1
EXHIBIT 99
RISK FACTORS
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. Although Class A common shareholders, other than Mr. Allen,
have an equity interest in Charter Communications, Inc. of approximately 96.2%,
Class A common shareholders have a very limited voting interest in Charter
Communications, Inc. and a limited indirect equity interest in Charter
Communications Holding Company. 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 3.8% 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 and Class B common stock, voting together as a single class, 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.
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 both for
him and for us and the holders of our public debt or equity. 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 another 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. 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
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 nature. As a result, there will be some discretion
left to the parties, who are subject to the potentially conflicting interests
described above. We cannot assure you that the interests of either Mr. Allen or
his affiliates will not conflict with the interests of the holders of our public
debt or equity. We have not instituted any formal plans to address conflicts of
interest that may arise.
2
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 specified businesses. 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.
MR. ALLEN'S CONTROL AND CHARTER COMMUNICATIONS, INC.'S ORGANIZATIONAL DOCUMENTS
MAY INHIBIT OR PREVENT A TAKEOVER OF A CHANGE IN MANAGEMENT THAT COULD RESULT IN
A CHANGE OF CONTROL PREMIUM OR UNFAVORABLY IMPACT THE MARKET PRICE OF OUR 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 shareholders 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
DEPENDS 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.
Charter Communications, Inc. is a holding company whose principal asset is
an approximate 41% 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 could adversely affect the ability of Charter
Communications, Inc. and Charter Communications Holding Company to meet their
obligations, including:
- existing and future debt obligations or any 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
certain services; and
- dividends or other distributions to holders of Class A common stock.
3
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. Furthermore, covenants in the indentures and credit agreements
governing the indebtedness of Charter Communications Holding Company's
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
OPERATIONS.
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.
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 OUR SECURITIES.
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 our 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;
4
- 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.
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 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 initial
public offering of our Class A common stock.
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 cable systems acquired in
the future will receive priority with respect to personnel requirements.
OUR BUSINESS
WE AND OUR SUBSIDIARIES 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 and our subsidiaries have a significant amount of debt. As of December
31, 2000, pro forma for the sale of the convertible senior notes and the
application of these proceeds to pay a portion of the amounts outstanding under
the Charter Holdings senior bridge loan facility and for the sale of the January
2001 Charter Holdings notes and the application of these proceeds to repay all
remaining amounts outstanding under the Charter Holdings senior bridge loan
facility and the Fanch revolving credit facility, and a portion of the amounts
outstanding under the Charter Operating and Falcon revolving credit facilities,
our total debt would have been approximately $13.1 billion, our shareholders'
equity would have been approximately
5
$3.1 billion and the deficiency of our earnings available to cover fixed charges
would have been approximately $2.0 billion. Since December 31, 2000, we have
incurred significant additional debt to fund our capital expenditures.
Our significant amount of debt could have important consequences. For
example, it could:
- make it more difficult for us to satisfy our obligations to the lenders
under our subsidiaries' credit facilities and to our public 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.
We anticipate incurring significant additional debt in the future to fund
the expansion, maintenance and upgrade of our cable systems. If current debt
levels increase, the related risks that we now face will intensify.
THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR SUBSIDIARIES' DEBT CONTAIN
RESTRICTIONS AND LIMITATIONS THAT COULD SIGNIFICANTLY IMPACT OUR ABILITY TO
OPERATE OUR BUSINESS AND ADVERSELY AFFECT THE HOLDERS OF OUR DEBT SECURITIES.
The credit facilities of our subsidiaries and the indentures governing our
subsidiaries' publicly held notes contain a number of significant covenants that
could adversely impact our business of our subsidiaries and adversely affect the
holders of our debt securities. In particular, the credit facilities and
indentures of our subsidiaries 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 subsidiaries' 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.
6
OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE OUR
DEBT AND THE DEBT OF OUR SUBSIDIARIES AND GROW OUR BUSINESS DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.
Our ability to service 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 distributions are not available to us from borrowings under
our credit facilities or from other sources of financing, we may not be able to
repay our debt or to grow our business or fund our other liquidity needs.
PROSPECTIVE LENDERS' COMMITMENTS TO LEND TO US UNDER THE 2001 SENIOR BRIDGE
LOAN COMMITMENT WE HAVE OBTAINED ARE SUBJECT TO A NUMBER OF CONDITIONS. IF THESE
CONDITIONS ARE NOT MET, THESE FUNDS WILL NOT BE AVAILABLE TO US. AS A RESULT, WE
MAY BE UNABLE TO CONSUMMATE PENDING ACQUISITIONS WHICH COULD TRIGGER DEFAULTS
UNDER OUR ACQUISITION AGREEMENTS AND OUR DEBT OBLIGATIONS. THE RELEVANT SELLERS
OR CREDITORS COULD INITIATE LEGAL PROCEEDINGS AGAINST US.
The bridge loan commitment for which we have received commitments will not
close unless specified closing conditions are satisfied. Some of these closing
conditions are not under our control, and we cannot assure you that all closing
conditions will be satisfied. For example, the closing conditions for these
facilities include:
- the absence of various types of material adverse changes, including
material adverse changes in the financial and capital markets; and
- receipt of required approvals from third parties. If we are not able to
obtain financing under these facilities, we will need to arrange other
sources of financing to meet our obligations, including our obligations
to consummate our pending acquisitions.
If the 2001 bridge loan commitment is not closed, we would need to raise
$2.0 billion to replace it, and we cannot assure you that alternate financing
sources will be available to us. We may as a result be unable to consummate the
pending AT&T transactions and may be in default under the related acquisition
agreements. The relevant sellers 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 HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT
SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE.
We commenced active operations in 1994 and have grown rapidly since then
through acquisitions of cable systems. As of December 31, 2000, 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 under our control. Our recent growth in revenues 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 our closed acquisitions and our planned upgrades and other capital
expenditures. We reported net losses before minority interest in loss of
subsidiary and extraordinary items of $22 million for 1998 and $639 million for
1999 and $2.1 billion for 2000. On a pro forma basis, giving effect to the
merger of Charter Holdings and Marcus Holdings, acquisitions in 1999 and 2000,
the sale of an insignificant subsidiary in December 2000, the sale of the March
1999 and January 2000 Charter Holdings notes, the drawdown on the Charter
Holdings senior bridge loan facility, the sale of Charter Communications, Inc.'s
convertible senior notes and the application of the net proceeds and the sale of
the January 2001 Charter Holdings notes and the application of the net proceeds,
we had net losses before minority interest in loss of
7
subsidiary and extraordinary item of $1.5 billion for 1999 and $2.1 billion for
2000. We cannot predict what impact, if any, continued losses will have on our
ability to finance our operations in the future.
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 6.4 million customers. We may
acquire more cable systems in the future, through acquisitions, system swaps or
otherwise. The integration of newly acquired cable systems poses a number of
significant risks, including:
- our acquisitions may not have a positive impact on our cash flows from
operations;
- the integration of new systems and customers will place significant
demands on our management and our operations, information services, and
financial, legal and marketing resources. Our current operating and
financial systems and controls and information services may not be
adequate, and any steps taken to improve these systems and controls may
not be sufficient;
- 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.
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.
Without giving effect to the pending AT&T transactions, in 2001, 2002 and
2003, we expect to spend a total of approximately $2.9 billion, $1.75 billion
and $950,000, respectively, to upgrade and rebuild our systems in order to offer
advanced services to our customers. In addition, we anticipate rebuild costs
associated with the AT&T systems we expect to acquire to total approximately
$350 million.
8
The amount that we spend on these types of capital expenditures over the next
two years will depend on the level of growth in digital cable customers and in
the delivery of other advanced services.
We cannot assure you that our anticipated levels of capital expenditures
will be sufficient to accomplish our planned system upgrades, maintenance and
expansion, or to roll out advanced services. Currently, a projected $500 million
to $750 million funding shortfall exists regarding anticipated capital
expenditures through late 2000 or early 2003, when we expect to become cash flow
positive. If we borrow the full amount available under the bridge loan
commitment, our planned capital expenditures are funded through the end of 2002
and our funding shortfall will be $300 million to $500 million through 2003. The
amount of this expected shortfall could increase if there is accelerated growth
in digital cable customers or in the delivery of other advanced services. 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 advanced 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 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 advanced 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 systems 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 terminals for analog and digital
cable services. This equipment is available from a limited number of suppliers.
We typically purchase set-top terminals under purchase orders placed from time
to time and do not carry significant inventories of set-top terminals. If demand
for set-top terminals exceeds our inventories and we are unable to obtain
required set-top terminals 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
set-top terminal 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.
9
THERE IS 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 is 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 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 securities.
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;
- local and regional telephone companies;
- long distance telephone service providers;
- direct broadcast satellite (DBS) companies;
- electric utilities;
- 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. 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 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.
THE LOSS OF MR. ALLEN OR MR. KENT 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 Communica-
10
tions, 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.
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 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 (ISP), 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. A federal district court in
Virginia, a federal district court in Florida and a federal circuit court in
California recently struck down as unlawful "open-access" requirements imposed
by a variety of franchising authorities. Each of these decisions struck down the
"open-access" requirements on different legal grounds. In response to the
federal circuit decision, the Federal Communications Commission recently
initiated an inquiry to determine the appropriate classification and regulatory
treatment of the provision of Internet service by cable operators. It separately
initiated a similar inquiry regarding the provision of interactive television
services by cable operators. The Federal Trade Commission and the Federal
Communications Commission recently imposed certain "open-access" requirements on
Time Warner and AOL in connection with their merger, but those requirements are
not applicable to other cable operators.
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.
11
In addition, we cannot assure you that if we were required to provide
access in this manner, it would not have a significant adverse impact on our
profitability. This could impact us in many ways, including by:
- increasing competition;
- increasing the expenses we incur to maintain our systems; and/or
- increasing the expense of upgrading and/or expanding our systems.
OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL
OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR
BUSINESS IN A KEY MARKET.
Our cable systems generally operate pursuant to franchises, permits or
licenses typically granted by a municipality or other state or local government
controlling the public rights-of-way. Many franchises establish comprehensive
facilities and service requirements, as well as specific customer service
standards and monetary penalties for non-compliance. In many cases, franchises
are terminable if the franchisee fails to comply with material provisions set
forth in the franchise agreement governing system operations. Franchises are
generally granted for fixed terms and must be periodically renewed. Local
franchising authorities may resist granting a renewal if either past performance
or the prospective operating proposal is considered inadequate. Franchise
authorities often demand concessions or other commitments as a condition to
renewal, which have been and may continue to be costly to us. In some instances,
franchises have not been renewed at expiration, and we have operated under
either temporary operating agreements or without a license while negotiating
renewal terms with the local franchising authorities.
We cannot assure you that we will be able to comply with all material
provisions of our franchise agreements or that we will be able to renew our
franchises in the future. A termination of and/or a sustained failure to renew a
franchise could adversely affect our business in the affected geographic area.
WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION
IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
Our cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, such
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which we hold franchises. In some cases municipal utilities may legally
compete with us without obtaining a franchise from the local franchising
authority. The existence of more than one cable system operating in the same
territory is referred to as an overbuild. These overbuilds could adversely
affect our growth, financial condition and results of operations by increasing
competition or creating competition where none existed previously. As of
December 31, 2000, we are aware of overbuild situations impacting 139,000 of our
basic customers or approximately 2% of our total basic customers and potential
overbuild situations in areas servicing another 253,000 basic customers or 4% of
our total basic customers, together representing a total of 392,000 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 in some
jurisdictions have adopted cable regulatory ordinances that further regulate the
operation of cable systems. This additional regulation increases our expenses in
operating our business. We cannot assure you that the local franchising
authorities will not impose new and more restrictive requirements.
Local franchising authorities also have the power to reduce rates and order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. Basic service tier
rates are the prices charged for basic programming services. As of December 31,
2000, we have refunded a total of approximately $1.2 million since our
inception. We may be required to refund additional amounts in the future.
12
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 rate methodology
prescribed by the Federal Communications Commission. 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, currently under appeal
to the Supreme Court, suggests that the provision of Internet service may
subject cable systems to substantially higher pole attachment rates, and certain
utilities have already proposed vastly higher pole attachment rates based in
part on the existing court decision.