1
FORM 8-K/A
(Amendment No. 2)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): January 1, 2000
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CHARTER COMMUNICATIONS HOLDINGS, LLC
------------------------------------
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
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(Exact name of registrants as specified in their charters)
Delaware
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Delaware
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(State or Other Jurisdiction of Incorporation or Organization)
333-77499 43-1843179
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333-77499-01 43-1843177
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(Commission File Number) (Federal Employer
Identification Number)
12444 Powerscourt Drive - Suite 400
St. Louis, Missouri 63131
- ------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (314) 965-0555
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Charter Communications Holdings, LLC (Charter Holdings) and Charter
Communications Holdings Capital Corporation filed this Current Report on January
18, 2000, announcing the transfer of cable systems from Charter Communications
Holding Company, LLC (Charter Holdco). Charter Holdings and Charter
Communications Holdings Capital Corporation amended this Current Report on March
16, 2000, to include historical financial statements and pro forma financial
information. The disclosure under Item 2 in the original report is hereby
incorporated by reference into this Amended Report. This Amended Report is
being filed to include the reports of independent auditors for the historical
financial statements of Fanch Cablevision, L.P. and affiliates (Fanch) and to
remove the term "unaudited" from Fanch's historical financial statements.
Fanch's combined financial position and results of operations remain unchanged
from the filing on March 16, 2000.
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ITEM 2. ACQUISITION OF ASSETS.
On January 1, 2000, Charter Holdings and Charter Holdco, the parent of
Charter Holdings, effected a number of transactions to transfer acquired cable
systems to Charter Holdings. As a result of these transactions, Charter Holdings
became the indirect parent of cable systems of Fanch, Falcon Communications,
L.P. (Falcon), now known as CC VII Holdings, LLC, and Avalon Cable LLC (Avalon),
now known as CC V Holdings, LLC.
Charter Holdings and Charter Communications Holdings Capital Corporation
filed this Current Report on January 18, 2000, announcing the transfer of cable
systems to Charter Holdings, and the disclosure under Item 2 in the original
report is hereby incorporated by reference into this Amended Report. This
Amended Report is being filed to provide certain historical financial statements
of Fanch, Falcon and Avalon and pro forma financial information reflecting the
transfer of cable systems to Charter Holdings.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of businesses acquired.
Audited financial statements of Falcon, Fanch and Avalon are
included herein beginning on page F-1.
(b) Pro forma financial information.
Pursuant to Article 11 of Regulation S-X, pro forma unaudited
financial information that gives effect to the transfer of
cable systems to Charter Holdings are included herein
beginning on page P-1.
(c) Exhibits.
2.8 Contribution and Sale Agreement entered into as of
December 30, 1999, by and among Charter Communications
Holding Company, LLC, CC VII Holdings, LLC, and Charter
Communications VII, LLC.*
2.9 Contribution and Sale Agreement entered into as of
December 30, 1999, by and among Charter Communications
Holding Company, LLC and Charter Communications
Holdings, LLC.*
- ------------------
* previously filed.
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INDEX TO FINANCIAL STATEMENTS
FALCON COMMUNICATIONS, L.P.
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1998 F-4
Consolidated Statements of Partners' Deficit for each of the three years in the period
ended December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1998 F-6
Notes to Consolidated Financial Statements F-7
AVALON CABLE LLC AND SUBSIDIARIES
Report of Independent Accountants F-29
Consolidated Balance Sheet as of December 31, 1998 and 1997 F-30
Consolidated Statement of Operations for the year ended December 31, 1998 and for the
period from September 4, 1997 (inception) through December 31, 1997 F-31
Consolidated Statement of Changes in Members' Interest for the period from
September 4, 1997 (inception) through December 31, 1998 F-32
Consolidated Statement of Cash Flows for the year ended December 31, 1998 and for the
period from September 4, 1997 (inception) through December 31, 1997 F-33
Notes to Consolidated Financial Statements F-34
CABLE MICHIGAN, INC. AND SUBSIDIARIES
Report of Independent Accountants F-48
Consolidated Balance Sheets as of December 31, 1997 and November 5, 1998 F-49
Consolidated Statements of Operations for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 through November 5, 1998 F-50
Consolidated Statements of Changes in Shareholders' Deficit for the years ended
December 31, 1996 and 1997, and for the period from January 1, 1998 through
November 5, 1998 F-51
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1997,
and for the period from January 1, 1998 through November 5, 1998 F-52
Notes to Consolidated Financial Statements F-53
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
Report of Independent Auditors F-68
Report of Independent Auditors F-70
Report of Independent Auditors F-71
Report of Independent Auditors F-72
Combined Balance Sheets as of November 11, 1999 and December 31, 1998 F-73
Combined Statements of Operations for the period from January 1, 1999 to
November 11, 1999 and for the years ended December 31, 1998 and 1997 F-75
Combined Statements of Net Assets for the period from January 1, 1999 to
November 11, 1999 and for the years ended December 31, 1998 and 1997 F-76
Combined Statements of Cash Flows for the period from January 1, 1999 to
November 11, 1999 and for the years ended December 31, 1998 and 1997 F-77
Notes to Combined Financial Statements F-78
F-1
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REPORT OF INDEPENDENT AUDITORS
Partners
Falcon Communications, L.P.
We have audited the accompanying consolidated balance sheets of Falcon
Communications, L.P. (successor to Falcon Holding Group, L.P.) as of December
31, 1997 and 1998, and the related consolidated statements of operations,
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Falcon Communications, L.P. (successor to Falcon Holding Group, L.P.) at
December 31, 1997 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Los Angeles, California
March 5, 1999
F-2
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FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
1997 1998
--------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
Cash and cash equivalents................................... $ 13,917 $ 14,284
Receivables:
Trade, less allowance of $825,000 and $670,000 for
possible losses....................................... 13,174 15,760
Affiliates............................................. 11,254 2,322
Other assets.............................................. 16,352 16,779
Property, plant and equipment, less accumulated
depreciation and amortization.......................... 324,559 505,894
Franchise cost, less accumulated amortization of
$203,700,000 and $226,526,000.......................... 222,281 397,727
Goodwill, less accumulated amortization of $18,531,000 and
$25,646,000............................................ 66,879 135,308
Customer lists and other intangible costs, less
accumulated amortization of $25,517,000 and
$59,422,000............................................ 59,808 333,017
Deferred loan costs, less accumulated amortization of
$7,144,000 and $2,014,000.............................. 12,134 24,331
--------- ----------
$ 740,358 $1,445,422
========= ==========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable............................................. $ 911,221 $1,611,353
Accounts payable.......................................... 9,169 10,341
Accrued expenses.......................................... 52,789 83,077
Customer deposits and prepayments......................... 1,452 2,257
Deferred income taxes..................................... 7,553 8,664
Minority interest......................................... 354 403
Equity in losses of affiliated partnerships in excess of
investment............................................. 3,202 --
--------- ----------
TOTAL LIABILITIES........................................... 985,740 1,716,095
--------- ----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY................................. 171,373 133,023
--------- ----------
PARTNERS' DEFICIT:
General partners.......................................... (13,200) (408,369)
Limited partners.......................................... (403,555) 4,673
--------- ----------
TOTAL PARTNERS' DEFICIT..................................... (416,755) (403,696)
--------- ----------
$ 740,358 $1,445,422
========= ==========
See accompanying notes to consolidated financial statements.
F-3
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FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
REVENUES............................................... $217,320 $255,886 $ 307,558
-------- -------- ---------
EXPENSES:
Service costs........................................ 60,302 75,643 97,832
General and administrative expenses.................. 36,878 46,437 63,401
Depreciation and amortization........................ 100,415 118,856 152,585
-------- -------- ---------
Total expenses............................... 197,595 240,936 313,818
-------- -------- ---------
Operating income (loss)...................... 19,725 14,950 (6,260)
-------- -------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net................................ (71,602) (79,137) (102,591)
Equity in net income (loss) of investee
partnerships...................................... (44) 443 (176)
Other income (expense), net.......................... 814 885 (2,917)
Income tax benefit (expense)......................... 1,122 2,021 (1,897)
-------- -------- ---------
Net loss before extraordinary item..................... (49,985) (60,838) (113,841)
Extraordinary item, retirement of debt................. -- -- (30,642)
-------- -------- ---------
NET LOSS............................................... $(49,985) $(60,838) $(144,483)
======== ======== =========
See accompanying notes to consolidated financial statements.
F-4
9
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
UNREALIZED GAIN ON
GENERAL LIMITED AVAILABLE-FOR-SALE
PARTNERS PARTNERS SECURITIES TOTAL
--------- --------- ------------------ ---------
(DOLLARS IN THOUSANDS)
PARTNERS' DEFICIT,
January 1, 1996.................... $ (12,091) $(399,423) $(167) $(411,681)
Sale of marketable
securities.................. -- -- 167 167
Capital contribution.......... -- 5,000 -- 5,000
Net loss for year............. (500) (49,485) -- (49,985)
--------- --------- ----- ---------
PARTNERS' DEFICIT,
December 31, 1996................ (12,591) (443,908) -- (456,499)
Reclassification from
redeemable partners'
equity...................... -- 100,529 -- 100,529
Capital contribution.......... -- 53 -- 53
Net loss for year............. (609) (60,229) -- (60,838)
--------- --------- ----- ---------
PARTNERS' DEFICIT,
December 31, 1997................ (13,200) (403,555) -- (416,755)
Reclassification of partners'
deficit..................... (408,603) 408,603 -- --
Redemption of partners'
interests................... (155,908) -- -- (155,908)
Net assets retained by the
managing general partner.... (5,392) -- -- (5,392)
Reclassification from
redeemable partners'
equity...................... 38,350 -- -- 38,350
Acquisition of Falcon Video
and TCI net assets.......... 280,409 -- -- 280,409
Capital contributions......... 83 -- -- 83
Net loss for year............. (144,108) (375) -- (144,483)
--------- --------- ----- ---------
PARTNERS' DEFICIT,
December 31, 1998................ $(408,369) $ 4,673 $ -- $(403,696)
========= ========= ===== =========
See accompanying notes to consolidated financial statements.
F-5
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FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
--------- -------- -----------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net loss............................................. $ (49,985) $(60,838) $ (144,483)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Payment-in-kind interest expense................ 26,580 20,444 --
Amortization of debt discount................... -- -- 19,342
Depreciation and amortization................... 100,415 118,856 152,585
Amortization of deferred loan costs............. 2,473 2,192 2,526
Write-off deferred loan costs................... -- -- 10,961
Gain on sale of securities...................... (2,264) -- --
Gain on casualty losses......................... -- (3,476) (314)
Equity in net (income) loss of investee
partnerships.................................. 44 (443) 176
Provision for losses on receivables, net of
recoveries.................................... 2,417 5,714 4,775
Deferred income taxes........................... (2,684) (2,748) 1,111
Other........................................... 764 1,319 278
Increase (decrease) from changes in:
Receivables..................................... (2,420) (9,703) (1,524)
Other assets.................................... (274) (4,021) 906
Accounts payable................................ 4,750 (1,357) 337
Accrued expenses................................ 10,246 13,773 24,302
Customer deposits and prepayments............... 569 (175) 633
--------- -------- -----------
Net cash provided by operating activities....... 90,631 79,537 71,611
--------- -------- -----------
Cash flows from investing activities:
Capital expenditures............................... (57,668) (76,323) (96,367)
Proceeds from sale of available-for-sale
securities...................................... 9,502 -- --
Increase in intangible assets...................... (4,847) (1,770) (7,124)
Acquisitions of cable television systems........... (247,397) -- (83,391)
Cash acquired in connection with the acquisition of
TCI and Falcon Video Communications, L.P. ...... -- -- 317
Proceeds from sale of cable system................. 15,000 -- --
Assets retained by the Managing General Partner.... -- -- (3,656)
Other.............................................. 1,163 1,806 1,893
--------- -------- -----------
Net cash used in investing activities........... (284,247) (76,287) (188,328)
--------- -------- -----------
Cash flows from financing activities:
Borrowings from notes payable...................... 700,533 37,500 2,388,607
Repayment of debt.................................. (509,511) (40,722) (2,244,752)
Deferred loan costs................................ (3,823) (29) (25,684)
Capital contributions.............................. 5,000 93 --
Redemption of partners' interests.................. -- -- (1,170)
Minority interest capital contributions............ -- 192 83
--------- -------- -----------
Net cash provided by (used in) financing
activities.................................... 192,199 (2,966) 117,084
--------- -------- -----------
Increase (decrease) in cash and cash equivalents..... (1,417) 284 367
Cash and cash equivalents, at beginning of year...... 15,050 13,633 13,917
--------- -------- -----------
Cash and cash equivalents, at end of year............ $ 13,633 $ 13,917 $ 14,284
========= ======== ===========
See accompanying notes to consolidated financial statements.
F-6
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FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Falcon Communications, L.P., a California limited partnership (the
"Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"), owns and
operates cable television systems serving small to medium-sized communities and
the suburbs of certain cities in 25 states. On September 30, 1998, pursuant to a
Contribution and Purchase Agreement dated as of December 30, 1997, as amended
(the "Contribution Agreement"), FHGLP acquired the assets and liabilities of
Falcon Video Communications, L.P. ("Falcon Video" or the "Falcon Video
Systems"), in exchange for ownership interests in FHGLP. Simultaneously with the
closing of that transaction, in accordance with the Contribution Agreement,
FHGLP contributed substantially all of the existing cable television system
operations owned by FHGLP and its subsidiaries (including the Falcon Video
Systems) to the Partnership and TCI Falcon Holdings, LLC ("TCI") contributed
certain cable television systems owned and operated by affiliates of TCI (the
"TCI Systems") to the Partnership (the "TCI Transaction"). As a result, TCI
holds approximately 46% of the equity interests of the Partnership and FHGLP
holds the remaining 54% and serves as the managing general partner of the
Partnership. The TCI Transaction is being accounted for as a recapitalization of
FHGLP into the Partnership and the concurrent acquisition by the Partnership of
the TCI Systems.
The consolidated financial statements include the accounts of the
Partnership and its subsidiary holding companies and cable television operating
partnerships and corporations, which include Falcon Cable Communications LLC
("Falcon LLC"), a Delaware limited liability company that serves as the general
manager of the cable television subsidiaries. The assets contributed by FHGLP to
the Partnership excluded certain immaterial investments, principally FHGLP's
ownership of 100% of the outstanding stock of Enstar Communications Corporation
("ECC"), which is the general partner and manager of fifteen limited
partnerships operating under the name "Enstar". ECC's ownership interest in the
Enstar partnerships ranges from 0.5% to 5%. Upon the consummation of the TCI
Transaction, the management of the Enstar partnerships was assigned to the
Partnership by FHGLP. The consolidated statements of operations and statements
of cash flows for the year ended December 31, 1998 include FHGLP's interest in
ECC for the nine months ended September 30, 1998. The effects of ECC's
operations on all previous periods presented are immaterial.
Prior to closing the TCI Transaction, FHGLP owned and operated cable
television systems in 23 states. FHGLP also controlled, held varying equity
interests in and managed certain other cable television partnerships (the
"Affiliated Partnerships") for a fee. FHGLP is a limited partnership, the sole
general partner of which is Falcon Holding Group, Inc., a California corporation
("FHGI"). FHGI also holds a 1% interest in certain of the subsidiaries of the
Partnership. At the beginning of 1998, the Affiliated Partnerships were
comprised of Falcon Classic Cable Income Properties, L.P. ("Falcon Classic")
whose cable television systems are referred to as the "Falcon Classic Systems,"
Falcon Video and the Enstar partnerships. As discussed in Note 3, the Falcon
Classic Systems were acquired by FHGLP during 1998. The Falcon Video Systems
were acquired on September 30, 1998 in connection with the TCI Transaction. As a
result of these transactions, the Affiliated Partnerships consist solely of the
Enstar partnerships from October 1, 1998 forward.
All significant intercompany accounts and transactions have been eliminated
in consolidation. The consolidated financial statements do not give effect to
any assets that the partners may have
F-7
12
\ FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outside their interests in the Partnership, nor to any obligations, including
income taxes, of the partners.
On July 12, 1996, the Partnership acquired the assets of Falcon Cable
Systems Company ("FCSC"), an Affiliated Partnership. The results of operations
of these cable systems have been included in the consolidated financial
statements from July 12, 1996. Management fees and reimbursed expenses received
by the Partnership from FCSC for the period of January 1, 1996 through July 11,
1996 are also included in the consolidated financial statements and have not
been eliminated in consolidation. See Note 3.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. Cash equivalents at December 31,
1996, 1997 and 1998 included $4.1 million, $4.5 million and $345,000 of
investments in commercial paper and short-term investment funds of major
financial institutions.
INVESTMENTS IN AFFILIATED PARTNERSHIPS
Prior to closing the TCI Transaction, the Partnership was the general
partner of certain entities, which in turn acted as general partner of the
Affiliated Partnerships. The Partnership's effective ownership interests in the
Affiliated Partnerships were less than one percent. The Affiliated Partnerships
were accounted for using the equity method of accounting. Equity in net losses
were recorded to the extent of the investments in and advances to the
partnerships plus obligations for which the Partnership, as general partner, was
responsible. The liabilities of the Affiliated Partnerships, other than amounts
due the Partnership, principally consisted of debt for borrowed money and
related accrued interest. The Partnership's ownership interests in the
Affiliated Partnerships were eliminated in 1998 with the acquisition of Falcon
Video and Falcon Classic and the retention by FHGLP of its interests in the
Enstar partnerships.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs associated
with installations in homes not previously served by cable are capitalized as
part of the distribution system, and reconnects are expensed as incurred. For
financial reporting, depreciation and amortization is computed using the
straight-line method over the following estimated useful lives.
CABLE TELEVISION SYSTEMS:
Headend buildings and equipment....................... 10-16 years
Trunk and distribution.............................. 5-15 years
Microwave equipment................................. 10-15 years
OTHER:
Furniture and equipment............................. 3-7 years
Vehicles............................................ 3-10 years
Leasehold improvements.............................. Life of lease
F-8
13
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FRANCHISE COST AND GOODWILL
The excess of cost over the fair values of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises and
goodwill. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises and in the renewal of existing franchises. These costs
are amortized using the straight-line method over the lives of the franchises,
ranging up to 28 years (composite 15 year average). Goodwill is amortized over
20 years. Costs relating to unsuccessful franchise applications are charged to
expense when it is determined that the efforts to obtain the franchise will not
be successful.
CUSTOMER LISTS AND OTHER INTANGIBLE COSTS
Customer lists and other intangible costs include customer lists, covenants
not to compete and organization costs which are amortized using the
straight-line method over two to five years.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on Costs of Start-Up Activities". The new
standard, which becomes effective for the Partnership on January 1, 1999,
requires costs of start-up activities, including certain organization costs, to
be expensed as incurred. Previously capitalized start-up costs are to be written
off as a cumulative effect of a change in accounting principle. The Partnership
believes that adoption of this standard will not have a material impact on the
Partnership's financial position or results of operations.
DEFERRED LOAN COSTS
Costs related to borrowings are capitalized and amortized to interest
expense over the life of the related loan.
RECOVERABILITY OF ASSETS
The Partnership assesses on an ongoing basis the recoverability of
intangible assets (including goodwill) and capitalized plant assets based on
estimates of future undiscounted cash flows compared to net book value. If the
future undiscounted cash flow estimates were less than net book value, net book
value would then be reduced to estimated fair value, which generally
approximates discounted cash flows. The Partnership also evaluates the
amortization periods of assets, including goodwill and other intangible assets,
to determine whether events or circumstances warrant revised estimates of useful
lives.
REVENUE RECOGNITION
Revenues from customer fees, equipment rental and advertising are
recognized in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the extent of
direct selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable television system. Management fees are recognized on the accrual basis
based on a percentage of gross revenues of the respective cable television
systems managed. Effective October 1, 1998, 20% of the management fees from the
Enstar partnerships is retained by FHGLP.
F-9
14
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Partnership's management of financial market risk and as
required by certain covenants in its New Credit Agreement, the Partnership
enters into various transactions that involve contracts and financial
instruments with off-balance-sheet risk, principally interest rate swap and
interest rate cap agreements. The Partnership enters into these agreements in
order to manage the interest-rate sensitivity associated with its variable-rate
indebtedness. The differential to be paid or received in connection with
interest rate swap and interest rate cap agreements is recognized as interest
rates change and is charged or credited to interest expense over the life of the
agreements. Gains or losses for early termination of those contracts are
recognized as an adjustment to interest expense over the remaining portion of
the original life of the terminated contract.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
in years beginning after June 15, 1999. The Partnership expects to adopt the new
statement effective January 1, 2000. SFAS 133 will require the Partnership to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives are either offset against the changes in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Partnership believes that adoption of SFAS 133 will
not have a material impact on the Partnership's financial position or results of
operations.
INCOME TAXES
The Partnership and its subsidiaries, except for Falcon First, are limited
partnerships or limited liability companies and pay no income taxes as entities
except for nominal taxes assessed by certain state jurisdictions. All of the
income, gains, losses, deductions and credits of the Partnership are passed
through to its partners. The basis in the Partnership's assets and liabilities
differs for financial and tax reporting purposes. At December 31, 1998, the book
basis of the Partnership's net assets exceeded its tax basis by $621.8 million.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established standards for the reporting and display of
comprehensive income and its components in a full set of comparative
general-purpose financial statements. SFAS 130 became effective for the
Partnership on January 1, 1998. The Partnership does not currently have items of
comprehensive income.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts
F-10
15
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
NOTE 2 -- PARTNERSHIP MATTERS
The Amended and Restated Agreement of Limited Partnership of FCLP ("FCLP
Partnership Agreement") provides that profits and losses will be allocated, and
distributions will be made, in proportion to the partners' percentage interests.
FHGLP is the managing general partner and a limited partner and owns a 54%
interest in FCLP, and TCI is a general partner and owns a 46% interest. The
partners' percentage interests are based on the relative net fair market values
of the assets contributed to FCLP under the Contribution Agreement, as estimated
at the closing. The percentage interests were subsequently adjusted to reflect
the December 1998 redemption of a small part of FHGLP's partnership interest. To
the extent the relative net fair market values of the assets contributed to FCLP
under the Contribution Agreement, as finally determined, are different from the
estimates used to calculate the partners' percentage interests, one or the other
of the partners will be required to make an additional cash capital contribution
to FCLP so as to cause the partners' capital contributions to be in proportion
to their percentage interests. Any such additional cash contribution is required
to be made only to the extent of distributions by FCLP to the contributing
partner. Any such additional cash contribution must be accompanied by interest
at 9% per year from the date of closing or, in certain cases, from the date on
which FCLP incurred any liability that affected the net fair market value of the
parties' capital contributions.
At any time after September 30, 2005, either TCI or FHGLP can offer to sell
to the other partner the offering partner's entire partnership interest in FCLP
for a negotiated price. The partner receiving such an offer may accept or reject
the offer. If the partner receiving such an offer rejects it, the offering
partner may elect to cause FCLP to be liquidated and dissolved in accordance
with the FCLP Partnership Agreement.
The Partnership expires on July 1, 2013. The Partnership will be dissolved
prior to its expiration date under certain circumstances, including the
withdrawal of FHGLP as the managing general partner (unless the partners vote to
continue the Partnership), the sale of substantially all of the Partnership's
assets, and at the election by TCI in the event of changes in FCLP's key
management.
The FCLP Partnership Agreement provides for an Advisory Committee
consisting of six individual representatives, three of whom are appointed by
FHGLP, two of whom are appointed by TCI and one of whom is appointed by joint
designation of FHGLP and TCI. The FCLP Partnership Agreement prohibits FCLP from
taking certain actions without the affirmative vote of a majority of the members
of the Advisory Committee, including, but not limited to, the following: (1) the
acquisition or disposition of assets under certain circumstances; and (2)
conducting or entering into any line of business other than the ownership and
operation of cable television systems and related and ancillary businesses.
The FCLP Partnership Agreement further prohibits the Partnership from
taking certain actions without the affirmative approval of TCI, including, but
not limited to, the following: (1) any merger, consolidation, recapitalization
or other reorganization, with certain permitted exceptions;
F-11
16
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) the acquisition or disposition of assets under certain circumstances; (3)
any sale or disposition of assets that would result in the allocation of taxable
income or gain to TCI; (4) incurring indebtedness if, after giving effect to
such indebtedness, FCLP's Operating Cash Flow Ratio, as defined, would exceed
8.0:1 through April 15, 2000 and 7.5:1 thereafter; (5) the issuance or
redemption of any partnership interest or convertible interest, with certain
permitted exceptions; (6) any transaction with FHGLP or any affiliate of FHGLP,
with certain permitted exceptions; (7) the adoption or amendment of any
management incentive plan; (8) the incurring of Net Overhead Expenses, as
defined, that exceed 4.5% of the gross revenues of FCLP and its subsidiaries in
any fiscal year; or (9) the liquidation or dissolution of FCLP, except in
accordance with the provisions of the FCLP Partnership Agreement.
TCI may elect to purchase all of FHGLP's interests in the Partnership in
certain circumstances if a court finds that FHGLP has engaged in conduct while
acting as Managing General Partner that has resulted in material harm to the
Partnership or TCI.
Prior to the closing of the TCI Transaction, the FHGLP Partnership
Agreement gave certain partners of FHGLP certain rights and priorities with
respect to other partners. Among these rights were stated obligations of the
Partnership to redeem certain partners' partnership interests at fair value or,
in some cases, at stated value. These rights and priorities were eliminated upon
the closing of the TCI Transaction. At the closing of the TCI Transaction, a
portion of the partnership interests held by certain FHGLP limited partners,
having an agreed value of $154.7 million, were redeemed for cash.
Under the amended FHGLP partnership agreement, the non-management limited
partners of FHGLP may elect at certain times either to require the incorporation
of FHGLP or to require that FHGLP elect to incorporate FCLP. Neither of these
elections may be made prior to March 30, 2006. If the non-management limited
partners of FHGLP make either of these elections, then, at any time more than
six months after the election and prior to the date on which the incorporation
is completed, the non-management limited partners of FHGLP may elect to require
that FCLP (or, if FHGLP has purchased all of TCI's interest in FCLP, FHGLP)
purchase all of the non-management partners' partnership interests in FHGLP.
Under certain circumstances, a non-management limited partner of FHGLP may elect
to exclude its partnership interest in FHGLP from the purchase and sale and,
upon such election, all put and call rights with respect to such partner's
partnership interest in FHGLP will terminate.
The put and call rights with respect to the partnership interests of the
non-management partners will terminate automatically if either FHGLP or FCLP is
incorporated, if the corporation that succeeds to the assets of FHGLP or FCLP
concurrently effects an initial public offering, and if the aggregate price to
the public (before underwriting discounts or commissions, registration fees, and
other expenses) of all stock sold in the public offering (including stock sold
by any selling shareholders, but excluding stock of a different class from that
acquired by the non-management partners in the incorporation) is at least $150
million.
At any time on or after April 1, 2006, FCLP (or, if FHGLP has purchased all
of TCI's interest in FCLP, FHGLP) may require that each of the non-management
limited partners of FHGLP sell its entire interest in FHGLP to FCLP or FHGLP, as
applicable. In the case of either a put or a call of the non-management limited
partners' interests in FHGLP, the purchase price will equal the amount that
would be distributed to each partner in dissolution and liquidation of FHGLP,
assuming the sale of FCLP's assets at fair market value, as determined by three
appraisers.
F-12
17
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated redemption values at December 31, 1997 and December 31, 1998
were $171.4 million and $133 million, respectively, and are reflected in the
consolidated financial statements as redeemable partners' equity. Such amounts
were determined based on management's estimate of the redemption value of such
interests under current market conditions. Management of the Partnership will
continue to adjust the recorded redemption values based on its estimate of the
relative fair value of the interests subject to redemption. The actual
redemption value of any partnership interests will generally be determined
through the third-party appraisal mechanisms described in the partnership
agreements, and the appraisers will not be bound by management's estimates.
Accordingly, such appraised valuations may be greater than or less than
management's estimates and any such variations could be significant.
While the Partnership has assumed the obligations of FHGLP under the 1993
Incentive Performance Plan (the "Incentive Performance Plan"), FHGLP has agreed
to contribute cash to the Partnership in an amount equal to any payments made by
the Partnership under the Incentive Performance Plan.
NOTE 3 -- ACQUISITIONS AND SALES
The Partnership acquired the cable television systems of FCSC on July 12,
1996 through a newly-formed subsidiary operating partnership for a purchase
price of $253 million including transaction costs. The acquisition of FCSC was
accounted for by the purchase method of accounting, whereby the purchase price
of the FCSC assets was allocated based on an appraisal. The excess of purchase
price over the fair value of net assets acquired, or $18.2 million, has been
recorded as goodwill and is being amortized using the straight-line method over
20 years.
In March and July 1998, FHGLP acquired the Falcon Classic Systems for an
aggregate purchase price of $83.4 million. Falcon Classic had revenue of
approximately $20.3 million for the year ended December 31, 1997.
As discussed in Note 1, on September 30, 1998 the Partnership acquired the
TCI Systems and the Falcon Video Systems in accordance with the Contribution
Agreement.
The acquisitions of the TCI Systems, the Falcon Video Systems and the
Falcon Classic Systems were accounted for by the purchase method of accounting,
whereby the purchase prices were allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the dates of
acquisition, as follows:
FALCON VIDEO FALCON CLASSIC
TCI SYSTEMS SYSTEMS SYSTEMS
----------- -------------------- --------------
(DOLLARS IN THOUSANDS)
Purchase Price:
General partnership interests
issued................................ $234,457 $ 43,073 $ --
Debt assumed.......................... 275,000 112,196 --
Debt incurred......................... -- -- 83,391
Other liabilities assumed............. 955 3,315 2,804
Transaction costs..................... 2,879 -- --
-------- -------- -------
513,291 158,584 86,195
-------- -------- -------
F-13
18
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FALCON VIDEO FALCON CLASSIC
TCI SYSTEMS SYSTEMS SYSTEMS
----------- -------------------- --------------
(DOLLARS IN THOUSANDS)
Fair Market Value of Net Assets
Acquired:
Property, plant and equipment....... 77,992 41,889 33,539
Franchise costs..................... 170,799 36,374 7,847
Customer lists and other intangible
assets............................ 217,443 53,602 34,992
Other assets........................ 4,165 2,381 3,164
-------- -------- -------
470,399 134,246 79,542
-------- -------- -------
Excess of purchase price over fair
value of assets acquired and
liabilities assumed............ $ 42,892 $ 24,338 $ 6,653
======== ======== =======
The excess of purchase price over the fair value of net assets acquired has
been recorded as goodwill and is being amortized using the straight-line method
over 20 years. The allocation of the purchase price may be subject to possible
adjustment pursuant to the Contribution Agreement.
The general partnership interests issued in the TCI Transaction were valued
in proportion to the estimated fair value of the TCI Systems and the Falcon
Video Systems as compared to the estimated fair value of the Partnership's
assets, which was agreed upon in the Contribution Agreement by all holders of
Partnership interests.
Sources and uses of funds for each of the transactions were as follows:
FALCON VIDEO FALCON CLASSIC
TCI SYSTEMS SYSTEMS SYSTEMS
----------- ------------ --------------
(DOLLARS IN THOUSANDS)
Sources of Funds:
Cash on hand............................... $ 11,429 $ 59,038 $ 6,591
Advance under bank credit facilities....... 429,739 56,467 76,800
-------- -------- -------
Total sources of funds........... $441,168 $115,505 $83,391
======== ======== =======
Uses of Funds:
Repay debt assumed from TCI and existing
debt of Falcon Video, including accrued
interest................................. $429,739 $115,505 $ --
Purchase price of assets................... -- -- 83,391
Payment of assumed obligations at
closing.................................. 6,495 -- --
Transaction fees and expenses.............. 2,879 -- --
Available funds............................ 2,055 -- --
-------- -------- -------
Total uses of funds.............. $441,168 $115,505 $83,391
======== ======== =======
The following unaudited condensed consolidated statements of operations
present the consolidated results of operations of the Partnership as if the
acquisitions referred to above had occurred at the beginning of the periods
presented and are not necessarily indicative of what
F-14
19
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would have occurred had the acquisitions been made as of such dates or of
results which may occur in the future.
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Revenues..................................... $ 399,449 $ 424,994 $ 426,827
Expenses..................................... (429,891) (438,623) (444,886)
--------- --------- ---------
Operating loss............................. (30,442) (13,629) (18,059)
Interest and other expenses.................. (126,904) (115,507) (130,632)
--------- --------- ---------
Loss before extraordinary item............... $(157,346) $(129,136) $(148,691)
========= ========= =========
NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the short maturity of
those instruments.
NOTES PAYABLE
The fair value of the Partnership's 11% Senior Subordinated Notes, 8.375%
Senior Debentures and 9.285% Senior Discount Debentures is based on quoted
market prices for those issues of debt. The fair value of the Partnership's
other subordinated notes is based on quoted market prices for similar issues of
debt with similar maturities. The carrying amount of the Partnership's remaining
debt outstanding approximates fair value due to its variable rate nature.
INTEREST RATE HEDGING AGREEMENTS
The fair value of interest rate hedging agreements is estimated by
obtaining quotes from brokers as to the amount either party would be required to
pay or receive in order to terminate the agreements.
The following table depicts the fair value of each class of financial
instruments for which it is practicable to estimate that value as of December
31:
1997 1998
---------------------- ------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents................. $ 13,917 $ 13,917 $ 14,284 $ 14,284
Notes payable (Note 6):
11% Senior Subordinated Notes........... 282,193 299,125 -- --
8.375% Senior Debentures................ -- -- 375,000 382,500
9.285% Senior Discount Debentures....... -- -- 294,982 289,275
Bank credit facilities.................. 606,000 606,000 926,000 926,000
Other Subordinated Notes................ 15,000 16,202 15,000 16,426
Capitalized lease obligations........... 10 10 1 1
Other................................... 8,018 8,018 370 370
F-15
20
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- ---------- ----------
Interest Rate Hedging Agreements (Note 6):
Interest rate swaps....................... $585,000 $ (371) $1,534,713 $(22,013)
Interest rate caps........................ 25,000 (148) -- --
The carrying value of interest rate swaps and caps was an asset of $402,000
at December 31, 1997 and a net obligation of $20.3 million at December 31, 1998.
See Note 6(g). The amount of debt on which current interest expense has been
affected is $520 million and $960 million for swaps at December 31, 1997 and
1998 and $25 million for caps at December 31, 1997. The balance of the contract
totals presented above reflects contracts entered into as of December 31 which
do not become effective until existing contracts expire.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
DECEMBER 31,
----------------------
1997 1998
--------- ---------
(DOLLARS IN THOUSANDS)
Cable television systems........................... $ 555,253 $ 765,641
Furniture and equipment............................ 19,067 25,576
Vehicles........................................... 12,067 18,381
Land, buildings and improvements................... 10,723 16,505
--------- ---------
597,110 826,103
Less accumulated depreciation and amortization..... (272,551) (320,209)
--------- ---------
$ 324,559 $ 505,894
========= =========
NOTE 6 -- NOTES PAYABLE
Notes payable consist of:
DECEMBER 31,
----------------------
1997 1998
-------- ----------
(DOLLARS IN THOUSANDS)
FCLP (formerly FHGLP) Only:
11% Senior Subordinated Notes(a)................... $282,193 $ --
8.375% Senior Debentures(b)...................... -- 375,000
9.285% Senior Discount Debentures, less
unamortized discount(b)....................... -- 294,982
Capitalized lease obligations.................... 10 1
Owned Subsidiaries:
Amended and Restated Credit Agreement(c)......... 606,000 --
New Credit Facility(d)........................... -- 926,000
Other subordinated notes(e)...................... 15,000 15,000
Other(f)......................................... 8,018 370
-------- ----------
$911,221 $1,611,353
======== ==========
F-16
21
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) 11% Senior Subordinated Notes
On March 29, 1993, FHGLP issued $175 million aggregate principal amount of
11% Senior Subordinated Notes due 2003 (the "Notes"). Interest payment dates
were semi-annual on each March 15 and September 15 commencing September 15,
1993. Through September 15, 2000 FHGLP, at its option, could pay all or any
portion of accrued interest on the Notes by delivering to the holders thereof,
in lieu of cash, additional Notes having an aggregate principal amount equal to
the amount of accrued interest not paid in cash. Through December 31, 1997, the
Partnership elected to issue $107.2 million additional notes as payment-in-kind
for interest. The Partnership elected to pay the interest payment due March 15,
1998 in cash and, under the terms of the Notes, was required to continue to make
cash payments.
On May 19, 1998, FHGLP repurchased approximately $247.8 million aggregate
principal amount of the Notes for an aggregate purchase price of $270.3 million
pursuant to a fixed spread tender offer for all outstanding Notes. The Notes
tendered represented approximately 88% of the Notes previously outstanding. The
approximate $34.4 million of Notes not repurchased in the tender offer were
redeemed on September 15, 1998 in accordance with their terms.
(b) 8.375% Senior Debentures and 9.285% Senior Discount Debentures
On April 3, 1998, FHGLP and its wholly-owned subsidiary, Falcon Funding
Corporation ("FFC" and, collectively with FHGLP, the "Issuers"), sold
$375,000,000 aggregate principal amount of 8.375% Senior Debentures due 2010
(the "Senior Debentures") and $435,250,000 aggregate principal amount at
maturity of 9.285% Senior Discount Debentures due 2010 (the "Senior Discount
Debentures" and, collectively with the Senior Debentures, the "Debentures") in a
private placement. The Debentures were exchanged for debentures with the same
form and terms, but registered under the Securities Act of 1933, as amended, in
August 1998.
In connection with consummation of the TCI Transaction, the Partnership was
substituted for FHGLP as an obligor under the Debentures and thereupon FHGLP was
released and discharged from any further obligation with respect to the
Debentures and the related Indenture. FFC remains as an obligor under the
Debentures and is now a wholly owned subsidiary of the Partnership. FFC was
incorporated solely for the purpose of serving as a co-issuer of the Debentures
and does not have any material operations or assets and will not have any
revenues.
The Senior Discount Debentures were issued at a price of 63.329% per $1,000
aggregate principal amount at maturity, for total gross proceeds of
approximately $275.6 million, and will accrete to stated value at an annual rate
of 9.285% until April 15, 2003. The unamortized discount amounted to $140.3
million at December 31, 1998. After giving effect to offering discounts,
commissions and estimated expenses of the offering, the sale of the Debentures
(representing aggregate indebtedness of approximately $650.6 million as of the
date of issuance) generated net proceeds of approximately $631 million. The
Partnership used substantially all the net proceeds from the sale of the
Debentures to repay outstanding bank indebtedness.
(c) Amended and Restated Credit Agreement
The Partnership had a $775 million senior secured Amended and Restated
Credit Agreement that was scheduled to mature on July 11, 2005. The Amended and
Restated Credit Agreement required the Partnership to make annual reductions of
$1 million on the term loan portion
F-17
22
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commencing December 31, 1997. Maximum available borrowings under the Amended and
Restated Credit Agreement were $774 million at December 31, 1997. The Amended
and Restated Credit Agreement required interest on the amount outstanding under
the reducing revolver portion to be tied to the ratio of consolidated total debt
(as defined) to consolidated annualized cash flow (as defined). Interest rates
were based on LIBOR or prime rates at the option of the Partnership. The LIBOR
margin under the reducing revolver ranged from 0.75% to 1.625%, while interest
on the term loan was at the LIBOR rate plus 2.375%.
At December 31, 1997, the weighted average interest rate on borrowings
outstanding under the Amended and Restated Credit Agreement (including the
effects of the interest rate hedging agreements) was 7.69%. The Partnership was
also required to pay a commitment fee per annum on the unused portion.
(d) New Credit Facility
On June 30, 1998, the Partnership entered into a new $1.5 billion senior
credit facility (the "New Credit Facility") which replaced the Amended and
Restated Credit Agreement and provided funds for the closing of the TCI
Transaction. See Note 1. The borrowers under the New Credit Facility were the
operating subsidiaries prior to consummation of the TCI Transaction and,
following the TCI Transaction, the borrower is Falcon LLC. The restricted
companies, as defined under the New Credit Facility, are Falcon LLC and each of
its subsidiaries (excluding certain subsidiaries designated as excluded
companies from time to time) and each restricted company (other than Falcon LLC)
is also a guarantor of the New Credit Facility.
The New Credit Facility consists of three committed facilities (one
revolver and two term loans) and one uncommitted $350 million supplemental
credit facility (the terms of which will be negotiated at the time the
Partnership makes a request to draw on such facility). Facility A is a $650
million revolving credit facility maturing December 29, 2006; Facility B is a
$200 million term loan maturing June 29, 2007; and Facility C is a $300 million
term loan maturing December 31, 2007. All of Facility C and approximately $126
million of Facility B were funded on June 30, 1998, and the debt outstanding
under the Amended and Restated Credit Agreement of approximately $329 million
was repaid. As a result, from June 30, 1998 until September 29, 1998, FHGLP had
an excess cash balance of approximately $90 million. Immediately prior to
closing the TCI Transaction, approximately $39 million was borrowed under
Facility A to discharge certain indebtedness of Falcon Video. In connection with
consummation of the TCI Transaction, Falcon LLC assumed the approximately $433
million of indebtedness outstanding under the New Credit Facility. In addition
to utilizing cash on hand of approximately $63 million, Falcon LLC borrowed the
approximately $74 million remaining under Facility B and approximately $366
million under Facility A to discharge approximately $73 million of Falcon Video
indebtedness and to retire approximately $430 million of TCI indebtedness
assumed as part of the contribution of the TCI Systems. As a result of these
borrowings, the amount outstanding under the New Credit Facility at December 31,
1998 was $926 million. Subject to covenant limitations, the Partnership had
available to it additional borrowing capacity thereunder of $224 million at
December 31, 1998. However, limitations imposed by the Partnership's partnership
agreement as amended would limit available borrowings at December 31, 1998 to
$23.1 million.
(e) Other subordinated notes
Other subordinated notes consist of 11.56% Subordinated Notes due March
2001. The subordinated note agreement contains certain covenants which are
substantially the same as the
F-18
23
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
covenants under the New Credit Facility, which is described in (d) above. At
December 31, 1998, management believes that the Partnership was in compliance
with such covenants.
(f) Other
Other notes payable as of December 31, 1997 consisted of $7.5 million owed
by Enstar Finance Company, LLC ("EFC"). FHGLP's interest in EFC was not
contributed to FCLP on September 30, 1998. Consequently, EFC's obligations are
excluded from those of the Partnership as of December 31, 1998.
(g) Interest Rate Hedging Agreements
The Partnership utilizes interest rate hedging agreements to establish
long-term fixed interest rates on a portion of its variable-rate debt. The New
Credit Facility requires that interest be tied to the ratio of consolidated
total debt to consolidated annualized cash flow (in each case, as defined
therein), and further requires that the Partnership maintain hedging
arrangements with respect to at least 50% of the outstanding borrowings
thereunder plus any additional borrowings of the Partnership, including the
Debentures, for a two year period. As of December 31, 1998, borrowings under the
New Credit Facility bore interest at an average rate of 7.55% (including the
effect of interest rate hedging agreements). The Partnership has entered into
fixed interest rate hedging agreements with an aggregate notional amount at
December 31, 1998 of $1.485 billion, including contracts of $160 million assumed
from Falcon Video in connection with the TCI Transaction. Agreements in effect
at December 31, 1998 totaled $910 million, with the remaining $575 million to
become effective as certain of the existing contracts mature during 1999 through
October of 2004. These agreements expire at various times through October, 2006.
In addition to these agreements, the Partnership has one interest rate swap
contract with a notional amount of $25 million under which it pays variable
LIBOR rates and receives fixed rate payments.
The hedging agreements resulted in additional interest expense of $1
million, $350,000 and $1.2 million for the years ended December 31, 1996, 1997
and 1998, respectively. The Partnership does not believe that it has any
significant risk of exposure to non-performance by any of its counterparties.
(h) Debt Maturities
The Partnership's notes payable outstanding at December 31, 1998 mature as
follows:
OTHER
8.375% SENIOR 9.285% SENIOR NOTES TO SUBORDINATED
YEAR DEBENTURES DEBENTURES BANKS NOTES OTHER TOTAL
---- ------------- ------------- -------- ------------ ----- ----------
(DOLLARS IN THOUSANDS)
1999................. $ -- $ -- $ 5,000 $ -- $371 $ 5,371
2000............... -- -- 5,000 -- -- 5,000
2001............... -- -- 5,000 15,000 -- 20,000
2002............... -- -- 5,000 -- -- 5,000
2003............... -- -- 5,000 -- -- 5,000
Thereafter........... 375,000 435,250 901,000 -- -- 1,711,250
F-19
24
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Extraordinary Item
Fees and expenses incurred in connection with the repurchase of the Notes
on May 19, 1998 and the retirement of the remaining Notes on September 15, 1998
were $19.7 million in the aggregate. In addition, the unamortized portion of
deferred loan costs related to the Notes and the Amended and Restated Credit
Agreement, which amounted to $10.9 million in the aggregate, were written off as
an extraordinary charge upon the extinguishment of the related debt.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Partnership leases land, office space and equipment under operating
leases expiring at various dates through the year 2039. See Note 9.
Future minimum rentals for operating leases at December 31, 1998 are as
follows:
YEAR TOTAL
---- -----------
(DOLLARS IN
THOUSANDS)
1999.................................................... $ 2,758
2000.................................................. 2,545
2001.................................................. 2,264
2002.................................................. 1,919
2003.................................................. 1,119
Thereafter.............................................. 4,449
-------
$15,054
=======
In most cases, management expects that, in the normal course of business,
these leases will be renewed or replaced by other leases. Rent expense amounted
to $2.1 million in 1996, $2.4 million in 1997 and $3.1 million in 1998.
In addition, the Partnership rents line space on utility poles in some of
the franchise areas it serves. These rentals amounted to $2.8 million for 1996,
$3.1 million for 1997 and $3.9 million for 1998. Generally, such pole rental
agreements are short-term; however, the Partnership anticipates such rentals
will continue in the future.
Beginning in August 1997, the Partnership elected to self-insure its cable
distribution plant and subscriber connections against property damage as well as
possible business interruptions caused by such damage. The decision to
self-insure was made due to significant increases in the cost of insurance
coverage and decreases in the amount of insurance coverage available. In October
1998, the Partnership reinstated third party insurance coverage against damage
to its cable distribution plant and subscriber connections and against business
interruptions resulting from such damage. This coverage is subject to a
significant annual deductible and is intended to limit the Partnership's
exposure to catastrophic losses, if any, in future periods. Management believes
that the relatively small size of the Partnership's markets in any one
geographic area, coupled with their geographic separation, will mitigate the
risk that the Partnership could sustain losses due to seasonal weather
conditions or other events that, in the aggregate, could have a material adverse
effect on the Partnership's liquidity and cash flows. The Partnership continues
to purchase insurance coverage in amounts management views as appropriate for
all other property, liability, automobile, workers' compensation and other types
of insurable risks.
F-20
25
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership is required under various franchise agreements at December
31, 1998 to rebuild certain existing cable systems at a cost of approximately
$83 million.
The Partnership is regulated by various federal, state and local government
entities. The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), provides for among other things, federal and local
regulation of rates charged for basic cable service, cable programming service
tiers ("CPSTs") and equipment and installation services. Regulations issued in
1993 and significantly amended in 1994 by the Federal Communications Commission
(the "FCC") have resulted in changes in the rates charged for the Partnership's
cable services. The Partnership believes that compliance with the 1992 Cable Act
has had a negative impact on its operations and cash flow. It also presently
believes that any potential future liabilities for refund claims or other
related actions would not be material. The Telecommunications Act of 1996 (the
"1996 Telecom Act") was signed into law on February 8, 1996. As it pertains to
cable television, the 1996 Telecom Act, among other things, (i) ends the
regulation of certain CPSTs in 1999; (ii) expands the definition of effective
competition, the existence of which displaces rate regulation; (iii) eliminates
the restriction against the ownership and operation of cable systems by
telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions.
The Partnership has various contracts to obtain basic and premium
programming from program suppliers whose compensation is generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures or
offer marketing support to the Partnership. The Partnership's programming
contracts are generally for a fixed period of time and are subject to negotiated
renewal. The Partnership does not have long-term programming contracts for the
supply of a substantial amount of its programming. Accordingly, no assurances
can be given that the Partnership's programming costs will not continue to
increase substantially or that other materially adverse terms will not be added
to the Partnership's programming contracts. Management believes, however, that
the Partnership's relations with its programming suppliers generally are good.
Effective December 1, 1998, the Partnership elected to obtain certain of
its programming services through an affiliate of TCI. This election resulted in
a reduction in the Partnership's programming costs, the majority of which will
be passed on to its customers in the form of reduced rates in compliance with
FCC rules. The Partnership has elected to continue to acquire its remaining
programming services under its existing programming contracts, but may elect to
acquire additional programming services through the TCI affiliate in the future.
The Partnership, in the normal course of business, purchases cable programming
services from certain program suppliers owned in whole or in part by an
affiliate of TCI.
The Partnership is periodically a party to various legal proceedings. Such
legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership's business, and management presently believes that
the outcome of all pending legal proceedings will not, individually or in the
aggregate, have a material adverse effect on the financial condition or results
of operations of the Partnership.
The Partnership, certain of its affiliates, and certain third parties have
been named as defendants in an action entitled Frank O'Shea I.R.A. et al. v.
Falcon Cable Systems Company, et al., Case No. BC 147386, pending in the
Superior Court of the State of California, County of Los Angeles (the "Action").
Plaintiffs in the Action are certain former unitholders of FCSC purporting to
represent a class consisting of former unitholders of FCSC other than those
affiliated with
F-21
26
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FCSC and/or its controlling persons. The complaint in the Action alleges, among
other things, that defendants breached their fiduciary and contractual duties to
unitholders, and acted negligently, with respect to the purchase from former
unitholders of their interests in FCSC in 1996. A settlement of the action has
been agreed to and will be presented to the court for approval on April 22,
1999. The terms of the settlement, if approved, are not expected to have a
material adverse effect on the financial condition of the Partnership. Net of
insurance proceeds, the settlement's cost to the Partnership would amount to
approximately $2.7 million, all of which had been reserved as of December 31,
1998. The Partnership recognized expenses related to the settlement of $52,000,
$145,000 and $2.5 million in 1996, 1997 and 1998, respectively.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
The subsidiaries of the Partnership have a cash or deferred profit sharing
plan (the "Profit Sharing Plan") covering substantially all of their employees.
FHGLP joined in the adoption of the FHGI cash or deferred profit sharing plan as
of March 31, 1993. The provisions of this plan were amended to be substantially
identical to the provisions of the Profit Sharing Plan.
The Profit Sharing Plan provides that each participant may elect to make a
contribution in an amount up to 20% of the participant's annual compensation
which otherwise would have been payable to the participant as salary. The
Partnership's contribution to the Profit Sharing Plan, as determined by
management, is discretionary but may not exceed 15% of the annual aggregate
compensation (as defined) paid to all participating employees. There were no
contributions for the Profit Sharing Plan in 1996, 1997 or 1998.
On September 30 1998, the Partnership assumed the obligations of FHGLP for
its 1993 Incentive Performance Plan (the "Incentive Plan"). The value of the
interests in the Incentive Plan is tied to the equity value of certain
partnership units in FHGLP held by FHGI. In connection with the assumption by
the Partnership, FHGLP agreed to fund any benefits payable under the Incentive
Plan through additional capital contributions to the Partnership, the waiver of
its rights to receive all or part of certain distributions from the Partnership
and/or a contribution of a portion of its partnership units to the Partnership.
The benefits which are payable under the Incentive Plan are equal to the amount
of distributions which FHGI would have otherwise received with respect to
1,932.67 of the units of FHGLP held by FHGI and a portion of FHGI's interest in
certain of the partnerships that are the general partners of the Partnership's
operating subsidiaries. Benefits are payable under the Incentive Plan only when
distributions would otherwise be paid to FHGI with respect to the
above-described units and interests. The Incentive Plan is scheduled to
terminate on January 5, 2003, at which time the Partnership is required to
distribute the units described above to the participants in the Incentive Plan.
At such time, FHGLP is required to cause the units to be contributed to the
Partnership to fund such distributions. The participants in the Incentive Plan
are present and former employees of the Partnership, FHGLP and its operating
affiliates, all of whom are 100% vested. Prior to the closing of the TCI
Transaction, FHGLP amended the Incentive Plan to provide for payments by FHGLP
at the closing of the TCI Transaction to participants in an aggregate amount of
approximately $6.5 million and to reduce by such amount FHGLP's obligations to
make future payments to participants under the Incentive Plan.
In 1999, the Partnership adopted a Restricted Unit Plan (the "New FCLP
Incentive Plan" or "Plan") for the benefit of certain employees. Grants of
restricted units are provided at the discretion of the Advisory Committee. The
value of the units in the New FCLP Incentive Plan is tied to the equity value of
FCLP above a base equity as determined initially in 1999 by the
F-22
27
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
partners, and for grants in subsequent years by an appraisal. Benefits are
payable under the New FCLP Incentive Plan only when distributions would
otherwise be payable to equity holders of FCLP. An initial grant of 100,000
units representing 2.75% of the equity of FCLP in excess of the equity base was
approved and will be allocated to the participants in the Plan. There is a
five-year vesting requirement for all participants.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Partnership is a separate, stand-alone holding company which employs
all of the management personnel. The Partnership is financially dependent on the
receipt of permitted payments from its operating subsidiaries, management and
consulting fees from domestic cable ventures, and the reimbursement of specified
expenses by certain of the Affiliated Partnerships to fund its operations.
Expected increases in the funding requirements of the Partnership combined with
limitations on its sources of cash may create liquidity issues for the
Partnership in the future. Specifically, the Amended and Restated Credit
Agreement and, subsequently, the New Credit Facility, permitted the subsidiaries
of the Partnership to remit to the Partnership no more than 4.25% of their net
cable revenues, as defined, in any year, effective July 12, 1996. Beginning on
January 1, 1999, this limitation was increased to 4.5% of net cable revenues in
any year. As a result of the 1998 acquisition by the Partnership of the Falcon
Classic and Falcon Video Systems, the Partnership will no longer receive
management fees and reimbursed expenses from Falcon Classic or receive
management fees from Falcon Video. Commencing on October 1, 1998, FHGLP retains
20% of the management fees paid by the Enstar partnerships. The management fees
earned from the Enstar partnerships were $1.9 million, $2 million and $1.9
million for the years ended December 31, 1996, 1997 and 1998, respectively.
The management and consulting fees and expense reimbursements earned from
the Affiliated Partnerships amounted to approximately $6.3 million and $3.7
million, $5.2 million and $2.1 million and $3.7 million and $1.5 million for the
years ended December 31, 1996, 1997 and 1998, respectively. The fees and expense
reimbursements of $6.3 million and $3.7 million earned in 1996 included $1.5
million and $1 million earned from FCSC from January 1, 1996 through July 11,
1996. The fees and expense reimbursements of $3.7 million and $1.5 million
earned in 1998 included $191,000 and $128,000 earned from Falcon Classic from
January 1, 1998 through July 16, 1998, and $1.2 million in management fees from
Falcon Video from January 1, 1998 through September 30, 1998. Subsequent to
these acquisitions, the amounts payable to the Partnership in respect of its
management of the former FCSC, Falcon Classic and Falcon Video Systems became
subject to the limitations contained in the Amended and Restated Credit
Agreement and, subsequently, the New Credit Facility.
Receivables from the Affiliated Partnerships for services and
reimbursements described above amounted to approximately $11.3 million and $2.3
million (which, in 1997, included $7.5 million of notes receivable from the
Enstar partnerships) at December 31, 1997 and 1998.
Included in Commitments and Contingencies (Note 7) are two facility lease
agreements with the Partnership's Chief Executive Officer and his wife, or
entities owned by them, requiring annual future minimum rental payments
aggregating $2.1 million through 2001, one facility being assumed by a
subsidiary as part of the assets acquired on July 12, 1996 from FCSC. That
subsidiary acquired the property in February 1999 for $282,500, a price
determined by two independent appraisals. During the years ended December 31,
1996, 1997 and 1998 rent expense on the first facility amounted to $397,000,
$383,000 and $416,000, respectively. The rent paid for the second facility for
the period July 12, 1996 through December 31, 1996 amounted to
F-23
28
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately $18,000, and the amount paid in each of 1997 and 1998 was
approximately $41,000.
In addition, the Partnership provides certain accounting, bookkeeping and
clerical services to the Partnership's Chief Executive Officer. The costs of
services provided were determined based on allocations of time plus overhead
costs (rent, parking, supplies, telephone, etc.). Such services amounted to
$118,300, $163,000 and $212,000 for the years ended December 31, 1996, 1997 and
1998, respectively. These costs were net of amounts reimbursed to the
Partnership by the Chief Executive Officer amounting to $75,000, $55,000 and
$72,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
NOTE 10 -- OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
(DOLLARS IN THOUSANDS)
Gain on sale of Available-for-Sale Securities............... $ 2,264 $ -- $ --
Gain on insured casualty losses............................. -- 3,476 314
Write down of investment.................................... (1,000) -- --
Gain (loss) on sale of investment........................... -- (1,360) 174
Net lawsuit settlement costs................................ -- (1,030) (2,614)
Other, net.................................................. (450) (201) (791)
------- ------- -------
$ 814 $ 885 $(2,917)
======= ======= =======
NOTE 11 -- SUBSEQUENT EVENTS
In March 1999, AT&T and Tele-Communications, Inc. completed a merger under
which Tele-Communications, Inc. became a unit of AT&T called AT&T Broadband &
Internet Services. The unit will continue to be headquartered in the Denver
area. Leo J. Hindery, Jr., who had been president of Tele-Communications, Inc.
since January 1997, was named President and Chief Executive Officer of AT&T
Broadband & Internet Services, which became the owner of TCI Falcon Holdings,
LLC as a result of the merger.
The Partnership entered into a letter of intent with AT&T to form a joint
venture. This joint venture would provide local or any-distance communications
services, other than mobile wireless services, video entertainment services and
high speed Internet access services, to residential and certain small business
customers under the AT&T brand name over the Partnership's infrastructure.
Formation of the joint venture is subject to certain conditions. The Partnership
is unable to predict if or when such conditions will be met.
F-24
29
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
OPERATING ACTIVITIES
During the years ended December 31, 1996, 1997 and 1998, the Partnership
paid cash interest amounting to approximately $39.7 million, $48.1 million and
$84.9 million, respectively.
INVESTING ACTIVITIES
See Note 3 regarding the non-cash investing activities related to the
acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems,
the Falcon Classic Systems and FCSC.
FINANCING ACTIVITIES
See Note 3 regarding the non-cash financing activities relating to the
acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems,
the Falcon Classic Systems and FCSC. See Note 2 regarding the reclassification
to redeemable partners' equity.
F-25
30
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FCLP (PARENT COMPANY ONLY)
The following parent-only condensed financial information presents Falcon
Communications, L.P.'s balance sheets and related statements of operations and
cash flows by accounting for the investments in its subsidiaries on the equity
method of accounting. The condensed balance sheet information for 1997 and
condensed statement of operations information through September 30, 1998 is for
FHGLP (parent only). The accompanying condensed financial information should be
read in conjunction with the consolidated financial statements and notes
thereto.
CONDENSED BALANCE SHEET INFORMATION
DECEMBER 31,
----------------------
1997 1998
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS:
Cash and cash equivalents.................................. $ 8,177 $ 1,605
Receivables:
Intercompany notes and accrued interest receivable.... 226,437 655,128
Due from affiliates and other entities, of which
$23,374,000 was contractually restricted or
otherwise deferred at December 31, 1997 (see Note
9).................................................. 25,340 2,129
Prepaid expenses and other............................... 711 236
Investments in affiliated partnerships................... 12,827 --
Other investments........................................ 1,519 --
Property, plant and equipment, less accumulated
depreciation and amortization......................... 1,323 3,599
Deferred loan costs, less accumulated amortization....... 4,846 20,044
--------- ---------
$ 281,180 $ 682,741
========= =========
LIABILITIES:
Notes payable............................................ $ 10 $ --
Senior notes payable..................................... 282,193 669,982
Notes payable to affiliates.............................. -- 70,805
Accounts payable......................................... 179 135
Accrued expenses......................................... 14,025 14,000
Equity in net losses of subsidiaries in excess of
investment............................................ 230,155 198,492
--------- ---------
TOTAL LIABILITIES................................ 526,562 953,414
REDEEMABLE PARTNERS' EQUITY................................ 171,373 133,023
PARTNERS' DEFICIT.......................................... (416,755) (403,696)
--------- ---------
$ 281,180 $ 682,741
========= =========
F-26
31
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FCLP (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
REVENUES:
Management fees:
Affiliated Partnerships................... $ 3,962 $ 2,873 $ 2,120
Subsidiaries.............................. 12,020 13,979 14,010
International and other................... 413 281 33
-------- -------- ---------
Total revenues....................... 16,395 17,133 16,163
-------- -------- ---------
EXPENSES:
General and administrative expenses.......... 9,096 11,328 21,134
Depreciation and amortization................ 375 274 559
-------- -------- ---------
Total expenses....................... 9,471 11,602 21,693
-------- -------- ---------
Operating income (loss).............. 6,924 5,531 (5,530)
OTHER INCOME (EXPENSE):
Interest income.............................. 19,884 22,997 50,562
Interest expense............................. (27,469) (30,485) (59,629)
Equity in net losses of subsidiaries......... (50,351) (56,422) (105,659)
Equity in net losses of investee
partnerships.............................. (73) (4) (31)
Other, net................................... 1,100 (2,455) --
-------- -------- ---------
Net loss before extraordinary item............. (49,985) (60,838) (120,287)
Extraordinary item, retirement of debt......... -- -- (24,196)
-------- -------- ---------
NET LOSS....................................... $(49,985) $(60,838) $(144,483)
======== ======== =========
F-27
32
FALCON COMMUNICATIONS, L.P.
(SUCCESSOR TO FALCON HOLDING GROUP, L.P.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FCLP (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- ------ ---------
(DOLLARS IN THOUSANDS)
Net cash provided by (used in)
Operating activities............................... $(8,969) $1,478 $(418,226)
------- ------ ---------
Cash flows from investing activities:
Distributions from affiliated partnerships....... 773 -- 1,820
Capital expenditures............................. (242) (417) (2,836)
Investments in affiliated partnerships and other
investments................................... (9,000) (254) (2,998)
Proceeds from sale of investments and other
assets........................................ 3 702 1,694
Proceeds from sale of available-for-sale
securities.................................... 9,502 -- --
Assets retained by Falcon Holding Group, L.P..... -- -- (2,893)
------- ------ ---------
Net cash provided by (used in) investing
activities....................................... 1,036 31 (5,213)
------- ------ ---------
Cash flows from financing activities:
Repayment of debt................................ (120) (131) (282,203)
Borrowings from notes payable.................... -- -- 650,639
Borrowings from subsidiaries..................... -- -- 70,805
Capital contributions............................ 5,000 93 --
Redemption of partners' equity................... -- -- (1,170)
Deferred loan costs.............................. -- -- (21,204)
------- ------ ---------
Net cash provided by (used in) financing
activities....................................... 4,880 (38) 416,867
------- ------ ---------
Net increase (decrease) in cash and cash
equivalents...................................... (3,053) 1,471 (6,572)
Cash and cash equivalents, at beginning of year.... 9,759 6,706 8,177
------- ------ ---------
Cash and cash equivalents, at end of year.......... $ 6,706 $8,177 $ 1,605
======= ====== =========
F-28
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
of Avalon Cable LLC
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in members' interest and
cash flows present fairly, in all material respects, the financial position of
Avalon Cable LLC and its subsidiaries (the "Company") at December 31, 1997 and
1998 and the results of their operations, changes in members' interest and their
cash flows for the period from September 4, 1997 (inception), through December
31, 1997 and for the year ended December 31, 1998 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on the financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999, except for Note 12,
as to which the date is May 13, 1999
F-29
34
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
----------------------
1998 1997
---------- ------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 9,288 $ --
Subscriber receivables, less allowance for doubtful accounts
of $943................................................... 5,862 --
Accounts receivable-affiliate............................... 124 --
Deferred income taxes....................................... 479 --
Prepaid expenses and other current assets................... 580 504
-------- ----
Total current assets........................................ 16,333 504
Property, plant and equipment, net.......................... 111,421 --
Intangible assets, net...................................... 462,117 --
Other assets................................................ 227 --
-------- ----
Total assets................................................ $590,098 $504
======== ====
LIABILITIES AND MEMBERS' INTEREST
CURRENT LIABILITIES:
Current portion of notes payable............................ $ 20 $ --
Accounts payable and accrued expenses....................... 11,646 --
Accounts payable, net-affiliate............................. 2,023 500
Advance billings and customer deposits...................... 3,171 --
-------- ----
Total current liabilities................................... 16,860 500
Note payable, net of current portion........................ 402,949 --
Note payable-affiliate...................................... 3,341 --
Deferred income taxes....................................... 1,841 --
-------- ----
Total liabilities........................................... 424,991 500
-------- ----
Minority interest........................................... 13,855 --
Commitments and contingencies (Note 10)
MEMBERS' INTEREST:
Members' capital............................................ 166,630 --
Accumulated earnings (deficit).............................. (15,378) 4
-------- ----
Total member's interest..................................... 151,252 4
-------- ----
Total liabilities and member's interest..................... $590,098 $504
======== ====
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
35
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM
FOR THE YEAR SEPTEMBER 4, 1997
ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -------------------
(DOLLARS IN THOUSANDS)
REVENUE:
Basic services.......................................... $ 14,976 $--
Premium services........................................ 1,468 --
Other................................................... 1,743 --
-------- --
Total revenues.......................................... 18,187 --
Operating expenses:
Selling, general and administrative..................... 4,207 --
Programming............................................. 4,564 --
Technical and operations................................ 1,951 --
Depreciation and amortization........................... 8,183 --
-------- --
Loss from operations.................................... (718) --
Other income (expense):
Interest income......................................... 173 4
Interest expense........................................ (8,223) --
Other expense, net...................................... (65) --
-------- --
Income (loss) before income taxes....................... (8,833) 4
Provision for income taxes.............................. (186) --
-------- --
Income (loss) before minority interest and extraordinary
item.................................................. (9,019) 4
Minority interest in consolidated entity................ (398) --
-------- --
Income (loss) before the extraordinary loss on early
extinguishment of debt................................ (9,417) 4
Extraordinary loss on early extinguishment of debt...... (5,965) --
-------- --
Net income (loss)....................................... $(15,382) $4
======== ==
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
36
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
FROM THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998
CLASS A CLASS B-1 ACCUMULATED TOTAL
-------------------- ------------------ EARNINGS MEMBERS'
UNITS $ UNITS $ (DEFICIT) INTEREST
--------- -------- ------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Net income for the period from
September 4, 1997 through
December 31, 1997............. -- $ -- -- $ -- $ 4 $ 4
Issuance of Class A units....... 45,000 45,000 -- -- -- 45,000
Issuance of Class B-1 units in
consideration for Avalon Cable
of New England LLC............ -- -- 64,696 4,345 -- 4,345
Contribution of assets and
liabilities of Avalon Cable of
Michigan Inc.................. -- -- 510,994 117,285 -- 117,285
Net loss for the year ended
December 31, 1998............. -- -- -- -- (15,382) (15,382)
------ ------- ------- -------- -------- --------
Balance at December 31, 1998.... 45,000 $45,000 575,690 $121,630 $(15,378) $151,252
====== ======= ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
37
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD
FOR THE YEAR SEPTEMBER 4, 1997
ENDED (INCEPTION)
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (15,382) $ 4
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 8,183 --
Deferred income taxes, net.............................. 1,010 --
Extraordinary loss on extinguishment of debt............ 5,965 --
Provision for loss on accounts receivable............... 75 --
Minority interest in consolidated entity................ 398 --
Accretion of senior discount notes...................... 1,083 --
Changes in operating assets and liabilities Increase in
subscriber receivables................................ (1,679)
Increase in accounts receivable-affiliates.............. (124) --
Increase in prepaid expenses and other current assets... (76) (4)
Increase in accounts payable and accrued expenses....... 4,863 --
Increase in accounts payable-affiliates................. 1,523 --
Increase in advance billings and customer deposits...... 1,684 --
Change in Other, net.................................... (227) --
--------- ---
Net cash provided by operating activities............... 7,296 --
--------- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (11,468) --
Acquisitions, net of cash acquired...................... (554,402) --
--------- ---
Net cash used in investing activities................... (565,870) --
--------- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of credit facility............... 265,888 --
Principal payment on credit facility.................... (125,013) --
Proceeds from issuance of senior subordinated debt...... 150,000 --
Proceeds from issuance of note payable-affiliate........ 3,341 --
Proceeds from issuance of senior discount notes......... 110,411 --
Proceeds from other notes payable....................... 600 --
Payments for debt issuance costs........................ (3,995) --
Contribution by members................................. 166,630 --
--------- ---
Net cash provided by financing activities............... 567,862 --
Increase in cash........................................ 9,288 --
Cash, beginning of period............................... -- --
--------- ---
Cash, end of period..................................... $ 9,288 $--
========= ===
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................ $ 3,480 $--
========= ===
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
38
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Avalon Cable LLC ("Avalon"), and its wholly owned subsidiaries Avalon Cable
Holdings Finance, Inc. ("Avalon Holdings Finance") and Avalon Cable of Michigan
LLC ("Avalon Michigan"), were formed in October 1998, pursuant to the laws of
the State of Delaware, as a wholly owned subsidiary of Avalon Cable of New
England Holdings, Inc. ("Avalon New England Holdings").
On November 6, 1998, Avalon New England Holdings contributed its 100%
interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon in
exchange for a membership interest in Avalon. This contribution was between
entities under common control and was accounted for similar to a
pooling-of-interests. Under this pooling-of-interests method, the results of
operations for Avalon include the results of operations from the date of
inception (September 4, 1997) of Avalon New England. On that same date, Avalon
received $63,000 from affiliated entities, which was comprised of (i) a $45,000
capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) a
$18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"),
which was used to make a $62,800 cash contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Holdings Finance which matures on December 31, 2001.
On December 10, 1998, Avalon received a dividend distribution from Avalon
New England in the amount of $18,206, which was used by Avalon to pay off the
promissory note payable to Avalon Holdings, plus accrued interest.
Avalon Cable of Michigan, Inc. was formed in June 1998, pursuant to the
laws of the state of Delaware, as a wholly owned subsidiary of Avalon Cable of
Michigan Holdings, Inc. ("Michigan Holdings".) On June 3, 1998, Avalon Cable of
Michigan, Inc. entered into an Agreement and Plan of Merger (the "Agreement")
among Avalon Cable of Michigan, Inc., Michigan Holdings and Cable Michigan, Inc.
("Cable Michigan"), pursuant to which Avalon Cable of Michigan, Inc. will merge
into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of
Michigan Holdings (the "Merger"). As part of the Merger, the name of the company
was changed to Avalon Cable of Michigan, Inc.
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior
to the effective time of the Merger (other than treasury stock shares owned by
Michigan Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Cable of
Michigan, Inc. acquired Cable Michigan's 62% ownership interest in Mercom, Inc.
("Mercom").
On November 6, 1998, Avalon Cable of Michigan, Inc. completed its Merger.
The total consideration payable in conjunction with the Merger, including fees
and expenses is $431,629, including repayment of all existing Cable Michigan
indebtedness and accrued interest of $135,205. Subsequent to the Merger, the
arrangements with RCN and CTE for certain support
F-34
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AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services were terminated. The Agreement also permitted Avalon Cable of Michigan,
Inc. to agree to acquire the remaining shares of Mercom that it did not own.
Michigan Holdings contributed $137,375 in cash to Avalon Cable of Michigan,
Inc., which was used to consummate the Merger. On November 5, 1998, Michigan
Holdings received $105,000 in cash in exchange for promissory notes to lenders
(the "Bridge Agreement"). On November 6, 1998, Michigan Holdings contributed the
proceeds received from the Bridge Agreement and an additional $35,000 in cash to
Avalon Cable of Michigan Inc. in exchange for 100 shares of common stock.
On March 26, 1999, Avalon completed a series of transactions to facilitate
certain aspects of its financing between affiliated entities under common
control. As a result of these transactions:
- Avalon Cable of Michigan Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon in exchange for an
approximate 88% voting interest in Avalon. Avalon contributed these
assets and liabilities to its wholly-owned subsidiary, Avalon Cable of
Michigan.
- Avalon Michigan has become the operator of the Michigan cluster replacing
Avalon Cable of Michigan, Inc.
- Avalon Michigan is an obligor on the Senior Subordinated Notes replacing
Avalon Cable of Michigan, Inc., and
- Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Michigan under the Senior Subordinated Notes. Avalon Cable of
Michigan, Inc. does not have significant assets, other than its
investment in Avalon.
- Avalon is an obligor on the Senior Discount Notes replacing Avalon Cable
of Michigan Holdings, Inc.
As a result of the reorganization between entities under common control,
Avalon accounted for the reorganization similar to a pooling-of-interests. Under
the pooling-of-interests method, the results of operations for Avalon include
the results of operations from the date of inception (June 2, 1998) inception of
Avalon Cable of Michigan, Inc. and the date of acquisition of the completed
acquisitions.
Avalon New England and Avalon Michigan provide cable service to the western
New England area and the state of Michigan, respectively. Avalon cable systems
offer customer packages of basic and premium cable programming services which
are offered at a per channel charge or are packaged together to form a tier of
services offered at a discount from the combined channel rate. Avalon cable
systems also provide premium cable services to their customers for an extra
monthly charge. Customers generally pay initial connection charges and fixed
monthly fees for cable programming and premium cable services, which constitute
the principal sources of revenue for Avalon.
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
F-35
40
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements of Avalon and its subsidiaries,
include the accounts of Avalon and its wholly owned subsidiaries, Avalon New
England, Avalon Michigan and Avalon Holdings Finance (collectively, the
"Company"). All significant transactions between Avalon and its subsidiaries
have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reported period. Actual results may vary from estimates used.
Revenue recognition
Revenue is recognized as cable services are provided. Installation fee
revenue is recognized in the period in which the installation occurs to the
extent that direct selling costs meet or exceed installation revenues.
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
were $82 for the year ended December 31, 1998.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company had cash in excess of federally insured deposits at financial
institutions at December 31, 1998. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations. The Company's trade receivables
reflect a customer base centered in the state of Michigan and New England. The
Company routinely assesses the financial strength of its customers; as a result,
concentrations of credit risk are limited.
Property, plant and equipment
Property, plant and equipment is stated at its fair value for items
acquired from Cable Michigan, historical cost for the minority interests share
of Mercom property, plant and equipment and cost for additions subsequent to the
merger. Initial subscribers installation costs, including materials, labor and
overhead costs, are capitalized as a component of cable plant and equipment. The
cost of disconnection and reconnection are charged to expense when incurred.
F-36
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AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed for financial statement purposes using the
straight-line method based upon the following lives:
Vehicles.................................................... 5 years
Cable plant and equipment................................... 5-12 years
Office furniture and equipment.............................. 5-10 years
Buildings and improvements.................................. 10-25 years
Intangible assets
Intangible assets represent the estimated fair value of cable franchises
and goodwill resulting from acquisitions. Goodwill is the excess of the purchase
price over the fair value of the net assets acquired, determined through an
independent appraisal. Deferred financing costs represent direct costs incurred
to obtain long-term financing and are amortized to interest expense over the
term of the underlying debt utilizing the effective interest method.
Amortization is computed for financial statement purposes using the
straight-line method based upon the anticipated economic lives:
Cable franchises............................................ 13-15 years
Goodwill.................................................... 15 years
Non-compete agreement....................................... 5 years
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Financial instruments
The Company estimates that the fair value of all financial instruments at
December 31, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
fair value of the notes payable-affiliate are considered to be equal to carrying
values since the Company believes that its credit risk has not changed from the
time this debt instrument was executed and therefore, would obtain a similar
rate in the current market.
Income taxes
The Company is not subject to federal and state income taxes since the
income or loss of the Company is included in the tax returns of Avalon Cable of
Michigan, Inc. and the Company's
F-37
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AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minority partners. However, Mercom, its majority-owned subsidiary is subject to
taxes that are accounted for using Statement of Financial Accounting Standards
No. 109 -- "Accounting for Income Taxes". The statement requires the use of an
asset and liability approach for financial reporting purposes. The asset and
liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between financial reporting basis and tax basis of assets and liabilities. If it
is more likely than not that some portion or all of a deferred tax asset will
not be realized, a valuation allowance is recognized.
3. MEMBERS' CAPITAL
Avalon has authorized two classes of equity units; class A units ("Class A
Units") and class B units ("Class B Units") (collectively, the "Units"). Each
class of the Units represents a fractional part of the membership interests in
Avalon and has the rights and obligations specified in Avalon's Limited
Liability Company Agreement. Each Class B Unit is entitled to voting rights
equal to the percentage such units represents of the aggregate number of
outstanding Class B Units. The Class A Units are not entitled to voting rights.
Class A Units
The Class A Units are participating preferred equity interests. A preferred
return accrues annually (the Company's "Preferred Return") on the initial
purchase price (the Company's "Capital Value") of each Class A Unit at a rate of
15, or 17% under certain circumstances, per annum. The Company cannot pay
distributions in respect of other classes of securities including distributions
made in connection with a liquidation until the Company's Capital Value and
accrued Preferred Return in respect of each Class A Unit is paid to the holders
thereof (such distributions being the Company's "Priority Distributions"). So
long as any portion of the Company's Priority Distributions remains unpaid, the
holders of a majority of the Class A Units are entitled to block certain actions
by the Company including the payment of certain distributions, the issuance of
senior or certain types of pari passu equity securities or the entering into or
amending of certain related-party agreements. In addition to the Company's
Priority Distributions, each Class A Unit is also entitled to participate in
common distributions, pro rata according to the percentage such unit represents
of the aggregate number of the Company's units then outstanding.
Class B Units
The Class B Units are junior equity securities which are divided into two
identical subclasses, Class B-1 Units and Class B-2 Units. After the payment in
full of Avalon's Priority Distributions, each Class B Unit is entitled to
participate in distributions pro rata according to the percentage such unit
represents of the aggregate number of the Avalon units then outstanding.
4. MERGER AND ACQUISITIONS
The Merger was accounted for using the purchase method of accounting.
Accordingly, the consideration was allocated to the net assets acquired based on
their fair market values at the date of the Merger. The purchase price was
allocated as follows: current assets and liabilities at fair values of $470,
approximately $94,000 to property, plant and equipment, $315,000 to cable
franchises and the excess of consideration paid over the fair market value of
the net assets acquired, or goodwill, of $81,705, offset by deferred taxes net
of $60,000.
F-38
43
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Merger agreement between Michigan Holdings and Avalon Cable of
Michigan, Inc. permitted Avalon Cable of Michigan, Inc. to agree to acquire the
1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it
did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Cable of
Michigan, Inc. and Mercom entered into a definitive agreement (the "Mercom
Merger Agreement") providing for the acquisition by Avalon Cable of Michigan,
Inc. of all of such shares at a price of $12.00 per share. Avalon Cable of
Michigan, Inc. completed this acquisition in March 1999. The total estimated
consideration payable in conjunction with the Mercom Acquisition, excluding fees
and expenses was $21,900.
In March 1999, Avalon Michigan acquired the cable television systems of
Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P.
for approximately $7,800, excluding transaction fees.
On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A
Limited Partnership ("Amrac") for consideration of $8,124, including acquisition
costs of $589. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through the use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $256.
On July 21, 1998, the Company acquired certain assets and liabilities from
Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc.
(collectively, "Pegasus") for consideration of $30,467, including acquisition
costs of $175. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $977.
Unaudited pro forma results of operations of the Company for the year ended
December 31, 1998, as if the Merger and acquisitions occurred on January 1,
1998.
DECEMBER 31,
1998
------------
(UNAUDITED)
Revenues.................................................... $ 96,751
========
Loss from operations........................................ $ (5,292)
========
Net loss.................................................... $(22,365)
========
In September 1998, the Company entered into a definitive agreement to
purchase all of the cable systems of Taconic Technology Corporation ("Taconic")
for approximately $8,525 (excluding transaction fees). As of December 31, 1998,
the Company incurred $41 of transaction costs related to the acquisition of
Taconic. This merger is expected to close in the second quarter of 1999.
F-39
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AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
At December 31, 1998, property, plant and equipment consists of the
following:
Cable plant and equipment................................... $106,602
Vehicles.................................................... 2,572
Office furniture and fixtures............................... 1,026
Buildings and improvements.................................. 2,234
Construction in process..................................... 768
--------
113,202
Less: accumulated depreciation.............................. (1,781)
--------
$111,421
========
Depreciation expense charged to operations was $1,781 for the year ended
December 31, 1998.
6. INTANGIBLE ASSETS
At December 31, 1998, intangible assets consist of the following:
1998
--------
Cable franchises............................................ $374,773
Goodwill.................................................... 82,928
Deferred financing costs.................................... 10,658
Non-compete agreement....................................... 100
--------
468,459
Less: accumulated amortization.............................. (6,342)
--------
$462,117
========
Amortization expense was $6,342 for the year ended December 31, 1998.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 1998, accounts payable and accrued expenses consist of the
following:
Accounts payable............................................ $ 5,321
Accrued corporate expenses.................................. 404
Accrued programming costs................................... 2,388
Taxes payable............................................... 1,383
Other....................................................... 2,150
-------
$11,646
=======
F-40
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AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEBT
At December 31, 1998, Long-term debt consists of the following:
Senior Credit Facility...................................... $140,875
Senior Subordinated Notes................................... 150,000
Senior Discount Notes....................................... 111,494
Other Note Payable.......................................... 600
--------
402,969
Less: current portion of notes payable...................... 20
--------
$402,949
========
Credit Facilities
On May 28, 1998, Avalon New England entered into a term loan and revolving
credit agreement with a major commercial lending institution (the "Credit
Agreement"). The Credit Agreement allowed for aggregate borrowings under Term
Loans A and B (collectively, the "Term Loans") and a revolving credit facility
of $30,000 and $5,000, respectively. The proceeds from the Term Loans and
revolving credit facility were used to fund the acquisitions made by Avalon New
England and to provide for Avalon New England's working capital requirements.
In December 1998, Avalon New England retired the Term Loans and revolving
credit agreement through the proceeds of a capital contribution from Avalon. The
fees and associated costs relating to the early retirement of this debt was
$1,110.
On November 6, 1998, Avalon New England became a co-borrower along with
Avalon Michigan and Avalon Cable Finance, Inc. ("Avalon Finance"), affiliated
companies (collectively referred to as the "Co-Borrowers"), on a $320,888 senior
credit facility, which includes term loan facilities consisting of (i) tranche A
term loans of $120,888 and (ii) tranche B term loans of $170,000, and a
revolving credit facility of $30,000 (collectively, the "Credit Facility").
Subject to compliance with the terms of the Credit Facility, borrowings under
the Credit Facility will be available for working capital purposes, capital
expenditures and pending and future acquisitions. The ability to advance funds
under the tranche A term loan facility terminated on March 31, 1999. The tranche
A term loans are subject to minimum quarterly amortization payments commencing
on January 31, 2001 and maturing on October 31, 2005. The tranche B term loans
are subject to minimum quarterly payments commencing on January 31, 2001 with
substantially all of tranche B term loans scheduled to be repaid in two equal
installments on July 31, 2006 and October 31, 2006. The revolving credit
facility borrowings are scheduled to be repaid on October 31, 2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility. In connection with the Senior Subordinated Notes and Senior Discount
Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and the
availability under the Credit Facility was reduced to $195,000. Avalon Michigan
had borrowings of $11,300 and $129,575 outstanding under the tranche A and
tranche B term note facilities, respectively, and had available $30,000 for
borrowings under the revolving credit facility. Avalon New England and Avalon
Finance had no borrowings outstanding under the Credit Facility at December 31,
1998.
The interest rate under the Credit Facility is a rate based on either (i)
the Base Rate (a rate per annum equal to the greater of the prime rate and the
federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per
annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency
reserve requirement plus, in either case, the applicable margin). As of
F-41
46
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, the applicable margin was (a) with respect to the tranche B
term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for
Eurodollar loans and (b) with respect to tranche A term loans and the revolving
credit facility was 2.00% per annum for Base Rate loans and 3.00% for Eurodollar
loans. The applicable margin for the tranche A term loans and the revolving
credit facility are subject to performance based grid pricing which is
determined based upon the consolidated leverage ratio of the Co-Borrowers. The
interest rate for the tranche A and tranche B term loans outstanding at December
31, 1998 was 8.58% and 9.33%, respectively. Interest is payable on a quarterly
basis. Accrued interest on the borrowings incurred by Avalon Cable of Michigan
Inc. under the credit facility was $1,389 at December 31, 1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured
by substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Cable
Finance Holdings, Inc., Avalon New England Holdings, Inc., Avalon Cable
Holdings, LLC and the Company.
A Change of Control as defined under the Credit Facility agreement would
constitute an event of default under the Credit Facility giving the lender the
right to terminate the credit commitment and declare all amounts outstanding
immediately due and payable.
Subordinated Debt
In December 1998, Avalon New England and Avalon Michigan became co-issuers
of a $150,000 principal balance, Senior Subordinated Notes ("Subordinated
Notes") offering. In conjunction with this financing, Avalon New England
received $18,130 from Avalon Michigan as a partial payment against the Company's
note receivable-affiliate from Avalon Michigan. Avalon Michigan paid $75 in
interest during the period from October 21, 1998 (inception) through December
31, 1998. The cash proceeds received by Avalon New England of $18,206 was paid
to Avalon as a dividend.
The Subordinated Notes mature on December 1, 2008, and interest accrued at
a rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1999. Accrued interest on
the Subordinated Notes was $1,078 at December 31, 1998.
The Senior Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will
be subject to redemption at any time at the option of the Co-Borrowers, in whole
or in part at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on December 1 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2003..................................................... 104.688%
2004..................................................... 103.125%
2005..................................................... 101.563%
2006 and thereafter...................................... 100.000%
F-42
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AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000
in 2002, $7,000 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Subordinated Notes originally issued remain outstanding immediately after
each such redemption.
As used in the preceding paragraph, "Equity Offering and Strategic Equity
Investment" means any public or private sale of Capital Stock of any of the
Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of
at least $25 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall
have been contributed to one or more of the Co-Borrowers in the form of an
equity contribution.
The Indentures provide that upon the occurrence of a change of control (a
"Change of Control") each holder of the Notes has the right to require the
Company to purchase all or any part (equal to $1,000 or an integral multiple
thereof) of such holder's Notes at an offer price in cash equal to 101% of the
aggregate principal amount thereon plus accrued and unpaid interest and
Liquidated Damages (as defined in the Indentures) thereof, if any, to the date
of purchase.
The Senior Discount Notes
On December 3, 1998, the Company, Avalon Michigan and Avalon Cable Holdings
Finance, Inc. (the "Holding Co-Borrowers") issued $196.0 million aggregate
principal amount at maturity of 117/8% Senior Discount Notes ("Senior Discount
Notes") due 2008.
The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity, to generate gross proceeds of approximately $110.4
million. Interest on the Senior Discount Notes will accrue but not be payable
before December 1, 2003. Thereafter, interest on the Senior Discount Notes will
accrue on the principal amount at maturity at a rate of 11.875% per annum, and
will be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing December 1, 2003. Prior to December 1, 2003, the accreted value of
the Senior Discount Notes will increase, representing amortization of original
issue discount, between the date of original issuance and December 1, 2003 on a
semi-annual basis using a 360-day year comprised of twelve 30-day months, such
that the accreted value shall be equal to the full principal amount at maturity
of the Senior Discount Notes on December 1, 2003. Original issue discount
accretion on the Senior Discount Notes was $1,083 at December 31, 1998.
On December 1, 2003, the Holding Co-Borrowers will be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding on a pro rata basis at a redemption price of 100%
of the principal amount at maturity of the Senior Discount Notes so redeemed.
On or after December 1, 2003, the Senior Discount Notes will be subject to
redemption at any time at the option of the Holding Co-borrowers, in whole or in
part, at the redemption prices, which are expressed as percentages of principal
amount, shown below plus accrued and unpaid
F-43
48
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest, if any, and liquidated damages, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 1 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2003................................................... 105.938%
2004................................................... 103.958%
2005................................................... 101.979%
2006 and thereafter.................................... 100.000%
Notwithstanding the foregoing, at any time before December 1, 2001, the
holding companies may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of senior discount notes originally
issued under the Senior Discount Note indenture at a redemption price equal to
111.875% of the accreted value at the date of redemption, plus liquidated
damages, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Discount Notes originally issued remain outstanding immediately after
each occurrence of such redemption.
Upon the occurrence of a Change of Control, each holder of Senior Discount
Notes will have the right to require the Holding Co-Borrowers to repurchase all
or any part of such holder's Senior Discount Notes pursuant to a Change of
Control offer at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, Cable Michigan, Inc. purchased and assumed all of
the bank's interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing and
security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables. At December
31, 1998, $14,151 of principal was outstanding. The borrowings under the term
credit agreement are eliminated in the Company's consolidated balance sheet.
Note payable
Avalon New England issued a note payable for $500 which is due on May 29,
2003, and bears interest at a rate of 7% per annum (which approximates Avalon
New England's incremental borrowing rate) payable annually. Additionally, Avalon
New England has a $100 non-compete agreement. The agreement calls for five
annual payments of $20, commencing on May 29, 1999.
F-44
49
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The income tax provision in the accompanying consolidated financial
statements of operations relating to Mercom, Inc., a majority-owned subsidiary,
is comprised of the following:
1998
----
CURRENT
Federal..................................................... $ --
State....................................................... --
----
Total Current............................................... --
----
DEFERRED
Federal..................................................... 171
State....................................................... 15
----
Total Deferred.............................................. 186
----
Total provision for income taxes............................ $186
====
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1998. The differences
are as follows:
1998
-------
Loss before provision for income taxes...................... $(8,833)
=======
Federal tax provision at statutory rates.................... $(3,092)
State income taxes.......................................... (182)
Allocated to members........................................ 3,082
Goodwill.................................................... 6
-------
Provision for income taxes.................................. $ 186
=======
TAX NET
OPERATING EXPIRATION
YEAR LOSSES DATE
- ---- --------- ----------
1998................................................... $922 2018
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
1998
-------
NOL carryforwards........................................... $ 922
Reserves.................................................... 459
Other, net.................................................. 20
-------
Total deferred assets....................................... 1,401
-------
Property, plant and equipment............................... (2,725)
Intangible assets........................................... (38)
-------
Total deferred liabilities.................................. (2,763)
-------
Subtotal.................................................... (1,362)
-------
Valuation allowance......................................... --
-------
Total deferred taxes........................................ $(1,362)
=======
F-45
50
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Leases
Avalon New England and Avalon Michigan rent poles from utility companies
for use in their operations. While rental agreements are generally short-term,
Avalon New England and Avalon Michigan anticipate such rentals will continue in
the future. Avalon New England and Avalon Michigan also lease office facilities
and various items of equipment under month-to-month operating leases. Rent
expense was $58 for the year ended December 31, 1998. Rental commitments are
expected to continue at approximately $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
Legal matters
Avalon and its subsidiaries are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities.
Avalon and its subsidiaries are subject to the provisions of the Cable
Television Consumer Protection and Competition Act of 1992, as amended, and the
Telecommunications Act of 1996. Avalon and its Subsidiaries have either settled
challenges or accrued for anticipated exposures related to rate regulation;
however, there is no assurance that there will not be further additional
challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
Avalon and its subsidiaries.
11. RELATED PARTY TRANSACTIONS AND BALANCES
During 1998, Avalon New England received $3,341 from Avalon Holdings. In
consideration for this amount, Avalon New England executed a note payable to
Avalon Holdings. This note is recorded as note payable-affiliate on the balance
sheet at December 31, 1998. Interest accrues at a rate of 5.57% per year and
Avalon New England has recorded accrued interest on this note of $100 at
December 31, 1998.
12. SUBSEQUENT EVENT
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communications is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to the full accretion date) plus
accrued and unpaid interest and Liquidated Damages (as defined in the Indenture)
thereof, if any, to the date of purchase.
F-46
51
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This agreement, if closed, would represent a Change of Control which, on
the closing date, constitutes an event of default under the Credit Facility
giving the lender the right to terminate the credit commitment and declare all
amounts outstanding immediately due and payable. Charter Communications has
agreed to repay all amounts due under the Credit Facility or cause all events of
default under the Credit Facility arising from the Change of Control to be
waived.
F-47
52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Avalon Cable of Michigan, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and changes in shareholders'
deficit and of cash flows present fairly, in all material respects, the
financial position of Cable Michigan, Inc. and subsidiaries (collectively, the
"Company") at December 31, 1996 and 1997 and November 5, 1998, and the results
of their operations and their cash flows for each of the two years ended
December 31, 1996 and 1997 and the period from January 1, 1998 to November 5,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999
F-48
53
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and temporary cash investments......................... $ 17,219 $ 6,093
Accounts receivable, net of reserve for doubtful accounts of
$541 at December 31, 1997 and $873 at November 5, 1998.... 3,644 4,232
Prepayments and other....................................... 663 821
Accounts receivable from related parties.................... 166 396
Deferred income taxes....................................... 1,006 541
-------- --------
Total current assets........................................ 22,698 12,083
Property, plant and equipment, net.......................... 73,836 77,565
Intangible assets, net...................................... 45,260 32,130
Deferred charges and other assets........................... 803 9,442
-------- --------
Total assets................................................ $142,597 $131,220
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current portion of long-term debt........................... $ -- $ 15,000
Accounts payable............................................ 5,564 8,370
Advance billings and customer deposits...................... 2,242 1,486
Accrued taxes............................................... 167 1,035
Accrued cable programming expense........................... 2,720 5,098
Accrued expenses............................................ 4,378 2,052
Accounts payable to related parties......................... 1,560 343
-------- --------
Total current liabilities................................... 16,631 33,384
Long-term debt.............................................. 143,000 120,000
Deferred income taxes....................................... 22,197 27,011
-------- --------
Total liabilities........................................... 181,828 180,395
-------- --------
Minority interest........................................... 14,643 14,690
-------- --------
Commitments and contingencies (Note 11)..................... -- --
Preferred Stock............................................. -- --
Common stock................................................ -- --
Common shareholders' deficit................................ (53,874) (63,865)
-------- --------
Total Liabilities and Shareholders' Deficit................. $142,597 $131,220
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
54
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FOR THE
DECEMBER 31, PERIOD FROM
------------------------ JANUARY 1, 1998 TO
1996 1997 NOVEMBER 5, 1998
---------- ---------- ------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AND SHARE AMOUNTS)
Revenues....................................... $ 76,187 $ 81,299 $ 74,521
Costs and expenses, excluding management fees
and depreciation and amortization.............. 40,593 44,467 41,552
Management fees................................ 3,498 3,715 3,156
Depreciation and amortization.................. 31,427 32,082 28,098
Merger related expenses........................ -- -- 5,764
---------- ---------- ----------
Operating income............................... 669 1,035 (4,049)
Interest income................................ 127 358 652
Interest expense............................... (15,179) (11,751) (8,034)
Gain on sale of Florida cable system........... -- 2,571 --
Other (expense), net........................... (736) (738) (937)
---------- ---------- ----------
(Loss) before income taxes..................... (15,119) (8,525) (12,368)
(Benefit) from income taxes.................... (5,712) (4,114) (1,909)
---------- ---------- ----------
(Loss) before minority interest and equity in
unconsolidated entities...................... (9,407) (4,411) (10,459)
Minority interest in loss (income) of
consolidated entity.......................... 1,151 53 (75)
---------- ---------- ----------
Net (Loss)..................................... $ (8,256) $ (4,358) $ (10,534)
========== ========== ==========
Basic and diluted earnings per average common
share Net (loss) to shareholders............. $ (1.20) $ (.63) $ (1.53)
Average common shares and common stock
equivalents outstanding...................... 6,864,799 6,870,528 6,891,932
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
55
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
THE PERIOD FROM JANUARY 1, 1998 TO NOVEMBER 5, 1998
----------------------------------------------------------------------------
COMMON ADDITIONAL SHAREHOLDER'S TOTAL
SHARES COMMON PAID-IN NET SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT INVESTMENT DEFICIT
----------- ------ ---------- -------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
Balance, December 31, 1995..... 1,000 $ 1 $ -- $ -- $(73,758) $(73,757)
Net loss....................... -- -- -- -- (8,256) (8,256)
Transfers from CTE............. -- -- -- -- 2,272 2,272
--------- ------ ---- -------- -------- --------
Balance, December 31, 1996..... 1,000 1 -- -- (79,742) (79,741)
Net loss from 1/1/97 through
9/30/97...................... -- -- -- -- (3,251) (3,251)
Net loss from 10/1/97 through
12/31/97..................... -- -- -- (1,107) -- (1,107)
Transfers from RCN
Corporation.................. -- -- -- -- 30,225 30,225
Common stock issued in
connection with the
Distribution................. 6,870,165 6,870 -- (59,638) 52,768 --
--------- ------ ---- -------- -------- --------
Balance, December 31, 1997..... 6,871,165 6,871 -- (60,745) -- (53,874)
Net loss from January 1, 1998
to November 5, 1998.......... -- -- -- (10,534) -- (10,534)
Exercise of stock options...... 30,267 30 351 -- -- 381
Tax benefits of stock option
exercises.................... -- -- 162 -- -- 162
--------- ------ ---- -------- -------- --------
Balance, November 5, 1998...... 6,901,432 $6,901 $513 $(71,279) $ -- $(63,865)
========= ====== ==== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
56
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, FOR THE PERIOD FROM
-------------------- JANUARY 1, 1998 TO
1996 1997 NOVEMBER 5, 1998
-------- --------- -------------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss).................................................. $ (8,256) $ (4,358) $(10,534)
Gain on pension curtailment/settlement...................... (855) -- --
Depreciation and amortization............................... 31,427 32,082 28,098
Deferred income taxes, net.................................. 988 (4,359) (3,360)
Provision for losses on accounts receivable................. 843 826 710
Gain on sale of Florida cable systems....................... -- (2,571) --
Increase (decrease) in minority interest.................... (1,151) (53) 47
Other non-cash items........................................ 2,274 1,914 --
Net change in certain assets and liabilities, net of
business acquisitions
Accounts receivable and customer deposits................... (1,226) (617) (2,054)
Accounts payable............................................ 1,365 2,234 2,806
Accrued expenses............................................ 125 580 52
Accrued taxes............................................... (99) 61 868
Accounts receivable from related parties.................... 567 1,549 (230)
Accounts payable to related parties......................... 1,314 (8,300) (1,217)
Other, net.................................................. 501 (644) (158)
-------- --------- --------
Net cash provided by operating activities................... 27,817 18,344 15,028
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment.................. (9,605) (14,041) (18,697)
Acquisitions, net of cash acquired.......................... -- (24) --
Proceeds from sale of Florida cable systems................. -- 3,496 --
Other....................................................... 390 560 --
-------- --------- --------
Net cash used in investing activities....................... (9,215) (10,009) (18,697)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt.................................. -- 128,000 --
Redemption of long-term debt................................ (1,500) (17,430) (8,000)
Proceeds from the issuance of common stock.................. -- -- 543
Transfers from CTE.......................................... -- 12,500 --
Change in affiliate notes, net.............................. (16,834) (116,836) --
Payments made for debt financing costs...................... -- (647) --
-------- --------- --------
Net cash provided by (used in) financing activities......... (18,334) 5,587 (7,457)
Net increase/(decrease) in cash and temporary cash
investments............................................... 268 13,922 (11,126)
Cash and temporary cash investments at beginning of year.... 3,029 3,297 17,219
-------- --------- --------
Cash and temporary cash investments at end of year.......... $ 3,297 $ 17,219 $ 6,093
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for Interest...................... $ 15,199 $ 11,400 $ 7,777
Income taxes................................................ 29 370 315
Supplemental Schedule of Non-cash Investing and Financing Activities:
In September 1997, in connection with the transfer of CTE's investment in
Mercom to the Company, the Company assumed CTE's $15,000 Term Credit Facility.
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to shareholders' net investment in connection with
the Distribution described in note 1.
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
57
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
1. BACKGROUND AND BASIS OF PRESENTATION
Prior to September 30, 1997, Cable Michigan, Inc. and subsidiaries (the
"Company") was operated as part of C-TEC Corporation ("C-TEC"). On September 30,
1997, C-TEC distributed 100 percent of the outstanding shares of common stock of
its wholly owned subsidiaries, RCN Corporation ("RCN") and the Company to
holders of record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of
the close of business on September 19, 1997 (the "Distribution") in accordance
with the terms of the Distribution Agreement dated September 5, 1997 among
C-TEC, RCN and the Company. The Company consists of C-TEC's Michigan cable
operations, including its 62% ownership in Mercom, Inc. ("Mercom"). In
connection with the Distribution, C-TEC changed its name to Commonwealth
Telephone Enterprises, Inc. ("CTE"). RCN consists primarily of C-TEC's bundled
residential voice, video and Internet access operations in the Boston to
Washington, D.C. corridor, its existing New York, New Jersey and Pennsylvania
cable television operations, a portion of its long distance operations and its
international investment in Megacable, S.A. de C.V. C-TEC, RCN, and the Company
continue as entities under common control until the Company completes the Merger
(as described below).
On June 3, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") among the Company, Avalon Cable of Michigan Holdings Inc.
("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant
to which Avalon Sub will merge into the Company and the Company will become a
wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of the Company outstanding prior to
the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
On November 6, 1998, the Company completed its merger into and with Avalon
Cable Michigan, Inc. The total consideration payable in conjunction with the
merger, including fees and expenses is approximately 431,600. Subsequent to the
merger, the arrangements with RCN and CTE (as described below) were terminated.
The Merger agreement also permitted the Company to agree to acquire the
remaining shares of Mercom that it did not own.
Cable Michigan provides cable services to various areas in the state of
Michigan. Cable Michigan's cable television systems offer customer packages for
basic cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Cable Michigan's cable television systems also provide
premium cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principle sources
of revenue for the Company.
The consolidated financial statements have been prepared using the
historical basis of assets and liabilities and historical results of operations
of all wholly and majority owned subsidiaries. However, the historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company and accordingly, certain assumptions were made
in preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations, financial condition or cash flows
of the Company
F-53
58
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the future or what they would have been had the Company been an independent,
public company during the reporting periods. All material intercompany
transactions and balances have been eliminated.
RCN's corporate services group has historically provided substantial
support services such as finance, cash management, legal, human resources,
insurance and risk management. Prior to the Distribution, the corporate office
of C-TEC allocated the cost for these services pro rata among the business units
supported primarily based on assets; contribution to consolidated earnings
before interest, depreciation, amortization, and income taxes; and number of
employees. In the opinion of management, the method of allocating these costs is
reasonable; however, such costs are not necessarily indicative of the costs that
would have been incurred by the Company on a stand-alone basis.
CTE, RCN and the Company have entered into certain agreements subsequent to
the Distribution, and governing various ongoing relationships, including the
provision of support services between the three companies, including a
distribution agreement and a tax-sharing agreement.
The fee per year for support services from RCN will be 4.0% of the revenues
of the Company plus a direct allocation of certain consolidated cable
administration functions of RCN. The direct charge for customer service along
with the billing service and the cable guide service will be a pro rata share
(based on subscribers) of the expenses incurred by RCN to provide such customer
service and to provide such billing and cable guide service for RCN and the
Company.
CTE has agreed to provide or cause to be provided to RCN and the Company
certain financial data processing services for a transitional period after the
Distribution. The fees for such services will be an allocated portion (based on
relative usage) of the cost incurred by CTE to provide such financial data
processing services to all three groups.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and temporary cash investments
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be temporary cash investments. Temporary cash investments are stated at cost,
which approximates market.
Property, plant and equipment and depreciation
Property, plant and equipment reflects the original cost of acquisition or
construction, including payroll and related costs such as taxes, pensions and
other fringe benefits, and certain general administrative costs.
F-54
59
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on the straight-line method based on the useful
lives of the various classes of depreciable property. The average estimated
lives of depreciable cable property, plant and equipment are:
Buildings................................................... 12-25 years
Cable television distribution equipment..................... 8.5-12 years
Vehicles.................................................... 5 years
Other equipment............................................. 12 years
Maintenance and repair costs are charged to expense as incurred. Major
replacements and betterments are capitalized. Gain or loss is recognized on
retirements and dispositions.
Intangible assets
Intangible assets are amortized on a straight-line basis over the expected
period of benefit ranging from 5 to 19.3 years. Intangible assets include cable
franchises. The cable systems owned or managed by the Company are constructed
and operated under fixed-term franchises or other types of operating authorities
(referred to collectively herein as "franchises") that are generally
nonexclusive and are granted by local governmental authorities. The provisions
of these local franchises are subject to federal regulation. Costs incurred to
obtain or renew franchises are capitalized and amortized over the term of the
applicable franchise agreement.
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Revenue recognition
Revenues from cable programming services are recorded in the month the
service is provided. Installation fee revenue is recognized in the period in
which the installation occurs.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $514, $560, and $505 in 1996, 1997, and for the period from
January 1, 1998 to November 5, 1998 respectively.
F-55
60
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based compensation
The Company applies Accounting Principles Board Opinion No.
25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its stock plans. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 -- "Accounting for
Stock-Based Compensation" ("SFAS 123").
Earnings (loss) per share
The Company has adopted statement of Financial Accounting Standards No.
128 -- "Earnings Per Share" ("SFAS 128"). Basic earnings (loss) per share is
computed based on net income (loss) divided by the weighted average number of
shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period after giving effect to convertible securities considered to be
dilutive common stock equivalents. The conversions of stock options during
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of stock options which
would have been converted in 1997 and in 1998 and had a dilutive effect if the
Company had income from continuing operations are 55,602 and 45,531,
respectively.
For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by one-fourth the average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common stock for each
four shares of C-TEC common equity owned.
Income taxes
The Company and Mercom file separate consolidated federal income tax
returns. Prior to the Distribution, income tax expense was allocated to C-TEC's
subsidiaries on a separate return basis except that C-TEC's subsidiaries receive
benefit for the utilization of net operating losses and investment tax credits
included in the consolidated tax return even if such losses and credits could
not have been used on a separate return basis. The Company accounts for income
taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting
for Income Taxes". The statement requires the use of an asset and liability
approach for financial reporting purposes. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between financial reporting
basis and tax basis of assets and liabilities. If it is more likely than not
that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
Reclassification
Certain amounts have been reclassified to conform with the current year's
presentation.
3. BUSINESS COMBINATION AND DISPOSITIONS
The Agreement between Avalon Cable of Michigan Holdings, Inc. and the
Company permitted the Company to agree to acquire the 1,822,810 shares
(approximately 38% of the outstanding stock) of Mercom that it did not own (the
"Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered into
a definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by the Company of all of such shares at a price of $12.00 per share.
The Company completed this acquisition in March 1999.
F-56
61
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total estimated consideration payable in conjunction with the Mercom
Acquisition, excluding fees and expenses was $21,900.
In March 1999, Avalon Michigan Inc. acquired the cable television systems
of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII,
L.P. for approximately $7,800, excluding transaction fees.
In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for
cash of approximately $3,500. The Company realized a pretax gain of $2,571 on
the transaction.
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
Cable plant....................................... $158,655 $ 174,532
Buildings and land................................ 2,837 2,917
Furniture, fixtures and vehicles.................. 5,528 6,433
Construction in process........................... 990 401
-------- ---------
Total property, plant and equipment............... 168,010 184,283
Less accumulated depreciation..................... (94,174) (106,718)
-------- ---------
Property, plant and equipment, net................ $ 73,836 $ 77,565
======== =========
Depreciation expense was $15,728, $16,431 and $14,968 for the years ended
December 31, 1996 and 1997, and the period from January 1, 1998 to November 5,
1998, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following at:
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
Cable Franchises.................................. $134,889 $ 134,889
Noncompete agreements............................. 473 473
Goodwill.......................................... 3,990 3,990
Other............................................. 1,729 1,729
-------- ---------
Total............................................. 141,081 141,081
Less accumulated amortization..................... (95,821) (108,951)
-------- ---------
Intangible assets, net............................ $ 45,260 $ 32,130
======== =========
Amortization expense charged to operations for the years ended December 31,
1996 and 1997 was $15,699 and $15,651, respectively, and $13,130 for the period
from January 1, 1998 to November 5, 1998.
F-57
62
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
1996 1997 1998
------- ------- -------
CURRENT
Federal............................................. $(6,700) $ 245 $ 320
State............................................... -- -- 28
------- ------- -------
Total Current....................................... (6,700) 245 348
------- ------- -------
DEFERRED:
Federal............................................. 988 (4,359) (2,074)
State............................................... -- -- (183)
------- ------- -------
Total Deferred...................................... 988 (4,359) (2,257)
------- ------- -------
Total (benefit) for income taxes.................... $(5,712) $(4,114) $(1,909)
======= ======= =======
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1996, 34% for 1997 and
35% for the period from January 1, 1998 to November 5, 1998. The differences are
as follows:
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------- JANUARY 1, 1998 TO
1996 1997 NOVEMBER 11, 1998
-------- ------- ------------------
(Loss) before (benefit) for income
taxes.................................. $(15,119) $(8,525) $(12,368)
======== ======= ========
Federal tax (benefit) at statutory
rates.................................... $ (5,307) $(2,899) $ (4,329)
State income taxes....................... -- -- (101)
Goodwill................................. 175 171 492
Increase (decrease) in valuation
allowance.............................. (518) (1,190) --
Nondeductible expenses................... -- 147 2,029
Benefit of rate differential applied to
reversing timing differences........... -- (424) --
Other, net............................... (62) 81 --
-------- ------- --------
(Benefit) for income taxes............... $ (5,712) $(4,114) $ (1,909)
======== ======= ========
Mercom, which files a separate consolidated income tax return, has the
following net operating losses available:
TAX NET
OPERATING EXPIRATION
YEAR LOSSES DATE
- ---- --------- ----------
1992..................................................... $ 435 2007
1995..................................................... $2,713 2010
In 1997, Mercom was liable for Federal Alternative Minimum Tax (AMT). At
December 31, 1997 and at November 5, 1998, the cumulative minimum tax credits
are $141 and $141, respectively. This amount can be carried forward indefinitely
to reduce regular tax liabilities that exceed AMT in future years.
F-58
63
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences that give rise to a significant portion of deferred
tax assets and liabilities are as follows:
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
NOL carryforwards................................... $ 1,588 $ 1,132
Alternative minimum tax credits..................... 141 141
Reserves............................................ 753 210
Other, net.......................................... 230 309
-------- --------
Total deferred assets............................... 2,712 1,792
-------- --------
Property, plant and equipment....................... (11,940) (10,515)
Intangible assets................................... (11,963) (10,042)
-------- --------
Total deferred liabilities.......................... (23,903) (20,557)
-------- --------
Subtotal............................................ (21,191) (18,765)
Valuation allowance................................. -- --
-------- --------
Total deferred taxes................................ $(21,191) $(18,765)
======== ========
In the opinion of management, based on the future reversal of taxable
temporary differences, primarily depreciation and amortization, the Company will
more likely than not be able to realize all of its deferred tax assets. As a
result, the net change in the valuation allowance for deferred tax assets during
1997 was a decrease of $1,262, which $72 related to Mercom of Florida.
Due to the sale of Mercom of Florida, the Company's deferred tax
liabilities decreased by $132.
7. DEBT
Long-term debt outstanding at November 5, 1998 is as follows:
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
Term Credit Facility................................ $100,000 $100,000
Revolving Credit Facility........................... 28,000 20,000
Term Loan........................................... 15,000 15,000
-------- --------
Total............................................... 143,000 135,000
Current portion of long-term debt................... -- 15,000
-------- --------
Total Long-Term Debt................................ $143,000 $120,000
======== ========
Credit Facility
The Company had an outstanding line of credit with a banking institution
for $3 million. No amounts were outstanding under this facility.
The Company has in place two secured credit facilities (the "Credit
Facilities") pursuant to a single credit agreement with a group of lenders for
which First Union National Bank acts as agent (the "Credit Agreement"), which
was effective as of July 1, 1997. The first is a five-year revolving credit
facility in the amount of $65,000 (the "Revolving Credit Facility"). The second
is an eight-year term credit facility in the amount of $100,000 (the "Term
Credit Facility").
F-59
64
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The interest rate on the Credit Facilities will be, at the election of the
Company, based on either a LIBOR or a Base Rate option (6.25% at November 5,
1998) (each as defined in the Credit Agreement).
The entire amount of the Term Credit Facility has been drawn and as of
November 5, 1998, $100,000 of the principal was outstanding thereunder. The
entire amount of the Revolving Credit Facility is available to the Company until
June 30, 2002. As of November 5, 1998, $20,000 of principal was outstanding
thereunder. Revolving loans may be repaid and reborrowed from time to time.
The Term Credit Facility is payable over six years in quarterly
installments, from September 30, 1999 through June 30, 2005. Interest only is
due through June 1999. The Credit Agreement is currently unsecured.
The Credit Agreement contains restrictive covenants which, among other
things, require the Company to maintain certain debt to cash flow, interest
coverage and fixed charge coverage ratios and place certain limitations on
additional debt and investments. The Company does not believe that these
covenants will materially restrict its activities.
Term Loan
On September 30, 1997, the Company assumed all obligations of CTE under a
$15 million credit facility extended by a separate group of lenders for which
First Union National Bank also acts as agent (the "$15 Million Facility"). The
$15 Million Facility matures in a single installment on June 30, 1999 and is
collateralized by a first priority pledge of all shares of Mercom owned by the
Company. The $15 Million Facility has interest rate provisions (6.25% at
November 5, 1998), covenants and events of default substantially the same as the
Credit Facilities.
On November 6, 1998, the long-term debt of the Company was paid off in
conjunction with the closing of the merger.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, the Company purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing and
security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables. At November 5,
1998, $14,151 of principal was outstanding. The borrowings under the term credit
agreement are eliminated in the Company's consolidated balance sheet.
8. COMMON STOCK AND STOCK PLANS
The Company has authorized 25,000,000 shares of $1 par value common stock,
and 50,000,000 shares of $1 par value Class B common stock. The Company also has
authorized
F-60
65
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10,000,000 shares of $1 par value preferred stock. At November 5, 1998,
6,901,432 common shares are issued and outstanding.
In connection with the Distribution, the Company Board of Directors (the
"Board") adopted the Cable Michigan, Inc. 1997 Equity Incentive Plan (the "1997
Plan"), designed to provide equity-based compensation opportunities to key
employees when shareholders of the Company have received a corresponding benefit
through appreciation in the value of Cable Michigan Common Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well
as stock options that are not designated as incentive stock options,
performance-based stock options, stock appreciation rights, performance share
units, restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 300,000 shares of Common Stock, plus shares of
Common Stock issuable in connection with the Distribution related option
adjustments, may be issued pursuant to Awards granted under the 1997 Plan.
All employees and outside consultants to the Company and any of its
subsidiaries and all Directors of the Company who are not also employees of the
Company are eligible to receive discretionary Awards under the 1997 Plan.
Unless earlier terminated by the Board, the 1997 Plan will expire on the
10th anniversary of the Distribution. The Board or the Compensation Committee
may, at any time, or from time to time, amend or suspend and, if suspended,
reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of the Company were granted
stock option awards under C-TEC's stock option plans. In connection with the
Distribution, 380,013 options covering Common Stock were issued. Each C-Tec
option was adjusted so that each holder would hold options to purchase shares of
Commonwealth Telephone Enterprise Common Stock, RCN Common Stock and Cable
Michigan Common Stock. The number of shares subject to, and the exercise price
of, such options were adjusted to take into account the Distribution and to
ensure that the aggregate intrinsic value of the resulting RCN, the Company and
Commonwealth Telephone Enterprises options immediately after the Distribution
was equal to the aggregate intrinsic value of the C-TEC options immediately
prior to the Distribution.
F-61
66
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to the Company stock options is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Outstanding December 31, 1995............................... 301,000
Granted..................................................... 33,750 $ 8.82
Exercised................................................... (7,250) --
Canceled.................................................... (35,500) 10.01
------- ------
Outstanding December 31, 1996............................... 292,000 8.46
Granted..................................................... 88,013 8.82
Exercised................................................... -- --
Canceled.................................................... (375) 10.01
------- ------
Outstanding December 31, 1997............................... 379,638 8.82
Granted..................................................... 47,500 31.25
Exercised................................................... (26,075) 26.21
Canceled.................................................... (10,250) --
------- ------
Outstanding November 5, 1998................................ 390,813 $11.52
======= ======
Shares exercisable November 5, 1998......................... 155,125 $ 8.45
The range of exercise prices for options outstanding at November 5, 1998
was $8.46 to $31.25.
No compensation expense related to stock option grants was recorded in
1997. For the period ended November 5, 1998 compensation expense in the amount
of $161 was recorded relating to services rendered by the Board.
Under the term of the Merger Agreement the options under the 1997 Plan vest
upon the closing of the merger and each option holder will receive $40.50 per
option.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS 123. The fair value of
these options was estimated at the date of grant using a Black Scholes option
pricing model with the following weighted average assumptions for the period
ended November 5, 1998. The fair value of these options was estimated at the
date of grant using a Black Scholes option pricing model with weighted average
assumptions for dividend yield of 0% for 1996, 1997 and 1998; expected
volatility of 39.5% for 1996, 38.6% prior to the Distribution and 49.8%
subsequent to the Distribution for 1997 and 40% for 1998; risk-free interest
rate of 5.95%, 6.52% and 5.68% for 1996, 1997 and 1998 respectively, and
expected lives of 5 years for 1996 and 1997 and 6 years for 1998.
The weighted-average fair value of options granted during 1997 and 1998 was
$4.19 and $14.97, respectively.
F-62
67
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share were as follows:
FOR THE YEARS FOR THE PERIOD
ENDED DECEMBER 31, FROM JANUARY 1,
------------------ TO NOVEMBER 5,
1996 1997 1998
------- ------- ---------------
Net (Loss) as reported........................... $(8,256) $(4,358) $(10,534)
Net (Loss) pro forma............................. (8,256) (4,373) (10,174)
Basic (Loss) per share-as reported............... (1.20) (0.63) (1.45)
Basic (Loss) per share-pro forma................. (1.20) (0.64) (1.48)
Diluted (Loss) per share-as reported............. (1.20) (0.63) (1.45)
Diluted (Loss) per share-pro forma............... (1.20) (0.64) (1.48)
In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the "Executive Stock Purchase Plan" or "C-TEC ESPP").
Under the C-TEC ESPP, participants may purchase shares of C-TEC Common Stock in
an amount of between 1% and 20% of their annual base compensation and between 1%
and 100% of their annual bonus compensation and provided, however, that in no
event shall the participant's total contribution exceed 20% of the sum of their
annual compensation, as defined by the C-TEC ESPP. Participant's accounts are
credited with the number of share units derived by dividing the amount of the
participant's contribution by the average price of a share of C-TEC Common Stock
at approximately the time such contribution is made. The share units credited to
participant's account do not give such participant any rights as a shareholder
with respect to, or any rights as a holder or record owner of, any shares of
C-TEC Common Stock. Amounts representing share units that have been credited to
a participant's account will be distributed, either in a lump sum or in
installments, as elected by the participant, following the earlier of the
participant's termination of employment with the Company or three calendar years
following the date on which the share units were initially credited to the
participant's account. It is anticipated that, at the time of distribution, a
participant will receive one share of C-TEC Common Stock for each share unit
being distributed.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the C-TEC ESPP. The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow. Shares of restricted
C-TEC Common Stock awarded under the C-TEC ESPP and share units awarded under
the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so that following
the Distribution, each such participant was credited with an aggregate
equivalent value of restricted shares of common stock of CTE, the Company and
RCN. In September 1997, the Board approved the Cable Michigan, Inc. Executive
Stock Purchase Plan, ("the "Cable Michigan ESPP"), with terms substantially the
same as the C-TEC ESPP. The number of shares which may be distributed under the
Cable Michigan ESPP as matching shares or in payment of share units is 30,000.
9. PENSIONS AND EMPLOYEE BENEFITS
Prior to the Distribution, the Company's financial statements reflect the
costs experienced for its employees and retirees while included in the C-TEC
plans.
F-63
68
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Through December 31, 1996, substantially all employees of the Company were
included in a trusteed noncontributory defined benefit pension plan, maintained
by C-TEC. Upon retirement, employees are provided a monthly pension based on
length of service and compensation. C-TEC funds pension costs to the extent
necessary to meet the minimum funding requirements of ERISA. Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
Country Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as follows for
1996:
Benefits earned during the year (service costs)............. $ 2,365
Interest cost on projected benefit obligation............... 3,412
Actual return on plan assets................................ (3,880)
Other components -- net..................................... (1,456)
-------
Net periodic pension cost................................... $ 441
=======
The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension cost (credit)
for December 31, 1996:
Discount Rate............................................... 7.5%
Expected long-term rate of return on plan assets............ 8.0%
Weighted average long-term rate of compensation increases... 6.0%
The Company's allocable share of the consolidated net periodic pension
costs (credit), based on the Company's proportionate share of consolidated
annualized salaries as of the valuation date, was approximately $10 for 1996.
These amounts are reflected in operating expenses. As discussed below, no
pension cost (credit) was recognized in 1997.
In connection with the restructuring, C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued through that date. C-TEC notified affected participants in
December 1996. In December 1996, C-TEC allocated pension plan assets of $6,984
and the related liabilities to a separate plan for employees who no longer
accrue benefits after sum distributions. The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292. The Company's
allocable share of this gain was $855. This gain results primarily from the
reduction of the related projected benefit obligation. The curtailed plan has
assets in excess of the projected benefit obligation.
C-TEC sponsors a 401(k) savings plan covering substantially all employees
of the Company who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specific
percentage of employee contributions. Contributions charged to expense were $128
in 1996. Contributions charged to expense in 1997 prior to the Distribution were
$107.
In connection with the Distribution, the Company established a qualified
saving plan under Section 401(k) of the Code. Contributions charged to expense
in 1997 were $53. Contributions charged to expense for the period from January
1, 1998 to November 5, 1998 were $164.
F-64
69
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Total rental expense, primarily for office space and pole rental, was $984,
$908 and $1,077 for the year ended December 31, 1996, 1997 and for the period
from January 1, 1998 to November 5, 1998, respectively. Rental commitments are
expected to continue to approximate $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no assurance
that there will not be further additional challenges to its rates. The 1996
statements of operations include charges aggregating approximately $833 relating
to cable rate regulation liabilities. No additional charges were incurred in the
year ended December 31, 1997 and for the period from January 1, 1998 to November
5, 1998.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company.
The Company has agreed to indemnify RCN and C-TEC and their respective
subsidiaries against any and all liabilities which arise primarily from or
relate primarily to the management or conduct of the business of the Company
prior to the effective time of the Distribution. The Company has also agreed to
indemnify RCN and C-TEC and their respective subsidiaries against 20% of any
liability which arises from or relates to the management or conduct prior to the
effective time of the Distribution of the businesses of C-TEC and its
subsidiaries and which is not a true C-TEC liability, a true RCN liability or a
true Company liability.
The Tax Sharing Agreement, by and among the Company, RCN and C-TEC (the
"Tax Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect to
tax periods, in the case of the Company, ending or deemed to end on or before
the Distribution date. Under the Tax Sharing Agreement, adjustments to taxes
that are clearly attributable to the Company group, the RCN group, or the C-TEC
group will be borne solely by such group. Adjustments to all other tax
liabilities will be borne 50% by C-TEC, 20% by the Company and 30% by RCN.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code, then the Company will be liable for any and all increases in tax
attributable thereto.
F-65
70
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company has the following transactions with affiliates:
FOR THE YEAR FOR THE
ENDED PERIOD ENDED
----------------- NOVEMBER 5,
1996 1997 1998
------- ------ ------------
Corporate office costs allocated to the Company... $ 3,498 $3,715 $1,866
Cable staff and customer service costs allocated
from RCN Cable.................................... 3,577 3,489 3,640
Interest expense on affiliate notes............... 13,952 8,447 795
Royalty fees charged by CTE....................... 585 465 --
Charges for engineering services.................. 296 -- --
Other affiliate expenses.......................... 189 171 157
In addition, RCN has agreed to obtain programming from third party
suppliers for Cable Michigan, the costs of which will be reimbursed to RCN by
Cable Michigan. In those circumstances where RCN purchases third party
programming on behalf of both RCN and the Company, such costs will be shared by
each company, on a pro rata basis, based on each company's number of
subscribers.
At December 31, 1997 and November 5, 1998, the Company has accounts
receivable from related parties of $166 and $396 respectively, for these
transactions. At December 31, 1997 and November 5, 1998, the Company has
accounts payable to related parties of $1,560 and $343 respectively, for these
transactions.
The Company had a note payable to RCN Corporation of $147,567 at December
31, 1996 primarily related to the acquisition of the Michigan cable operations
and its subsequent operations. The Company repaid approximately $110,000 of this
note payable in 1997. The remaining balance was transferred to shareholder's net
investment in connection with the Distribution.
12. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary investments with high credit
quality financial institutions. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
The Company's trade receivables reflect a customer base centered in the
state of Michigan. The Company routinely assesses the financial strength of its
customers; as a result, concentrations of credit risk are limited.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. The fair value of the revolving credit agreement is considered to
be equal to carrying value since the debt re-prices at least every six
months and the Company believes that its credit risk has not changed from
the time the floating rate debt was borrowed and therefore, would obtain
similar rates in the current market.
F-66
71
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
14. QUARTERLY INFORMATION (UNAUDITED)
The Company estimated the following quarterly data based on assumptions
which it believes are reasonable. The quarterly data may differ from quarterly
data subsequently presented in interim financial statements.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1998
Revenue.................................. $20,734 $22,311 $22,735 $ 8,741
Operating income before depreciation,
amortization, and management fees...... 9,043 10,047 10,185 12,277
Operating income (loss).................. 7,000 (3,324) (674) (7,051)
Net (loss)............................... (1,401) (5,143) (2,375) (1,615)
Net (loss) per average Common Share...... (0.20) (0.75) (0.34) (0.23)
1997
Revenue.................................. $19,557 $20,673 $20,682 $20,387
Operating income before depreciation,
amortization, and management fees...... 8,940 9,592 9,287 9,013
Operating income (loss).................. 275 809 (118) 69
Net (loss)............................... N/A N/A N/A (1,107)
Net (loss) per average Common Share...... N/A N/A N/A (0.16)
The fourth quarter information for the quarter ended December 31, 1998
includes the results of operations of the Company for the period from October 1,
1998 through November 5, 1998.
F-67
72
Report of Independent Auditors
The Audit Committee
Charter Communications, Inc.
We have audited the accompanying combined balance sheets of Fanch Cable Systems
Sold to Charter Communications, Inc. (comprised of components of TWFanch-one
Co., components of TWFanch-two Co., Mark Twain Cablevision, North Texas
Cablevision LTD., Post Cablevision of Texas L.P., Spring Green Communications
L.P., Fanch Narragansett CSI L.P., Cable Systems Inc., ARH, and Tioga), as of
November 11, 1999 and December 31, 1998, and the related combined statements of
operations, net assets and cash flows for the period from January 1, 1999
through November 11, 1999 and for the years ended December 31, 1998 and 1997.
These financial statements are the responsibility of Fanch Communications,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of North Texas Cablevision, LTD., Spring Green Communications L.P.,
Cable Systems Inc. and Fanch Narragansett CSI Limited Partnership, which
statements reflect total assets of $18,289,788 as of December 31, 1998 and
total revenues of $14,562,704 and $11,906,101 for the years ended December 31,
1998 and 1997. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to data
included for North Texas Cablevision LTD., Spring Green Communications L.P.,
Cable Systems Inc. and Fanch Narragansett CSI Limited Partnership, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of Fanch Cable Systems Sold to Charter
Communications, Inc. at November 11, 1999 and December 31, 1998, and the
combined results of its operations and its cash
F-68
73
flows for the period from January 1, 1999 through November 11, 1999 and the
years ended December 31, 1998 and 1997 in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Denver, Colorado
January 28, 2000
F-69
74
Report of Independent Auditors
The Shareholders
Cable Systems, Inc.
The Partners
Fanch Narragansett CSI Limited Partnership
We have audited the accompanying balance sheets of Cable Systems, Inc. and Fanch
Narragansett CSI Limited Partnership as of December 31, 1998 and 1997, and the
related statements of operations and cash flows for the years then ended. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined financial statements have been prepared pursuant to
Section 5.04(a) of the Loan Agreement between Cable Systems, Inc., Fanch
Narragansett CSI Limited Partnership and Fleet National Bank. Generally accepted
accounting principles do not recognize consolidated financial statements when a
less than 50% ownership ratio exists between two companies. As a result, our
opinion is restricted to the individual company statements shown.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cable Systems, Inc. and Fanch
Narragansett CSI Limited Partnership at December 31, 1998 and 1997, and the
results of its operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ Shields & Co.
March 9, 1999
Englewood, Colorado
F-70
75
Report of Independent Auditors
The Partners
North Texas Cablevision, Ltd.
We have audited the accompanying consolidated balance sheets of North Texas
Cablevision, Ltd. as of December 31, 1998 and 1997, and the related consolidated
statements of operations and partners' deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of North Texas Cablevision, Ltd.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Shields & Co.
March 9, 1999
Englewood, Colorado
F-71
76
Report of Independent Auditors
The Partners
Spring Green Communications, L.P.
We have audited the accompanying balance sheet of Spring Green Communications,
L.P. as of December 31, 1998 and 1997, and the related statements of operations
and partners' capital and cash flows from inception November 3, 1997, through
December 31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spring Green Communications,
L.P. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for the periods ended December 31, 1997, and 1998 in conformity with
generally accepted accounting principles.
/s/ Shields & Co.
March 10, 1999
Englewood, Colorado
F-72
77
Fanch Cable Systems Sold to Charter Communications, Inc.
Combined Balance Sheets
NOVEMBER 11 DECEMBER 31
1999 1998
-----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 568,583 $ 809,720
Accounts receivable, less allowance for doubtful
accounts of approximately $229,000 and $443,000
in 1999 and 1998, respectively 7,424,375 3,236,751
Prepaid expenses and other current assets 1,529,577 1,645,785
-----------------------------------
Total current assets 9,522,535 5,692,256
Property, plant and equipment:
Transmission and distribution
systems and related equipment 325,687,737 200,526,755
Furniture and equipment 13,704,415 8,389,207
-----------------------------------
339,392,152 208,915,962
Less accumulated depreciation (73,807,164) (52,484,281)
-----------------------------------
Net property, plant and equipment 265,584,988 156,431,681
Goodwill, net of accumulated amortization of
approximately $85,370,000 and $63,030,000 in 1999
and 1998, respectively 515,312,398 266,776,690
Subscriber lists, net of accumulated amortization of
approximately $28,168,000 and $15,024,000 in 1999
and 1998, respectively 67,444,869 17,615,056
Other intangible assets, net of accumulated
amortization of approximately $ 17,157,000 and
$14,411,000 in 1999 and 1998, respectively 12,032,316 11,482,409
-----------------------------------
Total intangible assets 594,789,583 295,874,155
Other assets - 1,050,815
===================================
Total assets $869,897,106 $459,048,907
===================================
F-73
78
NOVEMBER 11 DECEMBER 31
1999 1998
----------------------------------
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable and other accrued liabilities $ 7,065,436 $ 13,630,205
Subscriber advances and deposits 5,492,869 2,033,992
----------------------------------
Total current liabilities 12,558,305 15,664,197
Net assets 857,338,801 443,384,710
==================================
Total liabilities and net assets $ 869,897,106 $ 459,048,907
==================================
See accompanying notes.
F-74
79
Fanch Cable Systems Sold to Charter Communications, Inc.
Combined Statements of Operations
PERIOD FROM
JANUARY 1 TO
NOVEMBER 11 YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------------
Revenues:
Service $ 165,967,333 $ 123,183,391 $ 113,954,539
Installation and other 19,948,268 17,920,743 16,587,074
-----------------------------------------------------
185,915,601 141,104,134 130,541,613
Operating expenses, excluding depreciation
and amortization 58,504,674 42,616,007 40,346,214
Selling, general and administrative expenses 27,071,932 20,361,890 21,363,377
-----------------------------------------------------
85,576,606 62,977,897 61,709,591
Income before other expenses 100,338,995 78,126,237 68,832,022
Other expenses:
Depreciation and amortization 62,097,138 45,885,038 61,502,426
Management fees 6,161,558 3,998,259 3,663,561
Loss (gain) on disposal of assets 8,135,954 6,420,250 (1,229,272)
Other (income) expense, net (340,049) 313,693 232,102
-----------------------------------------------------
Net income before tax expense 24,284,394 21,508,997 4,663,205
Income tax expense 197,334 286,451 2,260,369
-----------------------------------------------------
Net income $ 24,087,060 $ 21,222,546 $ 2,402,836
=====================================================
See accompanying notes.
F-75
80
Fanch Cable Systems Sold to Charter Communications, Inc.
Combined Statements of Net Assets
PERIOD FROM
JANUARY 1 TO
NOVEMBER 11 YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
Net assets at beginning of period $ 443,384,710 $ 455,085,231 $ 481,540,621
Net income 24,087,060 21,222,546 2,402,836
Contributions from (payments to) owners 389,867,031 (32,923,067) (28,858,226)
------------------------------------------------------
Net assets at end of period $ 857,338,801 $ 443,384,710 $ 455,085,231
======================================================
See accompanying notes.
F-76
81
Fanch Cable Systems Sold to Charter Communications, Inc.
Combined Statements of Cash Flows
PERIOD FROM
JANUARY 1 TO
NOVEMBER 11 YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,087,060 $ 21,222,546 $ 2,402,836
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 62,097,138 45,885,038 61,502,426
Loss (gain) on disposal of assets 8,135,954 6,420,250 (1,229,272)
(Increase) decrease in accounts receivable,
prepaid expenses and other current assets (3,020,601) (2,053,483) 2,067,370
(Decrease) increase in accounts payable and other
accrued liabilities and subscriber advances and
deposits (3,105,892) 1,434,091 (4,676,441)
------------------------------------------------------
Net cash provided by operating activities 88,193,659 72,908,442 60,066,919
INVESTING ACTIVITIES
Acquisition of systems (413,345,351) - (18,243,593)
Purchases of property, plant and equipment (64,956,476) (39,343,681) (17,213,637)
Additions to intangibles, net - (909,674) (1,116,251)
Proceeds from sale of equipment - 103,028 5,337,321
------------------------------------------------------
Net cash used in investing activities (478,301,827) (40,150,327) (31,236,160)
FINANCING ACTIVITIES
Contributions from (payments to) owners 389,867,031 (32,923,067) (28,858,226)
------------------------------------------------------
Net cash provided by (used in) financing activities 389,867,031 (32,923,067) (28,858,226)
Net change in cash and cash equivalents (241,137) (164,952) (27,467)
Cash and cash equivalents at beginning of year 809,720 974,672 1,002,139
======================================================
Cash and cash equivalents at end of year $ 568,583 $ 809,720 $ 974,672
======================================================
See accompanying notes.
F-77
82
Fanch Cable Systems Sold to Charter Communications, Inc.
Notes to Combined Financial Statements
November 11, 1999
1. BASIS OF PRESENTATION
ACQUISITION BY CHARTER COMMUNICATIONS, INC. AND BASIS OF PRESENTATION
The Fanch Cable Systems Sold to Charter Communications, Inc. are comprised of
the following entities: components of TWFanch-one Co., components of TWFanch-two
Co., Mark Twain Cablevision, North Texas Cablevision LTD., Post Cablevision of
Texas L.P., Spring Green Communications L.P., Fanch Narragansett CSI L.P., Cable
Systems Inc., ARH, and Tioga (the "Combined Systems"). The Combined Systems were
managed by Fanch Communications, Inc. (the "Management Company").
Pursuant to a purchase agreement, dated May 12, 1999 between certain partners
("Partners") of the Combined Systems and Charter Communications, Inc.
("Charter"), the Partners of the Combined Systems entered into a distribution
agreement whereby the Partners will distribute and/or sell certain of their
cable systems to certain of their respective Partners. These Partners will then
sell the Combined Systems through a combination of asset sales and the sale of
equity and partnership interests to Charter.
Accordingly, these combined financial statements of the Combined Systems reflect
the "carved out" financial position, results of operations, cash flows and
changes in net assets of the operations of the Combined Systems as if they had
been operating as a separate company. For purposes of determining the financial
statement amounts of the Combined Systems, management excluded certain systems
(the "Excluded Systems"). In order to exclude the results of operations and
financial position of the Excluded Systems from the combined financial
statements, management has estimated certain revenues, expenses, assets and
liabilities that are not specifically identified to systems based on the ratio
of each Excluded System's basic subscribers to the total basic subscribers
served by the respective partnerships. Management believes the basis used for
these allocations is reasonable. The Combined Systems' results of operations are
not necessarily indicative of future operating results or the results that would
have occurred if the Combined Systems were a separate legal entity.
DESCRIPTION OF BUSINESS
The Combined Systems, operating in various states throughout the United States,
are principally engaged in operating cable television systems and related
activities under non-exclusive franchise agreements.
F-78
83
Fanch Cable Systems Sold to Charter Communications, Inc.
Notes to Combined Financial Statements (continued)
1. BASIS OF PRESENTATION (CONTINUED)
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
Combined Systems, as if the Combined Systems were a single company. All material
intercompany balances and transactions have been eliminated.
CASH, INTERCOMPANY ACCOUNTS AND DEBT
Under the Combined Systems' centralized cash management system, the cash
requirements of its individual operating units were generally subsidized by the
Management Company and the cash generated or used by the individual operating
units was transferred to/from the Management Company, as appropriate, through
the use of intercompany accounts. The resulting intercompany account balances
are included in net assets and all the net cash generated from (used in)
operations, investing activities and financing activities has been included in
the Combined Systems' net contributions by (payments to) the Management Company
in the combined statements of cash flows. The Management Company maintains
external debt to fund and manage operations on a centralized basis. Debt,
unamortized loan costs and interest expense of the Management Company have not
been allocated to the Combined Systems. As such, the debt, unamortized loan
costs, and related interest are not representative of the debt that would be
required or interest expense incurred if the Combined Systems were a separate
legal entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
The Combined Systems record additions to property, plant and equipment at cost,
which in the case of assets constructed includes amounts for material, labor and
overhead. Maintenance and repairs are charged to expense as incurred.
For financial reporting purposes, the Combined Systems use the straight-line
method of depreciation over the estimated useful lives of the assets as follows:
LIVES
--------------------
Transmission and distribution systems
and related equipment 3 to 20 years
Furniture and equipment 4 to 8 1/2 years
F-79
84
Fanch Cable Systems Sold to Charter Communications, Inc.
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Combined Systems pay an immaterial amount of income taxes. Taxes are paid
for Cable Systems, Inc., Hornell, ARH, Tioga, and systems operating in the State
of Michigan. The majority of the Combined Systems are various partnerships and,
as such, the tax effects of the Combined Systems' results of operations accrue
to the partners.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.
REVENUE RECOGNITION
The Combined Systems recognize revenue when services have been delivered.
Revenues on long-term contracts are recognized over the term of the contract
using the straight-line method.
INTANGIBLES
Intangibles are recorded at cost and are amortized on a straight-line basis over
their estimated useful lives. The estimated useful lives are as follows:
LIVES
-----------------------------------
Goodwill 7 to 20 years ( 7 to 10 in 1997)
Subscriber list 3 to 7 years
Other, including franchise costs 2 to 13 years
Amortization expense was $38,229,923, $25,955,253, and $44,595,992 for the
period from January 1, 1999 to November 11, 1999 and for the years ended
December 31, 1998 and 1997, respectively. Certain of the Combined Systems
changed the estimated useful life of goodwill from 7 and 10 years in 1997 to 20
years effective January 1, 1998 to
F-80
85
Fanch Cable Systems Sold to Charter Communications, Inc.
Notes to Combined Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
better match the amortization period to anticipated economic lives of the
franchises and to better reflect industry practice. This change in estimate
resulted in an increase in net income of approximately $20 million for the year
ended December 31, 1998.
3. DISPOSAL OF ASSETS
During the periods presented, various upgrades were performed on certain plant
locations. The cost and accumulated depreciation applicable to the plant
replaced has been estimated and recorded as a loss on disposal, which is
summarized as follows:
PERIOD FROM
JANUARY 1 TO
NOVEMBER 11 YEAR ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------------
Cost $12,238,388 $8,606,851 $ 5,529,505
Accumulated depreciation (4,102,434) (2,083,573) (2,003,191)
Proceeds - (103,028) (5,337,321)
Disposal of intangible assets - - 2,978,143
Accumulated amortization - - (2,396,408)
----------------------------------------------------
Loss (gain) on disposal $ 8,135,954 $6,420,250 $(1,229,272)
====================================================
4. PURCHASE AND SALE OF SYSTEMS
On March 30, 1997, the Combined Systems acquired cable television systems,
including plant and franchise and business licenses, serving communities in the
states of Pennsylvania and Virginia. The purchase price was $1.4 million, of
which $765,000 was allocated to property, plant and equipment and $635,000 was
allocated to intangible assets.
Concurrent with the purchase of the systems in Pennsylvania on March 30, 1997,
the Combined Systems sold certain of these assets, including plant and franchise
and business licenses, for $340,000. No gain or loss on this transaction was
recorded.
On June 30, 1997, the Combined Systems acquired cable television systems,
including plant and franchise and business licenses, serving communities in the
State of Indiana. The purchase price was $6,345,408, of which $2,822,260 was
allocated to property, plant and equipment and $3,523,148 was allocated to
intangible assets.
F-81
86
Fanch Cable Systems Sold to Charter Communications, Inc.
Notes to Combined Financial Statements (continued)
4. PURCHASE AND SALE OF SYSTEMS (CONTINUED)
On November 3, 1997, the Combined Systems acquired substantially all of the
assets, including franchise and business licenses, for cable systems serving
various communities in Wisconsin. The purchase price was $8.7 million, of which
$3.9 million was allocated to property, plant and equipment and $4.8 million was
allocated to intangible assets.
On June 12, 1998, the Combined Systems entered into an agreement to acquire
cable television systems, including plant and franchise and business licenses,
serving communities in the State of Michigan. The purchase price was $42
million, subject to purchase price adjustments. In connection with the
agreement, the Combined Systems received an additional $8.76 million in capital
contributions. The agreement was completed and the assets were transferred to
the Combined Systems on February 1, 1999. The Combined Systems recorded
approximately $11.7 million in property, plant and equipment and approximately
$30.3 million in intangible assets.
On July 8, 1998, the Combined Systems entered into an Asset Purchase Agreement
to acquire cable television systems, including plant and franchise and business
licenses, serving communities in the states of Maryland, Ohio and West Virginia.
The purchase price was $248 million, subject to purchase price adjustments. The
transaction was completed and the assets were transferred to the Combined
Systems on February 24, 1999. The Combined Systems recorded approximately $39
million to property, plant and equipment and approximately $209 million to
intangible assets.
On January 15, 1999, the Combined Systems entered into an agreement to acquire
cable television systems, including plant and franchise and business licenses,
serving communities in the State of Michigan from a related party. The purchase
price was $70 million, subject to purchase price adjustments. The agreement was
completed and the assets were transferred to the Combined Systems on March 31,
1999. In connection with the agreement, the Combined Systems received an
additional $25 million in capital contributions. The Combined Systems recorded
approximately $14.4 million to property, plant and equipment and approximately
$55.6 million to intangible assets.
On May 12, 1999, the Combined Systems entered into an agreement to acquire the
stock of ARH, Ltd. ARH, Ltd. is engaged in the business of owning and operating
cable television systems in Texas and West Virginia. The purchase price was $50
million subject to purchase price adjustments. The transaction was completed and
the assets were transferred to the Combined Systems on June 22, 1999. The
Combined Systems recorded approximately $3.9 million to property, plant and
equipment and approximately $46.1 million to intangible assets.
F-82
87
Fanch Cable Systems Sold to Charter Communications, Inc.
Notes to Combined Financial Statements (continued)
4. PURCHASE AND SALE OF SYSTEMS (CONTINUED)
Unaudited pro forma operating results as though the acquisitions discussed above
had occurred at the beginning of the periods, with adjustments to give effect to
amortization of franchises and certain other adjustments for the period, are as
follows:
PERIOD FROM
JANUARY 1 TO YEAR ENDED
NOVEMBER 11 DECEMBER 31
1999 1998
------------------------------
Revenues $202,259,532 $197,803,975
Income from operations 92,986,581 107,053,905
Net income 27,704,095 32,130,293
The unaudited pro forma information has been presented for comparative purposes
and does not purport to be indicative of the results of operations had these
transactions been complete as of the assumed date or which may be obtained in
the future.
5. RELATED PARTIES
The Combined Systems have entered into management agreements with the Management
Company whose sole stockholder is affiliated with several of the Combined
Systems. The Combined Systems have also entered into a management agreement with
an entity (the "Affiliated Company") that has ownership interest in certain of
the Combined Systems. The agreements provide that the Management Company and the
Affiliated Company will manage their respective systems and receive annual
compensation equal to 2.5% to 5% of the gross revenues from operations from
their respective systems. Management fees were $6,161,558, $4,072,179, and
$3,663,560 for the period from January 1, 1999 to November 11, 1999 and the
years ended December 31, 1998 and 1997, respectively.
A company affiliated with the Management Company provides subscriber billing
services for a portion of the Combined Systems' subscribers. The Combined
Systems incurred fees for monthly billing and related services in the
approximate amounts of $362,000, $507,000, and $535,000 for the period from
January 1, 1999 to November 11, 1999 and the years ended December 31, 1998 and
1997, respectively.
The Combined Systems purchase the majority of their programming through the
Affiliated Company. Fees incurred for programming were approximately
$38,356,000,
F-83
88
Fanch Cable Systems Sold to Charter Communications, Inc.
Notes to Combined Financial Statements (continued)
5. RELATED PARTIES (CONTINUED)
$24,600,000, and $22,200,000 for the period from January 1, 1999 to November 11,
1999 and the years ended December 31, 1998 and 1997, respectively.
The Management Company pays amounts on behalf of and receives amounts from the
Combined Systems in the ordinary course of business. Accounts receivable and
payable of the Combined Systems include amounts due from and due to the
Management Company.
6. COMMITMENTS
The Combined Systems, as an integral part of their cable operations, have
entered into lease contracts for certain items including tower rental, microwave
service and office space. Rent expense, including office, tower and pole rent,
for the period from January 1, 1999 to November 11, 1999 and the years ended
December 31, 1998 and 1997 was approximately $3,110,000, $2,462,866, and
$2,238,394, respectively. The majority of these agreements are on month-to-month
arrangements and, accordingly, the Combined Systems have no material future
minimum commitments related to these leases.
7. EMPLOYEE BENEFIT PLAN
The Combined Systems each have a defined contribution plan (the "Plan") which
qualifies under section 401(k) of the Internal Revenue Code. Therefore, each
system of the Combined Systems participates in the respective plan. Combined
Systems contributions were approximately $497,000, $354,000, and $297,000 for
the period from January 1, 1999 to November 11, 1999 and the years ended
December 31, 1998 and 1997, respectively.
F-84
89
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements are based on the
historical financial statements of Charter Communications Holdings, LLC (Charter
Holdings). Since January 1, 1999, Charter Communications Holding Company, LLC
(Charter Holdco) and Charter Holdings have closed numerous acquisitions. In
addition, a subsidiary of Charter Holdings merged with Marcus Cable Holdings,
LLC (Marcus Holdings) in April 1999. Charter Holdings' consolidated financial
statements are adjusted on a pro forma basis to illustrate the estimated effects
of the acquisition of cable systems from InterMedia Capital Partners IV, L.P.,
InterMedia Partners and affiliates (collectively "InterMedia" herein), and the
transfers of Avalon Cable LLC, cable systems of Fanch Cablevision L.P. and
affiliates, and Falcon Communications, L.P. from Charter Holdco in January 2000
(the "January Transfers") as if these transactions had occurred on September 30,
1999 for the Unaudited Pro Forma Balance Sheet and to illustrate the estimated
effects of the following transactions as if they had occurred on January 1, 1998
for the Unaudited Pro Forma Statements of Operations:
(1) the acquisition of Charter Holdings on December 23, 1998 by Paul G.
Allen;
(2) the acquisition of certain cable systems from Sonic Communications
Inc. on May 20, 1998 by Charter Holdings for an aggregate purchase
price net of cash acquired, of $228.4 million, comprised of $167.5
million in cash and $60.9 million in a note payable to the seller;
(3) the acquisition of Marcus Cable Company, L.L.C. (Marcus Cable) by Mr.
Allen and Marcus Holdings' merger with and into Charter Holdings
effective March 31, 1999;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) the acquisitions by Charter Communications Holding Company, Charter
Holdings and their subsidiaries completed from January 1, 1998 through
October 1, 1999;
(6) the refinancing of all the debt of our subsidiaries through the
issuance of the March 1999 Charter Holdings senior notes and senior
discount notes and funding under Charter Operating's credit
facilities; and
(7) the completion of the January Transfers, including the repurchase of
the Falcon 8.375% senior debentures due 2010 and 9.285% senior
discount debentures due 2010, and the Avalon 9.375% senior
subordinated notes due 2008 through the issuance and sale of high
yield senior notes in January 2000 (the "January 2000 Notes").
The Unaudited Pro Forma Financial Statements reflect the application of the
principles of purchase accounting to the transactions listed in items (1)
through (5) above. The allocation of certain purchase prices is based, in part,
on preliminary information, which is subject to adjustment upon obtaining
complete valuation information of intangible assets and post-closing purchase
price adjustments. We believe that finalization of the purchase prices will not
have a material impact on the results of operations or financial position of
Charter Holdings.
The Unaudited Pro Forma Financial Statements also illustrate the effects of
the issuance and sale by us of $1.532 billion January 2000 Notes. A portion of
the net proceeds were used to repurchase the notes identified in (7) above. The
remaining proceeds will be used to repurchase notes assumed in the purchase of
Bresnan Communications Company Limited Partnership.
The Unaudited pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable. In particular, the pro
forma adjustments assume that we will transfer to sellers of the InterMedia
cable systems the Indiana cable system that was retained at the time of the
InterMedia closing pending receipt of the necessary regulatory approvals.
The Unaudited Pro Forma Financial Statements of Charter Holdings do not
purport to be indicative of what our financial position or results of operations
would actually have been had the transactions described above been completed on
the dates indicated or to project our results of operations for any future date.
P-1
90
CHARTER COMMUNICATIONS HOLDINGS, LLC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------
CHARTER
CHARTER HOLDINGS JANUARY OFFERING
HOLDINGS ACQUISITIONS TRANSFERS ADJUSTMENTS
(NOTE A) (NOTE B) SUBTOTAL (NOTE B) (NOTE C) TOTAL
----------- ----------- ----------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
Revenues.............................. $ 970,362 $ 396,598 $ 1,366,960 $ 578,178 $ -- $ 1,945,138
----------- ----------- ----------- ------------ --------- ------------
Operating expenses:
Operating, general and
administrative.................... 505,041 201,163 706,204 280,754 -- 986,958
Depreciation and amortization....... 505,058 203,492 708,551 383,692 -- 1,092,242
Stock option compensation expense... 59,288 -- 59,288 -- -- 59,288
Corporate expense charges (Note D).. 18,309 32,113 50,422 14,043 -- 64,465
Management fees..................... -- 6,878 6,878 4,799 -- 11,677
----------- ----------- ----------- ------------ --------- ------------
Total operating expenses.......... 1,087,696 443,646 1,531,343 683,288 -- 2,214,630
----------- ----------- ----------- ------------ --------- ------------
Loss from operations.................. (117,334) (47,048) (164,383) (105,110) -- (269,492)
Interest expense...................... (310,650) (99,161) (409,811) (196,119) (11,663) (617,593)
Interest income....................... 2,284 501 2,785 807 -- 3,592
Other expense......................... (335) (440) (775) (15) -- (790)
----------- ----------- ----------- ------------- --------- ------------
Loss before extraordinary item........ $ (426,035) $ (146,148) $ (572,184) $ (300,437) $ (11,663) $ (884,283)
=========== =========== =========== ============ ========== ============
OTHER FINANCIAL DATA:
Adjusted EBITDA (Note E).............. $ 465,321 $ 195,435 $ 660,756 $ 297,424 $ 958,180
Adjusted EBITDA margin (Note F)....... 48.0% 49.3% 48.3% 51.4% 49.3%
P-2
91
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Holdings consist of the
following (dollars in thousands):
HISTORICAL
---------------------------
1/1/99 1/1/99
THROUGH THROUGH
9/30/99 3/31/99
CHARTER MARCUS PRO FORMA
HOLDINGS HOLDINGS (A) ADJUSTMENTS TOTAL
----------- ------------ ------------- -------------
Revenues............................................. $ 845,182 $ 125,180 $ -- $ 970,362
----------- ------------ ------------- -------------
Operating expenses:
Operating, general and administrative............. 436,057 68,984 -- 505,041
Depreciation and amortization..................... 441,391 51,688 11,979 (b) 505,058
Stock option compensation expense................. 59,288 -- -- 59,288
Corporate expense charges......................... 18,309 -- -- 18,309
Management fees................................... -- 4,381 (4,381) (c) --
----------- ------------ ------------- -------------
Total operating expenses....................... 955,045 125,053 7,598 1,087,696
----------- ------------ ------------- -------------
Income (loss) from operations........................ (109,863) 127 (7,598) (117,334)
Interest expense..................................... (288,750) (27,067) 5,167 (d) (310,650)
Interest income...................................... 18,326 104 (16,146) (e) 2,284
Other expense........................................ (177) (158) -- (335)
----------- ------------ ------------- -------------
Loss before extraordinary item....................... $ (380,464) $ (26,994) $ (18,577) $ (426,035)
============ ============ ============= =============
(a) Marcus Holdings represents the results of operations of Marcus Cable
through March 31, 1999, the date of its merger with Charter Holdings.
(b) As a result of Mr. Allen acquiring a controlling interest in Marcus
Cable, a large portion of the purchase price was recorded as franchises
($2.5 billion) that are amortized over 15 years. This resulted in
additional amortization for the period from January 1, 1999 through
March 31, 1999. The adjustment to depreciation and amortization expense
consists of the following (dollars in millions):
WEIGHTED AVERAGE
USEFUL LIFE DEPRECIATION/
FAIR VALUE (IN YEARS) AMORTIZATION
---------- ---------- ------------
Franchises........................................... $2,500.0 15 $ 40.8
Cable distribution systems........................... 720.0 8 21.2
Land, buildings and improvements..................... 28.3 10 0.7
Vehicles and equipment............................... 13.6 3 1.0
-----------
Total depreciation and amortization.............. 63.7
Less-historical depreciation and amortization
of Marcus Holdings............................ (51.7)
-----------
Adjustment................................. $ 12.0
===========
(c) Reflects the elimination of management fees.
(d) As a result of the acquisition of Marcus Cable by Mr. Allen, the
carrying value of outstanding debt was recorded at estimated fair
value, resulting in a debt premium that is to be amortized as an offset
to interest expense over the term of the debt. Interest expense was
further reduced by the effects of the extinguishment of substantially
all of our long-term debt in March 1999, excluding borrowings of our
previous credit facilities, and the refinancing of all previous credit
facilities.
(e) Reflects the elimination of interest income on excess cash since we
assumed substantially all such cash was used to acquire InterMedia.
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NOTE B: Pro forma operating results for the acquisitions completed by
Charter Holdings and the entities transferred to Charter Holdings in January
2000, consist of the following (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------------------------------------
CHARTER HOLDINGS ACQUISITIONS-HISTORICAL
---------------------------------------------------------------------------------------------------
GREATER
AMERICAN MEDIA INTERMEDIA
RENAISSANCE(A) CABLE(A) SYSTEMS(A) HELICON(A) RIFKIN(A) SYSTEMS OTHER(A) TOTAL
-------------- -------- ---------- ---------- --------- ---------- -------- -----
Revenues....................... $ 20,396 $ 12,311 $ 42,348 $ 49,565 $ 152,364 $ 152,789 $ 11,303 $ 441,076
-------- --------- --------- --------- ------- ------- --------- ---------
Operating expenses:
Operating, general and
administrative............. 9,382 6,465 26,067 31,693 95,077 84,174 6,213 259,071
Depreciation and amortization 8,912 5,537 5,195 16,617 77,985 79,325 3,746 197,317
Management fees.............. -- 369 -- 2,511 2,513 2,356 447 8,196
-------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses... 18,294 12,371 31,262 50,821 175,575 165,855 10,406 464,584
-------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations.. 2,102 (60) 11,086 (1,256) (23,211) (13,066) 897 (23,508)
Interest expense............... (6,321) (3,218) (565) (20,682) (34,926) (17,636) (1,944) (85,292)
Interest income................ 122 32 -- 124 -- 187 -- 465
Other income (expense)......... -- 2 (398) -- (12,742) (2,719) (30) (15,887)
-------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes........................ (4,097) (3,244) 10,123 (21,814) (70,879) (33,234) (1,077) (124,222)
Income tax expense (benefit)... (65) 5 4,535 -- (1,975) (2,681) -- (181)
-------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item........... $ (4,032) $ (3,249) $ 5,588 $ (21,814) $ (68,904) $ (30,553) $ (1,077) $(124,041)
======== ========= ========= ========= ========= ========= ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------
JANUARY TRANSFERS-HISTORICAL
------------------------------------------
FALCON FANCH AVALON TOTAL
------ ----- ------ -----
Revenues................................................................. $ 320,228 $ 155,626 $ 80,198 $ 556,052
------- ------- --------- ---------
Operating expenses:
Operating, general and administrative.................................. 167,824 69,895 45,119 282,838
Depreciation and amortization.......................................... 168,546 49,172 33,574 251,292
Equity-based deferred compensation..................................... 44,600 -- -- 44,600
Management fees........................................................ -- 4,253 -- 4,253
--------- --------- --------- ---------
Total operating expenses............................................. 380,970 123,320 78,693 582,983
--------- --------- --------- ---------
Income (loss) from operations............................................ (60,742) 32,306 1,505 (26,931)
Interest expense......................................................... (98,931) (950) (34,340) (134,221)
Interest income.......................................................... -- 9 743 752
Other income (expense)................................................... 8,085 (842) -- 7,243
--------- --------- --------- ---------
Income (loss) before income taxes........................................ (151,588) 30,523 (32,092) (153,157)
Income tax expense (benefit)............................................. (3,022) 177 (1,362) (4,207)
--------- --------- ---------- ---------
Income (loss) before extraordinary item.................................. $(148,566) $ 30,346 $ (30,730) $(148,950)
========= ========= ========= =========
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NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
CHARTER HOLDINGS ACQUISITIONS
--------------------------------------------------------------------------------
PRO FORMA
--------------------------------------------------------------------------------
HISTORICAL ACQUISITIONS(B) DISPOSITIONS(C) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------- ---------
Revenues $ 441,076 $ 8,286 $(49,436) $ (3,328)(e) $ 396,598
---------- -------- -------- -------- ---------
Operating expenses:
Operating, general and
administrative 259,071 4,358 (23,566) (38,700)(e)(f) 201,163
Depreciation and amortization 197,317 1,126 (20,845) 25,894 (g) 203,492
Equity-based deferred
compensation -- -- -- -- --
Corporate expense charges -- -- -- 32,113 (f) 32,113
Management fees 8,196 395 (1,713) -- 6,878
---------- -------- -------- -------- ---------
Total operating expenses 464,584 5,879 (46,124) 19,307 443,646
---------- -------- -------- -------- ---------
Income (loss) from operations (23,508) 2,407 (3,312) (22,635) (47,048)
Interest expense (85,292) (1,366) 11 (12,514)(i) (99,161)
Interest income 465 36 -- -- 501
Other income (expense) (15,887) 9 (21) 15,459 (j) (440)
---------- -------- -------- -------- ---------
Income (loss) before income taxes (124,222) 1,086 (3,322) (19,690) (146,148)
Income tax expense (benefit) (181) (114) -- 295 (k) --
---------- -------- -------- -------- ---------
Income (loss) before
extraordinary item $ (124,041) $ 1,200 $ (3,322) $(19,985) $(146,148)
========== ======== ======== ========= =========
NINE MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------------------
JANUARY 2000 ACQUISITIONS
-------------------------------------------------------------------------------
PRO FORMA
-------------------------------------------------------------------------------
HISTORICAL ACQUISITIONS(B) DISPOSITIONS(D) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------- ---------
Revenues $ 556,052 $ 22,583 $ (457) $ -- $ 578,178
---------- --------- --------- --------- ---------
Operating expenses:
Operating, general and
administrative 282,838 12,199 (240) (14,043)(f) 280,754
Depreciation and amortization 251,292 5,378 (195) 127,217 (g) 383,692
Equity-based deferred
compensation 44,600 -- -- (44,600)(h) --
Corporate expense charges -- -- -- 14,043 (f) 14,043
Management fees 4,253 546 -- -- 4,799
---------- --------- --------- --------- ---------
Total operating expenses 582,983 18,123 (435) 82,617 683,288
---------- --------- --------- --------- ---------
Income (loss) from operations (26,931) 4,460 (22) (82,617) (105,110)
Interest expense (134,221) (504) 2 (61,396)(i) (196,119)
Interest income 752 55 -- -- 807
Other income (expense) 7,243 (14) (2,555) (4,689)(j) (15)
---------- --------- --------- --------- ---------
Income (loss) before income taxes (157,157) 3,997 (2,575) (148,702) (300,437)
Income tax expense (benefit) (4,207) 102 -- 4,105 (k) --
---------- --------- --------- --------- ---------
Income (loss) before
extraordinary item $ (148,950) $ (3,895) $ (2,575) $(152,807) $(300,437)
========== ========= ========= ========= =========
(a) Renaissance represents the results of operations of Renaissance Media
Group LLC through April 30, 1999, the date of acquisition by Charter
Holdings. American Cable represents the results of operations of
American Cable Entertainment, LLC through May 7, 1999, the date of
acquisition by Charter Holdings. Greater Media Systems represents the
results of operations of cable systems of Greater Media Cablevision,
Inc. through June 30, 1999, the date of acquisition by Charter
Holdings. Helicon represents the results of operations of Helicon
Partners I, L.P. and affiliates through July 30, 1999, the date of
acquisition by Charter Holdings. Rifkin represents the results of
operations through September 13, 1999, the date of acquisition by
Charter Holdings. Other represents the results of operations of Vista
Broadband Communications, L.L.C. through July 30, 1999, the date of
acquisition by Charter Holdings and the results of operations of cable
systems of Cable Satellite of South Miami, Inc. through August 4, 1999,
the date of acquisition by Charter Holdings.
(b) Represents the historical results of operations for the period from
January 1, 1999 through the date of purchase for acquisitions completed
by Rifkin, Falcon, Fanch, and Avalon. These acquisitions were accounted
for using the purchase method of accounting. The purchase price in
millions and closing dates for the significant acquisitions are as
follows:
RIFKIN FANCH
------------- -------------
Purchase price............ $165.0 $42.2
Closing date.............. February 1999 February 1999
Purchase price............ $53.8 $248.0
Closing date.............. July 1999 February 1999
Purchase price............ $70.5
Closing date.............. March 1999
Purchase price............ $50.0
Closing date.............. June 1999
(c) Represents the elimination of the operating results related to the
cable systems transferred to InterMedia as part of a swap of cable
systems in October 1999. The agreed value of our systems transferred to
InterMedia was $420.0 million. This number includes 30,000 customers
served by an Indiana cable system that we did not transfer at the time
of the InterMedia closing because some of the necessary regulatory
approvals were still pending. We are obligated to transfer this system
to InterMedia upon receipt of such regulatory approvals. We will have
to pay $88.2 million to InterMedia if we do not obtain timely
regulatory approvals for our transfer to InterMedia of the Indiana
cable system and we are unable to transfer replacement systems. No
material gain or loss was recorded on the disposition as these systems
were recently acquired and recorded at fair value at that time.
(d) Represents the elimination of the operating results related to the sale
of a Falcon cable system sold in January 1999.
(e) Reflects the elimination of historical revenues and expenses associated
with an entity not included in the purchase by Charter Holdings.
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94
(f) Reflects a reclassification of expenses representing corporate expenses
that would have occurred at Charter Investment, Inc. totaling $46.2
million and the elimination of stock compensation expenses that were
included in operating, general and administrative expense.
(g) Represents additional depreciation and amortization as a result of
acquisitions completed by Charter Holdings and the January Transfers. A
large portion of the purchase price was allocated to franchises ($9.9
billion) that are amortized over 15 years. The adjustment to
depreciation and amortization expense consists of the following
(dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
------------ ---------------- -------------
Franchises................................................... $ 9,866.3 15 $ 441.4
Cable distribution systems................................... 1,500.3 8 127.5
Land, buildings and improvements............................. 46.8 10 3.0
Vehicles and equipment....................................... 77.3 3 15.3
------------
Total depreciation and amortization...................... 587.2
Less-historical depreciation and amortization............ (434.1)
-------------
Adjustment............................................ $ 153.1
============
(h) Reflects the elimination of change in control payments under the terms
of Falcon's equity-based compensation plans that were triggered by the
acquisition of Falcon. These plans will be terminated and the employees
will participate in the option plan of Charter Communications Holding
Company. As such, these costs will not recur.
(i) Reflects additional interest expense on borrowings, which have been or
will be used to finance the acquisitions as follows (dollars in
millions):
$165.0 million of credit facilities at a composite current rate of 8.7%--Avalon.................. $ 10.8
$150.0 million 9.375% senior subordinated notes--Avalon.......................................... 10.5
$196.0 million 11.875% senior discount notes--Avalon............................................. 10.8
$870.0 million of credit facilities at a composite current rate of 8.4%--Fanch................... 54.9
$1.0 billion of credit facilities at a composite current rate of 7.9%--CC VII-(Falcon)........... 59.1
$375.0 million 8.375% senior debentures--Falcon.................................................. 23.6
$435.3 million 9.285% senior discount debentures--Falcon......................................... 26.4
Interest expense for recent acquisitions prior to closing at composite current rate of 8.2%...... 99.2
---------
Total pro forma interest expenses........................................................... 295.3
Less-historical interest expense from acquired companies.................................... (221.4)
---------
Adjustment............................................................................... $ 73.9
=========
An increase in the interest rate of 0.125% on all variable rate debt
would result in an increase in interest expense of $5.2 million.
(j) Represents the elimination of gain (loss) on sale of cable systems
whose results of operations have been eliminated in (c) and (d) above.
(k) Reflects the elimination of income tax expense (benefit) as a result of
being acquired by a limited liability company.
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95
NOTE C: The offering adjustment to increase interest expense by
approximately $11.7 million consists of the following (dollars in millions):
INTEREST
DESCRIPTION EXPENSE
- ----------- ----------
$883.3 million of January 2000 High Yield Notes (at a blended rate of 10.5%).............................. $ 69.9
Amortization of debt issuance costs....................................................................... 2.3
----------
Total pro forma interest expense....................................................................... 72.2
Less-historical interest expense....................................................................... (60.5)
----------
Adjustment......................................................................................... $ 11.7
==========
NOTE D: Charter Investment, Inc. provided corporate management and
consulting services to Charter Holdings. In connection with the initial public
offering of common stock by Charter Communications, Inc., the existing
management agreement was assigned to Charter Communications, Inc.
NOTE E: Adjusted EBITDA represents loss before extraordinary item,
income taxes, depreciation and amortization, stock option compensation expense,
corporate expense charges, management fees, and other income (expense). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of a
cable company's ability to service indebtedness. However, adjusted EBITDA should
not be considered as an alternative to income from operations or to cash flows
from operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. Adjusted EBITDA should also not
be construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because adjusted EBITDA is not calculated
identically by all companies, the presentation here may not be comparable to
other similarly titled measures of other companies. Management's discretionary
use of funds depicted by adjusted EBITDA may be limited by working capital, debt
service and capital expenditure requirements and by restrictions related to
legal requirements, commitments and uncertainties.
NOTE F: Adjusted EBITDA margin represents adjusted EBITDA as a
percentage of revenues.
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CHARTER COMMUNICATIONS, HOLDINGS, LLC
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------
CHARTER
CHARTER MARCUS HOLDINGS JANUARY OFFERING
HOLDINGS HOLDINGS ACQUISITIONS TRANSFERS ADJUSTMENTS
(NOTE A) (NOTE B) (NOTE C) SUBTOTAL (NOTE C) (NOTE D) TOTAL
--------- -------- ------------ ----------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
Revenues............................ $ 601,953 $ 457,929 $ 597,471 $ 1,657,353 $ 754,899 $ -- $ 2,412,252
Operating expenses:
Operating, general and administrative 304,555 236,595 291,989 833,139 371,881 -- 1,205,020
Depreciation and amortization..... 370,406 258,348 330,566 959,320 524,095 -- 1,483,415
Stock option compensation expense. 845 -- -- 845 -- -- 845
Corporate expense charges (Note E) 16,493 17,042 20,991 54,526 21,322 -- 75,848
Management fees................... -- -- 14,668 14,668 6,135 -- 20,803
--------- --------- ---------- ----------- --------- -------- -----------
Total operating expenses........ 692,299 511,985 658,214 1,862,498 923,433 -- 2,785,931
--------- --------- ---------- ----------- --------- -------- -----------
Loss from operations................ (90,346) (54,056) (60,743) (205,145) (168,534) -- (373,679)
Interest expense.................... (200,794) (137,627) (228,793) (567,214) (260,284) (18,272) (845,770)
Other income (expense).............. 518 -- (5,825) (5,307) (5,637) -- (10,944)
--------- --------- ---------- ----------- --------- --------- -----------
Loss before extraordinary item...... $(290,622) $(191,683) $ (295,361) $ (777,666) $(434,455) $ (18,272) $(1,230,393)
========= ========= ========== =========== ========= ========= ===========
OTHER FINANCIAL DATA:
Adjusted EBITDA (Note F)............ $ 297,398 $ 221,334 $ 305,482 $ 824,214 383,018 $ 1,207,232
Adjusted EBITDA margin (Note G)..... 49.4% 48.3% 51.1% 49.7% 50.7% 50.0%
P-8
97
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Holdings including the
acquisition of us on December 23, 1998 by Mr. Allen and the acquisition of Sonic
Communications, Inc. (Sonic), consist of the following (dollars in thousands):
12/24/98 1/1/98
THROUGH THROUGH
12/31/98 1/1/98 THROUGH 12/23/98 5/20/98
-------- ------------------------------ -------
CHARTER CCA CHARTERCOMM CHARTER
HOLDINGS GROUP HOLDINGS HOLDINGS SONIC ELIMINATIONS SUBTOTAL
-------- --------- -------- -------- ------- ------------ ---------
Revenues.................................. $ 13,713 $ 324,432 $196,801 $ 49,731 $17,276 $ -- $ 601,953
-------- --------- -------- -------- ------- ------- ---------
Operating expenses:.......................
Operating, general and administrative 7,134 164,145 98,331 25,952 8,993 -- 304,555
Depreciation and amortization 8,318 136,689 86,741 16,864 2,279 -- 250,891
Stock option compensation expense 845 -- -- -- -- -- 845
Management fees/corporate expense
charges................................ 473 17,392 14,780 6,176 -- -- 38,821
-------- --------- -------- -------- ------- ------- ---------
Total operating expenses.............. 16,770 318,226 199,852 48,992 11,272 -- 595,112
Income (loss) from operations............. (3,057) 6,206 (3,051 739 6,004 -- 6,841
Interest expense.......................... (2,353) (113,824) (66,121) (17,277) (2,624) 1,900 (c) (200,299)
Other income (expense).................... 133 4,668 (1,684) (684) (15) (1,900)(c) 518
-------- --------- -------- -------- ------- ------- ---------
Income (loss) before income taxes......... (5,277) (102,950) (70,856) (17,222) 3,365 -- (192,940)
Income tax expense........................ -- -- -- -- 1,346 -- 1,346
-------- --------- -------- -------- ------- ------- ---------
Income (loss) before extraordinary item... $ (5,277) $(102,950) $(70,856) $(17,222) $ 2,019 $ -- $(194,286)
======== ========= ======== ======== ======= ======= =========
PRO FORMA
-----------------------
ADJUSTMENTS TOTAL
----------- ---------
Revenues.................................. $ -- $ 601,953
-------- ---------
Operating expenses:.......................
Operating, general and administrative -- 304,555
Depreciation and amortization 119,515(a) 370,406
Stock option compensation expense -- 845
Management fees/corporate expense
charges................................. (22,328)(b) 16,493
-------- ---------
Total operating expenses.............. 97,187 692,299
Income (loss) from operations............. (97,187) (90,346)
Interest expense.......................... (495)(d) (200,794)
Other income (expense).................... -- 518
-------- ---------
Income (loss) before income taxes......... (97,682) (290,622)
Income tax expense........................ (1,346)(e) --
-------- ---------
Income (loss) before extraordinary item... $(96,336) $(290,622)
======== =========
(a) Represents additional depreciation and amortization as a result of the
acquisition of us by Mr. Allen. A large portion of the purchase price
was allocated to franchises that are amortized over 15 years. The
adjustment to depreciation and amortization expense consists of the
following (dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE (IN YEARS) AMORTIZATION
----------- ---------------------- ------------
Franchises............................................. $ 3,600.0 15 $ 240.0
Cable distribution systems............................. 1,439.2 12 115.3
Land, buildings and improvements....................... 41.3 11 3.5
Vehicles and equipment................................. 61.2 5 11.6
------------
Total depreciation and amortization............. 370.4
Less-historical depreciation and amortization... (250.9)
------------
Adjustment................................. $ 119.5
============
(b) Reflects the reduction in corporate expense charges of approximately
$7.9 million to reflect the actual costs incurred. Management fees
charged to CCA Group and CharterComm Holdings, L.P., companies not
controlled by Charter Investment, Inc. at that time, exceeded the
allocated costs incurred by Charter Investment, Inc. on behalf of those
companies by $7.9 million. Also reflects the elimination of
approximately $14.4 million of change of control payments under the
terms of the then-existing equity appreciation rights plans. Such
payments were triggered by the acquisition of us by Mr. Allen. Such
payments were made by Charter Investment, Inc. and were not subject to
reimbursement by us, but were allocated to us for financial reporting
purposes. The equity appreciation rights plans were terminated in
connection with the acquisition of us by Mr. Allen, and these costs
will not recur.
(c) Represents the elimination of intercompany interest on a note payable
from Charter Holdings to CCA Group.
(d) Reflects additional interest expense on $228.4 million of borrowings
under our previous credit facilities used to finance the Sonic
acquisition offset by a reduction of interest expense related to the
extinguishment of substantially all of our long-term debt in March
1999, excluding borrowings of our previous credit facilities, and the
refinancing of all previous credit facilities.
(e) Reflects the elimination of income tax expense as a result of being
acquired by a limited liability company.
NOTE B: Pro forma operating results for Marcus Holdings consist of the
following (dollars in thousands):
P-9
98
YEAR ENDED
DECEMBER 31, PRO FORMA
1998 ACQUISITIONS(A) DISPOSITIONS(B) ADJUSTMENTS TOTAL
------------- --------------- --------------- ----------- -----------
Revenues................................ $ 499,820 $ 2,620 $ (44,511) $ -- $ 457,929
------------- ---------- ------------ ----------- -----------
Operating expenses:
Operating, general and
administrative.................... 271,638 1,225 (20,971) (15,297)(c) 236,595
Depreciation and amortization....... 215,789 -- -- 42,559 (d) 258,348
Corporate expense charges........... -- -- -- 17,042 (c) 17,042
Management fees..................... 3,341 -- -- (3,341)(c) --
Transaction and severance costs..... 135,379 -- -- (135,379)(e) --
------------- ---------- ------------ ----------- -----------
Total operating expenses.......... 626,147 1,225 (20,971) (94,416) 511,985
------------- ---------- ------------ ----------- -----------
Income (loss) from operations........... (126,327) 1,395 (23,540) 94,416 (54,056)
Interest expense........................ (159,985) -- -- 22,358 (d) (137,627)
Other income (expense).................. 201,278 -- (201,278) -- --
------------- ---------- ------------ ----------- -----------
Income (loss) before
extraordinary item.................. $ (85,034) $ 1,395 $ (224,818) $ 116,774 $ (191,683)
============= ========== ============ =========== ===========
(a) Represents the results of operations of acquired cable systems prior to
their acquisition in 1998 by Marcus Cable.
(b) Represents the elimination of operating results and the corresponding
gain on sale of cable systems sold by Marcus Cable during 1998.
(c) Represents a reclassification of expenses totaling $15.3 million from
operating, general and administrative to corporate expense charges.
Also reflects the elimination of management fees and the addition of
corporate expense charges of $1.7 million for actual costs incurred by
Charter Investment, Inc. on behalf of Marcus Holdings. Management fees
charged to Marcus Holdings exceeded the costs incurred by Charter
Investment, Inc. by $1.3 million.
(d) As a result of the acquisition of Marcus Holdings by Mr. Allen, a large
portion of the purchase price was recorded as franchises ($2.5 billion)
that are amortized over 15 years. This resulted in additional
amortization for year ended December 31, 1998. The adjustment to
depreciation and amortization expense consists of the following
(dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE (IN YEARS) AMORTIZATION
------------- ---------------------- -------------
Franchises................................................... $ 2,500.0 15 $ 167.2
Cable distribution systems................................... 720.0 8 84.5
Land, buildings and improvements............................. 28.3 10 2.7
Vehicles and equipment....................................... 13.6 3 4.0
------------
Total depreciation and amortization...................... 258.4
Less-historical depreciation and amortization............ (215.8)
------------
Adjustment............................................ $ 42.6
============
Additionally, the carrying value of outstanding debt was recorded at estimated
fair value, resulting in a debt premium that is to be amortized as an offset to
interest expense over the term of the debt. This resulted in a reduction in
interest expense for the year ended December 31, 1998.
(e) As a result of the acquisition of Marcus Holdings by Mr. Allen, Marcus
Holdings recorded transaction costs of approximately $135.4 million.
These costs were primarily comprised of approximately $90.2 million in
compensation paid to employees of Marcus Holdings in settlement of
specially designated Class B membership units, approximately $24.0
million of transaction fees paid to certain equity partners for
investment banking services and $5.2 million of transaction fees paid
primarily for professional fees. In addition, Marcus Holdings recorded
costs related to employee and officer stay-bonus and severance
arrangements of approximately $16.0 million.
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99
NOTE C: Pro forma operating results for the acquisitions completed by
Charter Holdings and the January Transfers consist of the following (dollars in
thousands):
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------------
CHARTER HOLDINGS ACQUISITIONS-HISTORICAL
--------------------------------------------------------------------------------------
GREATER
AMERICAN MEDIA INTERMEDIA
RENAISSANCE CABLE SYSTEMS HELICON RIFKIN(A) SYSTEMS OTHER TOTAL
----------- --------- --------- --------- --------- --------- --------- ---------
Revenues......................... $ 41,524 $ 15,685 $ 78,635 $ 75,577 $ 124,382 $ 176,062 $ 15,812 $ 527,677
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:..............
Operating, general and
administrative............. 21,037 7,441 48,852 40,179 63,815 86,753 7,821 275,898
Depreciation and
amortization............... 19,107 6,784 8,612 24,290 47,657 85,982 4,732 197,164
Management fees............... -- 471 -- 3,496 4,106 3,147 -- 11,220
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses... 40,144 14,696 57,464 67,965 115,578 175,882 12,553 484,282
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations........... 1,380 989 21,171 7,612 8,804 180 3,259 43,395
Interest expense................. (14,358) (4,501) (535) (27,634) (30,482) (25,449) (4,023) (106,982)
Interest income.................. 158 122 -- 93 -- 341 -- 714
Other income (expense)........... -- -- (493) -- 36,279 23,030 5 58,821
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes.................. (12,820) (3,390) 20,143 (19,929) 14,601 (1,898) (759) (4,052)
Income tax expense (benefit)..... 135 -- 7,956 -- (4,178) 1,623 -- 5,536
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item............ $ (12,955) $ (3,390) $ 12,187 $ (19,929) $ 18,779 $ (3,521) $ (759) $ (9,588)
========= ========= ========= ========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
JANUARY TRANSFERS-HISTORICAL
------------------------------------------
FALCON FANCH (B) AVALON TOTAL
--------- --------- --------- ---------
Revenues.................................................... $ 307,558 $ 141,104 $ 18,187 $ 466,849
--------- --------- --------- ---------
Operating expenses:.........................................
Operating, general and administrative.................... 161,233 62,977 10,067 234,277
Depreciation and amortization............................ 152,585 45,886 8,183 206,654
Corporate expense charges................................ -- 105 655 760
Management fees.......................................... -- 3,998 -- 3,998
Total operating expenses............................. 313,818 112,966 18,905 445,689
Income (loss) from operations............................... (6,260) 28,138 (718) 21,160
Interest expense............................................ (102,591) (1,873) (8,223) (112,687)
Interest income............................................. -- 17 173 190
Other expense............................................... (3,093) (6,628) (463) (10,184)
---------- ---------- ---------- ---------
Income (loss) before income taxes........................... (111,944) 19,654 (9,231) (101,521)
Income tax expense.......................................... 1,897 286 186 2,369
--------- --------- --------- ---------
Income (loss) before extraordinary item..................... $(113,841) $ 19,368 $ (9,417) $(103,890)
========== ========= ========= =========
P-11
100
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------
CHARTER HOLDINGS ACQUISITIONS
-------------------------------------------------------------------------
PRO FORMA
-------------------------------------------------------------------------
HISTORICAL ACQUISITIONS(C) DISPOSITIONS(D) ADJUSTMENTS TOTAL
---------- --------------- --------------- ------------ ---------
Revenues................. $527,677 $127,429 $ (57,635) $ -- $ 597,471
-------- -------- --------- --------- ---------
Operating expenses:
Operating, general
and administrative... 275,898 66,641 (29,559) (20,991)(f) 291,989
Depreciation and
amortization......... 197,164 31,262 (35,025) 137,165 (g) 330,566
Corporate expense
Charges.............. -- -- -- 20,991 (f) 20,991
Management fees........ 11,220 4,042 (594) -- 14,668
-------- -------- --------- --------- ---------
Total operating
expenses......... 484,282 101,945 (65,178) 137,165 658,214
-------- -------- --------- --------- ---------
Income (loss) from
operations............. 43,395 25,484 7,543 (137,165) (60,743)
Interest expense......... (106,982) (30,354) 16,923 (108,380)(h) (228,793)
Interest income.......... 714 323 -- -- 1,037
Other income (expense)... 58,821 (178) 235 (65,740)(i) (6,862)
-------- -------- --------- --------- ---------
Income (loss) before
income taxes........... (4,052) (4,725) 24,701 (311,285) (295,361)
Income tax expense....... 5,536 2,431 10 (7,977)(j) --
-------- -------- --------- --------- ---------
Income (loss) before
extraordinary item..... $ (9,588) $ (7,156) $ 24,691 $(303,308) $(295,361)
======== ======== ========= ========= =========
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
JANUARY TRANSFERS
-------------------------------------------------------------------------
PRO FORMA
-------------------------------------------------------------------------
HISTORICAL ACQUISITIONS(C) DISPOSITIONS(E) ADJUSTMENTS TOTAL
---------- -------------- ---------------- ------------- ---------
Revenues................. $ 466,849 $290,140 $ (2,090) $ -- $ 754,899
--------- -------- --------- --------- ---------
Operating expenses:
Operating, general
and administrative... 234,277 144,183 (979) (5,600)(f) 371,881
Depreciation and
amortization......... 206,654 84,465 (956) 233,932 (g) 524,095
Corporate expense
Charges.............. 760 14,962 -- 5,600 (f) 21,322
Management fees........ 3,998 2,175 (38) -- 6,135
--------- -------- --------- --------- ---------
Total operating
expenses......... 445,689 245,785 (1,973) 233,932 923,433
--------- -------- --------- --------- ---------
Income (loss) from
operations............. 21,160 44,355 (117) (233,932) (168,534)
Interest expense......... (112,687) (22,329) 4 (125,272)(h) (260,284)
Interest income.......... 190 801 -- -- 991
Other income (expense)... (10,184) 2,489 -- 1,067 (i) (6,628)
--------- -------- --------- --------- ---------
Income (loss) before
income taxes........... (101,521) 25,316 (113) (358,137) (434,455)
Income tax expense....... 2,369 (1,762) -- (607)(j) --
--------- -------- --------- --------- ---------
Income (loss) before
extraordinary item..... $(103,890) $ 27,078 $ (113) $(357,530) $(434,455)
========= ======== ========= ========= =========
(a) Rifkin includes the results of operations of Rifkin Acquisition
Partners, L.L.L.P., as follows (dollars in thousands):
RIFKIN
ACQUISITION OTHER TOTAL
----------- ----------- -----------
Revenues............................................................... $ 89,921 $ 34,461 $ 124,382
Income from operations................................................. 1,040 7,764 8,804
Income (loss) before extraordinary item................................ 24,419 (5,640) 18,779
(b) Fanch includes the results of operations of Fanch cable systems as
follows (dollars in thousands):
FANCH CABLE
SYSTEMS OTHERS TOTAL
----------- ----------- -----------
Revenues............................................................... $ 124,555 $ 16,549 $ 141,104
Income from operations................................................. 25,241 2,897 28,138
Income before extraordinary item....................................... 18,814 554 19,368
(c) Represents the historical results of operations for the period from
January 1, 1998 through the date of purchase for acquisitions completed
by Renaissance, the InterMedia systems, Helicon, Rifkin, Falcon, Fanch,
and Avalon in 1998, and the historical results of operations for the
year ended December 31, 1998 for acquisitions completed in 1999.
These acquisitions were accounted for using the purchase method of accounting.
Purchase prices and the closing dates for significant acquisitions are as
follows (dollars in millions):
INTERMEDIA
RENAISSANCE SYSTEMS HELICON RIFKIN FALCON FANCH
----------- ------------- ------------- ------------- -------------- -------------
Purchase price.... $309.5 $29.1 $26.1 $165.0 $86.2 $42.4
Closing date...... April 1998 December 1998 December 1998 February 1999 July 1998 February 1999
Purchase price.... $53.8 $158.6 $248.0
Closing date...... July 1999 September 1998 February 1999
Purchase price.... $513.3 $70.5
Closing date...... September 1998 March 1999
Purchase price.... $50.0
Closing date...... June 1999
The InterMedia acquisition above was part of a "swap".
P-12
101
(d) Represents the elimination of the operating results primarily related
to the cable systems transferred to InterMedia as part of a swap of
cable systems in October 1999. The fair value of the systems
transferred to InterMedia was $420.0 million. This number includes
30,000 customers served by an Indiana cable system that we did not
transfer at the time of the InterMedia closing because some of the
necessary regulatory approvals were still pending. We are obligated to
transfer this system to InterMedia upon receipt of such regulatory
approvals. We will have to pay $88.2 million to InterMedia if we do not
obtain timely regulatory approvals for our transfer to InterMedia of
the Indiana cable system and we are unable to transfer replacement
systems. No material gain or loss was recorded on the disposition as
these systems were recently acquired and recorded at fair value at that
time.
(e) Represents the elimination of the operating results related to the sale
of a Falcon cable system sold in January 1999.
(f) Reflects a reclassification of expenses representing corporate expenses
that would have occurred at Charter Investment, Inc.
(g) Represents additional depreciation and amortization as a result of the
acquisitions completed by Charter Holdings and the January Transfers. A
large portion of the purchase price was allocated to franchises ($9.9
billion) that are amortized over 15 years. The adjustments to
depreciation and amortization expense consists of the following
(dollars in millions):
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE (IN YEARS) AMORTIZATION
------------- ---------------------- -------------
Franchises................................................... $ 9,866.3 15 $ 641.1
Cable distribution systems................................... 1,500.3 8 187.4
Land, building and improvements.............................. 46.8 10 4.3
Vehicles and equipment....................................... 77.3 3 21.9
------------
Total depreciation and amortization....................... 854.7
Less-historical depreciation and amortization............. (483.6)
------------
Adjustment............................................ $ 371.1
============
(h) Reflects additional interest expense on borrowings which have been or
will be used to finance the acquisitions as follows (dollars in
millions):
$2.7 billion of credit facilities at composite current rate of 8.2%...................................... $ 217.9
$114.4 million 10% senior discount notes--Renaissance.................................................... 10.7
$165.0 million of credit facilities at a composite current rate of 8.7%--Avalon.......................... 14.4
$150.0 million 9.375% senior subordinated notes--Avalon.................................................. 14.1
$196.0 million 11.875% senior discount notes--Avalon..................................................... 14.7
$870.0 million of credit facilities at composite current rate of 8.4%--Fanch............................. 73.3
$1.0 billion of credit facilities at composite current rate of 7.9%--CC VII - (Falcon)................... 80.1
$375.0 million 8.375% senior debentures--Falcon.......................................................... 31.4
$435.3 million 9.285% senior discount debentures--Falcon................................................. 32.5
---------
Total pro forma interest expenses................................................................... 489.1
Less-historical interest expense from acquired companies............................................ (255.4)
---------
Adjustment........................................................................................ $ 233.7
=========
An increase in the interest rate on all variable rate debt of 0.125% would
result in an increase in interest expense of $6.9 million.
(i) Represents the elimination of gain (loss) on the sale of cable
television systems whose results of operations have been eliminated in
(d) and (e) above.
(j) Reflects the elimination of income tax expense (benefit) as a result of
being acquired by a limited liability company.
NOTE D: The offering adjustment to increase interest expense by
approximately $18.3 million consists of the following (dollars in millions):
P-13
102
INTEREST
DESCRIPTION EXPENSE
- ----------- ---------
$883.3 million of January 2000 High Yield Notes (at a blended rate of 10.5%).......................... $ 93.2
Amortization of debt issuance costs................................................................... 3.1
--------
Total pro forma interest expense................................................................ 96.3
Less-historical interest expense ............................................................... (78.0)
--------
Adjustment.............................................................................. $ 18.3
========
NOTE E: Charter Investment, Inc. provided corporate management and
consulting services to Charter Holdings in 1998 and to Marcus Holdings beginning
in October 1998.
NOTE F: Adjusted EBITDA represents loss before minority interest,
interest, depreciation and amortization, stock option compensation expense,
corporate expense charges, management fees and other income (expense). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of a
cable company's ability to service indebtedness. However, adjusted EBITDA should
not be considered as an alternative to income from operations or to cash flows
from operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. Adjusted EBITDA should also not
be construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because adjusted EBITDA is not calculated
identically by all companies, the presentation here may not be comparable to
other similarly titled measures of other companies. Management's discretionary
use of funds depicted by adjusted EBITDA may be limited by working capital, debt
service and capital expenditure requirements and by restrictions related to
legal requirements, commitments and uncertainties.
NOTE G: Adjusted EBITDA margin represents adjusted EBITDA as a
percentage of revenues.
P-14
103
CHARTER COMMUNICATIONS HOLDINGS, LLC
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1999
---------------------------------------------------------------------------------------
CHARTER
HISTORICAL HOLDINGS JANUARY OFFERING
CHARTER ACQUISITIONS TRANSFERS ADJUSTMENTS
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL
----------- ------------ ------------ ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents...... $ 434,183 $ (392,367) $ 41,816 $ (17,230) $ -- $ 24,586
Accounts receivable, net....... 48,470 2,230 50,700 28,269 -- 78,969
Receivable from related party.. 51,458 (51,458) -- -- -- --
Prepaid expenses and other..... 27,374 920 28,294 32,961 -- 61,255
------------ ------------ ------------ ------------- ------------- -------------
Total current assets........ 561,485 (440,675) 120,810 44,000 -- 164,810
Property, plant and equipment.. 2,279,489 145,949 2,425,438 929,448 -- 3,354,886
Franchises..................... 8,268,021 771,585 9,039,606 5,956,482 -- 14,996,088
Other assets................... 126,196 (424) 125,772 13,306 30,535 169,613
------------ ------------- ------------ ------------- ------------- -------------
Total assets................ $ 11,235,191 $ 476,435 $ 11,711,626 $ 6,943,236 $ 30,535 $ 18,685,397
============ ============ ============ ============= ============= =============
LIABILITIES AND
MEMBER'S EQUITY
Short-term debt................ $ -- $ -- $ -- $ 852,772 $ (852,772) $ --
Accounts payable
and accrued expenses........ 382,565 11,441 394,006 194,684 -- 588,690
Payables to manager of cable
systems..................... 8,036 -- 8,036 -- -- 8,036
------------ ------------ ------------- ------------- ------------- -------------
Total current liabilities... 390,601 11,441 402,042 1,047,456 (852,772) 596,726
Long-term debt................. 6,244,632 464,994 6,709,626 2,102,631 883,307 9,695,564
Deferred management fees....... 17,004 -- 17,004 -- -- 17,004
Other long-term liabilities.... 68,648 -- 68,648 -- -- 68,648
Member's equity................ 4,514,306 -- 4,514,306 3,793,149 -- 8,307,455
------------ ------------ ------------ ------------- ------------- -------------
Total liabilities
and member's equity...... $ 11,235,191 $ 476,435 $ 11,711,626 $ 6,943,236 $ 30,535 $ 18,685,397
============ ============ ============ ============= ============= =============
P-15
104
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
NOTE A: Pro forma balance sheets for our recently completed InterMedia
Systems and the January Transfers consist of the following (dollars in
thousands):
AS OF SEPTEMBER 30, 1999
-------------------------------------------------
JANUARY TRANSFERS
-------------------------------------------------
FALCON FANCH (A) AVALON TOTAL
---------- ---------- ---------- -----------
Cash and cash equivalents............................................. $ 4,196 $ 933 $ 2,995 $ 8,124
Accounts receivable, net.............................................. 16,236 4,910 7,059 28,205
Receivable from related party......................................... 2,414 -- -- 2,414
Prepaid expenses and other............................................ 30,422 1,600 879 32,901
---------- ---------- ---------- -----------
Total current assets................................................ 53,268 7,443 10,933 71,644
Property, plant and equipment......................................... 549,476 254,802 121,973 926,251
Franchises............................................................ 372,322 4,489 468,855 845,666
Other assets.......................................................... 434,163 595,637 46 1,029,846
---------- ---------- ---------- -----------
Total assets........................................................ $1,409,229 $ 862,371 $ 601,807 $ 2,873,407
========== ========== ========== ===========
Current maturities of long-term debt.................................. $ -- $ 20,534 $ 25 $ 20,559
Accounts payable and accrued expenses................................. 147,949 24,281 22,242 194,472
Deferred revenue...................................................... -- -- 3,272 3,272
Other current liabilities............................................. -- -- 2,968 2,968
---------- ---------- ---------- -----------
Total current liabilities........................................... 147,949 44,815 28,507 221,271
Long-term debt........................................................ 1,681,454 7,931 451,827 2,141,212
Note payable to related party, including accrued interest............. -- 1,457 -- 1,457
Other long-term liabilities, including redeemable preferred shares.... 424,280 203 951 425,434
Equity (deficit)...................................................... (844,454) 807,965 120,522 84,033
---------- ---------- ---------- -----------
Total liabilities and equity (deficit).............................. $1,409,229 $ 862,371 $ $601,807 $ 2,873,407
========== ========== ========== ===========
AS OF SEPTEMBER 30, 1999
------------------------------------------------------------
INTERMEDIA SYSTEMS ACQUISITION
------------------------------------------------------------
PRO FORMA
------------------------------------------------------------
HISTORICAL DISPOSITIONS(B) ADJUSTMENTS TOTAL
---------- ---------------- ----------- ----------
Cash and cash equivalents............ $ -- $ (4,819) $(387,548)(d) $ (392,367)
Accounts receivable, net............. 14,971 (1,590) (11,151)(e) 2,230
Receivable from related party........ 7,966 -- (59,424)(f) (51,458)
Prepaid expenses and other........... 1,286 (366) -- 920
-------- --------- --------- ----------
Total current assets............... 24,223 (6,775) (458,123) (440,675)
Property, plant and equipment........ 228,676 (82,727) -- 145,949
Franchises........................... 214,182 (334,137) 891,540 (g) 771,585
Deferred income taxes................ 15,279 -- (15,279)(h) --
Other assets......................... 544 (424) (544)(i) (424)
-------- --------- --------- ----------
Total assets....................... $482,904 $(424,063) $ 417,594 $ 476,435
-------- --------- --------- ----------
Current maturities of long-term
debt.............................. $ -- $ -- $ -- $ --
Short term debt...................... -- -- -- --
Accounts payable and accrued
expenses.......................... 15,504 (4,063) -- 11,441
Current deferred revenue............. 11,151 -- (11,151)(e) --
Note payable to related party........ 2,265 -- (2,265)(j) --
Other current liabilities............ -- -- -- --
-------- --------- --------- ----------
Total current liabilities.......... 28,920 (4,063) (13,416) 11,441
Deferred revenue..................... 3,583 -- (3,583)(e) --
Long-term debt....................... -- (420,000) 884,994 (k) 464,994
Note payable to related party,
including accrued interest......... 406,975 -- (406,975)(j) --
Other long-term liabilities,
including redeemable preferred
shares............................. 14,934 -- (14,934)(l) --
Equity (deficit)..................... 28,492 -- (28,492)(m) --
-------- --------- --------- ----------
Total liabilities and
equity (deficit)................ $482,904 $(424,063) $ 417,594 $ 476,435
======== ========= ========= ==========
AS OF SEPTEMBER 30, 1999
----------------------------------------------------------
JANUARY TRANSFERS
----------------------------------------------------------
PRO FORMA
----------------------------------------------------------
HISTORICAL ACQUISITIONS(C) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------
Cash and cash equivalents............ $ 8,124 $ 418 $ (25,772)(d) $ (17,230)
Accounts receivable, net............. 28,205 64 -- 28,269
Receivable from related party........ 2,414 125 (2,539)(f) --
Prepaid expenses and other........... 32,901 60 -- 32,961
---------- -------- ----------- ----------
Total current assets............... 71,644 667 (28,311) 44,000
Property, plant and equipment........ 926,251 3,197 -- 929,448
Franchises........................... 845,666 722 5,110,094 (g) 5,956,482
Deferred income taxes................ -- -- -- --
Other assets......................... 1,029,846 141 (1,016,681)(i) 13,306
---------- -------- ----------- ----------
Total assets....................... $2,873,407 $ 4,727 $ 4,065,102 $6,943,236
---------- -------- ----------- ----------
Current maturities of long-term
debt.............................. $ 20,559 $ -- $ (20,559)(k) $ --
Short term debt...................... -- -- 852,772 (k) 852,772
Accounts payable and accrued
expenses.......................... 194,472 212 -- 194,684
Current deferred revenue............. 3,272 -- (3,272)(j) --
Note payable to related party........ -- -- -- --
Other current liabilities............ 2,968 -- (2,968)(j) --
---------- -------- ----------- ----------
Total current liabilities.......... 221,271 212 825,973 1,047,456
Deferred revenue..................... -- -- -- --
Long-term debt....................... 2,141,212 2,751 (41,332)(k) 2,102,631
Note payable to related party,
including accrued interest......... 1,457 -- (1,457)(j) --
Other long-term liabilities,
including redeemable preferred
shares............................. 425,434 -- (425,434)(l) --
Equity (deficit)..................... 84,033 1,764 3,707,352(m) 3,793,149
---------- -------- ----------- ----------
Total liabilities and
equity (deficit)................ $2,873,407 $ 4,727 $ 4,065,102 $6,943,236
========== ======== =========== ==========
P-16
105
(a) Fanch includes the balance sheets of Fanch cable systems as follows
(dollars in thousands):
FANCH CABLE
SYSTEMS OTHERS TOTAL
----------- ----------- -----------
Total current assets......................................... $ 6,014 $ 1,429 $ 7,443
Total assets................................................. 837,398 24,973 862,371
Total current liabilities.................................... 21,652 23,163 44,815
Equity....................................................... 815,746 (7,781) 807,965
Total liabilities and equity................................. 837,398 24,973 862,371
(b) Represents the historical assets and liabilities as of September 30,
1999 of cable systems transferred to InterMedia on October 1, 1999 and
one Indiana cable system we are required to transfer to InterMedia as
part of a swap of cable systems. The cable system being swapped will be
accounted for at fair value. No material gain or loss was recorded in
conjunction with the swap.
(c) Represents the historical assets and liabilities as of September 30,
1999 of a cable system acquired by Avalon in 2000.
(d) Represents Charter Holdings' historical cash used to finance a portion
of the InterMedia and Avalon acquisitions.
(e) Represents the offset of advance billings against accounts receivable
to be consistent with Charter Holdings' accounting policy and the
elimination of deferred revenue.
(f) Reflects assets retained by the seller of $10.5 million and the
collection of the receivable of $51.5 million from Charter
Communications Holding Company in connection with the Avalon
acquisition.
(g) Substantial amounts of the purchase price have been allocated to
franchises based on estimated fair values. This results in an
allocation of purchase price as follows (dollars in thousands):
INTERMEDIA
SYSTEMS FALCON FANCH AVALON TOTAL
------------ -------------- ------------- ------------- --------------
Working capital..................... $ (13,110) $ (97,095) $ (16,838) $ (10,979) $ (138,022)
Property, plant and equipment....... 145,949 549,476 254,802 125,170 1,075,397
Franchises.......................... 771,585 3,084,626 2,159,777 712,079 6,728,067
Other............................... (424) 3,387 7,980 1,939 12,882
------------- -------------- ------------- ------------- --------------
$ 904,000 $ 3,540,394 $ 2,405,721 $ 828,209 $ 7,678,324
============= ============== ============= ============= ==============
The sources of cash for the InterMedia Systems and January Transfers
are as follows (dollars in millions):
Current liabilities:
Publicly held debt, at fair market value:
9.375% senior subordinated notes--Avalon....................... $ 151.5
8.375% senior debentures--Falcon............................... 378.8
9.285% senior discount debentures--Falcon...................... 322.5 $ 852.8
-------------
Long-term liabilities:
Publicly held debt, at fair market value:
11.875% senior discount notes--Avalon.......................... 127.4
Credit facilities drawn upon close of acquisition:
CC VII-(Falcon)................................................ 1,012.8
Fanch.......................................................... 870.0
Avalon......................................................... 165.0
Credit facilities drawn down--Charter Operating..................... 857.2 2,905.0 $ 3,885.2
------------- ------------- -----------
Funded equity contributions:
Net proceeds related to Initial Public Offering.................... 3,243.1
Falcon sellers' equity ............................................ 550.0 3,793.1
------------- ------------
$ 7,678.3
=============
P-17
106
(h) Represents the elimination of deferred income tax assets.
(i) Represents the elimination of the unamortized historical cost of
various assets based on the allocation of purchase price (see (f)
above) as follows (dollars in thousands):
Subscriber lists........................................................................ $ (464,615)
Noncompete agreements................................................................... (13,065)
Deferred financing costs................................................................ (52,486)
Goodwill................................................................................ (648,423)
Other assets............................................................................ (56,930)
--------------
(1,235,519)
Less-accumulated amortization........................................................... 218,294
--------------
$ (1,017,225)
==============
(j) Represents liabilities retained by the seller.
(k) Represents the following (dollars in millions):
Long-term debt not assumed.............................................................. $ (1,116.5)
Helicon notes (called).................................................................. (115.0)
Rifkin notes (tendered)................................................................. (125.0)
Avalon notes (put and repurchased)...................................................... (151.5)
Falcon debentures (put and repurchased)................................................. (701.3)
---------------
Total pro forma debt not assumed.................................................. (2,209.3)
Short-term debt:
9.375% senior subordinated notes--Avalon............................................. 151.5
8.375% senior debentures--Falcon..................................................... 378.8
9.285% senior discount debentures--Falcon............................................ 322.5
---------------
Total short-term debt........................................................... 852.8
Long-term debt:
11.875% senior discount notes--Avalon................................................ 127.4
Credit facilities:
Charter Operating................................................................. 857.2
Avalon............................................................................ 165.0
Fanch............................................................................. 870.0
CC VII-(Falcon)................................................................... 1,012.8
---------------
Total long-term debt................................................................. 3,032.4
---------------
$ 1,675.9
(l) Represents the elimination of historical liabilities retained by the
seller and the elimination of Falcon's historical redeemable preferred
shares.
(m) Represents the elimination of historical equity (deficit) of $114.3
million and additional contributions of $3,793.1 million made to us
related to the InterMedia acquisition and the January Transfers.
NOTE B: Offering adjustments represent the issuance and sale by Charter
Holdings of the January 2000 High Yield Notes, the proceeds of which were used
to repurchase the Falcon and Avalon debentures, and the addition to other assets
of a portion of the estimated expenses paid in connection with the issuance and
sale of the January 2000 High Yield Notes which were capitalized and will be
amortized over the term of the related debt.
P-18
107
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Charter Communications Holdings, LLC has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
CHARTER COMMUNICATIONS
HOLDINGS, LLC, a registrant
Dated March 20, 2000 By: /s/ KENT D. KALKWARF
-----------------------
Name: Kent D. Kalkwarf
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
108
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Charter Communications Holdings Capital Corporation has duly caused this report
to be signed on its behalf by the undersigned hereunto duly authorized.
CHARTER COMMUNICATIONS
HOLDINGS CAPITAL CORPORATION, a
registrant
Dated March 20, 2000 By: /s/ KENT D. KALKWARF
-----------------------
Name: Kent D. Kalkwarf
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting
Officer)