UNITED STATES
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 NUMBER: 000-27927
CHARTER COMMUNICATIONS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1857213
-------- ----------
(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)
(314) 965-0555
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of Class A common stock outstanding as of May 10, 2002:
294,646,658
Number of shares of Class B common stock outstanding as of May 10, 2002: 50,000
CHARTER COMMUNICATIONS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Charter Communications, Inc. and Subsidiaries 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 32
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;
- Your ability to obtain programming as needed and at a
reasonable price;
- our ability to continue to do business with existing vendors,
particularly high-tech companies that do not have a long
operating history; 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.
3
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001 *
(UNAUDITED)
ASSETS ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 16,749 $ 1,679
Accounts receivable, less allowance for doubtful
accounts of $27,461 and $32,866, respectively 224,441 290,504
Receivables from related party 6,509 4,634
Prepaid expenses and other current assets 70,025 70,362
------------ ------------
Total current assets 317,724 367,179
------------ ------------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated
depreciation of $2,267,454 and $2,009,195, respectively 7,152,588 7,149,483
Franchises, net of accumulated amortization
of $3,190,482 and $3,188,384, respectively 17,137,096 17,138,774
------------ ------------
Total investment in cable properties, net 24,289,684 24,288,257
------------ ------------
OTHER ASSETS 394,600 306,388
------------ ------------
Total assets $ 25,002,008 $ 24,961,824
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 1,193,322 1,374,994
------------ ------------
Total current liabilities $ 1,193,322 $ 1,374,994
------------ ------------
LONG-TERM DEBT 16,982,543 16,342,873
DEFERRED MANAGEMENT FEES - RELATED PARTY 13,751 13,751
OTHER LONG-TERM LIABILITIES 288,599 341,057
MINORITY INTEREST 3,778,188 3,976,791
PREFERRED STOCK - REDEEMABLE; $.001 par value; 1 million
shares authorized; 505,664 shares issued and outstanding 50,566 50,566
SHAREHOLDERS' EQUITY:
Class A common stock; $.001 par value; 1.75 billion and 1.75 billion shares
authorized, respectively; 294,536,963 and 294,536,830 shares issued and
outstanding, respectively 294 294
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 non-redeemable shares issued and outstanding -- --
Additional paid-in capital 4,952,929 4,952,633
Accumulated deficit (2,248,421) (2,073,527)
Accumulated other comprehensive loss (9,763) (17,608)
------------ ------------
Total shareholders' equity 2,695,039 2,861,792
------------ ------------
Total liabilities and shareholders' equity $ 25,002,008 $ 24,961,824
============ ============
* Agrees with the audited consolidated balance sheet included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
See accompanying notes to consolidated financial statements.
4
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2002 2001
------------- -------------
(UNAUDITED)
REVENUES $ 1,078,334 $ 873,797
------------- -------------
OPERATING EXPENSES:
Operating, general and administrative 613,706 472,147
Depreciation and amortization 486,969 695,895
Option compensation expense 636 6,038
Corporate expenses 15,431 13,721
------------- -------------
1,116,742 1,187,801
------------- -------------
Loss from operations (38,408) (314,004)
OTHER INCOME (EXPENSE):
Interest expense, net (363,167) (310,740)
Other, net 30,010 (59,917)
------------- -------------
(333,157) (370,657)
------------- -------------
Loss before minority interest in loss of subsidiary (371,565) (684,661)
MINORITY INTEREST IN LOSS OF SUBSIDIARY 197,398 403,962
------------- -------------
Net loss (174,167) (280,699)
Dividends on preferred stock - redeemable (727) --
------------- -------------
Net loss applicable to common stock $ (174,894) $ (280,699)
============= =============
LOSS PER COMMON SHARE, basic and diluted $ (0.59) $ (1.20)
============= =============
Weighted average common shares outstanding, basic and diluted 294,394,955 233,777,675
============= =============
See accompanying notes to consolidated financial statements.
5
CHARTER COMMUNICATIONS, INC. 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 $ (174,167) $ (280,699)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Minority interest in loss of subsidiary (197,398) (403,962)
Depreciation and amortization 486,969 695,895
Option compensation expense 636 6,038
Noncash interest expense 94,497 58,214
Loss on equity investments 819 12,783
(Gain) loss on derivative instruments and hedging activities (33,195) 45,687
Changes in operating assets and liabilities, net of effects from acquisitions
and dispositions:
Accounts receivable 60,780 27,011
Prepaid expenses and other current assets 1,098 (11,749)
Accounts payable and accrued expenses (192,241) (317,463)
Receivables from and payables to related party, including deferred
management fees (1,874) 14,158
----------- -----------
Net cash flows from operating activities 45,924 (154,087)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (471,300) (524,523)
Payments for acquisitions, net of cash acquired (77,488) --
Purchases of investments (4,207) (3,600)
Other investing activities (322) (2,404)
----------- -----------
Net cash flows from investing activities (553,317) (530,527)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 1,868,526 3,477,448
Repayments of long-term debt (1,311,385) (2,880,306)
Payments for debt issuance costs (34,678) (31,498)
Other financing activities -- 7,689
----------- -----------
Net cash flows from financing activities 522,463 573,333
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,070 (111,281)
CASH AND CASH EQUIVALENTS, beginning of period 1,679 130,702
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 16,749 $ 19,421
=========== ===========
CASH PAID FOR INTEREST $ 143,050 $ 166,204
=========== ===========
NONCASH TRANSACTIONS:
Reclassification of redeemable securities to equity and
minority interest $ -- $ 1,104,327
=========== ===========
See accompanying notes to consolidated financial statements.
6
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications, Inc. (Charter) is a holding company whose
primary asset at March 31, 2002 is a 46.5% controlling common equity interest in
Charter Communications Holding Company, LLC (Charter Holdco), which in turn is
the sole owner of Charter Communications Holdings, LLC (Charter Holdings).
Charter, Charter Holdco and its subsidiaries are collectively referred to herein
as the "Company." All material intercompany transactions and balances have been
eliminated in consolidation. The Company owns and operates cable systems serving
approximately 6.8 million customers at March 31, 2002. The Company currently
offers a full range of traditional analog cable television services, along with
an array of advanced products and services such as digital cable television,
interactive video programming, high-speed Internet access and video-on-demand.
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.
3. ACQUISITIONS
During the second and third quarters in 2001, the Company acquired
cable systems in two separate transactions for an aggregate purchase price of
$1.8 billion. In connection with the acquisitions, the Company paid aggregate
cash consideration of $1.76 billion, transfered a cable system valued at $25.1
million, issued 505,664 shares of Charter Series A Convertible Redeemable
Preferred Stock valued at $50.6 million (additional shares of Series A
Convertible Redeemable Preferred Stock valued at $5.1 million are to be issued
to certain sellers subject to certain holdback provisions of the acquisition
agreement). The purchase prices were allocated to assets acquired and
liabilities assumed based on fair values, including amounts assigned to
franchises of $1.4 billion.
On February 28, 2002, the Company and High Speed Access Corp. (HSA)
closed the Company's acquisition from HSA of the contracts and associated
assets, and assumed related liabilities, that served certain of the Company's
high-speed data customers. At closing, the Company wired $77.5 million in cash
and delivered 37,000 shares of HSA's Series D convertible preferred stock and
all the warrants to buy HSA common stock owned by the Company and HSA purchased
28,000 shares of its Series D convertible preferred stock from Vulcan Venture.
An additional $2.0 million of purchase price was held back to secure
indemnity claims. The purchase price was allocated to assets acquired and
liabilities assumed based on fair values, including $72.2 million assigned to
goodwill. During the period from 1997 to 2000, certain subsidiaries of the
Company entered into Internet-access related service agreements, and both Vulcan
Ventures and certain of the Company's subsidiaries made equity investments in
HSA.
The above transactions were accounted for using the purchase method of
accounting, and, accordingly, the results of operations of the acquired assets
and assumed liabilities have been included in the consolidated financial
statements from their respective dates of acquisition. The purchase prices were
allocated to assets and liabilities assumed based on fair values. The allocation
of the purchase price for the 2002 acquisition is based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information. Management believes that finalization of the allocation of the
purchase price will not have material impact on the consolidated results of
operations or financial position of the Company.
7
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The summarized operating results of the Company that follow are
presented on a pro forma basis as if the following had occurred on January 1,
2001 (dollars in thousands, except per share data): all significant
acquisitions and dispositions completed during 2001 and first quarter 2002, the
issuance of Charter Holdings senior notes and senior discount notes in January
2002 and 2001, the issuance of Charter Holdings senior notes and senior discount
notes in May 2001, and the issuance of and sale by Charter of convertible senior
notes and Class A common stock in May 2001. Adjustments have been made to give
effect to amortization of franchises acquired prior to July 1, 2001, interest
expense, minority interest, and certain other adjustments. These transactions
did not have a significant impact on the operating results for the three months
ended March 31, 2002.
THREE MONTHS ENDED
MARCH 31, 2001
---------------
Revenues $ 953,801
Loss from operations (332,484)
Net loss (349,252)
Loss per common share, basic and diluted (1.19)
The unaudited pro forma financial information does not purport to be
indicative of the consolidated results of operations had these transactions been
completed as of the assumed date or which may be obtained in the future.
Information regarding debt transactions which occurred during 2001 is included
in the Company's 2001 Annual Report on Form 10-K.
4. GOODWILL AND OTHER 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.
As discussed in Note 3, in February 2002, the Company closed on its
asset purchase agreement with HSA to acquire certain contracts and associated
assets and assume related liabilities. As a result of this transaction, the
Company recorded goodwill totaling $72.2 million.
8
The effect of the adoption of SFAS No. 142 as of March 31, 2002 and
December 31, 2001 is presented in the following table (in thousands):
MARCH 31, 2002 DECEMBER 31, 2001
------------------------------------------------------- -------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
INDEFINITE-LIVED
INTANGIBLE ASSETS:
Franchises with
indefinite lives $20,228,098 $ 3,173,206 $17,054,892 $20,228,098 $ 3,173,206 $17,054,892
Goodwill 72,214 -- 72,214 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
$20,300,312 $ 3,173,206 $17,127,106 $20,228,098 $ 3,173,206 $17,054,892
=========== =========== =========== =========== =========== ===========
FINITE-LIVED
INTANGIBLE ASSETS:
Franchises with
finite lives $ 99,480 $ 17,276 $ 82,204 $ 99,060 $ 15,178 $ 83,882
=========== =========== =========== =========== =========== ===========
Franchise amortization expense for the three months ended March 31,
2002 was $2.1 million, which represents the 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 will be 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 $8.4 million.
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 (in thousands):
MARCH 31,
-------------------------
2002 2001
----------- ----------
NET LOSS:
Reported net loss $ (174,894) $(280,699)
Add back: amortization of indefinite-lived franchises 315,781
Subtract: minority interest (186,942)
============ ==========
Adjusted net loss $ (174,894) $(151,860)
============ ==========
BASIC AND DILUTED NET LOSS PER SHARE:
Reported net loss per share $ (0.59) $ (1.20)
Add back: amortization of indefinite-lived franchises
-- 1.35
Subtract: minority interest
-- (0.80)
------------ ----------
Adjusted net loss per share $ (0.59) $ (0.65)
============ ==========
9
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. LONG-TERM DEBT
Long-term debt consists of the following as of March 31, 2002 and
December 31, 2001 (dollars in thousands):
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
LONG-TERM DEBT
Charter Communications, Inc.:
October and November 2000
5.75% convertible senior notes due 2005 $ 750,000 $ 750,000
May 2001
4.75% convertible senior notes due 2006 632,500 632,500
Charter Holdings:
March 1999
8.250% senior notes due 2007 600,000 600,000
8.625% senior notes due 2009 1,500,000 1,500,000
9.920% senior discount notes due 2011 1,475,000 1,475,000
January 2000
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 532,000 532,000
January 2001
10.75% senior notes due 2009 900,000 900,000
11.125% senior notes due 2011 500,000 500,000
13.50% senior discount notes due 2011 675,000 675,000
May 2001
9.625% senior notes due 2009 350,000 350,000
10.000% senior notes due 2011 575,000 575,000
11.750% senior discount notes due 2011 1,018,000 1,018,000
January 2002
9.625% senior notes due 2009 350,000 --
10.000% senior notes due 2011 300,000 --
12.125% senior discount notes due 2012 450,000 --
Renaissance Media Group LLC:
10.00% senior discount notes due 2008 114,413 114,413
CC V Holdings, LLC:
11.875% senior discount notes due 2008 179,750 179,750
Other long-term debt 1,178 1,313
CREDIT FACILITIES:
Charter Operating 3,932,000 4,145,000
CC VI Operating 865,000 901,000
CC VII 541,750 582,000
CC VIII Operating 1,032,000 1,082,000
------------ ------------
18,273,591 17,512,973
------------ ------------
Unamortized net discount (1,291,048) (1,170,103)
------------ ------------
$ 16,982,543 $ 16,342,873
============ ============
JANUARY 2002 CHARTER HOLDINGS NOTES. In January 2002, Charter Holdings
and Charter Communications Holding Capital Corporation (Charter Capital), issued
$1.1 billion in aggregate principal amount at maturity of senior notes and
senior discount notes. The January 2002 Charter Holdings notes consisted of
$350.0 million in aggregate principal amount of 9.625% senior notes due 2009,
$300.0 million in aggregate principal amount of 10.000% senior notes due 2011
and $450.0 million in aggregate principal amount at maturity of 12.125% senior
10
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
discount notes due 2012. The net proceeds of approximately $872.8 million were
used to repay a portion of the amounts outstanding under the revolving credit
facilities of the Company's subsidiaries.
The 9.625% senior notes are not redeemable prior to maturity. Interest
is payable semiannually in arrears on May 15 and November 15, beginning May 15,
2002, until maturity.
The 10.000% senior notes are redeemable at the option of the issuers at
amounts decreasing from 105.000% to 100% of par value plus accrued and unpaid
interest beginning on May 15, 2006, to the date of redemption. At any time prior
to May 15, 2004, the issuers may redeem up to 35% of the aggregate principal
amount of the 10.000% senior notes at a redemption price of 110.000% of the
principal amount under certain conditions. Interest is payable semiannually in
arrears on May 15 and November 15, beginning May 15, 2002, until maturity.
The 12.125% senior discount notes are redeemable at the option of the
issuers at amounts decreasing from 106.063% to 100% of accreted value beginning
January 15, 2007. At any time prior to January 15, 2005, the issuers may redeem
up to 35% of the aggregate principal amount of the 12.125% senior discount notes
at a redemption price of 112.125% of the accreted value under certain
conditions. Thereafter, cash interest is payable semiannually in arrears on
January 15 and July 15 beginning July 15, 2007, until maturity. The discount on
the 12.125% senior discount notes is being accreted using the effective interest
method.
As of March 31, 2002, $650.0 million of the January 2002 Charter
Holdings 9.625% and 10.000% senior notes were outstanding, and the accreted
value of the 12.125% senior discount notes was approximately $256.2 million.
CC VIII OPERATING CREDIT FACILITIES. The CC VIII Operating, LLC (CC
VIII Operating) credit facilities were amended and restated on January 3, 2002
and provided for borrowings of up to $1.55 billion. The CC VIII Operating credit
facilities provide for three term facilities, two Term A facilities with an
aggregate principal amount of $487.5 million, which reduces quarterly beginning
March 2002, that mature in June 2007, and a Term B facility with a principal
amount of $498.75 million, which reduces quarterly beginning March 2002, that
matures in February 2008. The CC VIII Operating credit facilities also provide
for two reducing revolving credit facilities, in the aggregate amount of $550.0
million, which reduce quarterly beginning in January 2002 and September 2005,
respectively, with maturity dates in June 2007. At the option of the lenders,
supplemental facilities in the amount of $300.0 million may be available.
Amounts under the CC VIII Operating credit facilities bear interest at the base
rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% for
Eurodollar loans and up to 1.75% for base rate loans. A quarterly commitment fee
of between 0.250% and 0.375% is payable on the unborrowed balance of the
revolving credit facilities.
As of March 31, 2002, outstanding borrowings were $1.0 billion, and
unused availability was $504.3 million. In January 2002, the Company repaid
$107.0 million under the revolving portion of the CC VIII Operating credit
facilities with proceeds from the issuance of the January 2002 Charter Holdings
notes.
CHARTER OPERATING CREDIT FACILITIES. The Charter Communications
Operating, LLC (Charter Operating) credit facilities were amended and restated
on January 3, 2002 and provide for four term facilities: two Term A facilities
with an aggregate principal amount of $1.11 billion that matures in September
2007, each with different amortization schedules, one beginning in June 2002 and
one beginning in September 2005; and two Term B facilities with an aggregate
principal amount of $2.75 billion, of which $1.85 billion matures in March 2008
and $900.0 million matures in September 2008. The Charter Operating credit
facilities also provide for two revolving credit facilities, in an aggregate
amount of $1.34 billion, which will reduce annually beginning in March 2004 and
September 2005, with a maturity date in September 2007. At the option of the
lenders, supplemental credit facilities in the amount of $100.0 million may be
available. 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% for Eurodollar loans and 1.75% for base rate loans. A quarterly commitment
fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance
of the revolving credit facilities.
11
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of March 31, 2002, outstanding borrowings were approximately $3.9
billion and unused availability was $1.3 billion. In January 2002, the Company
repaid $465.0 million under the revolving portion of the Charter Operating
credit facilities with proceeds from the issuance of the January 2002 Charter
Holdings notes.
6. MINORITY INTEREST
As of March 31, 2002, minority interest consists primarily of total
members' equity of Charter Holdco ($2.7 billion) multiplied by 53.5%, the
ownership percentage of Charter Holdco not owned by Charter, and of preferred
equity in CC VIII, LLC, an indirect subsidiary of Charter, which is held by
certain sellers in the 2000 acquisition of CC VIII, LLC (formerly known as
Bresnan). Gains and losses arising from the issuance by Charter Holdco of its
membership units are recorded as capital transactions, thereby increasing or
decreasing shareholders' equity and decreasing or increasing minority interest
on the accompanying consolidated balance sheets. Changes to minority interest
consist of the following for the periods presented (dollars in thousands):
Balance, December 31, 2001 $ 3,976,791
Minority interest in loss of subsidiary (197,398)
Changes in fair value of interest rate agreements 9,196
Loss on equity investments (10,583)
Other 182
-----------
Balance, March 31, 2002 $ 3,778,188
===========
7. COMPREHENSIVE LOSS
Investments in equity securities are accounted for at cost, under the
equity method of accounting or in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Charter recognizes losses
for any decline in value considered to be other than temporary. Certain
marketable equity securities are classified as available-for-sale and reported
at market value with unrealized gains and losses recorded as accumulated other
comprehensive loss on the accompanying consolidated balance sheets. Charter
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 loss. Comprehensive loss for the three
months ended March 31, 2002 and 2001 was $166.8 million and $289.2 million,
respectively.
8. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses interest rate risk management derivative instruments,
such as interest rate swap agreements and interest rate collar agreements
(collectively referred to herein as interest rate agreements) as required under
the terms of its credit facilities. The Company's policy is to manage interest
costs using a mix of fixed and variable rate debt. Using interest rate swap
agreements, the Company agrees 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 collar agreements are
used to limit the Company's exposure to and benefits from interest rate
fluctuations on variable rate debt to within a certain range of rates.
The Company has certain interest rate derivative instruments that have
been designated as cash flow hedging instruments. Such instruments are those
which effectively convert variable interest payments on debt instruments into
fixed payments. For qualifying hedges, derivative gains and losses are offset
against 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 and 2001, other expense includes losses of $1.5
million and gains of $2.3 million, respectively, which represent cash flow hedge
ineffectiveness on interest rate hedge agreements arising from differences
between the critical terms of
12
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the agreements and the related hedged obligations. 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 loss on the accompanying consolidated balance
sheets. At March 31, 2002 and 2001, a loss of $17.1 million and $19.9 million,
respectively, related to derivative instruments designated as cash flow hedges
was recorded in accumulated other comprehensive loss and minority interest. 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 or losses.
Certain interest rate derivative instruments are not designated as
hedges as they do not meet the effectiveness criteria specified by SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." However,
management 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 and 2001, the
Company recorded other income of $34.7 million and other expense of $48.0
million (including $23.9 million in the three months ended March 31, 2001 for
the loss on cumulative effect of adopting SFAS No. 133), respectively, for
interest rate derivative instruments not designated as hedges.
As of March 31, 2002 and December 31, 2001, the Company had outstanding
$3.6 billion and $3.3 billion, and $520.0 million and $520.0 million,
respectively, in notional amounts of interest rate swaps and collars,
respectively. The notional amounts of interest rate instruments do not represent
amounts exchanged by the parties and, thus, are not a measure of exposure to
credit loss. The amounts exchanged are determined by reference to the notional
amount and the other terms of the contracts.
9. 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.
10. SUBSEQUENT EVENTS
In April 2002, Interlink Communications Partners, LLC, Rifkin
Acquisition Partners, LLC and Charter Communications Entertainment I, LLC, each
an indirect, wholly-owned subsidiary of Charter Holdings, completed the purchase
of certain assets of Enstar Income Program II-2, L.P., Enstar Income Program
IV-3, L.P., Enstar/Growth Program Six-A, L.P., Enstar Cable of Macoupin County
and Enstar IV/PBD Systems Venture, serving in the aggregate approximately 21,600
customers for a total cash price of approximately $48.3 million. Enstar
Communications Corporation, a direct subsidiary of Charter Holdco, is the
general partner of the Enstar limited partnerships.
Also, in April 2002, Charter Communications Entertainment I, LLC
entered into an agreement to purchase all of Enstar Income Program II-1, L.P.'s
Illinois cable television systems, serving approximately 6,400 customers, for a
total sale price of approximately $14.7 million. Closing of the purchase is
subject to purchase price adjustments, regulatory approvals, customary closing
conditions and approval by the limited partners of Enstar Income Program II-1,
L.P. It is expected that this acquisition will close in the third quarter of
2002, although no assurance can be given regarding this matter.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to the "Certain Trends and Uncertainties" section 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. For a discussion of our critical accounting
policies (including the potential impact of SFAS No. 142), see Management's
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of Part II of Charter Communications, Inc.'s annual report on Form 10-K.
GENERAL
Charter Communications, Inc. is a holding company whose primary asset
as of March 31, 2002 is a 46.5% controlling common equity interest in Charter
Communications Holding Company, LLC. We own and operate cable systems serving
approximately 6.8 million customers at March 31, 2002. "We, "us" and "our"
refer to Charter Communications, Inc. and its Subsidiaries. We currently offer
a full range of traditional analog cable television services, along with an
array of advanced services such as digital cable television, interactive video
programming, cable modem high-speed Internet access and video-on-demand.
The following table presents various operating statistics as of March
31, 2002 and 2001:
AS OF MARCH 31,
-----------------------------
2002 2001
---------- ----------
VIDEO SERVICES:
BASIC ANALOG VIDEO:
Basic homes passed 11,777,300 10,258,300
Basic customers 6,804,800 6,349,800
Penetration of basic homes passed 57.8% 61.9%
DIGITAL VIDEO:
Digital homes passed 10,894,000 8,811,900
Digital customers 2,208,900 1,343,700
Penetration of digital homes passed 20.3% 15.2%
Penetration of basic customers 32.5% 21.2%
Digital converters deployed 3,055,900 1,697,000
DATA SERVICES:
Data homes passed 8,180,300 5,688,800
DATA CUSTOMERS:
Cable modem customers 747,700 307,800
Dial-up customers 32,500 35,500
---------- ----------
Total data customers 780,200 343,300
========== ==========
Penetration of data homes passed 9.5% 6.0%
REVENUE GENERATING UNITS:
Basic customers 6,804,800 6,349,800
New services customers (digital video and cable modem) 2,956,600 1,651,500
---------- ----------
Total revenue generating units 9,761,400 8,001,300
========== ==========
14
ACQUISITIONS
The following table sets forth information on acquisitions since
January 1, 2001:
PURCHASE
PRICE, NET
INCLUDING DEBT ACQUIRED
ACQUISITION ASSUMED BASIC
DATE (IN MILLIONS) CUSTOMERS
----------- --------------- ---------
AT&T Systems 6/01 $ 1,736 570,800
Cable USA 8/01 100(a) 32,200
-------- --------
Total during 2001 1,836 603,000
High-Speed Access 2/02 78 --
Enstar Limited Partnership systems 4/02 48 21,600
-------- --------
Total during 2002 126 21,600
-------- --------
Total $ 1,962 624,600
======== ========
(a) In connection with this transaction we acquired all of the outstanding stock
of Cable USA and the assets of related affiliates in exchange for 505,664 shares
of Charter Communications, Inc. Series A Convertible Redeemable Preferred Stock
valued at approximately $50.6 million and approximately $44.6 million in cash
paid by Charter Communications Holding Company, LLC.
On September 28, 2001, Charter Communications Holding Company and
High-Speed Access Corp. entered into an asset purchase agreement in which
Charter Communications Holding Company agreed to purchase from High Speed Access
the contracts and associated assets, and assume related liabilities, that serve
our customers, including a customer contact center, network operations center
and provisioning software. On December 20, 2001, Charter Communications Holding
Company assigned certain of its rights under the asset purchase agreement and
certain related agreements to its subsidiary, CC Systems, LLC. The transaction
closed on February 28, 2002. At the closing, CC Systems wired funds in the
amount of $77.5 million to High Speed Access and delivered 37,000 shares of High
Speed Access Series D convertible preferred stock and all of the warrants to buy
High Speed Access common stock owned by Charter Communications Holding Company
and High Speed Access purchased 38,000 shares of its Series D Preferred Stock
from Vulcan Ventures Incorporated for $8.0 million. To secure indemnity claims
against High Speed Access under the asset purchase agreement, $2.0 million of
the purchase price was held back. Additional purchase price adjustments may be
made as provided in the asset purchase agreement. Charter Communications Holding
Company obtained a fairness opinion from a qualified investment-banking firm
regarding the valuation of the assets purchased by CC Systems pursuant to the
asset purchase agreement. Concurrently with the closing of the transaction, High
Speed Access purchased all of its common stock held by Vulcan Ventures, and
certain of the agreements between our subsidiaries and High Speed Access,
including the programming content agreement, the services agreement, the systems
access agreement, the 1998 network services agreement and the May 2000 network
services agreement were terminated. The results of operations of the acquired
assets and assumed liabilities have been included in the consolidated financial
statements from the date of acquisition.
In April 2002, Interlink Communications Partners, LLC, Rifkin
Acquisition Partners, LLC and Charter Communications Entertainment I, LLC, each
an indirect, wholly-owned subsidiary of Charter Communications Holdings, LLC,
completed the purchase of certain assets of Enstar Income Program II-2, L.P.,
Enstar Income Program IV-3, L.P., Enstar/Growth Program Six-A, L.P., Enstar
Cable of Macoupin County and Enstar IV/PBD Systems Venture, serving in the
aggregate approximately 21,600 customers, for a total cash sale price of
approximately $48.3 million. Enstar Communications Corporation, a direct
subsidiary of Charter Communications Holding Company, is the general partner of
the Enstar limited partnerships.
Also, in April 2002, Charter Communications Entertainment I, LLC
entered into an agreement to purchase all of Enstar Income Program II-1, L.P.'s
Illinois cable television systems, serving approximately 6,400 customers, for a
total sale price of approximately $14.7 million. Closing of the purchase is
subject to purchase price adjustments, regulatory approvals, customary closing
conditions and approval by the limited partners of Enstar Income Program II-1,
L.P. It is expected that this acquisition will close in the third quarter of
2002, although no assurance can be given regarding this matter.
15
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH
31, 2001
The following table sets forth the percentages of revenues that items
in the accompanying consolidated statements of operations constitute for the
periods presented (dollars in millions, except per share data):
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------
2002 2001
----------------------------- -------------------------------
% OF % OF
AMOUNT REVENUES AMOUNT REVENUES
-------------- ----------- -------------- --------------
Revenues $ 1,078.3 100.0% $ 873.8 100.0%
--------- ---------- --------- ---------
Operating expenses:
Operating, general and administrative 613.7 56.9% 472.2 54.0%
Depreciation and amortization 487.0 45.2% 695.9 79.6%
Option compensation expense 0.6 0.1% 6.0 0.7%
Corporate expenses 15.4 1.4% 13.7 1.6%
--------- --------- --------- ---------
1,116.7 103.6% 1,187.8 135.9%
--------- --------- --------- ---------
Loss from operations (38.4) (3.6%) (314.0) (35.9%)
Other income (expense):
Interest expense, net (363.2) (310.8)
Other income (expense) 30.0 (59.9)
--------- ---------
(333.2) (370.7)
--------- ---------
Loss before minority interest (371.6) (684.7)
Minority interest in loss of subsidiary 197.4 404.0
--------- ---------
Net loss (174.2) (280.7)
Dividends on preferred stock - redeemable (0.7) --
--------- ---------
Net loss applicable to common stock $ (174.9) $ (280.7)
========= =========
Loss per common share, basic and diluted $ (0.59) $ (1.20)
========= =========
REVENUES. Revenues increased by $204.5 million, or 23.4%, from $873.8
million for the three months ended March 31, 2001 to $1,078.3 million for the
three months ended March 31, 2002. System operations existing before March 31,
2001 accounted for $106.4 million, or 52.0%, of the increase, while systems
acquired after March 31, 2001 accounted for $98.1 million, or 48.0%, of the
increase. Revenues by service offering are as follows (dollars in millions):
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
2002 2001 2002 OVER 2001
-------------------------- ------------------------ ----------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
----------- ----------- --------- --------- -------- --------
Analog video $ 754.6 70.0% $ 649.4 74.3% $ 105.2 16.2%
Digital video 103.7 9.6% 55.0 6.3% 48.7 88.5%
Cable modem 64.0 5.9% 25.2 2.9% 38.8 154.0%
Advertising sales 59.5 5.5% 55.6 6.4% 3.9 7.0%
Other 96.5 9.0% 88.6 10.1% 7.9 8.8%
---------- --------- -------- ------- --------
$ 1,078.3 100.0% $ 873.8 100.0% $ 204.5
========== ========= ======== ======= ========
16
Analog video revenues increased as a result of basic customers
increasing by 455,000, or 7.2%, to 6,804,800 at March 31, 2002 compared to
6,349,800 at March 31, 2001. The increase was partially offset by the
disconnection of approximately 145,000 marginal customers during the three
months ended March 31, 2002. Of the increase, approximately 581,700 customer
additions were the result of acquisitions. Additional increases resulted from
internal growth.
Digital video revenues increased as a result of digital customers
increasing by 865,200, or 64.4%, to 2,208,900 at March 31, 2002 compared to
1,343,700 at March 31, 2001. Of this increase, approximately 117,900 customer
additions were the result of acquisitions. The remaining increase resulted from
internal growth due to the upgrade and expansion of our systems to provide
advanced services to a larger customer base. Increased marketing efforts and
strong demand for this service have also contributed to the increase.
Data revenues increased as a result of data customers increasing by
436,900, or 127.3%, to 780,200 at March 31, 2002 compared to 343,300 at March
31, 2001. Of this increase, approximately 26,300 customer additions were the
result of acquisitions. The remaining increase was due to internal growth as our
system upgrades and expansion continue to increase our ability to offer
high-speed Internet service to a larger customer base. Growth in data services
was also the result of strong marketing efforts coupled with increased demand
for such services. Data customers consisted of 747,700 cable modem customers and
32,500 dial-up customers at March 31, 2002.
Advertising sales increased $3.9 million, or 7.0%, from $55.6 million
for the three months ended March 31, 2001 to $59.5 million for the three months
ended March 31, 2002. The increase was primarily due to internal growth and was
partially offset by a reduction in the level of advertising purchased by
programmers to promote their channels during 2002 compared to the corresponding
period in 2001.
OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and
administrative costs increased by $141.6 million, or 30.0%, from $472.1 million
for the three months ended March 31, 2001 to $613.7 million for the three months
ended March 31, 2002. Key components of expense as a percentage of revenues are
as follows (dollars in millions):
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2002 2001 2002 OVER 2001
------------------------ ------------------------- ------------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
---------- ----------- --------- ------------ ---------- -----------
General, administrative and service $246.3 22.8% $191.6 21.9% $ 54.7 28.5%
Analog video programming 261.6 24.3% 210.4 24.1% 51.2 24.3%
Digital video 35.1 3.3% 20.6 2.4% 14.5 70.4%
Cable modem 32.7 3.0% 17.6 2.0% 15.1 85.8%
Advertising sales 19.2 1.8% 15.3 1.8% 3.9 25.5%
Marketing 18.8 1.7% 16.6 1.9% 2.2 13.3%
------ ------ ------ ------ ------
$613.7 56.9% $472.1 54.1% $141.6
====== ====== ====== ====== ======
The increase in general, administrative and service costs of $54.7
million, or 28.5%, resulted primarily from our acquisition of the AT&T systems
in June 2001 coupled with overall continued internal growth. The increase in
analog video programming of $51.2 million, or 24.3%, was primarily due to
continued cost increases, particularly in sports programming, coupled with
increased channel capacity. The increase of $14.5 million, or 70.4%, in direct
operating costs to provide digital video services was primarily due to internal
growth of these advanced services. The increase of $15.1 million, or 85.8% in
direct operating costs to provide cable modem services was primarily due to
internal growth. Advertising sales costs increased $3.9 million, or 25.5%, due
to growth in our customer base and increased channel capacity. Marketing
expenses increased $2.2 million, or 13.3%, related to an increased level of
promotions of our service offerings.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased by $208.9 million, or 30.0%, from $695.9 million for the three months
ended
17
March 31, 2001 to $487.0 million for the three months ended March 31, 2002. This
decrease was due primarily to the adoption of 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 annually for impairment. Upon adoption we did not
incur an impairment charge and eliminated the amortization of indefinite-lived
franchise assets. Amortization of such assets totaled $315.8 million for the
three months ended March 31, 2001. We adopted SFAS No. 142 on January 1, 2002.
See Note 4 to the interim consolidated financial statements included in Part I,
Item I for further information. This decrease was partially offset by the
increase in depreciation expense related to additional capital expenditures in
2001 and 2002 and amortization for franchise renewal costs and franchise assets
that did not qualify for indefinite life treatment totaling $2.1 million for the
three months ended March 31, 2002.
OPTION COMPENSATION EXPENSE. Option compensation expense decreased by
$5.4 million, or 90.0%, from $6.0 million for the three months ended March 31,
2001 to $0.6 million for the three months ended March 31, 2002. Compensation
expense represents expense related to exercise prices on certain options that
were issued prior to our initial public offering in 1999 that were less than the
estimated fair values of our common stock at the time of grant. Compensation
expense is being accrued over the vesting period of such options and will
continue to be recorded at a decreasing rate until the last vesting period
lapses in April 2004.
CORPORATE EXPENSES. Corporate expenses increased by $1.7 million, or
12.4%, from $13.7 million for the three months ended March 31, 2001 to $15.4
million for the three months ended March 31, 2002. The increase was primarily
the result of continued growth.
INTEREST EXPENSE, NET. Interest expense, net increased by $52.4
million, or 16.9%, from $310.8 million for the three months ended March 31, 2001
to $363.2 million for the three months ended March 31, 2002. The increase in
interest expense, net was a result of an increase in average debt outstanding of
$3.4 billion to $16.8 billion for the first quarter of 2002 compared to $13.4
billion for the first quarter of 2001, partially offset by a decline in our
weighted average borrowing rate of 1.4% to 7.3% in the first quarter of 2002
from 8.7% in the first quarter of 2001. Our weighted average borrowing rate
decreased primarily as a result of a general decline in variable borrowing rates
and the effect of the interest rate swap agreements. The increased debt
primarily relates to the issuance of the January 2002 and May 2001 Charter
Holdings notes and the issuance of the May 2001 Charter Communications, Inc.
4.75% convertible notes used to repay a portion of the amounts outstanding under
the revolving credit facilities of our subsidiaries, and for general corporate
purposes, capital expenditures and a portion of the AT&T purchase price.
OTHER INCOME (EXPENSE). Other income (expense) changed by $89.9
million, or 150.1%, from $59.9 million of expense for the three months ended
March 31, 2001 to $30.0 million of income for the three months ended March 31,
2002. This was primarily due to a gain of $33.2 million on interest rate
agreements in the three months ended March 31, 2002 compared with a loss of
$21.8 million, a loss from cumulative effect of change in accounting principle
of $23.9 million and losses on investments of $12.8 million in the three months
ended March 31, 2001.
MINORITY INTEREST. Minority interest decreased by $206.6 million, or
51.1%, from $404.0 million for the three months ended March 31, 2001 to $197.4
million for the three months ended March 31, 2002. The minority interest
represents the ownership in Charter Communications Holding Company by entities
other than Charter Communications, Inc.
NET LOSS. Net loss decreased by $105.8 million, or 37.7%, from $280.7
million for the three months ended March 31, 2001 to $174.9 million for the
three months ended March 31, 2002 as a result of the factors described above,
including without limitation the decrease in amortization expense as a result
of adoption of SFAS No. 142.
LOSS PER COMMON SHARE. The loss per common share decreased by $0.61,
from $1.20 per common share for the three months ended March 31, 2001 to $0.59
per common share for the three months ended March 31, 2002 as a result of the
factors described above.
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
18
from operations, borrowings under the credit facilities of our subsidiaries,
issuances of debt securities by our subsidiaries and us and our issuances of
equity securities. Our ability to make payments on our debt securities is
dependent on the receipt of payments on our mirror debt securities issued by our
subsidiaries and distributions from Charter Communications Holding Company or
proceeds of the sale of its securities.
OPERATING ACTIVITIES. Net cash provided by operating activities for the
three months ended March 31, 2002 was $45.9 million and net cash used by
operating activities for the three months ended March 31, 2001 was $154.1
million. For the three months ended March 31, 2002, net cash provided by
operating activities increased primarily due to increased revenues of $204.5
million compared to the corresponding period in 2001, offset partially by a
change in operating assets and liabilities of $131.5 million compared to
December 31, 2001. For the three months ended March 31, 2001, net cash from
operating activities increased primarily due to a change in operating assets and
liabilities of $288.0 million.
Operating activities provided $200.0 million more cash during the three
months ended March 31, 2002 than the corresponding period in 2001. Operating
assets and liabilities used $156.5 million less cash during the three months
ended March 31, 2002 than in the corresponding period in 2001.
INVESTING ACTIVITIES. Net cash used in investing activities for the
three months ended March 31, 2002 and 2001 was $553.3 million and $530.5
million, respectively. For the three months ended March 31, 2002, net cash used
in investing activities resulted primarily from capital expenditures of $471.3
million for property, plant and equipment and $77.5 million for payments for
acquisitions. For the three months ended March 31, 2001, cash used in investing
activities resulted primarily from capital expenditures of $524.5 million for
property, plant and equipment. Capital expenditures reflect the continued
upgrade and rebuild of our systems in order to offer advanced services to our
customers and normal recurring capital expenditures. Our upgrade and rebuild
will continue to require substantial capital. We expect to spend approximately
$2.475 billion during 2002 for upgrades, rebuilds, and normal recurring capital
expenditures
Investing activities increased by $22.8 million during the three months
ended March 31, 2002 than in the corresponding period in 2001. Cash used for
purchases of property, plant and equipment increased by $53.2 million during the
three months ended March 31, 2002 than in the corresponding period in 2001. Cash
used for payments for acquisitions increased by $77.5 million during the three
months ended March 31, 2002 than in the corresponding period in 2001 primarily
as a result of our acquisition of certain assets and assumed liabilities of High
Speed Access.
FINANCING ACTIVITIES. Net cash provided by financing activities for the
three months ended March 31, 2002 and 2001 was $522.5 million and $573.3
million, respectively. For the three months ended March 31, 2002, we received
proceeds from the issuance of long-term debt and additional borrowings on our
credit facilities of $1.9 billion, which was offset primarily by repayment of
long-term debt of $1.3 billion. For the three months ended March 31, 2001, we
received proceeds from the issuance of long-term debt and additional borrowings
on our credit facilities of $3.5 billion, which was offset primarily by
repayment of long-term debt of $2.9 billion.
Financing activities provided $50.9 million less cash during the three
months ended March 31, 2002 than in the corresponding period in 2001.
As of March 31, 2002 and December 31, 2001, long-term debt totaled
approximately $17.0 billion and $16.3 billion, respectively. This debt was
comprised of approximately $6.4 billion and $6.7 billion of bank debt, $9.2
billion and $8.2 billion of high-yield bonds and $1.4 billion and $1.4 million
of convertible debt at March 31, 2002 and December 31, 2001, respectively.
As of March 31, 2002 and December 31, 2001, the weighted average rate
on the bank debt was approximately 6.3% and 6.0%, respectively, while the
weighted average rate on the high-yield debt was approximately 9.9% and 10.1%,
respectively, while the weighted average rate on the convertible debt was
approximately 5.3% and 5.8%, respectively, resulting in a blended weighted
average rate of 8.2% and 7.6%, respectively. Approximately 86.2% of our debt was
effectively fixed including the effects of our interest rate hedge agreements as
of March 31, 2002 compared to
19
approximately 81.9% at December 31, 2001. The fair value of our total fixed-rate
debt was $9.8 billion and $9.5 billion at March 31, 2002 and December 31, 2001,
respectively. The fair value of fixed-rate debt is based on quoted market
prices. The fair value of variable-rate debt approximated the carrying value of
$6.4 billion and $6.7 billion at March 31, 2002 and December 31, 2001,
respectively, since this debt bears interest at current market rates.
In recent years, we have incurred significant additional debt to fund
our capital expenditures and acquisitions. 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. Additionally, in
the event of a default or an event of default under the credit agreements of our
subsidiaries, such as the failure to maintain the applicable required financial
ratios, we would be unable to borrow under these credit facilities, which could
adversely impact our ability to operate our business and to make payments under
our debt instruments. An event of default may in certain circumstances result in
the acceleration of our debt under the related credit facility and may result in
defaults under the agreements governing our other long-term indebtedness. See "-
Certain Trends and Uncertainties."
We currently anticipate that we will have sufficient capital from
operating revenues and existing credit facilities to fund our operating costs,
interest expense, required debt repayments and capital expenditures during 2002
and through 2003, after which time we expect that cash flows from operations
will fund our operating costs, interest expense and capital expenditures.
However, any projections about future capital need and cash flows are subject to
substantial uncertainty. See "- Certain Trends and Uncertainties."
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our cable systems
for the development of new products and services, and deployment of digital
converters and cable modems. Upgrading our cable systems will enable us to offer
an increasing variety of advanced products and services, including digital
television, cable modem high-speed Internet access, video-on-demand, interactive
services, additional channels and tiers, and expanded pay-per-view options, to a
larger customer base.
We made capital expenditures, excluding acquisitions of cable systems
of $471.3 billion and $524.5 billion for the three months ended March 31, 2002
and 2001, respectively. The majority of the capital expenditures related to our
rebuild and upgrade program and purchases of converters and cable modems were
funded from cash flows from operations, the issuance of debt, borrowings under
credit facilities and the issuance of Class A common stock.
We expect to spend approximately $2.475 billion during 2002 for
upgrades, rebuilds, and normal recurring capital expenditures. Normal recurring
capital expenditures will include extensions of systems, development of new
products and services, purchases of converters and cable modems, and the
build-out of advanced customer contact centers. The actual amount that we spend
on these types of capital expenditures will depend on the level of our growth in
advanced services customer base and in the delivery of other interactive
services. We currently believe that our business plan is fully funded through
2003, the point at which we expect to generate free cash flow. However, we may
need additional capital if there is accelerated growth in advanced services
customers or in the delivery of other interactive services for advanced products
and services in our upgraded service areas or a need to upgrade other service
areas ahead of schedule. We may also need additional capital if we acquire
additional systems with a substantial number of customers. If we are not able to
obtain such capital from increases in our operating cash flow, additional
borrowings or other sources, we may not be able to fund any accelerated growth,
offer advanced products and services or compete effectively. Consequently, our
growth, financial condition and results of operations could suffer materially.
See "- Certain Trends and Uncertainties."
20
The following table describes the current technological state of our
systems as of March 31, 2002 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:
550 MEGAHERTZ
LESS THAN TO TWO-WAY
550 MEGAHERTZ 660 MEGAHERTZ 750 MEGAHERT 870 MEGAHERTZ CAPABILITY
------------- ------------- ------------ ------------- ----------
March 31, 2002 .................... 18.2% 9.7% 40.7% 31.4% 76.7%
December 31, 2002.................. 8.9% 6.2% 40.9% 44.0% 82.6%
December 31, 2003.................. 7.2% 5.0% 40.6% 47.2% 88.8%
INVESTING ACTIVITIES
HIGH SPEED ACCESS CORP. On September 28, 2001, Charter Communications
Holding Company and High Speed Access entered into an asset purchase agreement
in which Charter Communications Holding Company agreed to purchase from High
Speed Access the contracts and associated assets, and assume related
liabilities, that serve our customers, including a customer contact center,
network operations center and provisioning software. On December 20, 2001,
Charter Communications Holding Company assigned certain of its rights under the
asset purchase agreement and certain related agreements to its subsidiary, CC
Systems. The transaction closed on February 28, 2002. At the closing, CC Systems
wired funds in the amount of $77.5 million to High Speed Access and delivered
37,000 shares of High Speed Access Series D convertible preferred stock and all
of the warrants to buy High Speed Access common stock owned by Charter
Communications Holding Company and High Speed Access purchased 38,000 shares of
its Series D Preferred Stock from Vulcan Ventures for $8.0 million. To secure
indemnity claims against High Speed Access under the asset purchase agreement,
$2.0 million of the purchase price was held back. Additional purchase price
adjustments may be made as provided in the asset purchase agreement. Charter
Communications Holding Company obtained a fairness opinion from a qualified
investment-banking firm regarding the valuation of the assets purchased by CC
Systems pursuant to the asset purchase agreement. Concurrently with the closing
of the transaction, High Speed Access purchased all of its common stock held by
Vulcan Ventures, and certain of the agreements between our subsidiaries and High
Speed Access, including the programming content agreement, the services
agreement, the systems access agreement, the 1998 network services agreement and
the May 2000 network services agreement were terminated. The results of
operations of the acquired assets and assumed liabilities have been included in
the consolidated financial statements from the date of acquisition.
ENSTAR LIMITED PARTNERSHIP SYSTEMS. In April 2002, Interlink
Communications Partners, LLC, Rifkin Acquisition Partners, LLC and Charter
Communications Entertainment I, LLC, each an indirect, wholly-owned subsidiary
of Charter Holdings, completed the purchase of certain assets of Enstar Income
Program II-2, L.P., Enstar Income Program IV-3, L.P., Enstar/Growth Program
Six-A, L.P., Enstar Cable of Macoupin County and Enstar IV/PBD Systems Venture,
serving in the aggregate approximately 21,600 customers, for a total cash sale
price of approximately $48.3 million. Enstar Communications Corporation, a
direct subsidiary of Charter Communications Holding Company, is the general
partner of the Enstar limited partnerships.
Also, in April 2002, Charter Communications Entertainment I, LLC
entered into an agreement to purchase all of Enstar Income Program II-1, L.P.'s
Illinois cable television systems, serving approximately 6,400 customers, for a
total sale price of approximately $14.7 million. Closing of the purchase is
subject to purchase price adjustments, regulatory approvals, customary closing
conditions and approval by the limited partners of Enstar Income Program II-1,
L.P. It is expected that this acquisition will close in the third quarter of
2002, although no assurance can be given regarding this matter.
DIGEO, INC. In connection with the execution of the carriage agreement
on March 5, 2001, with digeo interactive, LLC, a subsidiary of digeo, inc.,
which will function as its television-based Internet portal for an initial
six-year period, Charter Communications Ventures, LLC received an equity
interest in digeo, inc. funded by Vulcan Ventures' contribution of approximately
$21.2 million, which is subject to a priority return of capital to Vulcan
Ventures up to the amount so funded. Vulcan Ventures also agreed to make,
through January 24, 2004, certain additional contributions through DBroadband
Holdings, LLC to acquire digeo, inc. equity in order to maintain Charter
Venture's
21
pro rata interest in digeo, inc. in the event of certain future digeo, inc.
equity financings by the founders of digeo, inc. These additional equity
interests will also be subject to a priority return of capital to Vulcan
Ventures up to the amount so contributed. Pursuant to this obligation, on April
26, 2002 Vulcan Ventures contributed an additional $12.5 million to DBroadband
Holdings, LLC which was in turn used to purchase additional equity of digeo,
inc. As of March 31, 2002 and December 31, 2001, the carrying value of our
investment in digeo was approximately $10.6 million and $21.2 million,
respectively.
FINANCING ACTIVITIES
As of March 31, 2002 and December 31, 2001, long-term debt totaled
approximately $17.0 billion and $16.3 billion, respectively. This debt was
comprised of approximately $6.4 billion and $6.7 billion of bank debt, $9.2
billion and $8.2 billion of high-yield bonds and $1.4 billion and $1.4 million
of convertible debt at March 31, 2002 and December 31, 2001, respectively. As of
March 31, 2002 and December 31, 2001, the weighted average rate on the bank debt
was approximately 6.3% and 6.0%, respectively, while the weighted average rate
on the high-yield debt was approximately 9.9% and 10.1%, respectively, resulting
in a blended weighted average rate of 8.2% and 7.6%, respectively. Approximately
86.2% of our debt was effectively fixed including the effects of our interest
rate hedge agreements as of March 31, 2002 compared to approximately 81.9% as of
December 31, 2001.
JANUARY 2002 CHARTER HOLDINGS NOTES. In January 2002, Charter Holdings
and its subsidiary, Charter Communications Holding Capital Corporation, issued
$1.1 billion in aggregate principal amount of senior notes and senior discount
notes. The January 2002 Charter Holdings notes consisted of $350.0 million in
aggregate principal amount of 9.625% senior notes due 2009, $300.0 million in
aggregate principal amount of 10.000% senior notes due 2011 and $450.0 million
in aggregate principal amount at maturity of 12.125% senior discount notes due
2012. The net proceeds of approximately $872.8 million were used to repay a
portion of the amounts outstanding under the revolving credit facilities of our
subsidiaries.
The 9.625% senior notes are not redeemable prior to maturity. Interest
is payable semiannually in arrears on May 15 and November 15, beginning May 15,
2002, until maturity.
The 10.000% senior notes are redeemable at the option of the issuers at
amounts decreasing from 105.000% to 100% of par value plus accrued and unpaid
interest beginning on May 15, 2006, to the date of redemption. At any time prior
to May 15, 2004, the issuers may redeem up to 35% of the aggregate principal
amount of the 10.000% senior notes at a redemption price of 110.000% of the
principal amount under certain conditions. Interest is payable semiannually in
arrears on May 15 and November 15, beginning May 15, 2002, until maturity.
The 12.125% senior discount notes are redeemable at the option of the
issuers at amounts decreasing from 106.063% to 100% of accreted value beginning
January 15, 2007. At any time prior to January 15, 2005, the issuers may redeem
up to 35% of the aggregate principal amount of the 12.125% senior discount notes
at a redemption price of 112.125% of the accreted value under certain
conditions. Thereafter, cash interest is payable semiannually in arrears on
January 15 and July 15 beginning July 15, 2007, until maturity. The discount on
the 12.125% senior discount notes is being accreted using the effective interest
method.
As of March 31, 2002, $650.0 million of the January 2002 Charter
Holdings 9.625% and 10.000% senior notes were outstanding, and the accreted
value of the 12.125% senior discount notes was approximately $256.2 million.
CC VIII OPERATING CREDIT FACILITIES. The CC VIII Operating credit
facilities were amended and restated on January 3, 2002 and provided for
borrowings of up to $1.55 billion. The CC VIII Operating credit facilities
provide for three term facilities, two Term A facilities with an aggregate
principal amount of $487.5 million, which reduces quarterly beginning March
2002, that mature in June 2007, and a Term B facility with a principal amount of
$498.75 million, which reduces quarterly beginning March 2002, that matures in
February 2008. The CC VIII Operating credit facilities also provide for two
reducing revolving credit facilities, in the aggregate amount of $550.0 million,
which reduce quarterly beginning in January 2002 and September 2005,
respectively, with maturity dates in June 2007. At the option of the lenders,
supplemental facilities in the amount of $300.0 million may be available.
Amounts under the CC
22
VIII Operating credit facilities bear interest at the base rate or the
Eurodollar rate, as defined, plus a margin of up to 2.75% for Eurodollar loans
and up to 1.75% for base rate loans. A quarterly commitment fee of between
0.250% and 0.375% is payable on the unborrowed balance of the revolving credit
facilities.
As of March 31, 2002, outstanding borrowings were $1.0 billion, and
unused availability was $504.3 million. In January 2002, the Company repaid
$107.0 million under the revolving portion of the CC VIII Operating credit
facilities with proceeds from the issuance of the January 2002 Charter Holdings
notes.
CHARTER OPERATING CREDIT FACILITIES. The Charter Operating credit
facilities were amended and restated on January 3, 2002 and provide for four
term facilities: two Term A facilities with an aggregate principal amount of
$1.11 billion that matures in September 2007, each with different amortization
schedules, one beginning in June 2002 and one beginning in September 2005; and
two Term B facilities with an aggregate principal amount of $2.75 billion, of
which $1.85 billion matures in March 2008 and $900.0 million matures in
September 2008. The Charter Operating credit facilities also provide for two
revolving credit facilities, in an aggregate amount of $1.34 billion, which will
reduce annually beginning in March 2004 and September 2005, with a maturity date
in September 2007. At the option of the lenders, supplemental credit facilities
in the amount of $100.0 million may be available. 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% for Eurodollar loans and 1.75%
for base rate loans. A quarterly commitment fee of between 0.25% and 0.375% per
annum is payable on the unborrowed balance of the revolving credit facilities.
As of March 31, 2002, outstanding borrowings were approximately $3.9
billion and the unused availability was $1.3 billion. In January 2002, the
Company repaid $465.0 million under the revolving portion of the Charter
Operating credit facilities with proceeds from the issuance of the January 2002
Charter Holdings notes.
OUTLOOK
We expect second quarter 2002 revenue of $1.145 billion to $1.155
billion and full year 2002 revenue of $4.6 billion to $4.7 billion. We expect
operating cash flow, after corporate overhead expense, of $500.0 million to
$505.0 million and full year 2002 operating cash flow of $2.035 billion to
$2.07 billion. We expect no meaningful increase in basic customers in 2002. We
anticipate that the number of revenue generating units will increase in second
quarter 2002 by 275,000 to 300,000 and for the full year 2002 by 1.1 million to
1.2 million over pro forma revenue generating units in 2001. We expect to have
video-on-demand service available to approximately half of our digital
customers by the end of 2002. Furthermore, we will continue our focus on
interactive TV following its recent launch to over 560,000 customers in a
number of markets with additional launches in several other markets in 2002 and
expect to expand our offering of this service in 2002 to include over 1.0
million customers. In 2002 we expect to offer several new advanced products and
services, including an advanced broadband media center terminal that enables
digital video recorder capability, home networking and internet-access over the
television; wireless home networking; and an enhanced customized internet
portal, with a customized browser and charter.com e-mail. Voice-over Internet
protocol telephony initiatives will continue to be tested and developed.
Customer care will remain a priority at Charter Communications, Inc. In
2002, we plan to build four additional customer contact centers with goals of
increasing efficiency and improving customer service. These new customer contact
centers will serve our customer base with state-of-the-art technology to further
improve customer satisfaction.
We will continue our system rebuilds and upgrades so that our customers
have access to advanced service technology. We expect to spend approximately
$2.475 billion during 2002 for upgrades, rebuilds, and normal recurring capital
expenditures.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and
uncertainties, in addition to those discussed elsewhere in this Quarterly Report
and in the Critical Accounting Policies section of "Management's Discussion
23
and Analysis of Financial Condition and Results of Operations" in Charter
Communications, Inc.'s annual report on Form 10-K, that could materially impact
our business, results of operations and financial condition.
SUBSTANTIAL LEVERAGE. We and our subsidiaries have a significant amount
of debt. As of March 31, 2002, our total debt was approximately $17.0 billion.
We anticipate that we may incur significant additional debt, including through
our subsidiaries, 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. 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.
Additionally, it is difficult to assess the impact that the terrorist attacks on
September 11, 2001 and the subsequent armed conflict and related events,
combined with the general economic slowdown, will have on future operations. 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, to grow our business or to fund our other liquidity and capital
needs.
RESTRICTIVE COVENANTS. The credit facilities of our subsidiaries and
the indentures governing the publicly held notes of our subsidiaries contain a
number of significant covenants that could adversely impact our business. In
particular, the credit facilities and indentures of our subsidiaries restrict
our subsidiaries' ability 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;
- grant 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 could
trigger acceleration of the debt under the applicable agreement and in certain
cases under other agreements governing our long-term indebtedness. Any default
under our credit facilities or indentures governing our outstanding debt might
adversely affect our growth, our financial condition and our results of
operations and the ability to make payments on the publicly held notes of our
subsidiaries and us and the credit facilities of our subsidiaries.
ACCELERATION OF INDEBTEDNESS OF OUR SUBSIDIARIES. In the event of a
default under our subsidiaries' credit facilities or public notes, our
subsidiaries' creditors could elect to declare all amounts borrowed, together
with accrued and unpaid interest and other fees, to be due and payable. In such
event, our subsidiaries' credit facilities and indentures will not permit our
subsidiaries to distribute funds to Charter Communications Holding Company or
Charter Communications, Inc. to pay interest or principal on our public notes.
If the amounts outstanding under such credit facilities or public notes are
accelerated, all of our subsidiaries' debt and liabilities would be payable from
our subsidiaries' assets, prior to any distribution of our subsidiaries' assets
to pay the interest and principal amounts on our public notes and we might not
be able to repay or make any payments on our public notes. Additionally, such a
default
24
would cause a cross-default in the indentures governing the Charter Holdings
notes and our convertible senior notes and would trigger the cross-default
provision of the Charter Operating Credit Agreement. Any default under any of
our subsidiaries' credit facilities or public notes might adversely affect the
holders of our public notes and our growth, financial condition and results of
operations.
LONG-TERM INDEBTEDNESS - CHANGE OF CONTROL PAYMENTS. We may not have
the ability to raise the funds necessary to fulfill our obligations under our
public notes or the public notes and credit facilities of our subsidiaries
following a change of control. Under the indentures governing our public notes,
upon the occurrence of specified change of control events, including certain
specified dispositions of our stock by Mr. Allen, we are required to offer to
repurchase all of our outstanding public notes. However, we may not have
sufficient funds at the time of the change of control event to make the required
repurchase of our public notes and our subsidiaries are limited in their ability
to make distributions or other payments to us to fund any required repurchase.
In addition, a change of control under our subsidiaries' credit facilities and
indentures governing their public notes would require the repayment of
borrowings under those credit facilities and indentures. Because such credit
facilities and public notes are obligations of our subsidiaries, the credit
facilities and the public notes would have to be repaid by our subsidiaries
before their assets could be available to us to repurchase our public notes. Our
failure to make or complete a change of control offer would place us in default
under our public notes. The failure of our subsidiaries to make a change of
control offer to repay the amounts outstanding under their credit facilities
would place them in default of these agreements and could result in a default
under the indentures governing our public notes.
VARIABLE INTEREST RATES. At March 31, 2002, excluding the effects of
hedging, approximately 37.5% 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 6.3% and 6.0%,
respectively, while the weighted average rate on the high-yield was
approximately 9.9% and 10.1%, respectively, while the weighted average rate on
the convertible debt was approximately 5.3% and 5.8%, respectively, resulting in
a blended weighted average rate of 8.2% and 7.6%, respectively. Approximately
86.2% of our debt was effectively fixed including the effects of our interest
rate hedge agreements as of March 31, 2002 compared to approximately 81.9% 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
25
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 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.
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 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.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
We are exposed to various market risks, including fluctuations in
interest rates. We use interest rate risk management derivative instruments,
such as interest rate swap agreements and interest rate collar agreements
(collectively referred to herein as interest rate agreements) as 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 collar agreements are used
to limit our exposure to and benefits from interest rate fluctuations on
variable rate debt to within a certain range of rates. Interest rate risk
management agreements are not held or issued for speculative or trading
purposes.
As of March 31, 2002 and December 31, 2001, long-term debt totaled
approximately $17.0 billion and $16.3 billion, respectively. This debt was
comprised of approximately $6.4 billion and $6.7 billion of debt under our
subsidiaries' credit facilities, $9.2 billion and $8.2 billion of high-yield
debt and approximately $1.4 billion and $1.4 million of debt related to our
convertible senior notes at March 31, 2002 and December 31, 2001, respectively.
As of March 31, 2002 and December 31, 2001, the weighted average rate
on the bank debt was approximately 6.3% and 6.0%, respectively, while the
weighted average rate on the high-yield debt was approximately 9.9% and 10.1%,
respectively, while the weighted average rate on the convertible debt was
approximately 5.3% and 5.8%, respectively, resulting in a blended weighted
average rate of 8.2% and 7.6%, respectively. Approximately 86.2% of our debt was
effectively fixed including the effects of our interest rate hedge agreements as
of March 31, 2002 compared to approximately 81.9% at December 31, 2001. The fair
value of our total fixed-rate debt was $9.8 billion and $9.5 billion at March
31, 2002 and December 31, 2001, respectively. The fair value of fixed-rate debt
is based on quoted market prices. The fair value of variable-rate debt
approximated the carrying value of $6.4 billion and $6.7 billion at March 31,
2002 and December 31, 2001, respectively, since this debt bears interest at
current market rates.
We have certain interest rate derivative instruments that have been
designated as cash flow hedging instruments. Such instruments are those which
effectively convert variable interest payments on debt instruments into fixed
payments. For qualifying hedges, derivative gains and losses are offset against
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 month period ended
March 31, 2002 and 2001, other expense includes losses of $1.5 million and gains
of $2.3 million, respectively, which represent cash flow hedge ineffectiveness
on interest rate hedge agreements arising from differences between the critical
terms of the agreements and the related hedged obligations. 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 loss on the accompanying
consolidated balance sheets. At March 31, 2002 and 2001, a loss of $17.1 million
and $19.9 million, respectively, related to derivative instruments designated as
cash flow hedges was recorded in accumulated other comprehensive loss and
minority interest. 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 or losses.
Certain interest rate derivative instruments are not designated as
hedges as they do not meet the effectiveness criteria specified by SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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 and 2001, we recorded other
income of $34.7 million and other expense of $48.0 million (including $23.9
million related to adopting SFAS No. 133), respectively, for interest rate
derivative instruments not designated as hedges.
As of March 31, 2002 and December 31, 2001, we had outstanding $3.6
billion and $3.3 billion, and $520.0 million and $520.0 million, respectively,
in notional amounts of interest rate swaps and collars, respectively. The
27
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of our exposure to credit loss.
We do not hold collateral for these instruments and are therefore
subject to credit loss in the event of nonperformance by the counter parties to
the interest rate exchange agreements. However we do not anticipate
nonperformance by the counter parties to the interest rate exchange agreements.
JANUARY 2002 CHARTER HOLDINGS NOTES - CREDIT FACILITY AMENDMENT. In
January 2002, Charter Holdings and Charter Capital issued senior notes with an
aggregate principal amount at maturity of $1.1 billion. The January 2002 Charter
Holdings notes are comprised of $350.0 million 9.625% senior notes due 2009,
$300.0 million 10.000% senior notes due 2011, and $450.0 principal amount at
maturity of 12.125% senior discount notes due 2012. The net proceeds of
approximately $872.8 million were used to repay a portion of the amounts
outstanding under the revolving credit facilities of our subsidiaries.
In January 2002, we amended the Charter Operating credit facilities and
the CC VIII Operating credit facilities to provide, among other things, for the
deferral of the repayment of the principal and a delay in the reduction of
certain facilities and, in consideration, we increased the interest rates
related to such facilities and paid a consent fee to those lenders that
consented to the amendment. The amounts available for borrowing under the
Charter Operating and the CC VIII Operating facilities were increased by $200.0
million and $100.0 million, respectively, at the time of the amendments.
28
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
We are involved from time to time in routine legal matters and other
claims incidental to our business. We believe that the resolution of such
matters, taking into account established reserves and insurance, will not have a
material adverse impact on our consolidated financial position or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
2.1(a) Asset Purchase Agreement, dated August 29, 2001, by and
between Charter Communications Entertainment I, LLC, Interlink
Communications Partners, LLC, and Rifkin Acquisitions
Partners, LLC and Enstar Income Program II-1, L.P., Enstar
Income Program II-2, L.P., Enstar Income Program IV-3, L.P.,
Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD
Systems Venture, and Enstar Cable of Macoupin County
(Incorporated by reference to Exhibit 2.1 to the current
report of Form 8-K filed by Enstar IV-2, L.P. on September 13,
2001 (File No. 000-15706)).
2.1(b) Letter of Amendment, dated September 10, 2001, by and between
Charter Communications Entertainment I, LLC, Interlink
Communications Partners, LLC, and Rifkin Acquisitions
Partners, LLC and Enstar Income Program II-1, L.P., Enstar
Income Program II-2, L.P., Enstar Income Program IV-3, L.P.,
Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD
Systems Venture, and Enstar Cable of Macoupin County
(Incorporated by reference to Exhibit 2.1 to the current
report of Form 8-K filed by Enstar IV-2, L.P. on September 13,
2001 (File No. 000-15706)).
2.1(c) Letter of Amendment, dated April 10, 2002, by and between
Charter Communications Entertainment I, LLC, Interlink
Communications Partners, LLC, and Rifkin Acquisitions
Partners, LLC and Enstar Income Program II-1, L.P., Enstar
Income Program II-2, L.P., Enstar Income Program IV-3, L.P.,
Enstar Income/Growth Program Six-A, L.P., Enstar IV/PBD
Systems Venture, and Enstar Cable of Macoupin County
(Incorporated by reference to Exhibit 2.1 to the current
report on Form 8-K filed by Enstar Income Program IV-1, L.P.
on April 22, 2002 (File No. 000-15705)).
2.2 Asset Purchase Agreement, dated April 10, 2002, by and between
Charter Communications Entertainment I, LLC, and Enstar Income
Program II-1, L.P. (Incorporated by reference to Exhibit 2.2
to the current report on Form 8-K filed by Enstar Income
Program II-1, L.P. on April 26, 2002 (File No. 000-14508)).
4.1(a) First Supplemental Indenture dated as of January 14, 2002
between Charter Communications Holdings, LLC, Charter
Communications Holdings Capital Corporation and BNY Midwest
Trust Company as Trustee governing 9.625% Senior Notes due
2009 (Incorporated by reference to Exhibit 10.2(a) to the
current report on Form 8-K filed by Charter Communications,
Inc. on January 15, 2002 (File No. 000-27927)).
4.1(b) Exchange and Registration Rights Agreement relating to
9.625% Senior Notes due 2009, dated as of January 14, 2002,
among Charter Communications Holding Company, LLC, Charter
Communications Capital Corporation, Salomon Smith Barney Inc.,
Banc of America Securities LLC, J.P. Morgan Securities Inc.,
Fleet Securities, Inc., TD Securities (USA) Inc., BMO Nesbitt
Burns Corp., Credit Lyonnais Securities (USA) Inc., RBC
Dominion Securities Corporation,
29
Scotia Capital (USA) Inc., SunTrust Capital Markets, Inc.,
U.S. Bancorp Piper Jaffray Inc., ABN AMRO Incorporated, First
Union Securities, Inc., CIBC World Markets Corp. and Dresdner
Kleinwort Wasserstein -- Grantchester, Inc. (Incorporated by
reference to Exhibit 10.2(b) to the current report on Form 8-K
filed by Charter Communications, Inc. on January 15, 2002
(File No. 000-27927)).
4.2(a) First Supplemental Indenture dated as of January 14, 2002
between Charter Communications Holdings, LLC, Charter
Communications Holdings Capital Corporation and BNY Midwest
Trust Company as Trustee governing 10.000% Senior Notes due
2011 (Incorporated by reference to Exhibit 10.3(a) to the
current report on Form 8-K filed by Charter Communications,
Inc. on January 15, 2002 (File No. 000-27927)).
4.2(b) Exchange and Registration Rights Agreement relating to 10.000%
Senior Notes due 2011, dated as of January 14, 2002, among
Charter Communications Holding Company, LLC, Charter
Communications Capital Corporation, Salomon Smith Barney Inc.,
Banc of America Securities LLC, J.P. Morgan Securities Inc.,
Fleet Securities, Inc., TD Securities (USA) Inc., BMO Nesbitt
Burns Corp., Credit Lyonnais Securities (USA) Inc., RBC
Dominion Securities Corporation, Scotia Capital (USA) Inc.,
SunTrust Capital Markets, Inc., U.S. Bancorp Piper Jaffray
Inc., ABN AMRO Incorporated, First Union Securities, Inc.,
CIBC World Markets Corp. and Dresdner Kleinwort Wasserstein --
Grantchester, Inc. (Incorporated by reference to Exhibit
10.3(b) to the current report on Form 8-K filed by Charter
Communications, Inc. on January 15, 2002 (File No.
000-27927)).
4.3(a) Indenture dated as of January 14, 2002 between Charter
Communications Holdings, LLC, Charter Communications Holdings
Capital Corporation and BNY Midwest Trust Company as Trustee
governing 12.125% Senior Discount Notes due 2012 (Incorporated
by reference to Exhibit 10.4(a) to the current report on Form
8-K filed by Charter Communications, Inc. on January 15, 2002
(File No. 000-27927)).
4.3(b) Exchange and Registration Rights Agreement relating to 12.125%
Senior Discount Notes due 2012, dated as of January 14, 2002,
among Charter Communications Holding Company, LLC, Charter
Communications Capital Corporation, Salomon Smith Barney Inc.,
Banc of America Securities LLC, J.P. Morgan Securities Inc.,
Fleet Securities, Inc., TD Securities (USA) Inc., BMO Nesbitt
Burns Corp., Credit Lyonnais Securities (USA) Inc., RBC
Dominion Securities Corporation, Scotia Capital (USA) Inc.,
SunTrust Capital Markets, Inc., U.S. Bancorp Piper Jaffray
Inc., ABN AMRO Incorporated, First Union Securities, Inc.,
CIBC World Markets Corp. and Dresdner Kleinwort Wasserstein --
Grantchester, Inc. (Incorporated by reference to Exhibit
10.4(b) to the current report on Form 8-K filed by Charter
Communications, Inc. on January 15, 2002 (File No.
000-27927)).
10.1 Credit Agreement, among Charter Communications Operating, LLC,
Charter Communications Holdings, LLC and certain lenders and
agents named therein, dated as of March 18, 1999, as amended
and restated as of January 3, 2002 (Incorporated by reference
to Exhibit 99.1 to the current report on Form 8-K filed by
Charter Communications, Inc. on January 24, 2002 (File No.
000-27927)).
10.2 Third Amended and Restated Credit Agreement, among CC VIII
Operating, LLC, as borrower, CC VIII Holdings, LLC, as
guarantor, and certain lenders and agents named therein, dated
as of February 2, 1999, as amended and restated as of January
3, 2002 (Incorporated by reference to Exhibit 99.2 to the
current report on Form 8-K filed by Charter Communications,
Inc. on January 24, 2002 (File No. 000-27927)).
30
10.3 Second Amendment to Amended and Restated Management Agreement,
dated as of March 17, 1999, as amended as of January 1, 2002,
by and between Charter Communications Operating, LLC and
Charter Communications, Inc. (Incorporated by reference to
Exhibit 10.8 to the annual report on Form 10-K filed by
Charter Communications, Inc. on March 29, 2002 (File No.
000-27927)).
10.4 Amendment No. 3 to the Charter Communications 1999 Option Plan
(Incorporated by reference to Exhibit 10.14(e) to the annual
report of Form 10-K filed by Charter Communications, Inc. on
March 29, 2002 (File No. 000-27927)).
(b) REPORTS ON FORM 8-K
On January 4, 2002, the Registrant filed a current report on Form 8-K
dated January 4, 2002 to report that the Registrant's subsidiaries, Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation, planned to raise $600 million in a private placement offering of
senior notes and senior discount notes. (The transaction size was subsequently
increased and the issuers received gross proceeds of approximately $900 million
when the notes were sold in January 2002.)
On January 7, 2002, the Registrant filed a current report on Form 8-K
dated September 28, 2001 to report various other events, including expected 2001
year-end results, updates on director resignations and elections, anticipated
closing of the acquisition of assets from High Speed Access Corp. and internal
restructuring.
On January 9, 2002, the Registrant filed a current report on Form 8-K
dated January 8, 2002 to report that the Registrant's subsidiaries, Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation, had entered into an agreement to sell senior notes and senior
discount notes with gross proceeds of approximately $900 million, with the
offering to be made in a private placement to qualified institutional buyers and
in compliance with Regulation S.
On January 15, 2002, the Registrant filed a current report on Form 8-K
dated January 8, 2002 to report that the Registrant's subsidiaries, Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation, had sold senior notes and senior discount notes and to file the
relevant documents as exhibits.
On January 24, 2002, the Registrant filed a current report on Form 8-K
dated January 2, 2002 to file as exhibits amended and restated credit agreements
entered into by the Registrant's subsidiaries.
On February 13, 2002, the Registrant filed a current report on Form 8-K
dated January 30, 2002 to report various events, including the election of a new
director, entering into a new agreement with Motorola, Inc. and digeo, inc., and
its results for the fourth quarter ended December 31, 2001.
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 23, 2002, the Registrant filed an Amendment No. 1 on Form
8-K/A dated April 22, 2002, to amend the Registrant's current report on Form 8-K
dated April 22, 2002 and filed April 22, 2002 to correct an error made by the
printer in filing the text of the Registrant's subsidiary's Form 8-K with the
Registrant's filing.
On April 26, 2002, the Registrant filed an Amendment No. 2 on Form
8-K/A dated April 22, 2002, to amend the current report on Form 8-K/A dated
April 22, 2002 and filed April 23, 2002.
On April 29, 2002, the Registrant filed a current report on Form 8-K
dated April 29, 2002 to report 2002 first quarter financial results.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, Charter Communications, Inc. has duly caused this Quarterly Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CHARTER COMMUNICATIONS, INC.,
Registrant
Dated: May 14, 2002
By: /s/ KENT D. KALKWARF
----------------------------------------
Name: Kent D. Kalkwarf
Title: Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ PAUL E. MARTIN
----------------------------------------
Name: Paul E. Martin
Title: Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
32