidiary of Charter Communications, Inc. In the case of an exchange in connection with a tax-free share exchange or a statutory merger, shares of Class A common stock held by Mr. Allen or the Allen-controlled entity will also be exchanged for Class B common stock. Mr. Allen currently owns shares of Class A common stock as a result of the exercise of put rights granted to sellers in the Falcon acquisition who received shares of Class A common stock in connection with that acquisition. Mr. Allen or his affiliates may in the future own additional shares of Class A common stock, for example, if they were required to repurchase shares of Class A common stock as a result of the exercise of put rights granted to the Rifkin and Bresnan sellers in respect of their shares of Class A common stock. Similar exchange agreements also permit all other holders of Charter Communications Holding Company common membership units, other than Charter Communications, Inc., to exchange at any time on a one-for-one basis any or all of their common membership units for shares of Class A common stock. These other holders include those sellers under the Bresnan acquisition that received common membership units of Charter Communications Holding Company in connection with that acquisition. Charter Communications Holding Company common membership units are exchangeable at any time for shares of our Class A common stock or, in the case of Mr. Allen and his affiliates, Class B common stock which is then convertible into shares of Class A common stock. The exchange agreements, Mr. Kent's option agreement and the Charter Communications Option Plan state that common membership units are exchangeable for shares of common stock at a value equal to the fair market value of the common membership units. The exchange ratio of common membership units to shares of Class A common stock will be one to one because Charter Communications, Inc. and Charter Communications Holding Company have been structured so that the fair market value of a share of the Class A common stock equals the fair market value of a common membership unit owned by Charter Communications, Inc. 158 161 Our organizational documents achieve this result by: - limiting the assets and liabilities that Charter Communications, Inc. may hold; and - requiring the number of shares of our common stock outstanding at any time to equal the number of common membership units owned by Charter Communications, Inc. If we fail to comply with these provisions or they are changed, the exchange ratio may vary from one to one and will then be based on a pre-determined formula contained in the exchange agreements, Mr. Kent's option agreement and the Charter Communications Option Plan. This formula will be based on the then current relative fair market values of common membership units and common stock. SPECIAL TAX ALLOCATION PROVISIONS OVERVIEW. Charter Communications Holding Company's amended and restated limited liability company agreement contains a number of provisions affecting allocation of tax losses and tax profits to its members. In some situations, these provisions could result in Charter Communications, Inc. having to pay income taxes in an amount that is more than it would have had to pay if these provisions did not exist. The purpose of these provisions is to allow Mr. Allen to take advantage for tax purposes of the losses expected to be generated by Charter Communications Holding Company. We do not expect that these special tax allocation provisions will materially affect our results of operations or financial condition. SPECIAL LOSS ALLOCATION PROVISIONS. The Charter Communications Holding Company amended and restated limited liability company agreement provides that, through the end of 2003, tax losses of Charter Communications Holding Company that would otherwise have been allocated to us based generally on the percentage of outstanding membership units will be allocated instead to the membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. We expect that the effect of these special loss allocation provisions will be that Mr. Allen, through his investment in Vulcan Cable III Inc. and Charter Investment, Inc., will receive tax savings. Except as described below, the special loss allocation provisions should not adversely affect Charter Communications, Inc. or its shareholders. This is because Charter Communications, Inc. would not be in a position to benefit from tax losses until Charter Communications Holding Company generates allocable tax profits, and we do not expect Charter Communications Holding Company to generate tax profits for the foreseeable future. The special loss allocation provisions will reduce Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company if over time there are insufficient allocations to be made under the special profit allocation provisions described below to restore these distribution rights. SPECIAL PROFIT ALLOCATION PROVISIONS. The amended and restated limited liability company agreement further provides that, beginning at the time Charter Communications Holding Company first becomes profitable (as determined under the applicable federal income tax rules for determining book profits), tax profits that would otherwise have been allocated to Charter Communications, Inc. based generally on its percentage of outstanding membership units will instead be allocated to Mr. Allen, through the membership units held by Vulcan Cable III Inc. and Charter Investment. We expect that these special profit allocation provisions will provide tax savings to Charter Communications, Inc. and result in additional tax costs for Mr. Allen. The special profit allocations will also have the effect of restoring over time Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. These special profit allocations generally will continue 159 162 until such time as Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company that had been reduced as a result of the special loss allocations have been fully restored. We cannot assure you that Charter Communications Holding Company will become profitable. POSSIBLE ADVERSE IMPACT FROM THE SPECIAL ALLOCATION PROVISIONS. In a number of situations, these special tax allocations could result in our having to pay more taxes than if the special tax allocation provisions had not been adopted. For example, the special profit allocation provisions may result in an allocation of tax profits to the membership units held by Vulcan Cable III Inc. and Charter Investment that is less than the amount of the tax losses previously allocated to these units pursuant to the special loss allocation provisions described above. In this case, we could be required to pay higher taxes but only commencing at the time when Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company have been fully restored as described above. These tax payments could reduce our reported net income for the relevant period. As another example, under their exchange agreement with Charter Communications, Inc., Vulcan Cable III Inc. and Charter Investment may exchange some or all of their membership units for Class B common stock prior to the date that the special profit allocation provisions have had the effect of fully restoring Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. Charter Communications, Inc. will then be allocated tax profits attributable to the membership units it receives in such exchange pursuant to the special profit allocation provisions. As a result, Charter Communications, Inc. could be required to pay higher taxes in years following such an exchange of common stock for membership units than if the special tax allocation provisions had not been adopted. These tax payments could reduce our reported net income for the relevant period. However, we do not anticipate that the special tax allocations will result in Charter Communications, Inc. having to pay taxes in an amount that is materially different on a present value basis than the taxes that would be payable had the special tax allocation provisions not been adopted, although there is no assurance that a material difference will not result. IMPACT OF MERGER AND OTHER NON-TAXABLE TRANSACTIONS; MR. ALLEN'S REIMBURSEMENT OBLIGATIONS. Mr. Allen, through Vulcan Cable III Inc. and Charter Investment, has the right to transfer his Charter Communications Holding Company membership units in a non-taxable transaction, including a merger, to Charter Communications, Inc. for common stock. Such a transaction may occur prior to the date that the special profit allocation provisions have had the effect of fully restoring Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. In this case, the following will apply. Vulcan Cable III Inc. or Charter Investment may elect to cause Charter Communications Holding Company to make additional special allocations in order to restore Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. If this election is not made, or if an election is made but these additional special allocations are insufficient to restore these rights to Mr. Allen, Mr. Allen, Vulcan Cable III Inc. or Charter Investment, whichever person or entity receives the Class B common stock, will agree to make specified payments to Charter Communications, Inc. in respect of the common stock received. The payments will equal the amount that Charter Communications, Inc. actually pays in income taxes solely as a result of the allocation to it of tax profits because of the losses previously allocated to membership units transferred to it. Any of these payments would be made at the time Charter Communications, Inc. actually pays these income taxes. 160 163 BRESNAN SPECIAL ALLOCATION PROVISIONS. Charter Communications Holding Company's amended and restated limited liability company agreement contains provisions for special allocations of tax losses and tax profits between the Bresnan sellers receiving membership units on the one hand and Mr. Allen, through Vulcan Cable III Inc. and Charter Investment, Inc., on the other. Because of these provisions, Charter Communications, Inc. could under some circumstances be required to pay higher taxes in years following an exchange by the Bresnan sellers of membership units for shares of Class A common stock. However, we do not anticipate that any such exchange for Class A common stock will result in our having to pay taxes in an amount that is materially different on a present value basis than the taxes that would have been payable had the special allocations not been adopted, although there is no assurance that a material difference will not result. The effect of the special loss allocations discussed above is that Mr. Allen and some of the sellers in the Bresnan transaction receive tax savings while at the same time reducing their rights to receive distributions upon a liquidation of Charter Communications Holding Company. If and when special profit allocations occur, their rights to receive distributions upon a liquidation of Charter Communications Holding Company will be restored over time, and they will likely incur some additional tax costs. OTHER MATERIAL TERMS OF THE AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF CHARTER COMMUNICATIONS HOLDING COMPANY GENERAL. Charter Communications Holding Company's amended and restated limited liability company agreement contains provisions that permit each member (and its officers, directors, agents, shareholders, members, partners or affiliates) to engage in businesses that may compete with the businesses of Charter Communications Holding Company or any subsidiary. However, the directors of Charter Communications, Inc., including Mr. Allen and Mr. Kent, are subject to fiduciary duties under Delaware corporate law that generally require them to present business opportunities in the cable transmission business to Charter Communications, Inc. The amended and restated limited liability company agreement restricts the business activities that Charter Communications Holding Company may engage in. See "Certain Relationships and Related Transactions -- Allocation of Business Opportunities with Mr. Allen." TRANSFER RESTRICTIONS. The amended and restated limited liability company agreement restricts the ability of each member to transfer its membership interest unless specified conditions have been met. These conditions include: - the transfer will not result in the loss of any license or regulatory approval or exemption that has been obtained by Charter Communications Holding Company and is materially useful in its business as then conducted or proposed to be conducted; - the transfer will not result in a material and adverse limitation or restriction on the operations of Charter Communications Holding Company and its subsidiaries taken as a whole; - the proposed transferee agrees in writing to be bound by the limited liability company agreement; and - except for a limited number of permitted transfers under the limited liability company agreement, the transfer has been approved by the manager in its sole discretion. SPECIAL REDEMPTION RIGHTS RELATING TO CLASS A PREFERRED MEMBERSHIP UNITS. The holders of Class A preferred membership units have the right under a separate redemption and put agreement to 161 164 cause Charter Communications Holding Company to redeem their preferred membership units at specified redemption prices. SPECIAL RIGHTS GRANTED FORMER OWNERS OF BRESNAN. The amended and restated limited liability company agreement provides that Charter Communications, Inc. must provide the Bresnan sellers that are affiliates of Blackstone Group L.P. consultative rights reasonably acceptable to Charter Communications, Inc. so that, as long as these Bresnan sellers hold Class C common membership units, they may preserve their status and benefits they get from being a venture capital operating company. AMENDMENTS TO THE LIMITED LIABILITY COMPANY AGREEMENT. Any amendment to the limited liability company agreement generally may be adopted only upon the approval of a majority of the Class B common membership units. The agreement may not be amended in a manner that adversely affects the rights of any class of common membership units without the consent of holders holding a majority of the membership units of that class. REGISTRATION RIGHTS HOLDERS OF CLASS B COMMON STOCK. Charter Communications, Inc., Mr. Allen, Charter Investment, Vulcan Cable III Inc., Mr. Kent, Mr. Babcock and Mr. Wood are parties to a registration rights agreement. The agreement gives Mr. Allen and his affiliates the right to cause us to register the shares of Class A common stock issued to them upon conversion of any shares of Class B common stock that they may hold. The agreement gives Messrs. Kent, Babcock and Wood the right to cause us to register the shares of Class A common stock issuable to them upon exchange of Charter Communications Holding Company membership units. This registration rights agreement provides that each eligible holder is entitled to unlimited "piggyback" registration rights permitting them to include their shares of Class A common stock in registration statements filed by us. These holders may also exercise their demand rights causing us, subject to specified limitations, to register their Class A shares, provided that the amount of shares subject to each demand has a market value at least equal to $50 million or, if the market value is less than $50 million, all of the Class A shares of the holders participating in the offering are included in such registration. We are obligated to pay the costs associated with all such registrations. Holders may elect to have their shares registered pursuant to a shelf registration statement if at the time of the election, Charter Communications, Inc. is eligible to file a registration statement on Form S-3 and the amount of shares to be registered has a market value equal to at least $100.0 million on the date of the election. Mr. Allen also has the right to cause Charter Communications, Inc. to file a shelf registration statement in connection with the resale of shares of Class A common stock then held by or issuable to specified sellers under the Falcon and Bresnan acquisitions that have the right to cause Mr. Allen to purchase equity interests issued to them as a result of these acquisitions. All shares of Class A common stock issuable to the registration rights holders in exchange for Charter Communications Holding Company membership units and upon conversion of outstanding Class B common stock and conversion of Class B common stock issuable to the registration rights holders upon exchange of Charter Communications Holding Company membership units are subject to the registration rights described above. FALCON SELLERS. The Falcon sellers are entitled to registration rights with respect to the shares of Class A common stock issued in exchange for Charter Communications Holding Company membership units received by them in connection with the Falcon acquisition. 162 165 These Falcon sellers or their permitted transferees have "piggyback" registration rights and up to four "demand" registration rights with respect to these shares of Class A common stock. The demand registration rights must be exercised with respect to tranches of Class A common stock worth at least $40 million at the time of notice of demand or at least $60 million at the initial public offering price. A majority of the holders of Class A common stock making a demand may also require us, on a one-time basis, to satisfy our registration obligations by filing a shelf registration statement for shares worth a total of at least $100 million. 122,668 shares of Class A common stock covered by this prospectus are registered hereby. BRESNAN SELLERS. The Bresnan sellers are entitled to registration rights with respect to the shares of Class A common stock issuable upon exchange of the Charter Communications Holding Company membership units and Class A Units in CC VIII, LLC held by them. We may register the shares of our Class A common stock issuable to the Bresnan sellers in exchange for these units for resale pursuant to a shelf registration statement on Form S-1. The Bresnan sellers collectively will have unlimited "piggyback" registration rights and up to four "demand" registration rights with respect to the Class A common stock issued in exchange for the membership units in Charter Communications Holding Company and Class A Units in CC VIII, LLC. The demand registration rights must be exercised with respect to tranches of Class A common stock worth at least $40 million at the time of notice of demand or at least $60 million at the initial public offering price. KALAMAZOO SELLER. The seller in the Kalamazoo transaction is entitled to registration rights with respect to the shares of Class A common stock issued in connection with that transaction. The Kalamazoo seller will have unlimited "piggyback" registration rights and up to two "demand" registration rights with respect to these shares of Class A common stock. The demand registration rights must be exercised with respect to tranches of Class A common stock worth at least $25 million at the time of the notice of demand. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. SHARES ELIGIBLE FOR FUTURE SALE We have 233,735,768 shares of Class A common stock issued and outstanding. In addition, the following shares of Class A common stock will be issuable in the future: - 324,300,479 shares of Class A common stock will be issuable upon conversion of Class B common stock issuable upon exchange of Charter Communications Holding Company membership units held by Vulcan III and Charter Investment. These membership units are exchangeable for shares of Class B common stock on a one-for-one basis. Shares of Class B common stock are convertible into Class A common stock on a one-for-one basis; - 39,011,744 shares of Class A common stock will be issuable upon the exchange of Charter Communications Holding Company membership units and CC VIII, LLC membership units issued to specified sellers in the Bresnan acquisition. These units are exchangeable for shares of Class A common stock; 163 166 - 50,000 shares of Class A common stock will be issuable upon conversion of outstanding Class B common stock on a one-for-one basis; - 27,843,285 shares of Class A common stock will be issuable upon the exchange of membership units in Charter Communications Holding Company that are received upon the exercise of options granted under the Charter Communications Option Plan and under agreements Mr. Kent, our chief executive officer. Upon issuance, these membership units will be immediately exchanged for shares of Class A common stock, without any further action by the optionholder. As of August 31, 2000, 5,922,502 of these options have vested; and - All or a portion of 52,516 shares of Class A common stock which constituted 10% of the shares issuable as payment of a portion of the merger consideration in the Chat TV transaction, but which will be issued on September 15, 2001 in the event that no indemnity claims have been made under the Chat TV acquisition agreement. Additional Class A common stock may be issued eighteen and/or thirty-six months following September 14, 2000 if certain performance targets are satisfied. Of the total number of our shares of Class A common stock issuable as described above, 28,274,462 shares will be eligible for immediate public resale following their issuance. In addition, of the total number of shares of Class A common stock issued or issuable as described above, 363,312,223 shares may only be sold in compliance with Rule 144 under the Securities Act of 1933, unless registered under the Securities Act of 1933 pursuant to demand or piggyback registration rights. Substantially all of the shares of Class A common stock issuable upon exchange of Charter Communications Holding Company membership units and upon conversion of shares of our Class B common stock have demand and piggyback registration rights attached to them. The sale of a substantial number of shares of Class A common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Class A common stock. In addition, any such sale or perception could make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate. A registration statement on Form S-8 covering the Class A common stock issuable pursuant to the exercise of options under the Charter Communications Option Plan was filed with the Securities and Exchange Commission in May 2000. The shares of Class A common stock covered by the Form S-8 registration statement generally may be resold in the public market without restriction or limitation, except in the case of our affiliates who generally may only resell such shares in accordance with the provisions of Rule 144 of the Securities Act of 1933. LEGAL MATTERS The validity of the shares of Class A common stock offered in this prospectus will be passed upon for Charter Communications, Inc. by Paul, Hastings, Janofsky & Walker LLP, New York, New York. EXPERTS The financial statements of Charter Communications, Inc., Charter Communications Properties Holdings, LLC and subsidiaries, CCA Group, CharterComm Holdings, L.P. and subsidiaries, Marcus Cable Holdings, LLC and subsidiaries, the Greater Media Cablevision Systems, Helican Partners I, L.P. and affiliates, the Sonic Communications Cable Television Systems, Long Beach Acquisition Corp. and CC V Holdings, LLC and subsidiaries included in this prospectus, to the extent and for 164 167 the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included in this prospectus in reliance upon the authority of said firm as experts in giving said reports. The combined financial statements of 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, the combined financial statements of TCI Falcon Systems as of September 30, 1998 and December 31, 1997 and for the nine-month period ended September 30, 1998, and for each of the years in the two-year period ended December 31, 1997, the consolidated financial statements of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, and the consolidated financial statements of Bresnan Communications Group LLC as of December 31, 1998 and 1999 and February 14, 2000, and for each of the years in the three year period ended December 31, 1999, and the period from January 1, 2000 to February 14, 2000, 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 systems, the financial statements of Indiana Cable Associates, Ltd., the consolidated financial statements of R/N South Florida Cable Management Limited Partnership, the combined financial statements of Fanch Cable Systems Sold to Charter Communications, Inc. and the consolidated financial statements of Falcon Communications, L.P., 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 audited combined financial statements of InterMedia Cable Systems (comprised of components of InterMedia Partners and InterMedia Capital Partners IV, L.P.), the audited financial statements of Rifkin Cable Income Partners L.P., the audited consolidated financial statements of Rifkin Acquisition Partners, L.L.L.P., the audited consolidated financial statements of Cable Michigan Inc. and subsidiaries, the audited consolidated financial statements of Avalon Cable LLC and subsidiaries, the audited financial statements of Indiana Cable Associates, Ltd, the audited consolidated financial statements of R/N South Florida Cable Management Limited Partnership, the audited consolidated financial statements of Avalon Cable of Michigan Holdings, Inc. and subsidiaries, the audited consolidated financial statements of Cable Michigan, Inc. and subsidiaries, the audited financial statements of Amrac Clear View, a Limited Partnership, the audited combined financial statements of the Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus Cable Television, Inc., included in this prospectus, have been audited by PricewaterhouseCoopers LLP, independent accountants. The entities and periods covered by these audits are indicated in their reports. The financial statements have been so included in reliance on the reports of PricewaterhouseCoopers LLP, given on the authority of said firm as experts in auditing and accounting. The financial statements of Cable Systems, Inc. and Fanch Narragansett CSI Limited Partnership, the consolidated financial statements of North Texas Cablevision, Ltd. and the financial statements of Spring Green Communications, L.P., included in this prospectus, have been audited by Shields & Co., 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. 165 168 The financial statements of Amrac Clear View, a Limited Partnership, as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, included in this prospectus, have been so included in reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C., independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 to register the Class A common stock offered by this prospectus. 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 Class A common stock offered in this prospectus, you should refer to the registration statement and its exhibits. We are required to file annual, quarterly and other information with the SEC. You may read and copy any document we file with the SEC at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC'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 SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You can also review such material by accessing the SEC'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 SEC. We intend to furnish to each holder of our Class A common stock annual reports containing audit 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 our Class A common stock such other reports as may be required by law. 166 169 INDEX TO FINANCIAL STATEMENTS F-1
PAGE ------- CHARTER COMMUNICATIONS INC. AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-8 Report of Independent Auditors............................ F-9 Report of Independent Auditors............................ F-10 Consolidated Balance Sheets as of December 31, 1999 and 1998.................................................... F-11 Consolidated Statements of Operations for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998......................... F-12 Consolidated Statements of Changes in Stockholders' Equity for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998....... F-13 Consolidated Statements of Cash Flows for the Year ended December 31, 1999, and for the Period from December 24, 1998, through December 31, 1998......................... F-14 Notes to Consolidated Financial Statements................ F-15 CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-38 Consolidated Statements of Operations for the Period from January 1, 1998 through December 23, 1998 and for the Year ended December 31, 1997............................ F-39 Consolidated Statement of Changes in Shareholder's Investment for the Period from January 1, 1998 through December 23, 1998 and for the Year ended December 31, 1997.................................................... F-40 Consolidated Statements of Cash Flows for the Period from January 1, 1998 through December 23, 1998 and for the Year ended December 31, 1997............................ F-41 Notes to Consolidated Financial Statements................ F-42 CCA GROUP: Report of Independent Public Accountants.................. F-49 Combined Balance Sheet as of December 31, 1997............ F-50 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-51 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-52 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-53 Notes to Combined Financial Statements.................... F-54 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-68 Consolidated Balance Sheet as of December 31, 1997........ F-69 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-70 Consolidated Statements of Partners' Capital for the Period from January 1, 1998, through December 23, 1998 and for the Years Ended December 31, 1997 and 1996...... F-71 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-72 Notes to Consolidated Financial Statements................ F-73 170 F-2
PAGE ------- MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-86 Consolidated Statement of Operations for the Three Months Ended March 31, 1999.................................... F-87 Consolidated Statement of Members' Deficit for the Three Months Ended March 31, 1999............................. F-88 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1999.................................... F-89 Notes to Consolidated Financial Statements................ F-90 Independent Auditors' Report.............................. F-96 Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................... F-97 Consolidated Statements of Operations for Each of the Years in the Three-Year Period Ended December 31, 1998.................................................... F-98 Consolidated Statements of Members' Equity/Partners' Capital for Each of the Years in the Three-Year Period Ended December 31, 1998................................. F-99 Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1998.................................................... F-100 Notes to Consolidated Financial Statements................ F-101 RENAISSANCE MEDIA GROUP LLC: Report of Independent Auditors............................ F-112 Consolidated Balance Sheet as of April 30, 1999........... F-113 Consolidated Statement of Operations for the Four Months Ended April 30, 1999.................................... F-114 Consolidated Statement of Changes in Members' Equity for the Four Months Ended April 30, 1999.................... F-115 Consolidated Statement of Cash Flows for the Four Months Ended April 30, 1999.................................... F-116 Notes to Consolidated Financial Statements................ F-117 Report of Independent Auditors............................ F-125 Consolidated Balance Sheet as of December 31, 1998........ F-126 Consolidated Statement of Operations for the Year Ended December 31, 1998....................................... F-127 Consolidated Statement of Changes in Members' Equity for the Year Ended December 31, 1998........................ F-128 Consolidated Statement of Cash Flows for the Year Ended December 31, 1998....................................... F-129 Notes to Consolidated Financial Statements for the Year Ended December 31, 1998................................. F-130 PICAYUNE, MS, LAFOURCHE, LA, ST. TAMMANY, LA, ST. LANDRY, LA, POINTE COUPEE, LA AND JACKSON, TN CABLE TELEVISION SYSTEMS: Report of Independent Auditors............................ F-140 Combined Balance Sheet as of April 8, 1998................ F-141 Combined Statement of Operations for the Period from January 1, 1998 through April 8, 1998................... F-142 Combined Statement of Changes in Net Assets for the Period from January 1, 1998 through April 8, 1998.............. F-143 Combined Statement of Cash Flows for the Period from January 1, 1998 through April 8, 1998................... F-144 Notes to Combined Financial Statements.................... F-145 Report of Independent Auditors............................ F-152 Combined Balance Sheets as of December 31, 1996 and 1997.................................................... F-153 Combined Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997........................ F-154 Combined Statements of Changes in Net Assets for the Years Ended December 31, 1996 and 1997........................ F-155 Combined Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997........................ F-156 Notes to Combined Financial Statements.................... F-157 171 F-3
PAGE ------- GREATER MEDIA CABLEVISION SYSTEMS: Report of Independent Public Accountants.................. F-164 Combined Statement of Income for the Nine Months Ended June 30, 1999........................................... F-165 Combined Statement of Changes in Net Assets for the Nine Months Ended June 30, 1999.............................. F-166 Combined Statement of Cash Flows for the Nine Months Ended June 30, 1999........................................... F-167 Notes to Combined Financial Statements.................... F-168 Report of Independent Public Accountants.................. F-172 Combined Balance Sheets as of September 30, 1998 and 1997.................................................... F-173 Combined Statements of Income for the Years Ended September 30, 1996, 1997 and 1998....................... F-174 Combined Statements of Changes in Net Assets for the Years Ended September 30, 1996, 1997 and 1998................. F-175 Combined Statements of Cash Flows for the Years Ended September 30, 1996, 1997 and 1998....................... F-176 Notes to Combined Financial Statements.................... F-177 HELICON PARTNERS I, L.P. AND AFFILIATES: Report of Independent Public Accountants.................. F-183 Combined Statement of Operations for the Seven Months Ended July 30, 1999..................................... F-184 Combined Statement of Changes in Partners' Deficit for the Seven Months Ended July 30, 1999........................ F-185 Combined Statement of Cash Flows for the Seven Months Ended July 30, 1999..................................... F-186 Notes to Combined Financial Statements.................... F-187 Independent Auditors' Report.............................. F-192 Combined Balance Sheets as of December 31, 1997 and 1998.................................................... F-193 Combined Statements of Operations for Each of the Years in the Three-Year Period Ended December 31, 1998........... F-194 Combined Statements of Changes in Partners' Deficit for Each of the Years in the Three-Year Period Ended December 31, 1998....................................... F-195 Combined Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1998........... F-196 Notes to Combined Financial Statements.................... F-197 RIFKIN CABLE INCOME PARTNERS L.P.: Report of Independent Accountants......................... F-209] Balance Sheet as of September 13, 1999.................... F-210 Statement of Operations for the period January 1, 1999 to September 13, 1999...................................... F-211 Statement of Equity for the period January 1, 1999 to September 13, 1999...................................... F-212 Statement of Cash Flows for the period January 1, 1999 to September 13, 1999...................................... F-213 Notes to Financial Statements............................. F-214 Report of Independent Accountants......................... F-218 Balance Sheet at December 31, 1997 and 1998............... F-219 Statement of Operations for Each of the Three Years in the Period Ended December 31, 1998.......................... F-220 Statement of Partners' Equity (Deficit) for Each of the Three Years in the Period Ended December 31, 1998....... F-221 Statement of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998.......................... F-222 Notes to Financial Statements............................. F-223 172 F-4
PAGE ------- RIFKIN ACQUISITION PARTNERS, L.L.L.P.: Report of Independent Accountants......................... F-227 Consolidated Balance Sheet as of September 13, 1999....... F-228 Consolidated Statement of Operations for the period January 1, 1999 through September 13, 1999.............. F-229 Consolidated Statement of Partners' Capital for the period January 1, 1999 through September 13, 1999.............. F-230 Consolidated Statement of Cash Flows for the period January 1, 1999 through September 13, 1999.............. F-231 Notes to Consolidated Financial Statements................ F-232 Report of Independent Accountants......................... F-241 Consolidated Balance Sheet at December 31, 1998 and 1997.................................................... F-242 Consolidated Statement of Operations for Each of the Three Years in the Period Ended December 31, 1998............. F-243 Consolidated Statement of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998............. F-244 Consolidated Statement of Partners' Capital (Deficit) for Each of the Three Years in the Period Ended December 31, 1998.................................................... F-245 Notes to Consolidated Financial Statements................ F-246 INDIANA CABLE ASSOCIATES, LTD.: Report of Independent Accountants......................... F-260 Balance Sheet as of September 13, 1999.................... F-261 Statement of Operations for the period January 1, 1999 to September 13, 1999...................................... F-262 Statement of Equity for the period January 1, 1999 to September 13, 1999...................................... F-263 Statement of Cash Flows for the period January 1, 1999 to September 13, 1999...................................... F-264 Notes to Financial Statements............................. F-265 Report of Independent Auditors............................ F-269 Balance Sheet as of December 31, 1997 and 1998............ F-270 Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998..................................... F-271 Statement of Partners' Deficit for the Years Ended December 31, 1996, 1997 and 1998........................ F-272 Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998..................................... F-273 Notes to Financial Statements............................. F-274 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP: Report of Independent Accountants......................... F-278 Consolidated Balance Sheet as of September 13, 1999....... F-279 Consolidated Statement of Operations for the period January 1, 1999 to September 13, 1999................... F-280 Consolidated Statement of Equity for the period January 1, 1999 to September 13, 1999.............................. F-281 Consolidated Statement of Cash Flows for the period January 1, 1999 to September 13, 1999................... F-282 Notes to Consolidated Financial Statements................ F-283 Report of Independent Auditors............................ F-287 Consolidated Balance Sheet as of December 31, 1997 and 1998.................................................... F-288 Consolidated Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998........................ F-289 Consolidated Statement of Partners' Equity (Deficit) for the Years Ended December 31, 1996, 1997 and 1998........ F-290 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998........................ F-291 Notes to Consolidated Financial Statements................ F-292 173 F-5
PAGE ------- INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.): Report of Independent Accountants......................... F-296 Combined Balance Sheets as of September 30, 1999 and December 31, 1998....................................... F-297 Combined Statements of Operations for the Nine Months Ended September 30, 1999 and for the Years ended December 31, 1998 and 1997.............................. F-298 Combined Statements of Changes in Equity for the Nine Months Ended September 30, 1999 and for the Years ended December 31, 1998 and 1997.............................. F-299 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1999 and for the Years ended December 31, 1998 and 1997.............................. F-300 Notes to Combined Financial Statements.................... F-301 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS: Report of Independent Public Accountants.................. F-312 Statement of Operations and Changes in Net Assets for the Period from April 1, 1998, through May 20, 1998......... F-313 Statement of Cash Flows for the Period from April 1, 1998, through May 20, 1998.................................... F-314 Notes to Financial Statements............................. F-315 LONG BEACH ACQUISITION CORP.: Report of Independent Public Accountants.................. F-318 Statement of Operations for the Period from April 1, 1997, through May 23, 1997.................................... F-319 Statement of Stockholder's Equity for the Period from April 1, 1997, through May 23, 1997..................... F-320 Statement of Cash Flows for the Period from April 1, 1997, through May 23, 1997.................................... F-321 Notes to Financial Statements............................. F-322 FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.: Report of Independent Auditors............................ F-326 Report of Independent Auditors............................ F-327 Report of Independent Auditors............................ F-328 Report of Independent Auditors............................ F-329 Combined Balance Sheets as of November 11, 1999 and December 31, 1998....................................... F-330 Combined Statements of Operations for the Period from January 1, 1999 to November 11, 1999 and for the Years Ended December 31, 1998 and 1997........................ F-331 Combined Statements of Net Assets for the Period from January 1, 1999 to November 11, 1999 and for the Years Ended December 31, 1998 and 1997........................ F-332 Combined Statements of Cash Flows for the Period from January 1, 1999 to November 11, 1999 and for the Years Ended December 31, 1998 and 1997........................ F-333 Notes to Combined Financial Statements.................... F-334 FALCON COMMUNICATIONS, L.P.: Report of Independent Auditors............................ F-339 Consolidated Balance Sheets as of December 31, 1998 and November 12, 1999....................................... F-340 Consolidated Statements of Operations for each of the two years in the period ended December 31, 1998 and for the Period from January 1, 1999 to November 12, 1999........ F-341 Consolidated Statements of Partners' Equity (Deficit) for the each of the two years in the period ended December 31, 1998 and for the Period from January 1, 1999 to November 12, 1999....................................... F-342 Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 1998 and for the Period from January 1, 1999 to November 12, 1999........ F-343 Notes to Consolidated Financial Statements................ F-345 174 F-6
PAGE ------- TCI FALCON SYSTEMS: Independent Auditors' Report.............................. F-365 Combined Balance Sheets at September 30, 1998 and December 31, 1997................................................ F-366 Combined Statements of Operations and Parent's Investment for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996.................................................... F-367 Combined Statements of Cash Flows for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996.................. F-368 Notes to Combined Financial Statements for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996.................. F-369 CC V HOLDINGS, LLC AND SUBSIDIARIES: Report of Independent Public Accountants.................. F-376 Consolidated Balance Sheet as of December 31, 1999........ F-377 Consolidated Statements of Operations for the Period from November 15, 1999, through December 31, 1999, and for the Period from January 1, 1999, through November 14, 1999.................................................... F-378 Consolidated Statement of Changes in Shareholders' Equity for the Period from January 1, 1999, through November 14, 1999................................................ F-379 Consolidated Statements of Cash Flows for the Period from November 15, 1999, through December 31, 1999, and for the Period from January 1, 1999, through November 14, 1999.................................................... F-380 Notes to Consolidated Financial Statements................ F-381 AVALON CABLE LLC AND SUBSIDIARIES: Report of Independent Accountants......................... F-393 Consolidated Balance Sheet as of December 31, 1998 and 1997.................................................... F-394 Consolidated Statement of Operations for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-395 Consolidated Statement of Changes in Members' Interest from September 4, 1997 (inception) through December 31, 1998.................................................... F-396 Consolidated Statement of Cash Flows for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-397 Notes to Consolidated Financial Statements................ F-398 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES: Report of Independent Accountants......................... F-412 Consolidated Balance Sheet as of December 31, 1998 and 1997.................................................... F-413 Consolidated Statements of Operations for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-414 Consolidated Statement of Changes in Shareholders' Equity for the period from September 4, 1997 (inception) through December 31, 1998............................... F-415 Consolidated Statement of Cash Flows for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-416 Notes to Consolidated Financial Statements................ F-417 CABLE MICHIGAN, INC. AND SUBSIDIARIES: Report of Independent Accountants......................... F-430 Consolidated Balance Sheets as of December 31, 1997 and November 5, 1998........................................ F-431 Consolidated Statements of Operations for the years ended December 31, 1996 and 1997 and for the period from January 1, 1998 to November 5, 1998..................... F-432 Consolidated Statements of Changes in Shareholders' Deficit for the years ended December 31, 1996 and 1997 and for the period from January 1, 1998 to November 5, 1998.................................................... F-433 Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997 and for the period from January 1, 1998 to November 5, 1998..................... F-434 Notes to Consolidated Financial Statements................ F-435 175 F-7
PAGE ------- AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP: Report of Independent Accountants......................... F-449 Balance Sheet as of May 28, 1998.......................... F-450 Statement of Operations for the period from January 1, 1998 through May 28, 1998............................... F-451 Statement of Changes in Partners' Equity (Deficit) for the period from January 1, 1998 through May 28, 1998........ F-452 Statement of Cash Flows for the period from January 1, 1998 through May 28, 1998............................... F-453 Notes to Financial Statements............................. F-454 Independent Auditors' Report.............................. F-458 Balance Sheets at December 31, 1996 and 1997.............. F-459 Statements of Net Earnings for the years ended December 31, 1995, 1996 and 1997................................. F-460 Statements of Changes in Partners' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997........ F-461 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997..................................... F-462 Notes to Financial Statements............................. F-463 PEGASUS CABLE TELEVISION, INC.: Report of Independent Accountants......................... F-466 Combined Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998....................................... F-467 Combined Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998..................................... F-468 Combined Statements of Changes in Stockholder's Deficit for the three years ended December 31, 1997 and for the six months ended June 30, 1998.......................... F-469 Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998..................................... F-470 Notes to Combined Financial Statements.................... F-471 BRESNAN COMMUNICATIONS GROUP LLC: Independent Auditors' Report.............................. F-477 Consolidated Balance Sheets as of December 31, 1998 and 1999.................................................... F-478 Consolidated Statements of Operations and Members' Equity (Deficit) for the Years Ended December 31, 1997, 1998 and 1999................................................ F-479 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999........................ F-480 Notes to Consolidated Financial Statements................ F-481 Independent Auditors' Report.............................. F-489 Consolidated Balance Sheets as of December 31, 1999 and February 14, 2000....................................... F-490 Consolidated Statements of Operations and Members' Equity (Deficit) for the Year ended December 31,1999 and for the Period from January 1, 2000 to February 14, 2000.... F-491 Consolidated Statements of Cash Flows for the Year ended December 31, 1999 and for the Period from January 1, 2000 to February 14, 2000............................... F-492 Notes to Consolidated Financial Statements................ F-493 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES: Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 (unaudited)........................... F-501 Consolidated Statements of Operations for the Three Months Ended June 30, 2000 and 1999 (unaudited)................ F-502 Consolidated Statements of Operations for the Six Months Ended June 30, 2000 and 1999 (unaudited)................ F-503 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 (unaudited)................ F-504 Notes to Consolidated Financial Statements (unaudited).... F-505 176 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO CHARTER COMMUNICATIONS, INC.: We have audited the accompanying consolidated balance sheets of Charter Communications, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Charter Communications VI Operating Company, LLC and subsidiaries, and CC VII -- Falcon Systems, as of December 31, 1999, and for the periods from the dates of acquisition through December 31, 1999, which statements on a combined basis reflect total assets and total revenues of 31 percent and 6 percent, respectively, of the related consolidated totals of the Company. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Charter Communications, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, March 2, 2000 F-8 177 REPORT OF INDEPENDENT AUDITORS Charter Communications VI Operating Company, LLC We have audited the consolidated balance sheet of Charter Communications VI Operating Company, LLC and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, member's equity and cash flows for the period from inception (November 9, 1999) to December 31, 1999 (not presented separately herein). These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Charter Communications VI Operating Company, LLC and subsidiaries at December 31, 1999, and the consolidated results of its operations and its cash flows for the period from November 9, 1999 to December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Denver, Colorado February 11, 2000 F-9 178 REPORT OF INDEPENDENT AUDITORS Sole Member CC VII Holdings, LLC We have audited the combined balance sheet of the CC VII -- Falcon Systems as of December 31, 1999, and the related combined statements of operations and parent's investment and cash flows for the period from November 13, 1999 (commencement date) to December 31, 1999 (not presented separately herein). These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the CC VII -- Falcon Systems at December 31, 1999 and the results of its operations and its cash flows for the period from November 13, 1999 (commencement date) to December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Los Angeles, California March 2, 2000 F-10 179 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-11
DECEMBER 31, ------------------------- 1999 1998 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 133,706 $ 9,573 Accounts receivable, net of allowance for doubtful accounts of $11,471 and $1,728, respectively........... 93,743 15,108 Prepaid expenses and other................................ 35,142 2,519 ----------- ---------- Total current assets................................. 262,591 27,200 ----------- ---------- INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment............................. 3,490,573 716,242 Franchises................................................ 14,985,793 3,590,054 ----------- ---------- 18,476,366 4,306,296 ----------- ---------- OTHER ASSETS................................................ 227,550 2,031 ----------- ---------- $18,966,507 $4,335,527 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...................... $ -- $ 10,450 Accounts payable and accrued expenses..................... 706,775 127,586 Payables to related party................................. 13,183 4,334 ----------- ---------- Total current liabilities............................ 719,958 142,370 ----------- ---------- LONG-TERM DEBT, less current maturities..................... 8,936,455 1,991,756 ----------- ---------- DEFERRED MANAGEMENT FEES -- RELATED PARTY................... 21,623 15,561 ----------- ---------- OTHER LONG-TERM LIABILITIES................................. 145,124 38,461 ----------- ---------- MINORITY INTEREST........................................... 5,381,331 2,146,549 ----------- ---------- REDEEMABLE SECURITIES....................................... 750,937 -- ----------- ---------- STOCKHOLDERS' EQUITY: Class A common stock...................................... 195 -- Class B common stock...................................... -- -- Preferred stock........................................... -- -- Additional paid-in capital................................ 3,075,694 832 Retained deficit.......................................... (66,231) (2) Accumulated other comprehensive income.................... 1,421 -- ----------- ---------- Total stockholders' equity........................... 3,011,079 830 ----------- ---------- $18,966,507 $4,335,527 =========== ========== 180 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) The accompanying notes are an integral part of these consolidated statements. F-12
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- REVENUES.................................................... $1,428,244 $13,713 ---------- ------- OPERATING EXPENSES: Operating, general and administrative..................... 737,957 7,134 Depreciation and amortization............................. 745,315 8,318 Option compensation expense............................... 79,979 845 Corporate expense charges -- related party................ 51,428 473 ---------- ------- 1,614,679 16,770 ---------- ------- Loss from operations................................... (186,435) (3,057) OTHER INCOME (EXPENSE): Interest expense.......................................... (477,799) (2,353) Interest income........................................... 34,467 133 Other, net................................................ (8,039) -- ---------- ------- Loss before income taxes and minority interest......... (637,806) (5,277) INCOME TAX EXPENSE.......................................... (1,030) -- ---------- ------- Loss before minority interest.......................... (638,836) (5,277) MINORITY INTEREST IN LOSS OF SUBSIDIARY..................... 572,607 5,275 ---------- ------- Net loss............................................... $ (66,229) $ (2) ========== ======= LOSS PER COMMON SHARE, basic and diluted.................... $ (2.22) $ (0.04) ========== ======= Weighted-average common shares outstanding.................. 29,811,202 50,000 ========== ======= 181 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-13
ACCUMULATED CLASS A CLASS B ADDITIONAL OTHER TOTAL COMMON COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' STOCK STOCK CAPITAL DEFICIT INCOME EQUITY ------- ------- ---------- -------- ------------- ------------- BALANCE, December 24, 1998.......... $ -- $-- $ 832 $ -- $ -- $ 832 Net loss.......................... -- -- -- (2) -- (2) ---- -- ---------- -------- ------ ---------- BALANCE, December 31, 1998.......... -- -- 832 (2) -- 830 Issuance of Class B common stock to Mr. Allen.................... -- -- 950 -- -- 950 Net proceeds from initial public offering of Class A common stock........................... 196 -- 3,547,724 -- -- 3,547,920 Issuance of common stock in exchange for additional equity of subsidiary................... 26 -- 638,535 -- -- 638,561 Distributions to Charter Investment...................... -- -- (2,233) -- -- (2,233) Equity classified as redeemable securities...................... (27) -- (700,759) -- -- (700,786) Option compensation expense....... -- -- 4,493 -- -- 4,493 Loss on issuance of equity by subsidiary...................... -- -- (413,848) -- -- (413,848) Net loss.......................... -- -- -- (66,229) -- (66,229) Unrealized gain on marketable securities available for sale... -- -- -- -- 1,421 1,421 ---- -- ---------- -------- ------ ---------- BALANCE, December 31, 1999.......... $195 $-- $3,075,694 $(66,231) $1,421 $3,011,079 ==== == ========== ======== ====== ========== 182 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-14
PERIOD FROM DECEMBER 24, 1998 YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (66,229) $ (2) Adjustments to reconcile net loss to net cash provided by operating activities-- Minority interest in loss of subsidiary................ (572,607) (5,275) Depreciation and amortization.......................... 745,315 8,318 Option compensation expense............................ 79,979 845 Noncash interest expense............................... 100,674 -- Changes in assets and liabilities, net of effects from acquisitions-- Accounts receivable.................................... (32,366) (8,753) Prepaid expenses and other............................. 13,627 (211) Accounts payable and accrued expenses.................. 177,321 10,227 Payables to related party, including deferred management fees...................................... 27,653 473 Other operating activities................................ 6,549 2,022 ------------ -------- Net cash provided by operating activities......... 479,916 7,644 ------------ -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment................. (741,508) (13,672) Payments for acquisitions, net of cash acquired........... (7,629,564) -- Loan to Marcus Cable Holdings............................. (1,680,142) -- Other investing activities................................ (26,755) -- ------------ -------- Net cash used in investing activities............. (10,077,969) (13,672) ------------ -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt, including proceeds from Charter Holdings Notes................................. 10,114,188 14,200 Repayments of long-term debt.............................. (5,694,375) -- Payments for debt issuance costs.......................... (113,481) -- Net proceeds from initial public offering of Class A common stock........................................... 3,547,920 -- Proceeds from issuance of Class B common stock............ 950 -- Capital contributions to Charter Holdco by Vulcan Cable... 1,894,290 -- Distributions to Charter Investment....................... (10,931) -- Other financing activities................................ (16,375) -- ------------ -------- Net cash provided by financing activities......... 9,722,186 14,200 ------------ -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 124,133 8,172 CASH AND CASH EQUIVALENTS, beginning of period.............. 9,573 1,401 ------------ -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 133,706 $ 9,573 ============ ======== CASH PAID FOR INTEREST...................................... $ 314,606 $ 5,538 ============ ======== NONCASH TRANSACTIONS: Transfer of operating subsidiaries to the Company......... $ 1,252,370 $ -- Transfer of equity interests to the Company............... 180,710 -- Issuance of equity as partial payments for acquisitions... 683,312 -- 183 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1. ORGANIZATION AND BASIS OF PRESENTATION: Charter Communications, Inc. On July 22, 1999, Charter Investment, Inc. (Charter Investment), a company controlled by Paul G. Allen, formed a wholly owned subsidiary, Charter Communications, Inc. (Charter), a Delaware corporation, with a nominal initial investment. On November 12, 1999, Charter sold 195.5 million shares of Class A common stock in an initial public offering and 50,000 shares of high vote Class B common stock to Mr. Allen. The net proceeds from the offerings of approximately $3.55 billion were used to purchase membership units of Charter Communications Holding Company, LLC (Charter Holdco), except for a portion of the proceeds that were retained by Charter to acquire a portion of the equity interests of Avalon Cable of Michigan Holdings, Inc. (Avalon). In exchange for the contribution of the net proceeds from the offerings and equity interests of Avalon, Charter received 195.55 million membership units of Charter Holdco on November 12, 1999, representing a 100% voting interest and an approximate 40.6% economic interest. Prior to November 12, 1999, Charter Holdco was owned 100% by Charter Investment and Vulcan Cable III Inc. (Vulcan Cable), both entities controlled by Mr. Allen. Subsequent to November 12, 1999, Mr. Allen controls Charter through his ownership of all of the high vote Class B common stock and Charter controls Charter Holdco through its ownership of all the voting interests. Charter's purchase of 50,000 membership units of Charter Holdco was accounted for as a reorganization of entities under common control similar to a pooling of interests. Accordingly, beginning December 23, 1998, the date Mr. Allen first controlled Charter Holdco, the assets and liabilities of Charter Holdco are reflected in the consolidated financial statements of Charter at Mr. Allen's basis and minority interest is recorded representing that portion of the economic interests not owned by Charter. For financial reporting purposes, 50,000 of the membership units previously issued by Charter Holdco to companies controlled by Mr. Allen are considered held by Charter effective December 23, 1998, representing an economic interest of less than 1%. Charter is a holding company whose sole asset is a controlling equity interest in Charter Holdco, an indirect owner of cable systems. Charter and Charter Holdco and its subsidiaries are collectively referred to as the Company. The Company owns and operates cable systems serving approximately 6.1 million (unaudited) customers, including customers from the Bresnan acquisition (see Note 21) completed in February 2000. The Company offers a full range of traditional cable television services and has begun to offer digital cable television services, interactive video programming and high-speed Internet access. Charter Communications Holding Company, LLC Charter Holdco, a Delaware limited liability company, was formed in February 1999 as a wholly owned subsidiary of Charter Investment. Charter Investment through its wholly owned subsidiary, Charter Communications Properties Holdings, LLC (CCPH), commenced operations with the acquisition of a cable system on September 30, 1995. Effective December 23, 1998, through a series of transactions, Mr. Allen acquired approximately 94% of Charter Investment for an aggregate purchase price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen Transaction"). In conjunction with the F-15 184 Paul Allen Transaction, Charter Investment acquired, for fair value from unrelated third parties, all of the interests it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.), all cable television operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment previously managed and owned minority interests in these companies. These acquisitions were accounted for using the purchase method of accounting and accordingly, results of operations of CharterComm Holdings and CCA Group are included in the financial statements from the date of acquisition. In February 1999, Charter Investment transferred all of its cable television operating subsidiaries to a wholly owned subsidiary of Charter Communications Holdings, LLC (Charter Holdings), Charter Communications Operating, LLC (Charter Operating). Charter Holdings is a wholly owned subsidiary of Charter Holdco. This transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. As a result of the change in ownership of CCPH, CharterComm Holdings and CCA Group, Charter Holdco has applied push-down accounting in the preparation of its consolidated financial statements. Accordingly, on December 23, 1998, Charter Holdco increased its members' equity by $2.2 billion to reflect the amounts paid by Mr. Allen and Charter Investment. The purchase price was allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $3.6 billion. On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen, (collectively, the "Mr. Allen Companies") purchased substantially all of the outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable) for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of the remaining partnership interest retained voting control of Marcus Cable. In February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed, and Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership interests in Marcus Cable, including voting control. On April 7, 1999, Marcus Holdings was merged into Charter Holdings and Marcus Cable was transferred to Charter Holdings. For financial reporting purposes, the merger was accounted for as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen obtained voting control of Marcus Cable. Accordingly, the results of operations of Marcus Cable have been included in the consolidated financial statements from April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in the consolidated financial statements using historical carrying values reflected in the accounts of the Mr. Allen Companies. Total member's equity of Charter Holdco increased by $1.3 billion as a result of the Marcus Cable acquisition. Previously, on April 23, 1998, the Mr. Allen Companies recorded the assets acquired and liabilities assumed of Marcus Cable based on their relative fair values. The consolidated financial statements of Charter Holdco include the accounts of Charter Operating and CCPH, the accounts of CharterComm Holdings and CCA Group and their subsidiaries since December 23, 1998 (date acquired by Charter Investment), and the accounts of Marcus Cable since March 31, 1999. All subsidiaries are indirect wholly owned by Charter Holdco. All material intercompany transactions and balances have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost that approximates market value. F-16 185 Property, Plant and Equipment Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installations. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, while equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Franchises Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Accumulated amortization related to franchises was $650.5 million and $5.3 million, as of December 31, 1999 and 1998, respectively. Amortization expense related to franchises for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, was $520.0 million and $5.3 million, respectively. Deferred Financing Costs Costs related to borrowings are deferred and amortized to interest expense using the effective interest method over the terms of the related borrowings. As of December 31, 1999, others assets include $120.7 million of deferred financing costs, net of accumulated amortization of $10.3 million. Impairment of Assets If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted net cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. Revenues Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 31, 1999 and 1998, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Local governmental authorities impose franchise fees on the Company ranging up to a federally mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly F-17
Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years 186 basis, from the Company's customers and are periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses. Channel Launch Payments The Company receives upfront payments from certain programmers to launch and promote new cable television channels. A portion of these payments represents reimbursement of advertising costs paid by the Company to promote the new channels. These reimbursements have been immaterial. The remaining portion is being amortized as an offset to programming expense over the respective terms of the program agreements which range from one to 20 years. For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, the Company amortized and recorded as a reduction of programming costs $3.4 million and $12, respectively. As of December 31, 1999, the unamortized portion of payments received totaled $13.4 million and is included in other long-term liabilities. Direct Response Advertising The Company expenses the production costs of advertising as incurred, except for direct response advertising, which is deferred and amortized over its expected period of future benefits. Direct response advertising consists primarily of direct mailings and radio, newspaper and cross-channel television advertisements that include a phone number for use in ordering the Company's products and services. The deferred advertising costs are amortized to advertising expense over the periods during which the future benefits are expected to be received. The periods range from two to four years depending on the type of service the customer subscribes to and represents the period the customer is expected to remain connected to the cable system. As of December 31, 1999, $700 of deferred advertising costs is included in other assets. Advertising expense was $30.0 million for the year ended December 31, 1999, including amortization of deferred advertising costs totaling $87. Investments and Other Comprehensive Income Investments in equity securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company owns common stock of WorldGate Communications, Inc. (WorldGate) that is classified as "available for sale" and reported at market value with unrealized gains and losses recorded as accumulated other comprehensive income. Based on quoted market prices, the investment was valued at $5.4 million as of December 31, 1999, and is included in other assets. Comprehensive loss for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, was $64.8 million and $2, respectively. Interest Rate Hedge Agreements The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designated for hedging purposes and are not held or issued for speculative purposes. F-18 187 Income Taxes Substantially all of the taxable income, gains, losses, deductions and credits of Charter Holdco are passed through to its partners, Charter Investment, Vulcan Cable and Charter. Prior to November 12, 1999, income taxes were the responsibility of the owners of Charter Investment and Vulcan Cable and are not provided for in the accompanying consolidated financial statements. Beginning November 12, 1999, Charter is responsible for its share of taxable income (loss) of Charter Holdco allocated to Charter in accordance with partnership tax rules and regulations. The tax basis of Charter's investment in Charter Holdco is not materially different than the carrying value of the investment for financial reporting purposes as of December 31, 1999. Charter Holdco's limited liability company agreement provides that through the end of 2003, tax losses of Charter Holdco that would otherwise have been allocated to Charter will instead be allocated to the membership units held by Vulcan Cable and Charter Investment. At the time Charter first becomes profitable (as determined under the applicable federal income tax rules), the profits that would otherwise have been allocated to Charter will instead be allocated to the membership units held by Vulcan Cable and Charter Investment until the tax benefits are fully restored. Management does not expect Charter Holdco to generate tax profits in the foreseeable future. Segments In 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. Segments have been identified based upon management responsibility. The individual segments have been aggregated into one segment, cable services. Loss per Common Share For purposes of the loss per common share calculation for the period from December 24, 1998, through December 31, 1998, Mr. Allen's 50,000 shares of high vote Class B common stock are considered to be outstanding for the entire period. Basic loss per common share is computed by dividing the net loss by 50,000 shares for 1998 and 29,811,202 shares for 1999, representing the weighted average common shares outstanding during 1999. Diluted loss per common share equals basic loss per common share for the periods presented, as the effect of stock options is anti-dilutive because the Company generated net losses. All membership units of Charter Holdco are exchangeable on a one-for-one basis into common stock of Charter at the option of the holders. Should the holders exchange units for shares, the effect would not be dilutive. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United Sates requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITIONS: During 1999, the Company acquired cable systems in 11 separate transactions for an aggregate purchase price, of $7.6 billion, net of cash acquired, excluding debt assumed of $2.5 billion. In connection with two of the acquisitions, Charter Holdco issued equity interests totaling $683.3 million. The purchase prices were allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $9.7 billion. The allocation of the purchase prices for these acquisitions are based, in part, on F-19 188 preliminary information, which is subject to adjustment upon obtaining complete valuation information. Management believes that finalization of the purchase prices and allocation will not have a material impact on the consolidated results of operations or financial position of the Company. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. Unaudited pro forma operating results of the Company as though the acquisitions discussed above, including the Paul Allen Transaction and the acquisition of Marcus Holdings, and the initial public offering of common stock and the March 1999 refinancing of debt discussed herein, had occurred on January 1, 1998, with adjustments to give effect to amortization of franchises, interest expense, minority interest and certain other adjustments are as follows: The unaudited pro forma financial information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 ---- ---- (UNAUDITED) Revenues.......................................... $ 2,624,394 $ 2,412,252 Loss from operations.............................. (355,030) (333,595) Loss before minority interest..................... (1,181,635) (1,165,806) Net loss.......................................... (479,744) (473,317) 5. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Balance, beginning of period....................... $ 1,728 $1,702 Acquisitions of cable systems...................... 5,860 -- Charged to expense................................. 20,872 26 Uncollected balances written off, net of recoveries....................................... (16,989) -- -------- ------ Balance, end of period............................. $ 11,471 $1,728 ======== ====== F-20
1999 1998 ---- ---- Cable distribution systems............................ $3,523,217 $661,749 Land, buildings and leasehold improvements............ 108,214 26,670 Vehicles and equipment................................ 176,221 30,590 ---------- -------- 3,807,652 719,009 Less--Accumulated depreciation........................ (317,079) (2,767) ---------- -------- $3,490,573 $716,242 ========== ======== 189 For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, depreciation expense was $225.0 million and $2.8 million, respectively. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31: The liability for pending transfer of cable system represents the fair value of a cable system to be transferred upon obtaining necessary regulatory approvals in connection with the transaction with InterMedia Capital Partners IV L. P., InterMedia Partners and their affiliates. Such approvals were subsequently obtained and the system assets were transferred in March 2000. 7. LONG-TERM DEBT: Long-term debt consists of the following at December 31:
1999 1998 ---- ---- Accounts payable........................................ $112,233 $ 7,439 Liability for pending transfer of cable system.......... 88,200 -- Accrued interest........................................ 85,870 30,809 Programming costs....................................... 72,245 11,856 Capital expenditures.................................... 66,713 15,560 Franchise fees.......................................... 46,524 12,534 Accrued general and administrative...................... 39,648 6,688 Accrued income taxes.................................... 4,188 15,205 Other accrued liabilities............................... 191,154 27,495 -------- -------- $706,775 $127,586 ======== ======== F-21
1999 1998 ---- ---- Charter Holdings: 14.000% Senior Secured Discount Debentures................ $ -- $ 109,152 11.250% Senior Notes...................................... -- 125,000 8.250% Senior Notes....................................... 600,000 -- 8.625% Senior Notes....................................... 1,500,000 -- 9.920% Senior Discount Notes.............................. 1,475,000 -- Renaissance: 10.000% Senior Discount Notes............................. 114,413 -- Rifkin: 11.125% Senior Subordinated Notes......................... 900 -- Avalon: 9.375% Senior Subordinated Notes.......................... 150,000 -- 11.875% Senior Discount Notes............................. 196,000 -- 7.000% Note payable, due 2003............................. 500 -- CC VII Holdings, LLC (Falcon): 8.375% Senior Debentures.................................. 375,000 -- 9.285% Senior Discount Debentures......................... 435,250 -- 190 In March 1999, Charter Holdings and Marcus Holdings extinguished substantially all existing long-term debt, excluding borrowings under its credit agreements, and refinanced substantially all existing credit agreements at various subsidiaries with a new credit agreement entered into by Charter Operating (the "Charter Operating Credit Facilities"). Charter Holdings Notes In March 1999, Charter Holdings and Charter Communications Holdings Capital Corporation, a wholly owned subsidiary of Charter Holdings, (collectively, the "Issuers") issued $600.0 million 8.250% Senior Notes due 2007 (the "8.250% Senior Notes") for net proceeds of $598.4 million, $1.5 billion 8.625% Senior Notes due 2009 (the "8.625% Senior Notes") for net proceeds of $1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes due 2011 (the "9.920% Senior Discount Notes") for net proceeds of $905.5 million, (collectively with the 8.250% Senior Notes and the 8.625% Senior Notes, referred to as the "Charter Holdings Notes"). The 8.250% Senior Notes are not redeemable prior to maturity. Interest is payable semi-annually in arrears on April 1 and October 1, beginning October 1, 1999 until maturity. The 8.625% Senior Notes are redeemable at the option of the Issuers at amounts decreasing from 104.313% to 100% of par value beginning on April 1, 2004, plus accrued and unpaid interest, to the date of redemption. At any time prior to April 1, 2002, the Company may redeem up to 35% of the aggregate principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of the principal amount under certain conditions. Interest is payable semi-annually in arrears on April 1 and October 1, beginning October 1, 1999, until maturity. The 9.920% Senior Discount Notes are redeemable at the option of the Issuers at amounts decreasing from 104.960% to 100% of accreted value beginning April 1, 2004. At any time prior to April 1, 2002, the Issuers may redeem up to 35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a redemption price of 109.920% of the accreted value under certain conditions. Thereafter, cash interest is payable semi-annually in arrears on April 1 and October 1 beginning April 1, 2004, until maturity. The discount on the 9.920% Senior Discount Notes is being accreted using the effective interest method. The unamortized discount was $497.2 million at December 31, 1999. The Charter Holdings Notes rank equally with current and future unsecured and unsubordinated indebtedness (including accounts payables of the Company). The Issuers are required to make an offer to repurchase all of the Charter Holdings Notes, at a price equal to 101% of the aggregate principal or 101% of the accreted value, together with accrued and unpaid interest, upon a change of control of the Company. F-22
1999 1998 ---- ---- Credit Facilities: Credit Agreements (including CCPH, CCA Group and CharterComm Holdings).................................. -- 1,726,500 Charter Operating......................................... 2,906,000 -- CC Michigan, LLC and CC New England, LLC (Avalon)......... 170,000 -- CC VI Operating Company, LLC (Fanch)...................... 850,000 -- Falcon Cable Communications, LLC.......................... 865,500 -- ---------- ---------- 9,638,563 1,960,652 Current maturities........................................ -- (10,450) Unamortized net (discount) premium........................ (702,108) 41,554 ---------- ---------- $8,936,455 $1,991,756 ========== ========== 191 Renaissance Notes In connection with the acquisition of Renaissance Media Group LLC (Renaissance) during the second quarter of 1999, the Company assumed $163.2 million principal amount at maturity of senior discount notes due April 2008 (the "Renaissance Notes"). As a result of the change in control of Renaissance, the Company was required to make an offer to repurchase the Renaissance Notes at 101% of their accreted value. In May 1999, the Company made an offer to repurchase the Renaissance Notes pursuant to this requirement, and the holders of the Renaissance Notes tendered an amount representing 30% of the total outstanding principal amount at maturity for repurchase. These notes were repurchased using a portion of the proceeds from the Charter Holdings Notes. As of December 31, 1999, $114.4 million aggregate principal amount at maturity of Renaissance Notes with an accreted value of $83.0 million remain outstanding. Interest on the Renaissance Notes shall be paid semi-annually at a rate of 10% per annum beginning on October 15, 2003. The Renaissance Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003, initially at 105% of their principal amount at maturity, plus accrued and unpaid interest, declining to 100% of the principal amount at maturity, plus accrued and unpaid interest, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the Company may redeem up to 35% of the original principal amount at maturity with the proceeds of one or more sales of membership units at 110% of their accreted value, plus accrued and unpaid interest on the redemption date, provided that after any such redemption, at least $106 million aggregate principal amount at maturity remains outstanding. Rifkin Notes The Company acquired Rifkin Acquisition Partners L.L.L.P. and InterLink Communications, Partners, LLLP (collectively, "Rifkin") in September 1999 and assumed Rifkin's 11.125% senior subordinated notes due 2006 (the "Rifkin Notes") together with a $3.0 million promissory note payable to Monroe Rifkin,. Interest on the Rifkin Notes is payable semi-annually on January 15 and July 15 of each year. In September 1999, the Company commenced an offer to repurchase any and all of the outstanding Rifkin Notes, for cash at a premium over the principal amounts. In conjunction with this tender offer, the Company sought and obtained the consent of a majority in principal amount of the note holders of the outstanding Rifkin Notes to proposed amendments to the indenture governing the Rifkin Notes, which eliminated substantially all of the restrictive covenants. In October 1999, the Company repurchased a portion of the Rifkin Notes with a total outstanding principal amount of $124.1 million for a total of $140.6 million, including a consent fee to the holders who delivered timely consents amending the indenture, and repurchased the promissory note issued to Monroe Rifkin for $3.4 million. These notes were paid using borrowings from the Charter Operating Credit Facilities. At December 31, 1999, $900 aggregate principal of Rifkin Notes remain outstanding. Avalon Notes The Company acquired CC V Holdings, LLC (Avalon) (formerly known as Avalon Cable LLC) in November 1999 and assumed Avalon's 11.875% Senior Discount Notes Due 2008 (the "Avalon 11.875% Notes") and 9.375% Subordinated Notes Due 2008 (the "Avalon 9.375% Notes"). As of December 31, 1999, $196.0 million aggregate principal amount of the Avalon 11.875% Notes with an accreted value of $124.8 million and $150.0 million principal amount of the Avalon 9.375% Notes were outstanding. After December 1, 2003, cash interest on the Avalon 11.875% Notes will be payable semi-annually on June 1 and December 1 of each year, commencing June 1, 2004. F-23 192 On December 3, 1999, the Company commenced a change of control offer with respect to the Avalon 9.375% Notes and a change of control offer with respect to the Avalon 11.875% Notes at purchase prices of 101% of principal amount or accreted value, as applicable. In January 2000, the Company completed the repurchase of the Avalon 9.375% Notes with a total outstanding principal amount of $134.0 million for a total of $137.4 million. In addition to the change of control repurchase, the Company repurchased the remaining outstanding principal amount of $16.0 million in the open market for $16.3 million. Also in January 2000, the Company repurchased a portion of the Avalon 11.875% Notes with a total outstanding principal amount of $16.3 million for a total of $10.5 million. The repurchase of the Avalon 9.375% Notes and the Avalon 11.875% Notes was funded by a portion of the cash proceeds from the issuance of additional notes by Charter Holdings in January 2000 (the "January 2000 Charter Holdings Notes"). Avalon 11.875% Notes with a total principal amount at maturity of $179.8 million and an accreted value of $116.4 million remain outstanding after the repurchases. Falcon Debentures The Company acquired CC VII Holdings, LLC (Falcon) (formerly known as Falcon Communications, L.P.) in November 1999 and assumed Falcon's 8.375% Senior Debentures Due 2010 (the "Falcon 8.375% Debentures") and 9.285% Senior Discount Debentures Due 2010 (the "Falcon 9.285% Debentures", collectively, with the Falcon 8.375% Debentures, the "Falcon Debentures"). As of December 31, 1999, $375.0 million aggregate principal amount of the Falcon 8.375% Debentures and $435.3 million aggregate principal amount of the Falcon 9.285% Debentures, with an accreted value of $323.0 million were outstanding. On December 10, 1999, the Company commenced change of control offers and offered to repurchase the Falcon Debentures at purchase prices of 101% of principal amount, plus unpaid and accrued interest, or accreted value, as applicable. In February 2000, the Company completed the repurchase of the Falcon 8.375% Debentures with a total outstanding principal amount of $317.4 million for a total of $328.6 million. In addition to the change of control repurchase, the Company repurchased the Falcon 8.375% Debentures with a total outstanding principal amount of $57.6 million in the open market for $59.4 million. Also, in February 2000, the Company repurchased the Falcon 9.285% Debentures with an aggregate principal amount of $230.0 million for a total of $173.8 million. In addition to the change of control repurchase, the Company repurchased the Falcon 9.285% Debentures with an aggregate principal amount of $205.3 million in the open market for $154.3 million. The repurchase of all the Falcon Debentures was funded by a portion of the proceeds from the January 2000 Charter Holdings Notes. Helicon Notes The Company acquired Helicon I, L.P. and affiliates (Helicon) in July 1999 and assumed Helicon's 11% Senior Secured Notes due 2003 (the "Helicon Notes"). On November 1, 1999, the Company redeemed all of the Helicon Notes at a purchase price equal to 103% of their principal amount, plus accrued interest, for $124.8 million using borrowings from the Charter Operating Credit Facilities. Charter Operating Credit Facilities The Charter Operating Credit Facilities provide for two term facilities, one with a principal amount of $1.0 billion that matures September 2007 (Term A), and the other with the principal amount of $1.85 billion that matures March 2008 (Term B). The Charter Operating Credit Facilities also provide for a $1.25 billion revolving credit facility with a maturity date of September 2007 and at the options of the lenders, supplemental credit facilities, in the amount of $500.0 million available until March 18, 2002. Amounts under the Charter Operating Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.22% to 8.97% as of December 31, 1999). A quarterly commitment fee of between F-24 193 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. As of December 31, 1999, the unused availability was $1.2 billion. In March 2000, the credit agreement was amended to increase the amount of the supplemental credit facility to $1.0 billion. In connection with this amendment, $600.0 million of the supplemental credit facility (the "Incremental Term Loan") was drawn down. The Incremental Term Loan maturity date is September 18, 2008. Avalon Credit Facilities In connection with the Avalon acquisition, the Company entered into a new credit agreement (the "Avalon Credit Facilities"). The Avalon Credit Facilities have maximum borrowings of $300.0 million, consisting of a revolving facility in the amount of $175.0 million that matures May 15, 2008, and a Term B loan in the amount of $125.0 million that matures on November 15, 2008. The Avalon Credit Facilities also provide for, at the options of the lenders, supplemental credit facilities in the amounts of $75 million available until December 31, 2003. All amounts mature in June 2008. Amounts under the Avalon Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin up to 2.75% (7.995% to 8.870% as of December 31, 1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. The Company borrowed $170.0 million under the Avalon Credit Facilities to fund a portion of the Avalon purchase price. As of December 31, 1999, unused availability was $ 130.0 million. Fanch Credit Facilities In connection with the acquisition of cable systems of Fanch Cablevision L.P. and affiliates (Fanch), the Company entered into a new credit agreement (the "Fanch Credit Facilities"). The Fanch Credit Facilities provide for two term facilities, one with a principal amount of $450.0 million that matures May 2008 (Term A), and the other with the principal amount of $400.0 million that matures November 2008 (Term B). The Fanch Credit Facilities also provide for a $350.0 million revolving credit facility with a maturity date of May 2008 and at the options of the lenders, supplemental credit facilities, in the amount of $300.0 million available until December 31, 2004. Amounts under the Fanch Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.12% to 8.87% as of December 31, 1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is payable on the unborrowed balance. The Company used $850.0 million of the credit facilities to fund a portion of the Fanch purchase price. As of December 31, 1999, unused availability was $ 350.0 million. Falcon Credit Facilities In connection with the Falcon acquisition, the existing Falcon credit agreement (the "Falcon Credit Facilities") was amended to provide for two term facilities, one with a principal amount of $200.0 million that matures June 2007 (Term B), and the other with the principal amount of $300.0 million that matures December 2007 (Term C). The Falcon Credit Facilities also provide for a $646.0 million revolving credit facility with a maturity date of December 2006 and at the options of the lenders, supplemental credit facilities in the amounts of $700.0 million with a maturity date of December 2007. At December 31, 1999, $110.0 million was outstanding under the supplemental credit facilities. Amounts under the Falcon Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of up to 2.5% (7.57% to 8.73% as of December 31, 1999). A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance. As of December 31, 1999, unused availability was $ 390.5 million. However, debt covenants limit the amount that can be borrowed to $342.0 million at December 31, 1999. F-25 194 The indentures governing the debt agreements require issuers of the debt and/or its subsidiaries to comply with various financial and other covenants, including the maintenance of certain operating and financial ratios. These debt instruments also contain substantial limitations on, or prohibitions of distributions, additional indebtedness, liens, asset sales and certain other items. As a result of limitations and prohibitions of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to Charter Holdings, Charter Holdco and Charter. Based upon outstanding indebtedness at December 31, 1999, the amortization of term loans, scheduled reductions in available borrowings of the revolving credit facilities, and the maturity dates for all senior and subordinated notes and debentures, aggregate future principal payments on the total borrowings under all debt agreements at December 31, 1999, are as follows: 8. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1999, is as follows:
YEAR AMOUNT ---- ------ 2000........................................................ $ -- 2001........................................................ 5,000 2002........................................................ 93,875 2003........................................................ 284,229 2004........................................................ 261,423 Thereafter.................................................. 8,994,036 ---------- $9,638,563 ========== F-26
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- DEBT Charter Holdings: 8.250% Senior Notes.................................. $ 598,557 $ -- $ 558,000 8.625% Senior Notes.................................. 1,495,787 -- 1,395,000 9.920% Senior Discount Notes......................... 977,807 -- 881,313 Renaissance: 10.000% Senior Discount Notes........................ 86,507 -- 79,517 Rifkin: 11.125% Senior Subordinated Notes.................... 954 -- 990 Avalon: 9.375% Senior Subordinated Notes..................... 151,500 -- 151,500 11.875% Senior Discount Notes........................ 129,212 -- 129,212 7.000% Note payable, due 2003........................ 500 -- 500 CC VII Holdings, LLC (Falcon): 8.375% Senior Debentures............................. 378,750 -- 378,750 9.285% Senior Discount Debentures.................... 325,381 -- 325,381 Credit Facilities: Charter Operating.................................... 2,906,000 -- 2,906,000 CC Michigan LLC and CC New England LLC (Avalon)...... 170,000 -- 170,000 CC VI Operating, LLC (Fanch)......................... 850,000 -- 850,000 Falcon Cable Communications, LLC..................... 865,500 -- 865,500 195 A summary of debt and the related interest rate hedge agreements at December 31, 1998, is as follows:
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- INTEREST RATE HEDGE AGREEMENTS Swaps.................................................. $ (6,827) $4,542,713 $ (47,220) Caps................................................... -- 15,000 16 Collars................................................ 1,361 240,000 (199) As the long-term debt under the credit agreements bears interest at current market rates, their carrying amount approximates market value at December 31, 1999 and 1998. The fair values of the notes and the debentures are based on quoted market prices. The weighted average interest pay rate for the Company's interest rate swap agreements was 8.06% and 7.66% at December 31, 1999 and 1998, respectively. The weighted average interest rate for the Company's interest rate cap agreements was 9.0% and 8.55% at December 31, 1999 and 1998, respectively. The weighted average interest rate for the Company's interest rate collar agreements were 9.13% and 7.74% for the cap and floor components, respectively, at December 31, 1999, and 8.61% and 7.31%, respectively, at December 31, 1998. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would (receive) or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's credit facilities, thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's consolidated financial position or results of operations. 9. STOCKHOLDERS' EQUITY: At December 31, 1999, 1.5 billion shares of $.001 par value Class A common stock, 750 million shares of $.001 par value Class B common stock, and 250 million shares of $.001 par value preferred stock are authorized. At December 31, 1999, 221.7 million, 50,000 and no shares F-27
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- DEBT Credit Agreements (including CCPH, CCA Group and CharterComm Holdings)................................ $1,726,500 $ -- $1,726,500 14.000% Senior Secured Discount Debentures............. 138,102 -- 138,102 11.250% Senior Notes................................... 137,604 -- 137,604 INTEREST RATE HEDGE AGREEMENTS Swaps.................................................. $ 23,216 $1,105,000 $ 23,216 Caps................................................... -- 15,000 -- Collars................................................ 4,174 310,000 4,174 196 of Class A common stock, Class B common stock and preferred stock, respectively, were issued and outstanding. The 221.7 million shares of Class A common stock includes 26.8 million shares classified as redeemable securities (see Note 16). At December 31, 1998, there were 750 million share authorized and 50,000 shares of Class B common stock issued and outstanding. 10. INCOME TAXES: Certain indirect subsidiaries of Charter Holdings are Corporations and file separate federal and state income tax returns. Results of operations from these subsidiaries are not material to the consolidated results of operations of the Company. Income tax expense for the year ended December 31, 1999, represents taxes assessed by certain state jurisdictions. Deferred income tax assets and liabilities are not material. Charter files separate federal and state income tax returns and is responsible for its share of taxable income (loss) of Charter Holdco as determined by partnership tax rules and regulations and Charter Holdco's limited liability company agreement (see Note 2). Management does not expect Charter to pay any income taxes in the foreseeable future. Any net deferred income tax assets will be offset entirely by a valuation allowance because of current and expected future losses. 11. REVENUES: Revenues consist of the following: 12. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES: Operating, general and administrative expenses consist of the following:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Basic.............................................. $1,002,954 $ 9,347 Premium............................................ 124,788 1,415 Pay-per-view....................................... 27,537 260 Digital video...................................... 8,299 10 Advertising sales.................................. 71,997 493 Cable modem........................................ 10,107 55 Other.............................................. 182,562 2,133 ---------- ------- $1,428,244 $13,713 ========== ======= F-28
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Programming........................................ $330,754 $3,137 General and administrative......................... 237,480 2,377 Service............................................ 99,486 847 Advertising........................................ 31,281 344 Marketing.......................................... 23,447 225 Other.............................................. 15,509 204 -------- ------ $737,957 $7,134 ======== ====== 197 13. RELATED PARTY TRANSACTIONS: Charter Investment provides management services to the Company including centralized customer billing services, data processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Certain costs for services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are allocated based on the number of basic customers. Such costs totaled $16.5 million and $128 for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively. All other costs incurred by Charter Investment 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 Investment on the Company's behalf and included in the accompanying financial statements are not materially different than costs the Company would have incurred as a stand-alone entity. Charter Investment utilizes a combination of excess insurance coverage and self-insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. Medical coverage provides for $1.0 million aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $1.0 million aggregate stop loss protection and a loss limitation of $250 per person per year. The Company is charged a management fee as stipulated in the management agreement between Charter Investment and Charter. To the extent management fees charged to the Company are greater (less) than the corporate expenses incurred by Charter Investment, the Company records distributions to (capital contributions from) Charter Investment. For the year ended December 31, 1999, the Company recorded distributions of $10.9 million, a portion of which have been allocated to minority interest. For the period from December 24, 1998, through December 31, 1998, the management fee charged to the Company approximated the corporate expenses incurred by Charter Investment on behalf of the Company. As of December 31, 1999 and 1998, management fees currently payable of $9.2 million and $473, respectively, are included in payables to related party. For the period from December 24, 1998, through December 31, 1998, the management fee charged to the Company approximated the corporate expenses incurred by Charter Investment and Charter on behalf of the Company. The credit facilities and indebtedness prohibit payments of management fees in excess of 3.5% of revenues until repayment of such indebtedness. Any amount in excess of 3.5% of revenues owed to Charter Investment based on the management agreement is recorded as deferred management fees-related party. Charter, Mr. Allen and certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interests in various entities that provide services or programming to the Company, including High Speed Access Corp. (High Speed Access), WorldGate, Wink Communications, Inc. (Wink), ZDTV, LLC (ZDTV), USA Networks, Inc. (USA Networks) and Oxygen Media Inc. (Oxygen Media). In addition, certain officers 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 customers receive cable modem-based Internet access through High Speed Access and TV-based Internet access through WorldGate. For the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, revenues attributable to these services were less than 1% of total revenues. The Company receives programming and certain interactive features embedded into programming for broadcast via its cable systems from Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee for the programming service generally based on the number of F-29 198 customers receiving the service. Such fees for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were approximately 1% of total operating costs. In addition, the Company receives commissions from USA Networks for home shopping sales generated by its customers. Such revenues for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were less than 1% of total revenues. 14. MINORITY INTEREST AND EQUITY INTERESTS OF CHARTER HOLDCO: Minority interest represents total members' equity of Charter Holdco multiplied by 59.4% as of December 31, 1999, and 99.96% as of December 31, 1998, the ownership percentages of Charter Holdco not owned by Charter. Members' equity of Charter Holdco was $9.1 billion as of December 31, 1999, and $2.2 billion as of December 31, 1998. Gains (losses) arising from issuances by Charter Holdco of its membership units are recorded as capital transactions thereby increasing (decreasing) stockholders' equity and (decreasing) increasing minority interest on the consolidated balance sheets. Changes to minority interest consist of the following: The preferred equity interests in Charter Holdco held by the Rifkin sellers were exchangeable into Class A common stock of Charter at the option of the Rifkin sellers only at the time of the initial public offering. In November 1999, preferred equity interests of $130.3 million were exchanged into common stock of Charter. The membership units of Charter Holdco held by the Falcon sellers were exchangeable into Class A common stock of Charter. The units are also puttable to Mr. Allen for cash. In November 1999, membership units of $43.4 million were put to Mr. Allen and $506.6 million were exchanged into the Class A common stock of Charter. For a two-year period, equity held by the Rifkin and Falcon sellers may be put to Mr. Allen for cash. Pursuant to a membership interests purchase agreement, as amended, Vulcan Cable contributed $500.0 million in cash on August 10, 1999, to Charter Holdco, contributed an additional $180.7 million in certain equity interests acquired in connection with the acquisition of F-30
MINORITY INTEREST -------- Initial transfer of Charter Investment's operating subsidiaries to Charter Holdco............................................ $2,150,979 Option compensation expense................................. 845 Minority interest in loss of subsidiary..................... (5,275) ---------- Balance, December 31, 1998.................................. 2,146,549 Distributions to Charter Investment......................... (8,698) Transfer of Marcus Holdings' operating subsidiaries to Charter Holdco............................................ 1,252,370 Transfer of Rifkin equity interests to Charter Holdco....... 180,710 Charter Holdco equity issued to Falcon and Rifkin sellers... 683,312 Charter Holdco equity issued to Vulcan Cable for cash....... 1,894,290 Contribution of marketable securities by Charter Investment................................................ 951 Accretion of preferred equity of Charter Holdco............. 1,755 Exchange of Charter Holdco units for Charter common stock... (638,561) Equity classified as redeemable securities.................. (50,151) Minority interest in loss of subsidiary..................... (572,607) Option compensation expense................................. 75,486 Gain on issuance of equity by Charter Holdco................ 413,848 Unrealized gain on marketable securities available for sale...................................................... 2,077 ---------- Balance, December 31, 1999.................................. $5,381,331 ========== 199 Rifkin in September 1999, to Charter Holdco, and contributed $644.3 million in September 1999 to Charter Holdco. All funds and equity interests were contributed to Charter Holdings. Concurrently with closing of the initial public offering, Vulcan Cable contributed $750 million in cash to Charter Holdco. 15. OPTION PLAN: In accordance with an employment agreement between Charter Investment and the President and Chief Executive Officer of Charter and a related option agreement with the President and Chief Executive Officer, an option to purchase 7,044,127 Charter Holdco membership interests, was issued to the President and Chief Executive Officer. The option vests over a four-year period from the date of grant and expires ten years from the date of grant. In February 1999, Charter Holdings adopted an option plan providing for the grant of options. The plan was assumed by Charter Holdco. The option plan provides for grants of options to employees, officers and directors of Charter Holdco and its affiliates and consultants who provide services to Charter Holdco. Options granted vest over five years from the grant date, commencing 15 months after the date of grant. Options not exercised accumulate and are exercisable, in whole or in part, in any subsequent period, but not later than ten years from the date of grant. Membership units received upon exercise of the options are automatically exchanged for shares of Class A common stock of Charter on a one-for-one basis. A summary of the activity for the Company's option plan for the year ended December 31, 1999, and for the period from December 23, 1998, through December 31, 1998, is as follows: In February 2000, the Company granted 5.7 million options at $19.47 per share. The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for the option plans. Option compensation expense of $80.0 million and $845 for the year ended December 31, 1999, and for the period from December 24, 1998, to December 31, 1998, respectively, has been recorded in the consolidated financial statements since the exercise prices were less than the estimated fair values of the underlying membership interests on the date of grant. Estimated fair values were determined by the Company using the valuation inherent in the Paul Allen Transaction and valuations of public companies in the cable television industry adjusted for factors specific to the F-31
1999 1998 ---------------------- --------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ -------- ------ -------- Options outstanding, beginning of period......... 7,044,127 $20.00 -- $-- Granted December 23, 1998.............................. 7,044,127 20.00 February 9, 1999............................... 9,111,681 20.00 April 5, 1999.................................. 473,000 20.73 November 8, 1999............................... 4,741,400 19.00 Cancelled........................................ (612,600) 19.95 ---------- ------ --------- ------ Options outstanding, end of period............... 20,757,608 $19.79 7,044,127 $20.00 ========== ====== ========= ====== 10.0 Weighted Average Remaining Contractual Life...... 9.2 years years ========== ========= Options Exercisable, end of period............... 2,091,032 $19.90 1,761,032 $20.00 ========== ====== ========= ====== Weighted average fair value of options granted... $12.59 $12.50 ========== ========= 200 Company. Compensation expense is being recorded over the vesting period of each grant that varies from four to five years. As of December 31, 1999, deferred compensation remaining to be recognized in future periods totaled $79.4 million. No stock option compensation expense was recorded for the options granted on November 8, 1999, since the exercise price is equal to the estimated fair value of the underlying membership interests on the date of grant. Since the membership units are exchangeable into Class A common stock of Charter on a one-for-one basis, the estimated fair value was equal to the initial offering price of Class A common stock. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), requires pro forma disclosure of the impact on earnings as if the compensation costs for these plans had been determined consistent with the fair value methodology of this statement. The Company's net loss would have been increased to the following unaudited pro forma amounts under SFAS 123: The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used for grants during the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively: risk-free interest rates of 5.5% and 4.8%; expected volatility of 43.8% and 43.7%; and expected lives of 10 years. The valuations assume no dividends are paid. 16. COMMITMENTS AND CONTINGENCIES: Leases The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, were $11.2 million and $70, respectively. As of December 31, 1999, future minimum lease payments are as follows:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- Net loss: As reported...................................... $(66,229) $ (2) Pro forma (unaudited)............................ (68,923) (2) Basic and diluted loss per common share: As reported...................................... (2.22) (0.04) Pro forma (unaudited)............................ (2.31) (0.04) The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, was $14.3 million and $137, respectively. Litigation The Company is a party to lawsuits and claims that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the F-32
2000........................................................ $9,036 2001........................................................ 7,141 2002........................................................ 4,645 2003........................................................ 3,153 2004........................................................ 2,588 Thereafter.................................................. 8,845 201 outcome of these lawsuits and claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. Redeemable Securities As previously disclosed in Charter's Registration Statement on Form S-1, as amended, the Rifkin and Falcon sellers who own membership units of Charter Holdco, including those sellers that exchanged their units for common stock of Charter, and certain Helicon sellers who purchased Class A common stock in November 1999, may have rescission rights arising out of possible violations of Section 5 of the Securities Act of 1933, as amended, in connection with the offers and sales of these equity interests. Accordingly, the maximum potential cash obligation related to the rescission rights, estimated at $750.9 million, has been excluded from stockholders' equity or minority interest and classified as "redeemable securities" on the consolidated balance sheet at December 31, 1999. One year after the dates of issuance of these equity interests (when these rescission rights will have expired), the Company will reclassify the respective amounts to stockholders' equity or minority interest, as applicable. 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. During 1999, the amounts refunded by the Company have been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. As of December 31, 1999, approximately 18% of the Company's local franchising authorities are certified to regulate basic tier rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the consolidated financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. F-33 202 The Company does not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Company's consolidated financial position or results of operations. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. 17. EMPLOYEE BENEFIT PLANS: The Company's employees may participate in 401(k) plans (the "401(k) Plans"). Employees that qualify for participation can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company matches 50% of the first 5% of participant contributions. The Company made contributions to the 401(k) Plans totaling $2.9 million and $20 for the year ended December 31, 1999, and for the period from December 24, 1998, through December 31, 1998, respectively. 18. ACCOUNTING STANDARD NOT YET IMPLEMENTED: The Company is required to adopt Statement of Financial Accounting Standards Board No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impact of adopting SFAS No. 133 on the consolidated financial statements nor has the Company determined the timing of the adoption of SFAS No. 133. However, SFAS No. 133 could increase the volatility in earnings (losses). 19. PARENT COMPANY ONLY FINANCIAL STATEMENTS: As the result of limitations on and prohibition of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to Charter, the parent company. The following parent-only financial statements of Charter account for the investment in Charter Holdco under the equity method of accounting. The financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto. F-34 203 CHARTER COMMUNICATIONS, INC. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS) CHARTER COMMUNICATIONS, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------ 1999 1998 ---- ---- ASSETS Cash and cash equivalents................................... $ 19,369 $ -- Other current assets........................................ 694 -- Investment in Charter Holdco................................ 3,762,016 830 ---------- ---- $3,782,079 $830 ========== ==== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities......................................... $ 9,175 $ -- Payables to related parties................................. 10,888 -- Redeemable securities....................................... 750,937 -- Stockholders' equity........................................ 3,011,079 830 ---------- ---- Total liabilities and stockholders' equity........ $3,782,079 $830 ========== ==== F-35
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- REVENUES Interest income............................................. $ 570 $-- Management fees............................................. 716 -- ----------- --- Total revenues.................................... 1,286 -- EXPENSES Equity in losses of Charter Holdco.......................... (66,229) (2) General and administrative expenses......................... (716) -- Interest expense............................................ (570) -- ----------- --- Total expenses.................................... (67,515) (2) ----------- --- Net loss.................................................. $ (66,229) $(2) =========== === 204 CHARTER COMMUNICATIONS, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): Year ended December 31, 1999:
PERIOD FROM DECEMBER 24, YEAR ENDED 1998, THROUGH DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (66,229) $(2) Equity in losses of Charter Holdco........................ 66,229 2 Change in assets and liabilities.......................... 19,369 -- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Charter Holdco.............................. (3,290,436) -- Payment for acquisition................................... (258,434) -- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of Class B common stock to Mr. Allen............. 950 -- Net proceeds from initial public offering of common stock.................................................. 3,547,920 -- ----------- --- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 19,369 -- CASH AND CASH EQUIVALENTS, beginning of period.............. -- -- ----------- --- CASH AND CASH EQUIVALENTS, end of period.................... $ 19,369 $-- =========== === 21. SUBSEQUENT EVENTS: On January 6, 2000, Charter Holdings issued the January 2000 Charter Holdings Notes with a principal amount of $1.5 billion. The January 2000 Charter Holdings Notes are comprised of $675.0 million 10.00% Senior Notes due 2009, $325.0 million 10.25% Senior Notes due 2010, and $532.0 million 11.75% Senior Discount Notes due 2010. The net proceeds were approximately $1.3 billion, after giving effect to discounts, commissions and expenses. The proceeds from the January 2000 Charter Holdings Notes were used to finance the repurchases of debt assumed in certain transactions. On February 14, 2000, Charter Holdco and Charter Holdings completed the acquisition of Bresnan Communications Company Limited Partnership (Bresnan). Prior to the acquisition, Charter Holdco assigned a portion of its rights to purchase Bresnan to Charter Holdings. Charter Holdco and Charter Holdings purchased 52% of Bresnan from certain sellers for cash and certain sellers contributed 18% of Bresnan to Charter Holdco for 14.8 million Class C common membership units of Charter Holdco, an approximate 2.6% equity interest in Charter Holdco. Charter Holdco then transferred its ownership interest to Charter Holdings. Thereafter, Charter Holdings and certain sellers contributed all of the outstanding interests in Bresnan to CC VIII, LLC (CC VIII), a subsidiary of Charter Holdings and Bresnan was dissolved. In exchange for the F-36
FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Revenues..................................... $160,955 $308,038 $376,189 $ 583,062 Loss from operations......................... (17,535) (54,032) (38,296) (76,572) Loss before minority interest................ (76,713) (155,186) (164,153) (242,784) Net loss..................................... (27) (35) (35) (66,132) Basic and diluted loss per common share...... (0.54) (0.70) (0.70) (0.56) Weighted average shares outstanding.......... 50,000 50,000 50,000 118,124,333 205 contribution of their interests in Bresnan, the sellers received approximately 24.2 million Class A preferred membership units in CC VIII representing 30% of the equity of CC VIII and are entitled to a 2% annual return on their preferred membership units. The purchase price for Bresnan was approximately $3.1 billion subject to adjustment and was comprised of $1.1 billion in cash, $384.6 million and $629.5 million in equity in Charter Holdco and CC VIII, respectively, and approximately $1.0 billion in assumed debt. All the membership units received by the sellers are exchangeable on a one-for-one basis for Class A common stock of Charter. The Bresnan cable systems acquired are located in Michigan, Minnesota, Wisconsin and Nebraska, and serve approximately 686,000 (unaudited) customers. In March 2000, Charter repurchased all of the outstanding Bresnan 9.25% Senior Discount Notes Due 2009 with an accreted value of $192.1 million and the Bresnan 8.00% Senior Notes Due 2009 with a principal amount of $170.0 million for a total of $369.7 million. The notes were repurchased using a portion of the proceeds of the January 2000 Charter Holdings Notes. F-37 206 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Properties Holdings, LLC: We have audited the accompanying consolidated statements of operations, changes in shareholder's investment and cash flows of Charter Communications Properties Holdings, LLC and subsidiaries for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of the operations and the cash flows of Charter Communications Properties Holdings, LLC and subsidiaries for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-38 207 CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-39
PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 23, DECEMBER 31, 1998 1997 ------------- ------------ REVENUES.................................................... $ 49,731 $18,867 -------- ------- OPERATING EXPENSES: Operating, general and administrative..................... 25,952 11,767 Depreciation and amortization............................. 16,864 6,103 Corporate expense allocation -- related party............. 6,176 566 -------- ------- 48,992 18,436 -------- ------- Income from operations................................. 739 431 -------- ------- OTHER INCOME (EXPENSE): Interest expense.......................................... (17,277) (5,120) Interest income........................................... 44 41 Other, net................................................ (728) 25 -------- ------- (17,961) (5,054) -------- ------- Net loss............................................... $(17,222) $(4,623) ======== ======= 208 CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S INVESTMENT (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of this consolidated statement. F-40
COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ------- ----------- -------- BALANCE, December 31, 1996.................... $-- $ 5,900 $ (3,252) $ 2,648 Net loss.................................... -- -- (4,623) (4,623) -- ------- -------- -------- BALANCE, December 31, 1997.................... -- 5,900 (7,875) (1,975) Capital contributions....................... -- 10,800 -- 10,800 Net loss.................................... -- -- (17,222) (17,222) -- ------- -------- -------- BALANCE, December 23, 1998.................... $-- $16,700 $(25,097) $ (8,397) == ======= ======== ======== 209 CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-41
PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 23, DECEMBER 31, 1998 1997 ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (17,222) $ (4,623) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization........................ 16,864 6,103 Noncash interest expense............................. 267 123 Loss on sale of cable system......................... -- 1,363 (Gain) loss on disposal of property, plant and equipment......................................... (14) 130 Changes in assets and liabilities, net of effects from acquisition -- Receivables............................................ 10 (227) Prepaid expenses and other............................. (125) 18 Accounts payable and accrued expenses.................. 16,927 894 Payables to manager of cable systems -- related party................................................ 5,288 (153) Other operating activities............................. 569 -- --------- -------- Net cash provided by operating activities......... 22,564 3,628 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (15,364) (7,880) Payment for acquisition, net of cash acquired............. (167,484) -- Proceeds from sale of cable system........................ -- 12,528 Other investing activities................................ (486) -- --------- -------- Net cash (used in) provided by investing activities...................................... (183,334) 4,648 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 217,500 5,100 Repayments of long-term debt.............................. (60,200) (13,375) Capital contributions..................................... 7,000 -- Payments for debt issuance costs.......................... (3,487) (12) --------- -------- Net cash provided by (used in) financing activities...................................... 160,813 (8,287) --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................... 43 (11) CASH AND CASH EQUIVALENTS, beginning of period.............. 626 637 --------- -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 669 $ 626 ========= ======== CASH PAID FOR INTEREST...................................... $ 7,679 $ 3,303 ========= ======== 210 CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION: Charter Communications Properties Holdings, LLC (CCPH), a Delaware limited liability company, formerly Charter Communications Properties Holdings, Inc., 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. Prior to February 19, 1999, CCPH was wholly owned by Charter Investment, Inc. (Charter Investment). Effective December 23, 1998, as part of a series of transactions, through which Paul G. Allen acquired Charter Investment, Mr. Allen acquired CCPH for an aggregate purchase price of $211 million, excluding $214 million in debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction, CCPH was converted from a corporation to a limited liability company. Also, in conjunction with the Paul Allen Transaction, Charter Investment for fair value acquired from unrelated third parties all of the interest it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings, Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.), all cable television operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment previously managed and owned minority interests in these companies. In February 1999, Charter Investment transferred all of its cable television operating subsidiaries to a wholly owned subsidiary of Charter Communications Holdings, LLC (Charter Holdings), Charter Communications Operating, LLC (Charter Operating). Charter Holdings was a wholly owned subsidiary of Charter Investment. The transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. The accompanying consolidated financial statements include the accounts of CCPH and CCP, its wholly owned cable operating subsidiary (collectively, the "Company"). The accounts of CharterComm Holdings and CCA Group are not included since these companies were not owned and controlled by Charter Investment prior to December 23, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost that approximates market value. Property, Plant and Equipment Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable transmission and distribution facilities, and the cost of new customer installations. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, while equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: F-42
Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years 211 For the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, depreciation expense was $6.2 million and $3.9 million, respectively. Franchises Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Other Assets Debt issuance costs are being amortized to interest expense using the effective interest method over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. Impairment of Assets If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted net cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. Revenues Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 23, 1998, and December 31, 1997, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Company ranging up to a federally mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly basis from the Company's customers and are periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses. 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. F-43 212 The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designated for hedging purposes and are not held or issued for speculative purposes. Income Taxes The Company filed a consolidated income tax return with Charter Investment. Income taxes were allocated to the Company in accordance with the tax-sharing agreement between the Company and Charter Investment. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITION: In 1998, the Company acquired a cable system for an aggregate purchase price, net of cash acquired, of $228.4 million, comprised of $167.5 million in cash and $60.9 million in a note payable to the seller. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $207.6 million and is included in franchises. The above acquisition was accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. The purchase price was allocated to tangible and intangible assets based on estimated fair values at the acquisition date. Unaudited pro forma operating results as though the acquisition discussed above, excluding the Paul Allen Transaction, had occurred on January 1, 1997, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows: The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had the transaction been completed as of the assumed date or which may be obtained in the future. F-44
PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 23, DECEMBER 31, 1998 1997 ------------- ------------ (UNAUDITED) Revenues........................................... $ 67,007 $ 63,909 Loss from operations............................... (7,097) (7,382) Net loss........................................... (24,058) (26,099) 213 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows: 5. SALE OF FT. HOOD SYSTEM: In February 1997, the Company sold the net assets of the Ft. Hood system, which served customers in Texas, for an aggregate sales price of approximately $12.5 million. The sale of the Ft. Hood system resulted in a loss of approximately $1.4 million, which is included in operating, general and administrative costs in the accompanying consolidated statement of operations for the year ended December 31, 1997. 6. INCOME TAXES: Deferred tax assets and liabilities are recognized for the estimated future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred income tax expense or benefit is the result of changes in the liability or asset recorded for deferred taxes. A valuation allowance must be established for any portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized. No current provision (benefit) for income taxes was recorded. The effective income tax rate is less than the federal rate of 35% primarily due to providing a valuation allowance on deferred income tax assets. 7. RELATED-PARTY TRANSACTIONS: Charter Investment provides management services to the Company including centralized customer billing services, data processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Certain costs for services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are determined based on the number of basic customers. Such costs totaled $437 and $220, respectively, for the period from January 1, 1998, through December 23, 1998, and the year ended December 31, 1997. All other costs incurred by Charter Investment on behalf of the Company are expensed in the accompanying consolidated financial statements and are included in corporate expense allocations related party. The cost of these services is allocated based on the number of basic customers. Management considers these allocations to be reasonable for the operations of the Company. Charter Investment utilized a combination of excess insurance coverage and self-insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries, at the present value of the actuarially F-45
PERIOD FROM JANUARY 1, FOR THE YEAR 1998, THROUGH ENDED DECEMBER 23, DECEMBER 31, 1998 1997 ------------- ------------ Balance, beginning of period....................... $ 52 $ 87 Acquisition of system............................ 96 -- Charged to expense............................... 1,122 325 Uncollected balances written off, net of recoveries.................................... (778) (360) ------ ----- Balance, end of period............................. $ 492 $ 52 ====== ===== 214 computed present and future liabilities for such benefits. Medical coverage provides for $2.4 million aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. The Company is charged a management fee based on percentages of revenues as stipulated in the management agreement between Charter Investment and the Company. For the period from January 1, 1998, through December 23, 1998, and the year ended December 31, 1997, the management fee charged to the Company approximated the corporate expenses incurred by Charter Investment on behalf of the Company. 8. COMMITMENTS AND CONTINGENCIES: Leases The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, were $278 and $130, respectively. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, was $421 and $271, respectively. Litigation The Company is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. Regulation in the Cable Television Industry The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. As of December 31, 1998, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in F-46 215 jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Company does not believe any adjudications regarding their pre-sunset complaints will have a material adverse effect on the Company's consolidated financial position or results of operations. A number of states subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. The Company is subject to state regulation in Connecticut. 9. EMPLOYEE BENEFIT PLANS: 401(k) Plan The Company's employees may participate in the Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 15% of their salary, on or before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company contributes an amount equal to 50% of the first 5% of contributions by each employee. The Company contributed $74 and $29 for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, respectively. Appreciation Rights Plan Certain employees of Charter participated in the 1995 Charter Communications, Inc. Appreciation Rights Plan (the "Plan"). The Plan permitted Charter Investment to grant 1,500,000 units to certain key employees, of which 1,251,500 were outstanding at December 31, 1997. Units received by an employee vest at a rate of 20% per year, unless otherwise provided in the participant's Appreciation Rights Unit Agreement. The appreciation rights entitled the participants to receive payment, upon termination or change in control of Charter Investment, of the excess of the unit value over the base value (defined as the appreciation value) for each vested unit. The unit value was based on adjusted equity, as defined in the Plan. Deferred compensation expense was based on the appreciation value since the grant date and was being amortized over the vesting period. As a result of the acquisition of Charter Investment by Mr. Allen, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter Investment in 1999. The cost of this plan was allocated to the Company based on the number of basic customers. The Company considers this allocation to be reasonable for the operations of the Company. For the period January 1, 1998, through December 23, 1998, the Company expensed $3,800, included in corporate expense allocation-related party and increased shareholder's investment for the cost of this plan. F-47 216 10. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No. 133, has delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company has not yet quantified the impact of adopting SFAS No. 133 on the consolidated financial statements nor has determined the timing of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). F-48 217 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CCA Group: We have audited the accompanying combined balance sheet of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc. (collectively CCA Group) and subsidiaries as of December 31, 1997, and the related combined statements of operations, shareholders' deficit and cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of CCA Group and subsidiaries as of December 31, 1997, and the combined results of their operations and their cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-49 218 CCA GROUP COMBINED BALANCE SHEET -- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these combined statements. F-50
ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 4,501 Accounts receivable, net of allowance for doubtful accounts of $926....................................... 9,407 Prepaid expenses and other................................ 1,988 Deferred income tax asset................................. 5,915 ---------- Total current assets.............................. 21,811 ---------- RECEIVABLE FROM RELATED PARTY, including accrued interest... 13,090 ---------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 352,860 Franchises, net of accumulated amortization of $132,871... 806,451 ---------- 1,159,311 ---------- OTHER ASSETS................................................ 13,731 ---------- $1,207,943 ========== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 25,625 Accounts payable and accrued expenses..................... 48,554 Payables to manager of cable television systems -- related party.................................................. 1,975 ---------- Total current liabilities......................... 76,154 ---------- DEFERRED REVENUE............................................ 1,882 ---------- DEFERRED INCOME TAXES....................................... 117,278 ---------- LONG-TERM DEBT, less current maturities..................... 758,795 ---------- DEFERRED MANAGEMENT FEES.................................... 4,291 ---------- NOTES PAYABLE, including accrued interest................... 348,202 ---------- SHAREHOLDERS' DEFICIT: Common stock.............................................. 1 Additional paid-in capital................................ 128,499 Accumulated deficit....................................... (227,159) ---------- Total shareholders' deficit....................... (98,659) ---------- $1,207,943 ========== 219 CCA GROUP COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these combined statements. F-51
PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, --------------------- 1998 1997 1996 ------------- ---- ---- REVENUES............................................. $ 324,432 $ 289,697 $233,392 --------- --------- -------- EXPENSES: Operating costs.................................... 135,705 122,917 102,977 General and administrative......................... 28,440 26,400 18,687 Depreciation and amortization...................... 136,689 116,080 96,547 Management fees -- related parties................. 17,392 11,414 8,634 --------- --------- -------- 318,226 276,811 226,845 --------- --------- -------- Income from operations.......................... 6,206 12,886 6,547 --------- --------- -------- OTHER INCOME (EXPENSE): Interest income.................................... 4,962 2,043 1,883 Interest expense................................... (113,824) (108,122) (88,999) Other, net......................................... (294) 171 (2,504) --------- --------- -------- (109,156) (105,908) (89,620) --------- --------- -------- Net loss........................................ $(102,950) $ (93,022) $(83,073) ========= ========= ======== 220 CCA GROUP COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these combined statements. F-52
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- ----- BALANCE, December 31, 1995................. $ 1 $ 99,999 $ (51,064) $ 48,936 Net loss................................. -- -- (83,073) (83,073) --- -------- --------- --------- BALANCE, December 31, 1996................. 1 99,999 (134,137) (34,137) Capital contributions.................... -- 28,500 -- 28,500 Net loss................................. -- -- (93,022) (93,022) --- -------- --------- --------- BALANCE, December 31, 1997................. 1 128,499 (227,159) (98,659) Capital contributions.................... -- 5,684 -- 5,684 Net loss................................. -- -- (102,950) (102,950) --- -------- --------- --------- BALANCE, December 23, 1998................. $ 1 $134,183 $(330,109) $(195,925) === ======== ========= ========= 221 CCA GROUP COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these combined statements. F-53
PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, --------------------- 1998 1997 1996 ------------- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................... $(102,950) $(93,022) $ (83,073) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization................... 136,689 116,080 96,547 Amortization of debt issuance costs and non cash interest cost................................. 44,701 49,107 39,927 (Gain) loss on sale of property, plant and equipment..................................... 511 (156) 1,257 Changes in assets and liabilities, net of effects from acquisitions -- Accounts receivable, net...................... 4,779 222 (1,393) Prepaid expenses and other.................... 243 (175) 216 Accounts payable and accrued expenses......... 3,849 8,797 3,855 Payables to manager of cable television systems, including deferred management fees....................................... 3,485 784 448 Deferred revenue.............................. 1,336 559 (236) Other operating activities.................... 5,583 (3,207) 1,372 --------- -------- --------- Net cash provided by operating activities..... 98,226 78,989 58,920 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment......... (95,060) (82,551) (56,073) Payments for acquisitions, net of cash acquired.... -- (147,187) (122,017) Other investing activities......................... (2,898) (1,296) 54 --------- -------- --------- Net cash used in investing activities........... (97,958) (231,034) (178,036) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt....................... 300,400 162,000 127,000 Repayments of long-term debt....................... (64,120) (39,580) (13,100) Payments of debt issuance costs.................... (8,442) (3,360) (3,126) Repayments under notes payable..................... (230,994) -- -- Capital contributions.............................. -- 28,500 -- --------- -------- --------- Net cash provided by (used in) financing activities.................................... (3,156) 147,560 110,774 --------- -------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS............ (2,888) (4,485) (8,342) CASH AND CASH EQUIVALENTS, beginning of period....... 4,501 8,986 17,328 --------- -------- --------- CASH AND CASH EQUIVALENTS, end of period............. $ 1,613 $ 4,501 $ 8,986 ========= ======== ========= CASH PAID FOR INTEREST............................... $ 179,781 $ 49,687 $ 51,434 ========= ======== ========= 222 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION CCA Group consists of CCA Holdings Corp. (CCA Holdings), CCT Holdings Corp. (CCT Holdings) and Charter Communications Long Beach, Inc. (CC-LB), all Delaware corporations (collectively referred to as "CCA Group" or the "Company") and their subsidiaries. The combined financial statements of each of these companies have been combined by virtue of their common ownership and management. All material intercompany transactions and balances have been eliminated. CCA Holdings commenced operations in January 1995 in connection with consummation of the Crown Transaction (as defined below). The accompanying financial statements include the accounts of CCA Holdings; its wholly-owned subsidiary, CCA Acquisition Corp. (CAC); CAC's wholly-owned subsidiary, Cencom Cable Entertainment, Inc. (CCE); and Charter Communications Entertainment I, L.P. (CCE-I), which is controlled by CAC through its general partnership interest. Through December 23, 1998, CCA Holdings was approximately 85% owned by Kelso Investment Associates V, L.P., an investment fund, together with an affiliate (collectively referred to as "Kelso" herein) and certain other individuals and approximately 15% by Charter Communications, Inc. (Charter), manager of CCE-I's cable television systems. CCT Holdings was formed on January 6, 1995. CCT Holdings commenced operations in September 1995 in connection with consummation of the Gaylord Transaction (as defined below). The accompanying financial statements include the accounts of CCT Holdings and Charter Communications Entertainment II, L.P. (CCE-II), which is controlled by CCT Holdings through its general partnership interest. Through December 23, 1998, CCT Holdings was owned approximately 85% by Kelso and certain other individuals and approximately 15% by Charter, manager of CCE-II's cable television systems. In January 1995, CAC completed the acquisition of certain cable television systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards, Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC and CCT Holdings entered into an Asset Exchange Agreement whereby CAC exchanged a 1% undivided interest in all of its assets for a 1.22% undivided interest in certain assets to be acquired by CCT Holdings from an affiliate of Gaylord Entertainment Company, Inc. (Gaylord). Effective September 30, 1995, CCT Holdings acquired certain cable television systems from Gaylord (the "Gaylord Transaction"). Upon execution of the Asset Purchase Agreement, CAC and CCT Holdings entered into a series of agreements to contribute the assets acquired under the Crown Transaction to CCE-I and certain assets acquired in the Gaylord acquisition to CCE-II. Collectively, CCA Holdings and CCT Holdings own 100% of CCE-I and CCE-II. CC-LB was acquired by Kelso and Charter in May 1997. The accompanying financial statements include the accounts of CC-LB and its wholly owned subsidiary, Long Beach Acquisition Corp. (LBAC) from the date of acquisition. Through December 23, 1998, CC-LB was owned approximately 85% by Kelso and certain other individuals and approximately 15% by Charter, manager of LBAC's cable television systems. Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through a series of transactions. In conjunction with Mr. Allen's acquisition, Charter acquired 100% of the outstanding stock of CCA Holdings, CCT Holdings and CC-LB on December 23, 1998. F-54 223 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In 1998, CCE-I provided cable television service to customers in Connecticut, Illinois, Massachusetts, Missouri and New Hampshire, CCE-II provided cable television service to customers in California and LBAC provided cable television service to customers in Long Beach, California, and certain surrounding areas. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that approximates market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a residence are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, and equipment replacement costs and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: In 1997, the Company shortened the estimated useful lives of certain property, plant and equipment for depreciation purposes. As a result, additional depreciation of $8,123 was recorded during 1997. FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable television systems represent management's estimate of fair value and are amortized using the straight-line method over 15 years. OTHER ASSETS Debt issuance costs are amortized to interest expense over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. INCOME TAXES Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-55
Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years 224 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITIONS: In 1997, CC-LB acquired the stock of LBAC for an aggregate purchase price, net of cash acquired, of $147,200. In connection with the completion of this acquisition, LBAC recorded $55,900 of deferred income tax liabilities resulting from differences between the financial reporting and tax basis of certain assets acquired. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $190,200 and is included in franchises. In 1996, the Company acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $122,000. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the dates of acquisition was $100,200 and is included in franchises. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of the acquisitions. Unaudited pro forma operating results for the 1997 acquisitions as though the acquisitions had been made on January 1, 1997, with pro forma adjustments to give effect to amortization of franchises, interest expense and certain other adjustments as follows: The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 3. RECEIVABLE FROM RELATED PARTY: In connection with the transfer of certain assets acquired in the Gaylord Transaction to Charter Communications Properties, Inc. (CCP), Charter Communications Properties Holding Corp. (CCP Holdings), the parent of CCP and a wholly owned subsidiary of Charter, entered into a $9,447 promissory note with CCT Holdings. The promissory note bears interest at the rates paid by CCT Holdings on the Gaylord Seller Note. Principal and interest are due on September 29, 2005. Interest income has been accrued based on an average rate of interest over the life of the Gaylord Seller Note, which approximates 15.4% and totaled $1,899 for the period from January 1, 1998, through December 23, 1998, and $1,806 and $1,547 for the years ended December 31, 1997 and 1996, respectively. As of December 31, 1997, interest receivable totaled $3,643. F-56
YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) ------------- Revenues.................................................... $303,797 Income from operations...................................... 14,108 Net loss.................................................... (94,853) 225 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1997: Depreciation expense for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, was $72,914, $59,599 and $39,575, respectively. 5. OTHER ASSETS: Other assets consists of the following at December 31, 1997:
Cable distribution systems.................................. $ 426,241 Land, buildings and leasehold improvements.................. 15,443 Vehicles and equipment...................................... 24,375 --------- 466,059 Less -- Accumulated depreciation............................ (113,199) --------- $ 352,860 ========= 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1997:
Debt issuance costs......................................... $13,416 Note receivable............................................. 2,100 Other....................................................... 1,342 ------- 16,858 Less -- Accumulated amortization............................ (3,127) ------- $13,731 ======= F-57
Accrued interest............................................ $ 8,389 Franchise fees.............................................. 6,434 Programming expenses........................................ 5,855 Accounts payable............................................ 4,734 Public education and governmental costs..................... 4,059 Salaries and related benefits............................... 3,977 Capital expenditures........................................ 3,629 Other....................................................... 11,477 ------- $48,554 ======= 226 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1997: CCE-I CREDIT AGREEMENT CCE-I maintains a credit agreement (the "CCE-I Credit Agreement"), which provides for a $280,000 term loan that matures on September 30, 2006, an $85,000 fund loan that matures on March 31, 2007, and a $175,000 revolving credit facility with a maturity date of September 30, 2006. Amounts under the CCE-I Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.75%. The variable interest rate ranged from 6.88% to 8.06% at December 23, 1998, and from 7.63% to 8.50% and 7.63% to 8.38% at December 31, 1997 and 1996, respectively. Commencing June 30, 2002, and at the end of each calendar quarter thereafter, available borrowings under the revolving credit facility and the term loan shall be reduced on an annual basis by 12.0% in 2002 and 15.0% in 2003. Commencing June 30, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the fund loan shall be reduced on an annual basis by 0.75% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.375% and 0.5% per annum is payable on the unborrowed balance of the revolving credit facility. COMBINED CREDIT AGREEMENT CCE-II and LBAC maintain a credit agreement (the "Combined Credit Agreement") which provides for two term loan facilities, one with the principal amount of $100,000 that matures on March 31, 2005, and the other with the principal amount of $90,000 that matures on March 31, 2006. The Combined Credit Agreement also provides for a $185,000 revolving credit facility, with a maturity date of March 31, 2005. Amounts under the Combined Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.5%. The variable interest rate ranged from 6.56% to 7.59% at December 23, 1998, and from 7.50% to 8.38% at December 31, 1997, respectively. F-58
CCE-I: Term loans................................................ $274,120 Fund loans................................................ 85,000 Revolving credit facility................................. 103,800 -------- 462,920 -------- CCE-II: Term loans................................................ 105,000 Revolving credit facility................................. 123,500 -------- 228,500 -------- LBAC: Term loans................................................ 85,000 Revolving credit facility................................. 8,000 -------- 93,000 -------- Total debt........................................ 784,420 Less -- Current maturities.................................. (25,625) -------- Total long-term debt.............................. $758,795 ======== 227 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Commencing March 31, 2001, and at the end of each quarter thereafter, available borrowings under the revolving credit facility and one term loan shall be reduced on an annual basis by 5.0% in 2001, 15.0% in 2002 and 18.0% in 2003. Commencing in December 31, 1999, and at the end of each quarter thereafter, available borrowings under the other term loan shall be reduced on annual basis by 0.5% in 1999, 0.8% in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.25% and 0.375% per annum, based upon the intercompany indebtedness of the Company, is payable on the unborrowed balance of the revolving credit facility. CCE CREDIT AGREEMENT In October 1998, Charter Communications Entertainment, L.P. (CCE L.P.), a 98% direct and indirect owner of CCE-I and CCE-II and indirectly owned subsidiary of the Company, entered into a credit agreement (the "CCE L.P. Credit Agreement") which provides for a term loan facility with the principal amount of $130,000 that matures on September 30, 2007. Amounts under the CCE L.P. Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The variable interest rate at December 23, 1998, was 8.62%. Commencing June 30, 2002, and the end of each calendar quarter thereafter, the available borrowings for the term loan shall be reduced on an annual basis by 0.75% in 2002 and 1.0% in 2003. CCE-II HOLDINGS CREDIT AGREEMENT CCE-II Holdings, LLC (CCE-II Holdings), a wholly owned subsidiary of CCE L.P. and the parent of CCE-II, entered into a credit agreement (the "CCE-II Holdings Credit Agreement") in November 1998, which provides for a term loan facility with the principal amount of $95,000 that matures on September 30, 2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The variable rate at December 23, 1998, was 8.56%. Commencing June 30, 2002, and at the end of each quarter thereafter, available borrowings under the revolving credit facility and one term loan shall be reduced on an annual basis by 0.5% in 2002 and 1.0% in 2003. The credit agreements require the Company to comply with various financial and nonfinancial covenants, including the maintenance of annualized operating cash flow to fixed charge ratio, as defined, not to exceed 1.0 to 1.0. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens asset sales and certain other items. 8. NOTES PAYABLE: Notes payable consists of the following at December 31, 1997: In connection with the Crown Transaction, the Company entered into an $82,000 senior subordinated loan agreement with a subsidiary of Hallmark, HC Crown Corp., and pursuant to F-59
HC Crown Note............................................... $ 82,000 Accrued interest on HC Crown Note........................... 36,919 Gaylord Seller Note......................................... 165,688 Accrued interest on Gaylord Seller Note..................... 63,595 -------- Total............................................. $348,202 ======== 228 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) such loan agreement issued a senior subordinated note (the "HC Crown Note"). The HC Crown Note was an unsecured obligation. The HC Crown Note was limited in aggregate principal amount to $82,000 and has a stated maturity date of December 31, 1999 (the "Stated Maturity Date"). Interest has been accrued at 13% per annum, compounded semiannually, payable upon maturity. In October 1998, the Crown Note and accrued interest was paid in full. In connection with the Gaylord Transaction, CCT Holdings entered into a $165,700 subordinated loan agreement with Gaylord (the "Gaylord Seller Note"). Interest expense has been accrued based on an average rate of interest over the life of the Gaylord Seller Note, which approximated 15.4%. In connection with the Gaylord Transaction, CCT Holdings, CCE L.P. and Gaylord entered into a contingent payment agreement (the "Contingent Agreement"). The Contingent Agreement indicates CCE L.P. will pay Gaylord 15% of any amount distributed to CCT Holdings in excess of the total of the Gaylord Seller Note, Crown Seller Note and $450,000. In conjunction with the Paul G. Allen acquisition of Charter and the Company, Gaylord was paid an additional $132,000 pursuant to the Contingent Agreement and the Gaylord Seller Note was paid in full. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1997, is as follows: As the long-term debt under the credit agreements bear interest at current market rates, their carrying amount approximates fair market value at December 31, 1997. Fair value of the HC Crown Note is based upon trading activity at December 31, 1997. Fair value of the Gaylord Seller Note is based on current redemption value. The weighted average interest pay rate for the Company's interest rate swap agreements was 7.82% at December 31, 1997. The weighted average interest rate for the Company's interest rate cap agreements was 8.49% at December 31, 1997. The weighted average interest rates for the Company's interest rate collar agreements were 9.04% and 7.57% for the cap and floor components, respectively, at December 31, 1997. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. F-60
1997 -------------------------------- CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- DEBT Debt under credit agreements............................ $784,420 $ -- $784,420 HC Crown Note (including accrued interest).............. 118,919 -- 118,587 Gaylord Seller Note (including accrued interest)........ 229,283 -- 214,074 INTEREST RATE HEDGE AGREEMENTS Swaps................................................... -- 405,000 (1,214) Caps.................................................... -- 120,000 -- Collars................................................. -- 190,000 (437) 229 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would receive or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's Senior Credit Facility thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the results of operations or the financial position of the Company. 10. COMMON STOCK: The Company's common stock consist of the following at December 31, 1997: CCA HOLDINGS The Class A Voting Common Stock (CCA Class A Common Stock) and Class C Nonvoting Common Stock (CCA Class C Common Stock) have certain preferential rights upon liquidation of CCA Holdings. In the event of liquidation, dissolution or "winding up" of CCA Holdings, holders of CCA Class A and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CCA Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C shareholders shall ratably receive the remaining proceeds. F-61
CCA Holdings: Common stock -- Class A, voting, $.01 par value, 100,000 shares authorized; 75,515 shares issued and outstanding............................................ $ 1 Common stock -- Class B, voting, $.01 par value, 20,000 shares authorized; 4,300 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 5,000 shares authorized; 185 shares issued and outstanding... -- --- 1 --- CCT Holdings: Common stock -- Class A, voting, $.01 par value, 20,000 shares authorized; 16,726 shares issued and outstanding............................................ -- Common stock -- Class B, voting, $.01 par value, 4,000 shares authorized; 3,000 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 1,000 shares authorized; 275 shares issued and outstanding... -- --- CC-LB: Common stock -- Class A, voting, $.01 par value, 31,000 shares authorized, 27,850 shares issued and outstanding............................................ -- Common stock -- Class B, voting, $.01 par value, 2,000 shares authorized, 1,500 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 2,000 shares authorized, 650 shares issued and outstanding... -- --- Total common stock................................ $ 1 === 230 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) If upon liquidation, dissolution or "winding up" the assets of CCA Holdings are insufficient to permit payment to Class A and Class C shareholders for their full preferential amounts, all assets of CCA Holdings shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amounts, the proceeds are to be distributed on a pro rata basis to Class B shareholders. Upon the occurrence of any Conversion Event (as defined within the Amended and Restated Certificate of Incorporation) Class C shareholders may convert any or all of their outstanding shares into the same number of Class A shares. Furthermore, CCA Holdings may automatically convert outstanding Class C shares into the same number of Class A shares. CCA Holdings is restricted from making cash dividends on its common stock until the balance outstanding under the HC Crown Note is repaid. Charter and Kelso entered into a Stockholders' Agreement providing for certain restrictions on the transfer, sale or purchase of CCA Holdings' common stock. CCT HOLDINGS The Class A Voting Common Stock (CCT Class A Common Stock) and Class C Nonvoting Common Stock (CCT Class C Common Stock) have certain preferential rights upon liquidation of CCT Holdings. In the event of liquidation, dissolution or "winding up" of CCT Holdings, holders of CCT Class A Common Stock and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CCT Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C shareholders shall ratably receive the remaining proceeds. If upon liquidation, dissolution or "winding up" the assets of CCT Holdings are insufficient to permit payment to Class A Common Stock and Class C shareholders for their full preferential amount, all assets of the Company shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amount, the proceeds are to be distributed on a pro rata basis to Class B shareholders. Upon the occurrence of any Conversion Event (as defined within the Amended and Restated Certificate of Incorporation), Class C shareholders may convert any or all of their outstanding shares into the same number of Class A shares. Furthermore, CCT Holdings may automatically convert outstanding Class C shares into the same number of Class A shares. CCT Holdings is restricted from making cash dividends on its common stock until the balance outstanding under the note payable to seller is repaid. Charter and Kelso entered into a Stockholders' Agreement providing for certain restrictions on the transfer, sale or purchase of CCT Holdings' common stock. CC-LB The Class A Voting Common Stock (CC-LB Class A Common Stock) and Class C Nonvoting Common Stock (CC-LB Class C Common Stock) have certain preferential rights upon liquidation of CC-LB. In the event of liquidation, dissolution or "winding up" of CC-LB, holders of CC-LB Class A Common Stock and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CC-LB Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A, Class B and Class C shareholders shall ratably receive the remaining proceeds. F-62 231 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) If upon liquidation, dissolution or "winding up" the assets of CC-LB are insufficient to permit payment to Class A and Class C shareholders for their full preferential amount, all assets of the Company shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amount, the proceeds are to be distributed on a pro rata basis to Class B shareholders. CC-LB Class C Common Stock may be converted into CC-LB Class A Common Stock upon the transfer of CC-LB Class C Common Stock to a person not affiliated with the seller. Furthermore, CC-LB may automatically convert outstanding Class C shares into the same number of Class A shares. 11. RELATED PARTY TRANSACTIONS: Charter provides management services to the Company under the terms of a contract which provides for annual base fees equal to $9,277 and $9,485 for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, respectively, plus an additional fee equal to 30% of the excess, if any, of operating cash flow (as defined in the management agreement) over the projected operating cash flow. Payment of the additional fee is deferred due to restrictions provided within the Company's credit agreements. Deferred management fees bear interest at 8.0% per annum. The additional fees for the periods from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996, totaled $2,160, $1,990 and $1,255, respectively. In addition, the Company receives financial advisory services from an affiliate of Kelso, under terms of a contract which provides for fees equal to $1,064 and $1,113 per annum as of January 1, 1998, through December 23, 1998, and December 31, 1997, respectively. Management and financial advisory service fees currently payable of $2,281 are included in payables to manager of cable television systems -- related party at December 31, 1997. The Company pays certain acquisition advisory fees to an affiliate of Kelso and Charter, which typically equal approximately 1% of the total purchase price paid for cable television systems acquired. Total acquisition fees paid to the affiliate of Kelso for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to the affiliate of Kelso in 1997 and 1996 were $-0- and $1,400, respectively. Total acquisition fees paid to Charter for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $-0- and $1,400, respectively. The Company and all entities managed by Charter collectively utilize a combination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Medical coverage provides for $2,435 aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. Charges are determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. The Company is allocated its share of the charges monthly based upon its total number of employees, historical claims and medical cost trend rates. Management considers this allocation to be reasonable for the operations of the Company. For the period from January 1, 1998, through December 23, 1998, the Company expensed $1,950 relating to insurance allocations. During 1997 and 1996, the Company expensed $1,689 and $2,065, respectively, relating to insurance allocations. Beginning in 1996, the Company and other entities managed by Charter employed the services of Charter's National Data Center (the "National Data Center"). The National Data Center performs certain customer billing services and provides computer network, hardware and F-63 232 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) software support to the Company and other affiliated entities. The cost of these services is allocated based on the number of customers. Management considers this allocation to be reasonable for the operations of the Company. For the period from January 1, 1998, through December 23, 1998, the Company expensed $843 relating to these services. During 1997 and 1996, the Company expensed $723 and $466 relating to these services, respectively. CCE-I maintains a regional office. The regional office performs certain operational services on behalf of CCE-I and other affiliated entities. The cost of these services is allocated to CCE-I and affiliated entities based on their number of customers. Management considers this allocation to be reasonable for the operations of CCE-I. From the period January 1, 1998, through December 23, 1998, the Company expensed $1,926 relating to these services. During 1997 and 1996, CCE-I expensed $861 and $799, respectively, relating to these services. 12. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, was $2,222. Rent expense incurred under these leases during 1997 and 1996 was $1,956 and $1,704, respectively. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expensed incurred for pole attachments for the period from January 1, 1998, through December 23, 1998, was $2,430. Rent expense incurred for pole attachments during 1997 and 1996 was $2,601 and $2,330, respectively. LITIGATION The Company is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. 13. REGULATION IN THE CABLE TELEVISION INDUSTRY: The cable television industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the F-64 233 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) maximum permitted rates. As of December 23, 1998, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable television rates is not allowed to be more restrictive than the federal or local regulation. The Company is subject to state regulation in Connecticut. 14. INCOME TAXES: Deferred tax assets and liabilities are recognized for the estimated future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred income tax expense or benefit is the result of changes in the liability or asset recorded for deferred taxes. A valuation allowance must be established for any portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized. For the period from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996, no current provision (benefit) for income taxes was recorded. The effective income tax rate is less than the federal rate of 35% primarily due to providing a valuation allowance on deferred income tax assets. F-65 234 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes are comprised of the following at December 31, 1997: At December 31, 1997, the Company had net operating loss (NOL) carryforwards for regular income tax purposes aggregating $204,400, which expire in various years from 1999 through 2012. Utilization of the NOLs carryforwards is subject to certain limitations. 15. EMPLOYEE BENEFIT PLANS: The Company's employees may participate in the Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company contributes an amount equal to 50% of the first 5% of contributions by each employee. For the period from January 1, 1998, through December 23, 1998, the Company contributed $585 to the 401(k) plan. During 1997 and 1996, the Company contributed approximately $499 and $435 to the 401(k) Plan, respectively. Certain employees of the Company are participants in the 1996 Charter Communications/ Kelso Group Appreciation Rights Plan (the "Plan"). The Plan covers certain key employees and consultants within the group of companies and partnerships controlled by affiliates of Kelso and managed by Charter. The Plan permits the granting of up to 1,000,000 units, of which 705,000 were outstanding at December 31, 1997. Unless otherwise provided in a particular instance, units vest at a rate of 20% per annum. The Plan entitles participants to receive payment of the appreciated unit value for vested units, upon the occurrence of certain events specified in the Plan (i.e. change in control, employee termination) The units do not represent a right to an equity interest to any entities within the CCA Group. Compensation expense is based on the appreciated unit value and is amortized over the vesting period. As a result of the acquisition of Charter and the Company, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter in 1999. For the period from January 1, 1998, through December 23, 1998, the Company recorded $5,684 of expense, included in management fees, and a contribution from Charter related to the Appreciation Rights Plan. F-66
Deferred income tax assets: Accounts receivable....................................... $ 252 Other assets.............................................. 7,607 Accrued expenses.......................................... 4,740 Deferred revenue.......................................... 624 Deferred management fees.................................. 1,654 Tax loss carryforwards.................................... 80,681 Tax credit carryforward................................... 1,360 Valuation allowance....................................... (40,795) --------- Total deferred income tax assets.................. 56,123 --------- Deferred income tax liabilities: Property, plant and equipment............................. (38,555) Franchise costs........................................... (117,524) Other..................................................... (11,407) --------- Total deferred income tax liabilities............. (167,486) --------- Net deferred income tax liability................. $(111,363) ========= 235 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 16. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). 17. SUBSEQUENT EVENT: Subsequent to December 23, 1998, CCA Holdings, CCT Holdings and CC-LB converted to limited liability companies and are now known as CCA Holdings LLC, CCT Holdings LLC and Charter Communications Long Beach, LLC, respectively. F-67 236 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CharterComm Holdings, L.P.: We have audited the accompanying consolidated balance sheet of CharterComm Holdings, L.P. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, partners' capital and cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CharterComm Holdings, L.P. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-68 237 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ASSETS LIABILITIES AND PARTNERS' CAPITAL
CURRENT ASSETS: Cash and cash equivalents................................. $ 2,742 Accounts receivable, net of allowance for doubtful accounts of $330....................................... 3,158 Prepaid expenses and other................................ 342 -------- Total current assets.............................. 6,242 -------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 235,808 Franchises, net of accumulated amortization of $119,968... 480,201 -------- 716,009 -------- OTHER ASSETS................................................ 16,176 -------- $738,427 ======== The accompanying notes are an integral part of these consolidated statements. F-69
CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 5,375 Accounts payable and accrued expenses..................... 30,507 Payables to manager of cable television systems -- related party.................................................. 1,120 -------- Total current liabilities......................... 37,002 -------- DEFERRED REVENUE............................................ 1,719 -------- LONG-TERM DEBT, less current maturities..................... 666,662 -------- DEFERRED MANAGEMENT FEES.................................... 7,805 -------- DEFERRED INCOME TAXES....................................... 5,111 -------- REDEEMABLE PREFERRED LIMITED UNITS -- 577.81 units, issued and outstanding.................................... 20,128 -------- PARTNERS' CAPITAL: General Partner........................................... -- Common Limited Partners -- 220.24 units issued and outstanding............................................ -- -------- Total partners' capital........................... -- -------- $738,427 ======== 238 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-70
PERIOD FROM JANUARY 1, 1998, YEAR ENDED THROUGH DECEMBER 31 DECEMBER 23, -------------------- 1998 1997 1996 ------------ ---- ---- REVENUES.............................................. $196,801 $175,591 $120,280 -------- -------- -------- OPERATING EXPENSES: Operating costs..................................... 83,745 75,728 50,970 General and administrative.......................... 14,586 12,607 9,327 Depreciation and amortization....................... 86,741 76,535 53,133 Management fees -- related party.................... 14,780 8,779 6,014 -------- -------- -------- 199,852 173,649 119,444 -------- -------- -------- Income (loss) from operations.................... (3,051) 1,942 836 -------- -------- -------- OTHER INCOME (EXPENSE): Interest income..................................... 211 182 233 Interest expense.................................... (66,121) (61,498) (41,021) Other, net.......................................... (1,895) 17 (468) -------- -------- -------- (67,805) (61,299) (41,256) -------- -------- -------- Loss before extraordinary item................... (70,856) (59,357) (40,420) EXTRAORDINARY ITEM -- Loss on early retirement of debt................................................ (6,264) -- -- -------- -------- -------- Net loss......................................... (77,120) (59,357) (40,420) REDEMPTION PREFERENCE ALLOCATION: Special Limited Partner units....................... -- -- (829) Redeemable Preferred Limited units.................. -- -- (4,081) NET LOSS ALLOCATED TO REDEEMABLE PREFERRED LIMITED UNITS............................................... 20,128 2,553 4,063 -------- -------- -------- Net loss applicable to partners' capital accounts....................................... $(56,992) $(56,804) $(41,267) ======== ======== ======== NET LOSS ALLOCATION TO PARTNERS' CAPITAL ACCOUNTS: General Partner..................................... $(56,992) $(21,708) $(38,391) Common Limited Partners............................. -- (35,096) (2,876) -------- -------- -------- $(56,992) $(56,804) $(41,267) ======== ======== ======== 239 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-71
COMMON GENERAL LIMITED PARTNER PARTNERS TOTAL ------- -------- ----- BALANCE, December 31, 1995.............................. $ 29,396 $ 2,202 $ 31,598 Capital contributions................................. 30,703 2,300 33,003 Allocation of net loss................................ (38,391) (2,876) (41,267) -------- -------- -------- BALANCE, December 31, 1996.............................. 21,708 1,626 23,334 Capital contributions................................. -- 33,470 33,470 Allocation of net loss................................ (21,708) (35,096) (56,804) -------- -------- -------- BALANCE, December 31, 1997.............................. -- -- -- Capital contributions................................. 4,920 -- 4,920 Allocation of net loss................................ (56,992) -- (56,992) -------- -------- -------- BALANCE, December 23, 1998.............................. $(52,072) $ -- $(52,072) ======== ======== ======== 240 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) The accompanying notes are an integral part of these consolidated statements. F-72
PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 31, DECEMBER 23, ----------------------- 1998 1997 1996 ------------ ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.............................................. $ (77,120) $ (59,357) $ (40,420) Adjustments to reconcile net loss to net cash provided by operating activities -- Extraordinary item -- Loss on early retirement of debt............................................. 6,264 -- -- Depreciation and amortization...................... 86,741 76,535 53,133 Amortization of debt issuance costs, debt discount and interest rate cap agreements................. 14,563 14,212 9,564 Loss on disposal of property, plant and equipment........................................ 1,714 203 367 Changes in assets and liabilities, net of effects from acquisition -- Accounts receivable, net......................... 2,000 369 (303) Prepaid expenses and other....................... (203) 943 245 Accounts payable and accrued expenses............ (1,970) 3,988 9,911 Payables to manager of cable television systems, including deferred management fees............ 9,456 3,207 3,479 Deferred revenue................................. 770 (82) 452 Other operating activities....................... 5,378 -- -- --------- --------- --------- Net cash provided by operating activities........ 47,593 40,018 36,428 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............ (85,044) (72,178) (48,324) Payments for acquisitions, net of cash acquired....... (5,900) (159,563) (145,366) Other investing activities............................ 5,280 1,577 (2,089) --------- --------- --------- Net cash used in investing activities.............. (85,664) (230,164) (195,779) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.......................... 547,400 231,250 260,576 Repayments of long-term debt.......................... (505,300) (67,930) (34,401) Partners' capital contributions....................... -- 29,800 -- Payment of debt issuance costs........................ (3,651) (3,593) (11,732) Payment of Special Limited Partnership units.......... -- -- (43,243) Repayments of note payable -- related party........... -- -- (15,000) Payments for interest rate cap agreements............. -- -- (35) --------- --------- --------- Net cash provided by financing activities.......... 38,449 189,527 156,165 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 378 (619) (3,186) CASH AND CASH EQUIVALENTS, beginning of period.......... 2,742 3,361 6,547 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period................ $ 3,120 $ 2,742 $ 3,361 ========= ========= ========= CASH PAID FOR INTEREST.................................. $ 61,559 $ 42,538 $ 28,860 ========= ========= ========= 241 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION CharterComm Holdings, L.P. (CharterComm Holdings) was formed in March 1996 with the contributions of Charter Communications Southeast Holdings, L.P. (Southeast Holdings), Charter Communications, L.P. (CC-I) and Charter Communications II, L.P. (CC-II). This contribution was accounted for as a reorganization under common control and, accordingly, the consolidated financial statements and notes have been restated to include the results and financial position of Southeast Holdings, CC-I and CC-II. Through December 23, 1998, CharterComm Holdings was owned 75.3% by affiliates of Charterhouse Group International, Inc., a privately owned investment firm (collectively referred to herein as "Charterhouse"), indirectly owned 5.7% by Charter Communications, Inc. (Charter), manager of the Partnership's (as defined below) cable television systems, and owned 19.0% primarily by other institutional investors. Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through a series of transactions. In conjunction with Mr. Allen's acquisition, Charter acquired 100% of the outstanding partnership interests in CharterComm Holdings on December 23, 1998. The accompanying consolidated financial statements include the accounts of CharterComm Holdings and its subsidiaries collectively referred to as the "Partnership" herein. All significant intercompany balances and transactions have been eliminated in consolidation. In 1998, the Partnership through its subsidiaries provided cable television service to customers in Alabama, Georgia, Kentucky, Louisiana, North Carolina, South Carolina and Tennessee. CASH EQUIVALENTS The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that approximates market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, and equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: F-73
Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years 242 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1997, the Partnership shortened the estimated useful lives of certain property, plant and equipment for depreciation purposes. As a result, an additional $4,775 of depreciation was recorded during 1997. FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable television systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. In addition, approximately $100,000 of franchise rights are being amortized over a period of 3 to 11 years. OTHER ASSETS Debt issuance costs are being amortized to interest expense over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. IMPAIRMENT OF ASSETS If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. REVENUES Cable television revenues from basic and premium services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable television system. As of December 31, 1997, no installation revenue has been deferred, as direct selling costs exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Partnership ranging up to a federally mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected from the Partnership's customers and are periodically remitted to local franchises. Franchise fees collected and paid are reported as revenue. INTEREST RATE HEDGE AGREEMENTS The Partnership manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. F-74 243 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Partnership's interest rate swap agreements require the Partnership to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Partnership to reduce the impact of rising interest rates on floating rate debt. The Partnership's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. OTHER INCOME (EXPENSE) Other, net includes gain and loss on disposition of property, plant and equipment, and other miscellaneous items, all of which are not directly related to the Partnership's primary line of business. In 1996, the Partnership recorded $367 of nonoperating losses for its portion of insurance deductibles pertaining to damage caused by hurricanes to certain cable television systems. INCOME TAXES Income taxes are the responsibility of the partners and are not provided for in the accompanying financial statements except for Peachtree Cable TV, Inc. (Peachtree), an indirect wholly owned subsidiary, which is a C corporation and for which taxes are presented in accordance with SFAS No. 109. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACQUISITIONS: In 1998, the Partnership acquired cable television systems in one transaction for a purchase price net of cash acquired, of $5,900. The excess cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $5,000 and is included in franchises. In 1997, the Partnership acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $159,600. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $126,400 and is included in franchises. In 1996, the Partnership acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $145,400. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $118,200 and is included in franchises. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. F-75 244 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited pro forma operating results for the 1997 acquisitions as though the acquisitions had been made on January 1, 1997, with pro forma adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows. The unaudited pro forma information does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 3. DISTRIBUTIONS AND ALLOCATIONS: For financial reporting purposes, redemption preference allocations, profits and losses are allocated to partners in accordance with the liquidation provision of the applicable partnership agreement. As stated in the Partnership Agreement, the Partnership may make distributions to the partners out of all available funds at such times and in such amounts as the General Partner may determine in its sole discretion. 4. REDEEMABLE PREFERRED LIMITED UNITS: As of December 31, 1995, certain Redeemable Preferred Limited Partner units of CC-I and CC-II were outstanding. During 1996, the Partnership issued certain Redeemable Preferred Limited Partner units of CharterComm Holdings. The Preferred Limited Partners' preference return has been reflected as an addition to the Redeemable Preferred Limited Partner units, and the decrease has been allocated to the General Partner and Common Limited Partner consistent with the liquidation and distribution provisions in the partnership agreements. At December 23, 1998, the balance related to the CharterComm Holdings Preferred Limited Partner units was as follows:
YEAR ENDED DECEMBER 31, 1997 ------------ (UNAUDITED) Revenues.................................................... $182,770 Income from operations...................................... 2,608 Net loss.................................................... (61,389) F-76
Contribution, March 1996.................................... $ 20,052 1996 redemption preference allocation..................... 2,629 Allocation of net loss.................................... -- -------- Balance, December 31, 1996.................................. 22,681 1997 redemption preference allocation..................... -- Allocation of net loss.................................... (2,553) -------- Balance, December 31, 1997.................................. 20,128 1998 redemption preference allocation..................... -- Allocation of net loss.................................... (20,128) -------- Balance, December 23, 1998.................................. $ -- ======== 245 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1998 and 1997 redemption preference allocations of $4,617 and $4,020, respectively, have not been reflected in the Preferred Limited Partners' capital accounts since the General Partner and Common Limited Partners' capital accounts have been reduced to $-0-. 5. SPECIAL LIMITED PARTNER UNITS (CC-I): Prior to March 28, 1996, certain Special Limited Partner units of CC-I were outstanding. CC-I's profits were allocated to the Special Limited Partners until allocated profits equaled the unrecovered preference amount (preference amounts range from 6% to 17.5% of the unrecovered initial cost of the partnership units and unrecovered preference amounts per annum). When there was no profit to allocate, the preference return was reflected as a decrease in Partners' Capital. In accordance with a purchase agreement and through the use of a capital contribution from Charter Communications Southeast, L.P. (Southeast), a wholly owned subsidiary of Southeast Holdings, resulting from the proceeds of the Notes (see Note 9), CC-I paid the Special Limited Partners $43,243 as full consideration for their partnership interests on March 28, 1996. 6. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1997: Depreciation expense for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, was $44,307, $33,634 and $16,997, respectively. 7. OTHER ASSETS: Other assets consist of the following at December 31, 1997:
Cable distribution systems.................................. $274,837 Land, buildings and leasehold improvements.................. 5,439 Vehicles and equipment...................................... 14,669 -------- 294,945 Less -- Accumulated depreciation............................ (59,137) -------- $235,808 ======== As a result of the payment and termination of the CC-I Credit Agreement and CC-II Credit Agreement (see Note 9), debt issuance costs of $6,264 were written off as an extraordinary loss on early retirement of debt for the period from January 1, 1998, through December 23, 1998. F-77
Debt issuance costs......................................... $18,385 Other assets................................................ 3,549 ------- 21,934 Less -- Accumulated amortization............................ (5,758) ------- $16,176 ======= 246 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1997: 9. LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1997:
Accrued interest............................................ $ 9,804 Franchise fees.............................................. 3,524 Programming costs........................................... 3,391 Accounts payable............................................ 2,479 Capital expenditures........................................ 2,099 Salaries and related benefits............................... 2,079 Other....................................................... 7,131 ------- $30,507 ======= SENIOR SECURED DISCOUNT DEBENTURES On March 28, 1996, Southeast Holdings and CharterComm Holdings Capital Corporation (Holdings Capital), a wholly owned subsidiary of Southeast Holdings (collectively the "Debentures Issuers"), issued $146,820 of Senior Secured Discount Debentures (the "Debentures") for proceeds of $75,000. Proceeds from the Debentures were used to pay fees and expenses related to the issuance of the Debentures and the balance of $72,400 was a capital contribution to Southeast. The Debentures are secured by all of Southeast Holdings' ownership interest in Southeast and rank pari passu in right and priority of payment to all other existing and future indebtedness of the Debentures Issuers. The Debentures are effectively subordinated to the claims of creditors of Southeast Holdings' subsidiaries, including the Combined Credit Agreement (as defined herein). The Debentures are redeemable at the Debentures Issuers' option at amounts decreasing from 107% to 100% of principal, plus accrued and unpaid interest to the redemption date, beginning on March 15, 2001. The Debentures Issuers are required to make an offer to purchase all of the Debentures, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the Debentures Indenture. No interest is payable on the Debentures prior to March 15, 2001. Thereafter, interest on the Debentures is payable semiannually in arrears beginning September 15, 2001, until maturity on March 15, 2007. The discount on the Debentures is being accreted using the effective interest method at an interest rate of 14% from the date of issuance to March 15, 2001. F-78
Senior Secured Discount Debentures.......................... $146,820 11 1/4% Senior Notes........................................ 125,000 Credit Agreements: CC-I...................................................... 112,200 CC-II..................................................... 339,500 -------- 723,520 Less: Current maturities........................................ (5,375) Unamortized discount...................................... (51,483) -------- $666,662 ======== 247 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11 1/4% SENIOR NOTES Southeast and CharterComm Capital Corporation (Southeast Capital), a wholly owned subsidiary of Southeast (collectively the "Notes Issuers"), issued $125,000 aggregate principal amount of 11 1/4% Senior Notes (the "Notes"). The Notes are senior unsecured obligations of the Notes Issuers and rank pari passu in right and priority of payment to all other existing and future indebtedness of the Notes Issuers. The Notes are effectively subordinated to the claims of creditors of Southeast's subsidiaries, including the lenders under the Combined Credit Agreement. The Notes are redeemable at the Notes Issuers' option at amounts decreasing from 105.625% to 100% of principal, plus accrued and unpaid interest to the date of redemption, beginning on March 15, 2001. The Notes Issuers are required to make an offer to purchase all of the Notes, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the Notes Indenture. Interest is payable semiannually on March 15 and September 15 until maturity on March 15, 2006. Southeast and Southeast Holdings are holding companies with no significant assets other than their direct and indirect investments in CC-I and CC-II. Southeast Capital and Holdings Capital were formed solely for the purpose of serving as co-issuers and have no operations. Accordingly, the Notes Issuers and Debentures Issuers must rely upon distributions from CC-I and CC-II to generate funds necessary to meet their obligations, including the payment of principal and interest on the Notes and Debentures. COMBINED CREDIT AGREEMENT In June 1998, CC-I and CC-II (the "Borrowers") replaced their existing credit agreements and entered into a combined credit agreement (the "Combined Credit Agreement"), which provides for two term loan facilities, one with the principal amount of $200,000 that matures on June 30, 2007, and the other with the principal amount of $150,000 that matures on December 31, 2007. The Combined Credit Agreement also provides for a $290,000 revolving credit facility, with a maturity date of June 30, 2007. Amounts under the Combined Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.0%. The variable interest rates ranged from 6.69% to 7.31% at December 23, 1998. Commencing March 31, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the revolving credit facility and the $200,000 term loan shall be reduced on an annual basis by 11.0% in 2002 and 14.6% in 2003. Commencing March 31, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the $150,000 term loan shall be reduced on an annual basis by 1.0% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of the revolving credit facility. The Debentures, Notes and Combined Credit Agreement require the Partnership to comply with various financial and nonfinancial covenants including the maintenance of a ratio of debt to annualized operating cash flow, as defined, not to exceed 5.25 to 1 at December 23, 1998. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens, asset sales and certain other items. CC-I CREDIT AGREEMENT CC-I maintained a credit agreement (the "CC-I Credit Agreement") with a consortium of banks for borrowings up to $127,200, consisting of a revolving line of credit of $63,600 and a F-79 248 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) term loan of $63,600. Interest accrued, at CC-I's option, at rates based upon the Base Rate, as defined in the CC-I Credit Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the applicable margin based upon CC-I's leverage ratio at the time of the borrowings. The variable interest rates ranged from 7.75% to 8.00% and 7.44% to 7.50% at December 31, 1997 and 1996, respectively. In June 1998, the CC-I Credit Agreement was repaid and terminated in conjunction with the establishment of the Combined Credit Agreement. CC-II CREDIT AGREEMENT CC-II maintained a credit agreement (the "CC-II Credit Agreement") with a consortium of banks for borrowings up to $390,000, consisting of a revolving credit facility of $215,000, and two term loans totaling $175,000. Interest accrued, at CC-II's option, at rates based upon the Base Rate, as defined in the CC-II Credit Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the applicable margin based upon CC-II's leverage ratio at the time of the borrowings. The variable interest rates ranged from 7.63% to 8.25% and 7.25% to 8.125% at December 31, 1997 and 1996, respectively. In June 1998, the CC-II Credit Agreement was repaid and terminated in conjunction with the establishment of the Combined Credit Agreement. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1997, is as follows:
CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- -----