SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to .
---- ----
Commission File Numbers:
333-75415
333-75415-03
CC V Holdings, LLC*
CC V Holdings Finance, Inc.*
----------------------------
(Exact names of registrants as specified in their charters)
Delaware 13-4029965
Delaware 13-4029969
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12405 Powerscourt Drive
St. Louis, Missouri 63131
------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (314) 965-0555
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date:
All of the issued and outstanding shares of capital stock of CC V
Holdings Finance, Inc. are held by CC V Holdings, LLC. All of the
limited liability company membership interests of CC V Holdings, LLC
are held by Charter Communications Holdings, LLC, a reporting company
under the Exchange Act. There is no public trading market for any of
the aforementioned limited liability company membership interests or
shares of capital stock.
*CC V Holdings, LLC and CC V Holdings Finance, Inc. meet the conditions set
forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and are therefore
filing this Form with the reduced disclosure format.
CC V HOLDINGS, LLC
CC V HOLDINGS FINANCE, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
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Part I. Financial Information
Item 1. Financial Statements - CC V Holdings, LLC and Subsidiaries. 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures. 15
Note: Separate financial statements of CC V Holdings Finance, Inc. have not been
presented as this entity had no operations and substantially no assets or
equity. Accordingly, management has determined that such financial statements
are not material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended, 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 Quarterly Report may be
identified by the use of forward-looking words such as "believe," "expect,"
"anticipate," "should," "planned," "will," "may," "intend," "estimated," and
"potential," among others. Important factors that could cause actual results to
differ materially from the forward-looking statements we make in this Quarterly
Report are set forth in this Quarterly Report and in other reports or documents
that we file from time to time with the United States Securities and Exchange
Commission or the SEC, and include, but are not limited to:
- our plans to achieve growth by offering advanced products and
services;
- our anticipated capital expenditures for our upgrades and new
equipment and facilities;
- our ability to fund capital expenditures and any future
acquisitions;
- the effects of governmental regulation on our business;
- our ability to compete effectively in a highly competitive and
changing environment;
- our ability to obtain programming as needed and at a
reasonable price; and
- general business and economic conditions, particularly in
light of the uncertainty stemming from recent terrorist
activities in the United States and the armed conflict abroad.
All forward-looking statements attributable to us or a person acting on
our behalf are expressly qualified in their entirety by this cautionary
statement. We are under no obligation to update any of the forward-looking
statements after the date of this Quarterly Report to conform these statements
to actual results or to changes in our expectations.
2
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,640 $ --
Accounts receivable, less allowance for doubtful
accounts of $1,899 and $2,520, respectively 8,811 11,692
Receivable from manager - related party 30,811 22,419
Prepaid expenses and other current assets 1,171 1,894
----------- ----------
Total current assets 43,433 36,005
----------- ----------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated
depreciation of $237,234 and $211,107, respectively 788,650 792,157
Franchises, net of accumulated amortization of $422,199
and $421,633, respectively 3,088,394 3,088,958
----------- ----------
Total investment in cable properties, net 3,877,044 3,881,115
----------- ----------
OTHER ASSETS 13,088 7,845
----------- ----------
Total assets $3,933,565 $3,924,965
=========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 121,995 $ 166,227
----------- ----------
Total current liabilities 121,995 166,227
----------- ----------
LONG-TERM DEBT 1,183,437 1,229,605
LOANS PAYABLE-RELATED PARTIES 38,060 27,000
OTHER LONG-TERM LIABILITIES 7,684 12,275
MINORITY INTEREST 658,093 654,863
MEMBER'S EQUITY 1,924,296 1,834,995
----------- ----------
Total liabilities and member's equity $3,933,565 $3,924,965
=========== ==========
See accompanying notes to consolidated financial statements.
3
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
----------- ---------
(UNAUDITED)
REVENUES $ 139,032 $ 121,061
--------- ---------
OPERATING EXPENSES:
Operating, general and administrative 78,659 65,147
Depreciation and amortization 62,204 116,135
Corporate expense charges - related party 1,996 1,951
--------- ---------
142,859 183,233
--------- ---------
Loss from operations (3,827) (62,172)
OTHER INCOME (EXPENSE):
Interest expense, net (20,165) (25,828)
Gain on derivative instruments and hedging activity 5,475 --
Other, net 234 (110)
--------- ---------
(14,456) (25,938)
--------- ---------
Loss before minority interest expense (18,283) (88,110)
Minority interest expense (3,230) (3,159)
--------- ---------
Net loss $ (21,513) $ (91,269)
========= =========
See accompanying notes to consolidated financial statements.
4
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
--------------------------------
2002 2001
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (21,513) $ (91,269)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization 62,204 116,135
Minority interest expense 3,230 3,159
Noncash interest expense 3,968 3,620
Gain on derivative instruments and hedging activities (5,475) --
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable 2,880 2,021
Prepaid expenses and other current assets 723 (3,968)
Accounts payable and accrued expenses (44,234) (36,045)
Payables to and receivables from manager - related party (8,392) 10,484
Other operating activities (3,248) (3,402)
----------- ------------
Net cash flows from operating activities (9,857) 735
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (53,691) (69,042)
----------- ------------
Net cash flows from investing activities (53,691) (69,042)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 82,000 1,030,000
Repayments of long-term debt (132,000) (950,135)
Borrowings from related party 38,060 --
Repayments to related party (27,000) --
Repayments of bonds (135) --
Payments for debt issuance costs (3,704) (4,246)
Contributions from manager - related party 108,967 (7,688)
----------- ------------
Net cash flows from financing activities 66,188 67,931
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,640 (376)
CASH AND CASH EQUIVALENTS, beginning of period -- 11,232
----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,640 $ 10,856
=========== ============
CASH PAID FOR INTEREST $ 17,866 $ 9,838
=========== ============
NON-CASH TRANSACTIONS:
Transfer of cable systems to other Charter Holdings subsidiaries $ -- $ 36,393
=========== ============
Forgiveness of intercompany liabilities by parent company recorded
as equity contribution $ -- $ 394,801
=========== ============
See accompanying notes to consolidated financial statements.
5
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
1. ORGANIZATION AND BASIS OF PRESENTATION
On November 15, 1999, Charter Communications Holding Company, LLC
(Charter Holdco), a direct subsidiary of Charter Communications, Inc. (Charter),
acquired all of the equity interests of Avalon Cable, LLC (now known as CC V
Holdings or the Company) and Avalon Cable Holdings Finance, Inc. (now known as
CC V Holdings Finance, Inc.) Effective January 1, 2000, these acquired interests
were transferred to Charter Communications Holdings, LLC (Charter Holdings), a
wholly owned subsidiary of Charter Holdco.
Effective in December 2000, Charter Holdings contributed all of its
equity interests in CC VIII, LLC (CC VIII, formerly known as Bresnan) to CC V
Holdings, resulting in CC V Holdings becoming the parent company of CC VIII. The
Company accounted for the contribution of CC VIII as a reorganization of
entities under common control in a manner similar to a pooling of interests. In
connection with this transaction, Charter Holdings forgave CC VIII's
intercompany liabilities totaling $294.8 million which were recorded by the
Company as an equity contribution. CC V Holdings is a Delaware limited liability
company. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Effective on January 2, 2001, the Company entered into certain cable
system swap transactions with other subsidiaries of Charter Holdings. Such cable
systems swaps were effected in order to increase operational efficiency by
swapping systems into the subsidiaries which are physically located closest to
them. The Company accounted for the systems transferred into the Company from
other Charter Holdings subsidiaries as a reorganization of entities under common
control in a manner similar to a pooling of interests. Accordingly, beginning on
November 15, 1999, the date the Company was acquired by Charter Holdco, the
consolidated financial statements of CC V Holdings include the accounts of four
systems that were transferred into the Company from other Charter Holdings
subsidiaries. Also, on January 2, 2001, the Company transferred five of its
systems to other Charter Holdings subsidiaries as part of the swap transactions.
The disposition of such systems by the Company was recorded as a noncash
transaction with related parties for the year ended December 31, 2001.
As of March 31, 2002, the Company owns and operates cable systems
serving approximately 957,300 customers. The Company currently offers a full
array of traditional analog cable services and advanced bandwidth services such
as digital cable television, interactive video programming, Internet access
through television-based service, dial-up telephone modems and high-speed cable
modems, and video-on-demand. The Company operates primarily in the states of
Michigan, Minnesota and Wisconsin and in the New England area.
Reclassifications
Certain 2001 amounts have been reclassified to conform with the 2002
presentation.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures typically included in the Company's Annual Report on Form
10-K have been condensed or omitted for this Quarterly Report.
The accompanying consolidated financial statements are unaudited;
however, in the opinion of management, such statements include all adjustments,
which consist of only normal recurring adjustments, necessary for a fair
presentation of the results for the periods presented. Interim results are not
necessarily indicative of results for a full year. For further information, see
the Company's Annual Report on Form 10-K for the year ended December 31, 2001.
3. LONG-TERM DEBT
In January 2001, all amounts due under the CCV Holdings credit
facilities were repaid using borrowings from the CC VIII Operating credit
facilities and the CCV Holdings credit facilities were terminated. In addition,
the CC VIII
6
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
Operating credit facilities were amended and restated to, among other things,
increase borrowing availability by $550.0 million to $1.45 billion. The credit
facilities were further amended and restated on January 3, 2002 and provide for
borrowings of up to $1.55 billion.
Long-term debt consists of the following as of the dates presented:
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
CC VIII Operating credit facilities $ 1,032,000 $ 1,082,000
CC V Holdings senior discount notes 150,259 146,292
Other 1,178 1,313
----------- -----------
$ 1,183,437 $ 1,229,605
=========== ===========
4. INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142, among other things, eliminates the amortization of
goodwill and indefinite-lived intangible assets. The Company has sufficiently
upgraded the technological state of its cable systems and now has sufficient
experience with the local franchise authorities where it acquired franchises to
conclude substantially all franchises will be renewed indefinitely.
On January 1, 2002, the Company adopted SFAS No. 142. Accordingly,
beginning January 1, 2002, all franchises that qualify for indefinite life
treatment under SFAS No. 142 are no longer being amortized against earnings and
will be tested for impairment annually, or more frequently as warranted by
events or changes in circumstances. During the first quarter of 2002, the
Company had an independent appraisal performed to determine the valuations of
its franchises. Franchises were aggregated into essentially inseparable
reporting units to conduct the valuations. The valuation determined that the
fair value of each of the Company's reporting units exceeded their carrying
amount. As a result, no impairment charge was recorded upon adoption. The
carrying amount of franchises as of March 31, 2002 and December 31, 2001 was
$3.1 billion.
The effect of the adoption of SFAS No. 142 as of March 31, 2002 and
December 31, 2001 is presented in the following table:
MARCH 31, 2002 DECEMBER 31, 2001
---------------------------------------------- ------------------------------------------------
GROSS CARRYING ACCUMULATED NET GROSS CARRYING ACCUMULATED NET
AMOUNT AMORTIZATION CARRYING AMOUNT AMOUNT AMORTIZATION CARRYING AMOUNT
-------------- ------------ --------------- -------------- ------------ ---------------
INDEFINITE-LIVED INTANGIBLE
ASSETS:
Franchises with
indefinite lives $3,484,833 $ 418,539 $3,066,294 $3,484,833 $ 418,539 $3,066,294
FINITE-LIVED INTANGIBLE
ASSETS:
Franchises with
finite lives 25,760 3,660 22,100 25,758 3,094 22,664
------------ ---------- ---------- ---------- ---------- ----------
Total franchises $3,510,593 $ 422,199 $3,088,394 $3,510,591 $ 421,633 $3,088,958
============ ========== ========== ========== ========== ==========
Amortization expense for the three months ended March 31, 2002 was $0.6
million which represented amortization relating to franchises that did not
qualify for indefinite-life treatment under SFAS No. 142 and costs associated
with franchise renewals. Certain franchises did not qualify for indefinite-life
treatment due to technological or operational factors that limit their lives.
These costs are amortized on a straight-line basis over 10 years. For each of
the next five years amortization expense relating to these franchises will be
approximately $2.3 million per year.
7
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
As required by SFAS No. 142, the standard has not been retroactively
applied to the results for the period prior to adoption. A reconciliation of net
loss for the three months ended March 31, 2002 and 2001, as if SFAS No. 142 had
been adopted as of January 1, 2001, is presented below:
2002 2001
--------- ---------
NET LOSS:
Reported net loss $(21,513) $(91,269)
Add back: amortization of indefinite-lived
franchises -- 55,713
-------- --------
Adjusted net loss $(21,513) $(35,556)
======== ========
5. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2001, the Company entered into certain interest rate
derivative instruments that have been designated as cash flow hedging
instruments. In accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," the Company's interest rate derivative
instrument are recorded in the consolidated balance sheet as either an asset or
liability measured at fair value. Such instruments are those which effectively
convert variable interest payments on debt instruments into fixed payments. For
qualifying hedges, SFAS No. 133 allows derivative gains and losses to offset
related results on hedged items in the consolidated statement of operations. The
Company has formally documented, designated and assessed the effectiveness of
transactions that receive hedge accounting. For the three months ended March 31,
2002, there was no charge for cash flow ineffectiveness. Changes in the fair
value of interest rate agreements designated as hedging instruments of the
variability of cash flows associated with floating-rate debt obligations are
reported in accumulated other comprehensive gain. At March 31, 2002 and December
31, 2001, included in accumulated other comprehensive income was a gain of $5.5
million and $3.7 million, respectively, related to derivative instruments
designated as cash flow hedges. The amounts are subsequently reclassified into
interest expense as a yield adjustment in the same period in which the related
interest on the floating-rate debt obligations affects earnings (losses).
Certain interest rate derivative instruments are not designated as
hedges as they do not meet the effectiveness criteria specified by SFAS No. 133.
However, the Company believes such instruments are closely correlated with the
respective debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value with the impact
recorded as other income or expense. For the three months ended March 31, 2002,
the Company recorded other income of $5.5 million for interest rate derivative
instruments not designated as hedges.
8
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
6. COMPREHENSIVE LOSS
The Company reports changes in the fair value of interest rate
agreements designated as hedging instruments of the variability of cash flows
associated with floating-rate debt obligations, that meet the effectiveness
criteria of SFAS No. 133, in accumulated other comprehensive gain. Comprehensive
loss for the three months ended March 31, 2002 and 2001 was $16.0 million and
$91.3 million, respectively.
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 provides for the
rescission of several previously issued accounting standards, new accounting
guidance for the accounting for certain lease modifications and various
technical corrections that are not substantive in nature to existing
pronouncements. SFAS No. 145 will be adopted by the company beginning January 1,
2003, except for the provisions relating to the amendment of SFAS No. 13, which
will be adopted for transactions occurring subsequent to May 15, 2002. Adoption
of SFAS No. 145 will not have a material impact on the consolidated financial
statements of the Company.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table summarizes amounts and the percentages of total
revenues for certain items for the periods indicated (dollars in thousands):
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------
2002 2001
------------------------ ------------------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES
--------- ----- --------- -----
Revenues $ 139,032 100.0% $ 121,061 100.0%
--------- ----- --------- -----
Operating expenses:
Operating, general and administrative 78,659 56.6% 65,147 53.8%
Depreciation and amortization 62,204 44.7% 116,135 95.9%
Corporate expense charges - related party 1,996 1.4% 1,951 1.6%
--------- ----- --------- -----
142,859 102.8% 183,233 151.3%
--------- ----- --------- -----
Loss from operations (3,827) (2.8)% (62,172) (51.31)%
Other income (expense):
Interest expense, net (20,165) (14.5)% (25,828) (21.3)%
Gain on derivative instruments and hedging activity 5,475 3.9% -- --
Other, net 234 0.2% (110) (0.1)%
--------- ----- --------- -----
(14,456) (10.4)% (25,938) (21.4)%
--------- ----- --------- -----
Loss before minority interest expense (18,283) (13.2)% (88,110) (72.7)%
Minority interest expense (3,230) (2.3)% (3,159) (2.6)%
--------- ----- --------- -----
Net loss $ (21,513) (15.5)% $ (91,269) (75.3)%
========= ===== ========= -----
Other financial data is as follows for the periods indicated (dollars in
thousands, except Average Monthly Revenue per Basic Customer):
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
2002 2001
---------- ----------
EBITDA (a) $ 64,086 $ 53,853
Adjusted EBITDA (b) 60,373 55,914
Cash flows from operating activities (9,857) 735
Cash flows from investing activities (53,691) (69,042)
Cash flows from financing activities 66,188 67,931
Homes passed (at period end) (c) 1,518,500 1,482,500
Basic customers (at period end) (d) 957,300 959,000
Basic penetration (at period end) (e) 63.0% 64.7%
Digital customers (at period end) (f) 222,400 143,000
Digital penetration (at period end) (g) 23.2% 14.9%
Cable modem customers (at period end) (h) 138,700 47,800
Average Monthly Revenue per Basic Customer (quarter) (i) $ 48.41 $ 42.08
(a) EBITDA represents earnings (loss) before interest, depreciation and
amortization, minority interest and income taxes. 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
10
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.
(b) Adjusted EBITDA represents EBITDA before corporate expense charges, loss on
derivative instruments and hedging activity and other income (expense). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of a
cable company's ability to service indebtedness. However, adjusted EBITDA should
not be considered as an alternative to income from operations or to cash flows
from operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. Adjusted EBITDA should also not
be construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because adjusted EBITDA is not calculated
identically by all companies, the presentation here may not be comparable to
other similarly titled measures of other companies. Management's discretionary
use of funds depicted by adjusted EBITDA may be limited by working capital, debt
service and capital expenditure requirements and by restrictions related to
legal requirements, commitments and uncertainties.
(c) 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.
(d) Basic customers are customers who receive basic cable service.
(e) Basic penetration represents basic customers as a percentage of homes
passed.
(f) Digital customers are customers who receive digital cable service.
(g) Digital penetration represents digital customers as a percentage of basic
customers.
(h) Cable modem customers are customers who receive cable modem service.
(i) Average monthly revenue per basic customer represents revenues divided by
the number of months in the period divided by the number of basic customers at
period end.
COMPARISON OF RESULTS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH
31, 2001
Revenues. Revenues increased $17.9 million, or 14.8%, to $139.0 million
for the three months ended March 31, 2002 from $121.1 million for the three
months ended March 31, 2001. Basic revenues increased by $7.4 million due to an
increase in rates charged to basic customers. Digital and cable modem revenues
increased by $10.5 million related to an increase in digital and cable modem
customers and increased rates charged to digital customers.
Operating, general and administrative expenses. Operating, general and
administrative expenses increased $13.6 million, or 20.9%, to $78.7 million for
the three months ended March 31, 2002 from $65.1 million for the three months
ended March 31, 2001. The increase was primarily due to increases in digital and
cable modem customers, continued increases in license fees paid for programming
and an increased number of channels provided to customers.
Depreciation and amortization expense. Depreciation and amortization
expense decreased $53.9 million, or 46.4%, to $62.2 million for the three months
ended March 31, 2002 from $116.1 million for the three months ended March 31,
2001. This decrease was due primarily to the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets,"
which requires that franchise intangible assets that meet the indefinite life
criteria of SFAS No. 142 no longer be amortized against earnings but instead be
tested for impairment on an annual basis. Upon adoption we did not incur an
impairment charge and eliminated the amortization of indefinite-lived assets.
Amortization of such assets totaled $55.7 million for the quarter ended March
31, 2001. This decrease was partially offset by the increase in depreciation
expense related to capital expenditures under our rebuild and upgrade program in
2001 and 2002.
Corporate expense charges - related party. These charges for the three
months ended March 31, 2002 and 2001 represent costs incurred by Charter Holdco
and Charter Communications, Inc. on our behalf.
11
Gain on derivative instruments and hedging activity. Gain on derivative
instruments and hedging activity increased by $5.5 million for the three months
ended March 31, 2002 due to favorable positions on interest rate agreements.
Interest expense, net. Interest expense, net decreased by $5.6 million,
or 21.7%, to $20.2 million for the three months ended March 31, 2002 from $25.8
million for the three months ended March 31, 2001. The decrease was primarily
due to a decline in our weighted average borrowing rate of 4.5% to 4.1% in the
first quarter of 2002 from 8.6% in the first quarter of 2001.
Minority interest. Minority interest represents the 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.
Net loss. Net loss decreased by $69.8 million for the three months
ended March 31, 2002 compared to the three months ended March 31, 2001 as a
result of the combination of factors discussed above.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 provides for the
rescission of several previously issued accounting standards, new accounting
guidance for the accounting for certain lease modifications and various
technical corrections that are not substantive in nature to existing
pronouncements. SFAS No. 145 will be adopted by the company beginning January 1,
2003, except for the provisions relating to the amendment of SFAS No. 13, which
will be adopted for transactions occurring subsequent to May 15, 2002. Adoption
of SFAS No. 145 will not have a material impact on the consolidated financial
statements.
CERTAIN TRENDS AND UNCERTAINTIES
Variable Interest Rates. At March 31, 2002, excluding the effects of
hedging, approximately 85.3% of our debt bears interest at variable rates that
are linked to short-term interest rates. In addition, a significant portion of
our existing debt, assumed debt or debt we might arrange in the future will bear
interest at variable rates. If interest rates rise, our costs relative to those
obligations will also rise. As of March 31, 2002 and December 31, 2001, the
weighted average rate on the bank debt was approximately 5.6% and 5.5%,
respectively, while the weighted average rate on the fixed rate debt was
approximately 11.9%, resulting in a blended weighted average rate of 6.4% and
6.2%, respectively. Approximately 71.9% of our debt was effectively fixed
including the effects of our interest rate hedge agreements as of March 31, 2002
compared to approximately 68.9% at December 31, 2001.
Regulation and Legislation. Cable systems are extensively regulated at
the federal, state, and local level, including rate regulation of basic service
and equipment and municipal approval of franchise agreements and their terms,
such as franchise requirements to upgrade cable plant and meet specified
customer service standards. Cable operators also face significant regulation of
their channel carriage. They currently can be required to devote substantial
capacity to the carriage of programming that they would not carry voluntarily,
including certain local broadcast signals, local public, educational and
government access programming, and unaffiliated commercial leased access
programming. This carriage burden could increase in the future, particularly if
the Federal Communications Commission were to require cable systems to carry
both the analog and digital versions of local broadcast signals. The Federal
Communications Commission is currently conducting a proceeding in which it is
considering this channel usage possibility, although it recently issued a
tentative decision against such dual carriage.
There is also uncertainty whether local franchising authorities, state
regulators, the Federal Communications Commission, or the U.S. Congress will
impose obligations on cable operators to provide unaffiliated Internet service
providers with 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. Multiple federal courts have now struck down
open-access requirements imposed by several different franchising authorities as
unlawful. In March 2002, the Federal Communications Commission adopted a policy
of regulatory forbearance concerning cable's provision of high-speed Internet
service, and it officially classified such service in a manner that makes open
access requirements unlikely. At the same time, the Federal Communications
Commission initiated a rulemaking proceeding that leaves open the possibility
that the Commission may assert regulatory control in the future. As we offer
other advanced services over our cable system, we are likely to face additional
calls for regulation of our capacity and operation. These regulations, if
adopted, could adversely affect our operations.
Management of Growth. We, along with our affiliated companies, 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. The failure 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.
New Services and Products. 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. If we are unable to grow our cash flow sufficiently, we may be unable
to fulfill our obligations or obtain alternative financing. Further, due to
declining market conditions and slowing economic trends during the last year,
both before and after the terrorist attacks on September 11, 2001, we cannot
assure you that we will be able to achieve our planned levels of growth as these
conditions and events may negatively affect the demand for our additional
services and products and spending by customers and advertisers.
Economic Slowdown; Terrorism; And Armed Conflict. Although we do not
believe that the terrorist attacks on September 11, 2001 and the subsequent
armed conflict and related events have resulted in any material changes to our
business and operations to date, it is difficult to assess the impact that these
events, combined with the general economic slowdown, will have on future
operations. These events, combined with the general economic slowdown, could
result in reduced spending by customers and advertisers, which could reduce our
revenues and operating cash flow. Additionally, an economic slowdown could
affect our ability to collect accounts receivable. If we experience reduced
operating revenues, it could negatively affect our ability to make expected
capital expenditures and could also result in our inability to meet our
obligations under our financing agreements. These developments could also have a
negative impact on our financing and variable interest rate agreements through
disruptions in the market or negative market conditions. Terrorist attacks could
interrupt or disrupt our ability to deliver our services (or the services
provided to us by programmers) and could cause unforeseen damage to our physical
facilities. Terrorism and the related events may have other adverse effects on
us, in ways that cannot be presently predicted.
CONTINGENCIES
In connection with our acquisition of Mercom, Inc., former Mercom
shareholders holding 731,894 Mercom common shares (approximately 15.3% of all
outstanding Mercom common shares) gave notice of their election to exercise
appraisal rights as provided by Delaware law. On July 2, 1999, former Mercom
shareholders holding 535,501 shares of Mercom common stock filed a petition for
appraisal of stock in the Delaware Chancery Court. With respect to 209,893 of
the total number of shares for which we received notice, the notice provided was
received from beneficial holders of Mercom shares who were not holders of
record. We believe that the notice with respect to these shares did not comply
with Delaware law and is ineffective.
We cannot predict at this time the effect on us of the elections to
exercise appraisal rights. If a Delaware court were to find that the fair value
of the Mercom common shares, exclusive of any element of value arising from the
acquisition of Mercom, exceeded $12.00 per share, we would have to pay the
additional amount for each Mercom common share subject to the appraisal
proceedings together with a fair rate of interest. We could be ordered by the
Delaware court also to pay reasonable attorney's fees and the fees and expenses
of experts for the shareholders. In addition, we would have to pay its own
litigation costs. We have already provided for the consideration of $12.00 per
Mercom common share due under the terms of the merger with Mercom with respect
to these shares. We can provide no assurance as to what a Delaware court would
find in any appraisal proceeding or when this matter will be resolved.
Accordingly, we cannot assure that the ultimate outcome would have no material
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adverse impact on our consolidated financial condition or results of operations.
In addition, we are party to lawsuits and claims that arose in the
ordinary course of conducting business. In our opinion, after consulting with
legal counsel, the outcome of these lawsuits and claims will not have a material
adverse effect on our consolidated financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
In April 2001, we entered into certain interest rate derivative
instruments that have been designated as cash flow hedging instruments. In
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," our interest rate derivative instrument are recorded in the
consolidated balance sheet as either an asset or liability measured at fair
value. Such instruments are those which effectively convert variable interest
payments on debt instruments into fixed payments. For qualifying hedges, SFAS
No. 133 allows derivative gains and losses to offset related results on hedged
items in the consolidated statement of operations. We have formally documented,
designated and assessed the effectiveness of transactions that receive hedge
accounting. For the three months ended March 31, 2002, there was no charge for
cash flow ineffectiveness. Changes in the fair value of interest rate agreements
designated as hedging instruments of the variability of cash flows associated
with floating-rate debt obligations are reported in accumulated other
comprehensive gain. At March 31, 2002 and December 31, 2001, included in
accumulated other comprehensive gain was a gain of $5.5 million and $3.7
million, respectively, related to derivative instruments designated as cash flow
hedges. The amounts are subsequently reclassified into interest expense as a
yield adjustment in the same period in which the related interest on the
floating-rate debt obligations affects earnings (losses).
Certain interest rate derivative instruments are not designated as
hedges as they do not meet the effectiveness criteria specified by SFAS No. 133.
However, we believe such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative instruments not
designated as hedges are marked to fair value with the impact recorded as other
income or expense. For the three months ended March 31, 2002, we recorded other
income of $5.5 million for interest rate derivative instruments not designated
as hedges.
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PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On April 22, 2002, the registrant filed a current report on Form 8-K
dated April 22, 2002 to report that the registrant had changed its principal
independent accountants.
On April 26, 2002, the registrant filed a current report on Form 8-K/A
dated April 22, 2002 as an amendment to the Form 8-K dated and filed on April
22, 2002 regarding a change in its principal independent accountants.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrants have duly caused this report to be signed on their
behalf by the undersigned thereunto duly authorized.
CC V HOLDINGS, LLC
Dated: May 10, 2002 By: CHARTER COMMUNICATIONS, INC.,
--------------------------------
Registrants' Manager
By: /s/ Kent D. Kalkwarf
----------------------
Name: Kent D. Kalkwarf
Title: Executive Vice President
and Chief Financial Officer
(Principal Financial Officer) of
Charter Communications, Inc.
(Manager) and CC V Holdings, LLC
By: /s/ Paul E. Martin
--------------------
Name: Paul E. Martin
Title: Senior Vice President - Corporate
Controller (Principal Accounting Officer)
of Charter Communications, Inc.
(Manager) and CC V Holdings, LLC
CCV HOLDINGS FINANCE, INC.
Dated: May 10, 2002 By: /s/ Kent D. Kalkwarf
----------------------
Name: Kent D. Kalkwarf
Title: Executive Vice President
and Chief Financial Officer
(Principal Financial Officer) of
Charter Communications, Inc.
(Manager) and CC V Holdings, LLC
By: /s/ Paul E. Martin
--------------------
Name: Paul E. Martin
Title: Senior Vice President - Corporate
Controller (Principal Accounting Officer)
of Charter Communications, Inc.
(Manager) and CC V Holdings, LLC
15