Quarterly
Report on Form 10-Q for the Period ended June 30, 2005
Table
of Contents
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
Item
1. Financial Statements - Charter Communications, Inc.
and
Subsidiaries
|
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
7
|
|
|
|
27
|
|
|
|
50
|
|
|
|
50
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
51
|
|
|
|
53
|
This
quarterly report on Form 10-Q is for the three and six months ended
June
30, 2005. The Securities and Exchange Commission ("SEC") allows us
to
"incorporate by reference" information that we file with the SEC, which means
that we can disclose important information to you by referring you directly
to
those documents. Information incorporated by reference is considered to be
part
of this quarterly report. In addition, information that we file with the
SEC in
the future will automatically update and supersede information contained
in this
quarterly report. In this quarterly report, "we," "us" and "our" refer to
Charter Communications, Inc., Charter Communications Holding Company, LLC
and
their subsidiaries.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This
quarterly
report includes
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities
Act"),
and
Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange
Act"),
regarding, among other things, our plans, strategies and prospects, both
business and financial including, without limitation, the forward-looking
statements set forth in the "Results
of Operations"
and
"Liquidity
and Capital Resources"
sections
under Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of
Operations"
in this
quarterly
report.
Although we believe that our plans, intentions and expectations reflected
in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties
and
assumptions including, without limitation, the factors described under
"Certain
Trends and Uncertainties"
under
Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of
Operations"
in this
quarterly
report.
Many of
the forward-looking statements contained in this quarterly
report may
be
identified by the use of forward-looking words such as "believe," "expect," "anticipate," "should," "planned," "will," "may," "intend," "estimated"
and
"potential"
among
others. Important factors that could cause actual results to differ materially
from the forward-looking statements we make in this quarterly
report are
set
forth in this quarterly
report and
in
other reports or documents that we file from time to time with the SEC, and
include, but are not limited to:
|
·
|
the
availability of funds to meet interest payment obligations under
our debt
and to fund our operations and necessary capital expenditures,
either
through cash flows from operating activities, further borrowings
or other
sources;
|
|
·
|
our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and
other
services and to maintain a stable customer base, particularly in
the face
of increasingly aggressive competition from other service
providers;
|
|
·
|
our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which would result in a violation
of the
applicable facility or indenture and could trigger a default of
other
obligations under cross-default
provisions;
|
|
·
|
our
ability to pay or refinance debt as it becomes
due;
|
|
·
|
our
ability to obtain programming at reasonable prices or to pass programming
cost increases on to our customers;
|
|
·
|
general
business conditions, economic uncertainty or slowdown;
and
|
|
·
|
the
effects of governmental regulation, including but not limited to
local
franchise authorities, on our business.
|
All
forward-looking statements attributable to us or any person acting on our
behalf
are expressly qualified in their entirety by this cautionary statement. We
are
under no duty or obligation to update any of the forward-looking statements
after the date of this quarterly
report.
PART
I. FINANCIAL INFORMATION.
Item
1. Financial
Statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(DOLLARS
IN MILLIONS, EXCEPT SHARE DATA)
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
40
|
|
$
|
650
|
|
Accounts
receivable, less allowance for doubtful accounts of
|
|
|
|
|
|
|
|
$14
and $15, respectively
|
|
|
183
|
|
|
190
|
|
Prepaid
expenses and other current assets
|
|
|
82
|
|
|
82
|
|
Total
current assets
|
|
|
305
|
|
|
922
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
depreciation
of $6,061 and $5,311, respectively
|
|
|
6,075
|
|
|
6,289
|
|
Franchises,
net
|
|
|
9,839
|
|
|
9,878
|
|
Total
investment in cable properties, net
|
|
|
15,914
|
|
|
16,167
|
|
|
|
|
|
|
|
|
|
OTHER
NONCURRENT ASSETS
|
|
|
560
|
|
|
584
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
16,779
|
|
$
|
17,673
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
1,224
|
|
$
|
1,217
|
|
Total
current liabilities
|
|
|
1,224
|
|
|
1,217
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
19,247
|
|
|
19,464
|
|
DEFERRED
MANAGEMENT FEES - RELATED PARTY
|
|
|
14
|
|
|
14
|
|
OTHER
LONG-TERM LIABILITIES
|
|
|
682
|
|
|
681
|
|
MINORITY
INTEREST
|
|
|
659
|
|
|
648
|
|
PREFERRED
STOCK - REDEEMABLE; $.001 par value; 1 million
|
|
|
|
|
|
|
|
shares
authorized; 545,259 shares issued and outstanding
|
|
|
55
|
|
|
55
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
Class
A Common stock; $.001 par value; 1.75 billion shares
authorized;
|
|
|
|
|
|
|
|
304,941,082
and 305,203,770 shares issued and outstanding,
respectively
|
|
|
--
|
|
|
--
|
|
Class
B Common stock; $.001 par value; 750 million
|
|
|
|
|
|
|
|
shares
authorized; 50,000 shares issued and outstanding
|
|
|
--
|
|
|
--
|
|
Preferred
stock; $.001 par value; 250 million shares
|
|
|
|
|
|
|
|
authorized;
no non-redeemable shares issued and outstanding
|
|
|
--
|
|
|
--
|
|
Additional
paid-in capital
|
|
|
4,802
|
|
|
4,794
|
|
Accumulated
deficit
|
|
|
(9,905
|
)
|
|
(9,196
|
)
|
Accumulated
other comprehensive loss
|
|
|
1
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Total
shareholders’ deficit
|
|
|
(5,102
|
)
|
|
(4,406
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$
|
16,779
|
|
$
|
17,673
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS
IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
Unaudited
|
|
Three
Months Ended June
30,
|
|
Six
Months Ended June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
1,323
|
|
$
|
1,239
|
|
$
|
2,594
|
|
$
|
2,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
569
|
|
|
515
|
|
|
1,128
|
|
|
1,027
|
|
Selling,
general and administrative
|
|
|
256
|
|
|
244
|
|
|
493
|
|
|
483
|
|
Depreciation
and amortization
|
|
|
378
|
|
|
364
|
|
|
759
|
|
|
734
|
|
Asset
impairment charges
|
|
|
8
|
|
|
--
|
|
|
39
|
|
|
--
|
|
(Gain)
loss on sale of assets, net
|
|
|
--
|
|
|
2
|
|
|
4
|
|
|
(104
|
)
|
Option
compensation expense, net
|
|
|
4
|
|
|
12
|
|
|
8
|
|
|
26
|
|
Special
charges, net
|
|
|
(2
|
)
|
|
87
|
|
|
2
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,213
|
|
|
1,224
|
|
|
2,433
|
|
|
2,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
110
|
|
|
15
|
|
|
161
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(451
|
)
|
|
(410
|
)
|
|
(871
|
)
|
|
(803
|
)
|
Gain
(loss) on derivative instruments and hedging activities,
net
|
|
|
(1
|
)
|
|
63
|
|
|
26
|
|
|
56
|
|
Loss
on debt to equity conversions
|
|
|
--
|
|
|
(15
|
)
|
|
--
|
|
|
(23
|
)
|
Gain
(loss) on extinguishment of debt
|
|
|
1
|
|
|
(21
|
)
|
|
8
|
|
|
(21
|
)
|
Gain
on investments
|
|
|
20
|
|
|
2
|
|
|
21
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(431
|
)
|
|
(381
|
)
|
|
(816
|
)
|
|
(791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest and income taxes
|
|
|
(321
|
)
|
|
(366
|
)
|
|
(655
|
)
|
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
(3
|
)
|
|
(6
|
)
|
|
(6
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(324
|
)
|
|
(372
|
)
|
|
(661
|
)
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(31
|
)
|
|
(43
|
)
|
|
(46
|
)
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(355
|
)
|
|
(415
|
)
|
|
(707
|
)
|
|
(708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock - redeemable
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$
|
(356
|
)
|
$
|
(416
|
)
|
$
|
(709
|
)
|
$
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE, basic and diluted
|
|
$
|
(1.18
|
)
|
$
|
(1.39
|
)
|
$
|
(2.34
|
)
|
$
|
(2.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
303,620,347
|
|
|
300,522,815
|
|
|
303,465,474
|
|
|
297,814,091
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
|
Six
Months Ended June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(707
|
)
|
$
|
(708
|
)
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
6
|
|
|
10
|
|
Depreciation
and amortization
|
|
|
759
|
|
|
734
|
|
Asset
impairment charges
|
|
|
39
|
|
|
--
|
|
Option
compensation expense, net
|
|
|
8
|
|
|
22
|
|
Special
charges, net
|
|
|
(2
|
)
|
|
85
|
|
Noncash
interest expense
|
|
|
114
|
|
|
163
|
|
Gain
on derivative instruments and hedging activities, net
|
|
|
(26
|
)
|
|
(56
|
)
|
(Gain)
loss on sale of assets, net
|
|
|
4
|
|
|
(104
|
)
|
Loss
on debt to equity conversions
|
|
|
--
|
|
|
23
|
|
(Gain)
loss on extinguishment of debt
|
|
|
(14
|
)
|
|
18
|
|
Gain
on investments
|
|
|
(21
|
)
|
|
--
|
|
Deferred
income taxes
|
|
|
43
|
|
|
95
|
|
Changes
in operating assets and liabilities, net of effects from
dispositions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1
|
|
|
1
|
|
Prepaid
expenses and other assets
|
|
|
--
|
|
|
3
|
|
Accounts
payable, accrued expenses and other
|
|
|
(23
|
)
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
181
|
|
|
168
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(542
|
)
|
|
(390
|
)
|
Change
in accrued expenses related to capital expenditures
|
|
|
45
|
|
|
(52
|
)
|
Proceeds
from sale of assets
|
|
|
8
|
|
|
729
|
|
Purchases
of investments
|
|
|
(3
|
)
|
|
(12
|
)
|
Proceeds
from investments
|
|
|
17
|
|
|
--
|
|
Other,
net
|
|
|
(2
|
)
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(477
|
)
|
|
273
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
|
635
|
|
|
2,813
|
|
Repayments
of long-term debt
|
|
|
(946
|
)
|
|
(3,160
|
)
|
Payments
for debt issuance costs
|
|
|
(3
|
)
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
(314
|
)
|
|
(444
|
)
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(610
|
)
|
|
(3
|
)
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
650
|
|
|
127
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
40
|
|
$
|
124
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$
|
744
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
NONCASH
TRANSACTIONS:
|
|
|
|
|
|
|
|
Issuance
of debt by Charter Communications Operating, LLC
|
|
$
|
333
|
|
$
|
--
|
|
Retirement
of Charter Communications Holdings, LLC debt
|
|
$
|
(346
|
)
|
$
|
--
|
|
Debt
exchanged for Charter Class A common stock
|
|
$
|
--
|
|
$
|
30
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
|
Organization
and Basis of Presentation
|
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets
at
June 30, 2005 are the 47% controlling common equity interest in Charter
Communications Holding Company, LLC ("Charter Holdco") and "mirror" notes
which
are payable by Charter Holdco to Charter and have the same principal amount
and
terms as those of Charter’s convertible senior notes. Charter Holdco is the sole
owner of Charter Communications Holdings, LLC ("Charter Holdings"). The
condensed consolidated financial statements include the accounts of Charter,
Charter Holdco, Charter Holdings and all of their subsidiaries where the
underlying operations reside, collectively referred to herein as the "Company."
Charter consolidates Charter Holdco on the basis of voting control. Charter
Holdco’s limited liability company agreement provides that so long as Charter’s
Class B common stock retains its special voting rights, Charter will maintain
a
100% voting interest in Charter Holdco. Voting control gives Charter full
authority and control over the operations of Charter Holdco. All significant
intercompany accounts and transactions among consolidated entities have been
eliminated. The Company is a broadband communications company operating in
the
United States. The Company offers its customers traditional cable video
programming (analog and digital video) as well as high-speed Internet services
and, in some areas, advanced broadband services such as high definition
television, video on demand and telephone. The Company sells its cable video
programming, high-speed Internet and advanced broadband services on a
subscription basis. The Company also sells local advertising on
satellite-delivered networks.
The
accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted
in the
United States for interim financial information and the rules and regulations
of
the Securities and Exchange Commission ("SEC"). Accordingly, certain information
and footnote disclosures typically included in Charter’s Annual Report on Form
10-K have been condensed or omitted for this quarterly report. The accompanying
condensed consolidated financial statements are unaudited and are subject
to
review by regulatory authorities. However, in the opinion of management,
such
financial statements include all adjustments, which consist of only normal
recurring adjustments, necessary for a fair presentation of the results for
the
periods presented. Interim results are not necessarily indicative of results
for
a full year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Areas involving significant judgments and estimates include
capitalization of labor and overhead costs; depreciation and amortization
costs;
impairments of property, plant and equipment, franchises and goodwill; income
taxes; and contingencies. Actual results could differ from those
estimates.
Reclassifications
Certain
2004 amounts have been reclassified to conform with the 2005
presentation.
2.
|
Liquidity
and Capital Resources
|
The
Company incurred net loss applicable to common stock of $356 million and
$416
million for the three months ended June 30, 2005 and 2004, respectively,
and
$709 million and $710 million for the six months ended June 30, 2005 and
2004,
respectively. The Company’s net cash flows from operating activities were $181
million and $168 million for the six months ended June 30, 2005 and 2004,
respectively.
The
Company has a significant level of debt. The Company's long-term financing
as of
June 30, 2005 consists of $5.4 billion of credit facility debt, $12.9 billion
accreted value of high-yield notes and $863 million accreted value of
convertible senior notes. For the remainder of 2005, $15 million of the
Company’s debt matures, and in 2006, an additional $55 million of the Company’s
debt matures. In 2007 and beyond, significant additional amounts will become
due
under the Company’s remaining long-term debt obligations.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
The
Company has historically required significant cash to fund debt service costs,
capital expenditures and ongoing operations. Historically, the Company has
funded these requirements through cash flows from operating activities,
borrowings under its credit facilities, sales of assets, issuances of debt
and
equity securities and from cash on hand. However, the mix of funding sources
changes from period to period. For the six months ended June 30, 2005, the
Company generated $181 million of net cash flows from operating activities,
after paying cash interest of $744 million. In addition, the Company used
approximately $542 million for purchases of property, plant and equipment.
Finally, the Company had net cash flows used in financing activities of $314
million, which included, among other things, approximately $705 million in
repayment of borrowings under the Company’s revolving credit facility. This
repayment was the primary reason cash on hand decreased by $610 million to
$40
million at June 30, 2005.
The
Company expects that cash on hand, cash flows from operating activities and
the
amounts available under its credit facilities will be adequate to meet its
cash
needs for the remainder of 2005. Cash flows from operating activities and
amounts available under the Company’s credit facilities may not be sufficient to
fund the Company’s operations and satisfy its principal repayment obligations
that come due in 2006 and, the Company believes, will not be sufficient to
fund
its operations and satisfy such repayment obligations thereafter.
It
is
likely that the Company will require additional funding to repay debt maturing
after 2006. The Company is working with its financial advisors to address
such
funding requirements. However, there can be no assurance that such funding
will
be available to the Company. Although Mr. Allen and his affiliates have
purchased equity from the Company in the past, Mr. Allen and his affiliates
are
not obligated to purchase equity from, contribute to or loan funds to the
Company in the future.
Credit
Facilities and Covenants
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Communications Operating,
LLC ("Charter Operating") credit facilities. These credit facilities, along
with
the Company’s indentures, contain certain restrictive covenants, some of which
require the Company to maintain specified financial ratios and meet financial
tests and to provide audited financial statements with an unqualified opinion
from the Company’s independent auditors. As of June 30, 2005, the Company was in
compliance with the covenants under its indentures and credit facilities
and the
Company expects to remain in compliance with those covenants for the next
twelve
months. As of June 30, 2005, the Company had borrowing availability under
the
credit facilities of $870 million, none of which was restricted due to
covenants. Continued access to the Company’s credit facilities is subject to the
Company remaining in compliance with the covenants of these credit facilities,
including covenants tied to the Company’s operating performance. If the
Company’s operating performance results in non-compliance with these covenants,
or if any of certain other events of non-compliance under these credit
facilities or indentures governing the Company’s debt occurs, funding under the
credit facilities may not be available and defaults on some or potentially
all
of the Company’s debt obligations could occur. An event of default under the
covenants governing any of the Company’s debt instruments could result in the
acceleration of its payment obligations under that debt and, under certain
circumstances, in cross-defaults under its other debt obligations, which
could
have a material adverse effect on the Company’s consolidated financial condition
or results of operations.
The
Charter Operating credit facilities required the Company to redeem the CC
V
Holdings, LLC notes as a result of the Charter Holdings leverage ratio becoming
less than 8.75 to 1.0. In satisfaction of this requirement, in March 2005,
CC V
Holdings, LLC redeemed all of its outstanding notes, at 103.958% of principal
amount, plus accrued and unpaid interest to the date of redemption. The total
cost of the redemption including accrued and unpaid interest was approximately
$122 million. The Company funded the redemption with borrowings under the
Charter Operating credit facilities.
Specific
Limitations
Charter’s
ability to make interest payments on its convertible senior notes, and, in
2006
and 2009, to repay the outstanding principal of its convertible senior notes
of
$25 million and $863 million, respectively, will depend on its ability to
raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco or its subsidiaries,
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
including
CCH II, LLC ("CCH
II"),
CCO
Holdings, LLC ("CCO
Holdings")
and
Charter Operating. Distributions
by Charter’s subsidiaries to a parent company (including Charter and Charter
Holdco) for
payment of principal on Charter’s convertible senior notes,
however, are restricted by the indentures governing the CCH II notes, CCO
Holdings notes, and Charter Operating notes, unless
under their respective indentures there is no default and a specified leverage
ratio test is met at the time of such event. During the six months ended
June
30, 2005, Charter Holdings distributed $60 million to Charter
Holdco.
As of
June 30, 2005, Charter Holdco was owed $62 million in intercompany loans
from
its subsidiaries, which amount was available to pay interest and principal
on
Charter's convertible senior notes. In
addition, Charter
has $122 million of governmental securities pledged as security for the next
five semi-annual interest payments on Charter’s 5.875% convertible senior
notes.
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on the
convertible senior notes, only if, after giving effect to the distribution,
Charter Holdings can incur additional debt under the leverage ratio of 8.75
to
1.0, there is no default under Charter Holdings’ indentures and other specified
tests are met. For the quarter ended June
30,
2005, there
was
no default under Charter Holdings’ indentures and other specified tests were
met. However, Charter Holdings did not meet the leverage ratio of 8.75 to
1.0
based on June
30,
2005
financial results. As a result, distributions from Charter Holdings to Charter
or Charter Holdco are currently restricted and will continue to be restricted
until that test is met. During
this restriction period,
the
indentures governing the Charter Holdings notes permit Charter Holdings and
its
subsidiaries to make specified investments in Charter Holdco or Charter,
up to
an amount determined by a formula, as long as there is no default under the
indentures.
In
accordance with the registration rights agreement entered into with their
initial sale, the Company was required to register for resale by April 21,
2005
its 5.875% convertible senior notes due 2009, issued in November 2004. Since
these convertible notes were not registered by that date, the Company paid
or
will pay liquidated damages totaling $0.5 million through July 14, 2005,
the day
prior to the effective date of the registration statement. In addition, in
accordance with the share lending agreement entered into in connection with
the
initial sale of its 5.875% convertible senior notes due 2009, Charter was
required to register by April 1, 2005 150 million shares of its Class A common
stock that Charter was obligated to lend to Citigroup Global Markets Limited
("CGML") at CGML’s request. Because this registration statement was not declared
effective by such date, the Company paid or will pay liquidated damages totaling
$11 million from April 2, 2005 through July 17, 2005, the day before the
effective date of the registration statement. The liquidated damages were
recorded as interest expense in the accompanying condensed consolidated
statements of operations.
As
of
June 30, 2005, the Company has concluded it is probable that three pending
cable
asset sales, representing approximately 33,000 customers, will close within
the
next twelve months thus meeting the criteria for assets held for sale under
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
As such
the assets were written down to fair value less estimated costs to sell
resulting in asset impairment charges during the three and six months ended
June
30, 2005 of approximately $8 million and $39 million, respectively. At June
30,
2005 assets held for sale, included in investment in cable properties, are
approximately $40 million.
In
March
2004, the Company closed the sale of certain cable systems in Florida,
Pennsylvania, Maryland, Delaware and West Virginia to Atlantic Broadband
Finance, LLC. The Company closed the sale of an additional cable system in
New
York to Atlantic Broadband Finance, LLC in April 2004. These transactions
resulted in a $106 million pretax gain recorded as a gain on sale of assets
in
the Company’s consolidated statements of operations. The total net proceeds from
the sale of all of these systems were approximately $735 million. The proceeds
were used to repay a portion of amounts outstanding under the Company’s
revolving credit facility.
Gain
on
investments for the three and six months ended June 30, 2005 primarily
represents a
gain
realized on an exchange of the Company’s interest in an equity investee for an
investment in a larger enterprise.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
4.
|
Franchises
and Goodwill
|
Franchise
rights represent the value attributed to agreements with local authorities
that
allow access to homes in cable service areas acquired through the purchase
of
cable systems. Management estimates the fair value of franchise rights at
the
date of acquisition and determines if the franchise has a finite life or
an
indefinite-life as defined by SFAS No. 142, Goodwill
and Other Intangible Assets.
Franchises
that qualify for indefinite-life treatment under SFAS No. 142 are
tested
for impairment annually based on valuations, or more frequently as warranted
by
events or changes in circumstances. Such
test
resulted in a total franchise impairment of approximately $3.3 billion during
the third quarter of 2004. Franchises are aggregated into essentially
inseparable asset groups to conduct the valuations. The asset groups generally
represent geographic clustering of the Company’s cable systems into groups by
which such systems are managed. Management believes such grouping represents
the
highest and best use of those assets.
The
Company’s valuations, which are based on the present value of projected after
tax cash flows, result in a value of property, plant and equipment, franchises,
customer relationships and its total entity value. The value of goodwill
is the
difference between the total entity value and amounts assigned to the other
assets.
Franchises,
for valuation purposes, are defined as the future economic benefits of the
right
to solicit and service potential customers (customer marketing rights), and
the
right to deploy and market new services such as interactivity and telephone
to
the potential customers (service marketing rights). Fair value is determined
based on estimated discounted future cash flows using assumptions consistent
with internal forecasts. The franchise after-tax cash flow is calculated
as the
after-tax cash flow generated by the potential customers obtained and the
new
services added to those customers in future periods. The sum of the present
value of the franchises’ after-tax cash flow in years 1 through 10 and the
continuing value of the after-tax cash flow beyond year 10 yields the fair
value
of the franchise.
The
Company follows the guidance of EITF Issue 02-17, Recognition
of Customer Relationship Intangible Assets Acquired in a Business Combination,
in
valuing customer relationships. Customer relationships, for valuation purposes,
represent the value of the business relationship with existing customers
and are
calculated by projecting future after-tax cash flows from these customers
including the right to deploy and market additional services such as
interactivity and telephone to these customers. The present value of these
after-tax cash flows yields the fair value of the customer relationships.
Substantially all acquisitions occurred prior to January 1, 2002. The Company
did not record any value associated with the customer relationship intangibles
related to those acquisitions. For acquisitions subsequent to January 1,
2002
the Company did assign a value to the customer relationship intangible, which
is
amortized over its estimated useful life.
As
of
June 30, 2005 and December 31, 2004, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
|
June
30, 2005
|
|
December 31,
2004
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with indefinite lives
|
|
$
|
9,806
|
|
$
|
--
|
|
$
|
9,806
|
|
$
|
9,845
|
|
$
|
--
|
|
$
|
9,845
|
|
Goodwill
|
|
|
52
|
|
|
--
|
|
|
52
|
|
|
52
|
|
|
--
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,858
|
|
$
|
--
|
|
$
|
9,858
|
|
$
|
9,897
|
|
$
|
--
|
|
$
|
9,897
|
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with finite lives
|
|
$
|
39
|
|
$
|
6
|
|
$
|
33
|
|
$
|
37
|
|
$
|
4
|
|
$
|
33
|
|
Franchises
with indefinite lives decreased $39 million as a result of the asset impairment
charges recorded related to three pending cable asset sales (see Note 3).
Franchise amortization expense for the three and six months ended June
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
30,
2005
and 2004 was $1 million and $2 million, respectively, which represents the
amortization relating to franchises that did not qualify for indefinite-life
treatment under SFAS No. 142, including costs associated with franchise
renewals. The Company expects that amortization expense on franchise assets
will
be approximately $3 million annually for each of the next five years. Actual
amortization expense in future periods could differ from these estimates
as a
result of new intangible asset acquisitions or divestitures, changes in useful
lives and other relevant factors.
5.
|
Accounts
Payable and Accrued
Expenses
|
Accounts
payable and accrued expenses consist of the following as of June 30, 2005
and
December 31, 2004:
|
|
June
30,
2005
|
|
December 31,
2004
|
|
|
|
|
|
|
|
Accounts
payable - trade
|
|
$
|
86
|
|
$
|
148
|
|
Accrued
capital expenditures
|
|
|
110
|
|
|
65
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
Interest
|
|
|
342
|
|
|
324
|
|
Programming
costs
|
|
|
285
|
|
|
278
|
|
Franchise-related
fees
|
|
|
54
|
|
|
67
|
|
Compensation
|
|
|
94
|
|
|
66
|
|
Other
|
|
|
253
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,224
|
|
$
|
1,217
|
|
Long-term
debt consists of the following as of June
30,
2005 and
December 31, 2004:
|
|
|
|
December
31, 2004
|
|
|
|
Face
Value
|
|
Accreted
Value
|
|
Face
Value
|
|
Accreted
Value
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.75%
convertible senior notes due 2006
|
|
$
|
25
|
|
$
|
25
|
|
$
|
156
|
|
$
|
156
|
|
5.875%
convertible senior notes due 2009
|
|
|
863
|
|
|
838
|
|
|
863
|
|
|
834
|
|
Charter
Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.250%
senior notes due 2007
|
|
|
105
|
|
|
105
|
|
|
451
|
|
|
451
|
|
8.625%
senior notes due 2009
|
|
|
1,244
|
|
|
1,243
|
|
|
1,244
|
|
|
1,243
|
|
9.920%
senior discount notes due 2011
|
|
|
1,108
|
|
|
1,108
|
|
|
1,108
|
|
|
1,108
|
|
10.000%
senior notes due 2009
|
|
|
640
|
|
|
640
|
|
|
640
|
|
|
640
|
|
10.250%
senior notes due 2010
|
|
|
318
|
|
|
318
|
|
|
318
|
|
|
318
|
|
11.750%
senior discount notes due 2010
|
|
|
450
|
|
|
450
|
|
|
450
|
|
|
448
|
|
10.750%
senior notes due 2009
|
|
|
874
|
|
|
874
|
|
|
874
|
|
|
874
|
|
11.125%
senior notes due 2011
|
|
|
500
|
|
|
500
|
|
|
500
|
|
|
500
|
|
13.500%
senior discount notes due 2011
|
|
|
675
|
|
|
629
|
|
|
675
|
|
|
589
|
|
9.625%
senior notes due 2009
|
|
|
640
|
|
|
638
|
|
|
640
|
|
|
638
|
|
10.000%
senior notes due 2011
|
|
|
710
|
|
|
708
|
|
|
710
|
|
|
708
|
|
11.750%
senior discount notes due 2011
|
|
|
939
|
|
|
851
|
|
|
939
|
|
|
803
|
|
12.125%
senior discount notes due 2012
|
|
|
330
|
|
|
275
|
|
|
330
|
|
|
259
|
|
CCH
II, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
10.250%
senior notes due 2010
|
|
|
1,601
|
|
|
1,601
|
|
|
1,601
|
|
|
1,601
|
|
CCO
Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8¾%
senior notes due 2013
|
|
|
500
|
|
|
500
|
|
|
500
|
|
|
500
|
|
Senior
floating rate notes due 2010
|
|
|
550
|
|
|
550
|
|
|
550
|
|
|
550
|
|
Charter
Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8%
senior second lien notes due 2012
|
|
|
1,100
|
|
|
1,100
|
|
|
1,100
|
|
|
1,100
|
|
8
3/8% senior second lien notes due 2014
|
|
|
733
|
|
|
733
|
|
|
400
|
|
|
400
|
|
Renaissance
Media Group LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000%
senior discount notes due 2008
|
|
|
114
|
|
|
116
|
|
|
114
|
|
|
116
|
|
CC
V Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.875%
senior discount notes due 2008
|
|
|
--
|
|
|
--
|
|
|
113
|
|
|
113
|
|
Credit
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Operating
|
|
|
5,445
|
|
|
5,445
|
|
|
5,515
|
|
|
5,515
|
|
|
|
$
|
19,464
|
|
$
|
19,247
|
|
$
|
19,791
|
|
$
|
19,464
|
|
The
accreted values presented above represent the face value of the notes less
the
original issue discount at the time of sale plus the accretion to the balance
sheet date.
Gain
(loss) on extinguishment of debt
In
March
and June 2005, Charter Operating consummated exchange transactions with a
small
number of institutional holders of Charter Holdings 8.25% senior notes due
2007
pursuant to which Charter Operating issued, in private placements, approximately
$333 million principal amount of new notes with terms identical to Charter
Operating's 8.375% senior second lien notes due 2014 in exchange for
approximately $346 million of the Charter Holdings 8.25% senior notes due
2007.
The exchanges resulted in a loss on extinguishment of debt of approximately
$1
million for the three months ended June 30, 2005 and a gain on extinguishment
of
debt of approximately $10 million for the six months ended June 30, 2005.
The
Charter Holdings notes received in the exchange were thereafter distributed
to
Charter Holdings and cancelled.
During
the three and six months ended June 30, 2005, the Company repurchased, in
private transactions, from a small number of institutional holders, a total
of
$97 million and $131 million, respectively, principal amount of its 4.75%
convertible senior notes due 2006. These transactions resulted in a net gain
on
extinguishment of debt of approximately $3 million and $4 million for the
three
and six months ended June 30, 2005, respectively.
In
March
2005, Charter’s subsidiary, CC V Holdings, LLC, redeemed all of its 11.875%
notes due 2008, at 103.958% of principal amount, plus accrued and unpaid
interest to the date of redemption. The total cost of redemption was
approximately $122 million and was funded through borrowings under the Charter
Operating credit facilities. The redemption resulted in a loss on extinguishment
of debt for the six months ended June 30, 2005 of approximately $5 million.
Following
such redemption, CC V Holdings, LLC and its subsidiaries (other than
non-guarantor subsidiaries) guaranteed the Charter Operating credit facilities
and granted a lien on all of their assets as to which a lien can be perfected
under the Uniform Commercial Code by the filing of a financing
statement.
7.
|
Minority
Interest and Equity Interest of Charter
Holdco
|
Charter
is a holding company whose primary asset is a controlling equity interest
in
Charter Holdco, the indirect owner of the Company’s cable systems, and $863
million and $990 million at June 30, 2005 and December 31, 2004, respectively,
of mirror notes which are payable by Charter Holdco to Charter and have the
same
principal amount and terms as those of Charter’s convertible senior notes.
Minority
interest on the Company’s consolidated balance sheets represents the ownership
percentage of Charter Holdco not owned by Charter, or approximately 53% of
total
members’ equity of Charter Holdco, plus $662 million and $656 million of
preferred membership interests in CC VIII, LLC ("CC VIII"), an indirect
subsidiary of Charter Holdco, as of June 30, 2005 and December 31, 2004,
respectively. As
more
fully described in Note 17, this preferred interest arises from the
approximately $630 million of preferred
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
membership
units issued by CC VIII in connection with an acquisition in February 2000
and
continues to be the subject of a dispute between Charter and Mr. Paul G.
Allen,
Charter’s Chairman and controlling shareholder. Generally, operating earnings or
losses are allocated to the minority owners based on their ownership percentage,
thereby increasing or decreasing the Company’s net loss, respectively. To the
extent they relate to CC VIII, the allocations of earnings or losses are
subject
to adjustment based on the ultimate resolution of this disputed ownership.
Due
to the uncertainties related to the ultimate resolution, effective January
1,
2005, the Company ceased recognizing minority interest in earnings or losses
of
CC VIII for financial reporting purposes until such time as the resolution
of
the matter is determinable or other events occur. For
the
three and six months ended June 30, 2005, the Company’s results include income
of $8 million and $17 million, respectively, attributable to CC
VIII.
Members’
deficit of Charter Holdco was $5.1 billion and $4.4 billion as of June 30,
2005
and December 31, 2004, respectively. Gains and losses arising from the issuance
by Charter Holdco of its membership units are recorded as capital transactions,
thereby increasing or decreasing shareholders’ equity and decreasing or
increasing minority interest on the accompanying condensed consolidated balance
sheets. Minority interest was approximately 53% as of June 30, 2005 and December
31, 2004. Minority interest includes the proportionate share of changes in
fair
value of interest rate derivative agreements. Such amounts are temporary
as they
are contractually scheduled to reverse over the life of the underlying
instrument. Additionally, reported losses allocated to minority interest
on the
consolidated statement of operations are limited to the extent of any remaining
minority interest on the balance sheet related to Charter Holdco. Because
minority interest in Charter Holdco is substantially eliminated, Charter
absorbs
substantially all losses before income taxes that otherwise would be allocated
to minority interest. Subject
to any changes in Charter Holdco’s capital structure, future losses will
continue to be substantially absorbed by Charter.
Changes
to minority interest consist of the following:
|
|
|
Minority
Interest
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
648
|
|
CC
VIII 2% Priority Return (see Note 17)
|
|
|
6
|
|
Changes
in fair value of interest rate agreements
|
|
|
5
|
|
Balance,
June 30, 2005
|
|
$
|
659
|
|
Certain
marketable equity securities are classified as available-for-sale and reported
at market value with unrealized gains and losses recorded as accumulated
other
comprehensive loss on the accompanying condensed consolidated balance sheets.
Additionally, the Company reports changes in the fair value of interest rate
agreements designated as hedging the variability of cash flows associated
with
floating-rate debt obligations, that meet the effectiveness criteria of SFAS
No. 133, Accounting
for Derivative Instruments and Hedging Activities,
in
accumulated other comprehensive loss, after giving effect to the minority
interest share of such gains and losses. Comprehensive loss for the three
months
ended June 30, 2005 and 2004 was $355 million and $404 million, respectively,
and $704 million and $697 million for the six months ended June 30, 2005
and
2004, respectively.
9.
|
Accounting
for Derivative Instruments and Hedging
Activities
|
The
Company uses interest rate risk management derivative instruments, such as
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) to manage its interest costs.
The Company’s policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, the Company has
agreed
to exchange, at specified intervals through 2007, the difference between
fixed
and variable interest amounts calculated by reference to an agreed-upon notional
principal amount. Interest rate collar agreements are used to limit the
Company’s exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
The
Company does not hold or issue derivative instruments for trading purposes.
The
Company does, however, have certain interest rate derivative instruments
that
have been designated as cash flow hedging instruments. Such instruments
effectively convert variable interest payments on certain debt instruments
into
fixed payments. For qualifying hedges, SFAS No. 133 allows derivative
gains
and losses to offset related results on hedged items in the consolidated
statement of operations. The Company has formally documented, designated
and
assessed the effectiveness of transactions that receive hedge accounting.
For
the three months ended June 30, 2005 and 2004, net gain (loss) on derivative
instruments and hedging activities includes gains of $0 and $3 million,
respectively, and for the six months ended June 30, 2005 and 2004, net gain
(loss) on derivative instruments and hedging activities includes gains of
$1
million and $2 million, respectively, which represent cash flow hedge
ineffectiveness on interest rate hedge agreements arising from differences
between the critical terms of the agreements and the related hedged obligations.
Changes in the fair value of interest rate agreements designated as hedging
instruments of the variability of cash flows associated with floating-rate
debt
obligations that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive loss. For the three months ended
June 30, 2005 and 2004, a gain of $0 and $27 million, respectively, and for
the
six months ended June 30, 2005 and 2004, a gain of $9 million and $29 million,
respectively, related to derivative instruments designated as cash flow hedges,
was recorded in accumulated other comprehensive loss and minority interest.
The
amounts are subsequently reclassified into interest expense as a yield
adjustment in the same period in which the related interest on the floating-rate
debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they
do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative instruments
not
designated as hedges are marked to fair value, with the impact recorded as
gain
(loss) on derivative instruments and hedging activities in the Company’s
condensed consolidated statements of operations.
For the
three months ended June 30, 2005 and 2004, net
gain
(loss) on derivative instruments and hedging activities includes losses of
$1
million and gains of $60 million, respectively, and for the six months ended
June 30, 2005 and 2004, net gain (loss) on derivative instruments and heding
activities includes gains of $25 million and $54 million, respectively, for
interest rate derivative instruments not designated as hedges.
As
of
June 30, 2005 and December 31, 2004, the Company had outstanding $2.2
billion and $2.7 billion and $20 million and $20 million, respectively, in
notional amounts of interest rate swaps and collars, respectively. The notional
amounts of interest rate instruments do not represent amounts exchanged by
the
parties and, thus, are not a measure of exposure to credit loss. The amounts
exchanged are determined by reference to the notional amount and the other
terms
of the contracts.
Certain
provisions of the Company’s 5.875% convertible senior notes issued in November
2004 were considered embedded derivatives for accounting purposes and were
required to be accounted for separately from the convertible senior notes.
In
accordance with SFAS No. 133, these derivatives are marked to market with
gains
or losses recorded in interest expense on the Company’s condensed consolidated
statement of operations. For the three and six months ended June 30, 2005,
the
Company recognized $8 million and $27 million, respectively, as a reduction
in
interest expense related to these derivatives. At June 30, 2005 and December
31,
2004, $1 million and $10 million, respectively, is recorded in accounts payable
and accrued expenses relating to the short-term portion of these derivatives
and
$3 million and $21 million, respectively, is recorded in other long-term
liabilities related to the long-term portion.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
Revenues
consist of the following for the three and six months ended June 30, 2005
and
2004:
|
|
Three
Months
Ended
June 30,
|
|
Six
Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
861
|
|
$
|
846
|
|
$
|
1,703
|
|
$
|
1,695
|
|
High-speed
Internet
|
|
|
226
|
|
|
181
|
|
|
441
|
|
|
349
|
|
Advertising
sales
|
|
|
76
|
|
|
73
|
|
|
140
|
|
|
132
|
|
Commercial
|
|
|
69
|
|
|
58
|
|
|
134
|
|
|
114
|
|
Other
|
|
|
91
|
|
|
81
|
|
|
176
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,323
|
|
$
|
1,239
|
|
$
|
2,594
|
|
$
|
2,453
|
|
Operating
expenses consist of the following for the three and six months ended June
30,
2005 and 2004:
|
|
Three
Months
Ended
June 30,
|
|
Six
Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Programming
|
|
$
|
351
|
|
$
|
329
|
|
$
|
709
|
|
$
|
663
|
|
Advertising
sales
|
|
|
25
|
|
|
25
|
|
|
50
|
|
|
48
|
|
Service
|
|
|
193
|
|
|
161
|
|
|
369
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
569
|
|
$
|
515
|
|
$
|
1,128
|
|
$
|
1,027
|
|
12.
|
Selling,
General and Administrative
Expenses
|
Selling,
general and administrative expenses consist of the following for the three
and
six months ended June 30, 2005 and 2004:
|
|
Three
Months
Ended
June 30,
|
|
Six
Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
225
|
|
$
|
208
|
|
$
|
427
|
|
$
|
416
|
|
Marketing
|
|
|
31
|
|
|
36
|
|
|
66
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256
|
|
$
|
244
|
|
$
|
493
|
|
$
|
483
|
|
Components
of selling expense are included in general and administrative and marketing
expense.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
The
Company has recorded special charges as a result of reducing its workforce,
consolidating administrative offices and management realignment in 2004 and
2005. The activity associated with this initiative is summarized in the table
below.
|
|
Three
Months
Ended
June 30,
|
|
Six
Months
Ended
June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
6
|
|
$
|
7
|
|
$
|
6
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
Charges
|
|
|
--
|
|
|
2
|
|
|
4
|
|
|
3
|
|
Payments
|
|
|
(2
|
)
|
|
(3
|
)
|
|
(6
|
)
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30,
|
|
$
|
4
|
|
$
|
6
|
|
$
|
4
|
|
$
|
6
|
|
For
the
three and six months ended June 30, 2005, special charges were offset by
approximately $2 million related to an agreed upon discount in respect of
the
portion of the settlement consideration payable under the Stipulations of
Settlement of the consolidated Federal Class Action and the Federal Derivative
Action allocable to plaintiff’s attorney fees and Charter’s insurance carrier as
a result of the election to pay such fees in cash (see Note 15).
For
the
three and six months ended June 30, 2004, special charges also includes
approximately $85 million, which represents the aggregate value of the Charter
Class A common stock and warrants to purchase Charter Class A common stock
contemplated to be issued as part of the terms set forth in memoranda of
understanding regarding settlement of the consolidated Federal Class Action
and
Federal Derivative Action. For the six months ended June 30, 2004, special
charges includes approximately $9 million of litigation costs related to
the
tentative settlement of the South Carolina national class action suit, subject
to final documentation and court approval (see Note 15).
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries
are not
subject to income tax. However, certain of these subsidiaries are
corporations and are subject to income tax. All of the taxable income,
gains, losses, deductions and credits of Charter Holdco are passed through
to
its members: Charter, Charter Investment, Inc. ("Charter
Investment")
and
Vulcan Cable III Inc. ("Vulcan
Cable").
Charter is responsible for its share of taxable income or loss of Charter
Holdco
allocated to Charter in accordance with the Charter Holdco limited liability
company agreement ("LLC
Agreement")
and
partnership tax rules and regulations.
As
of
June
30,
2005
and December 31, 2004, the Company had net deferred income tax liabilities
of
approximately $259 million and $216 million, respectively. Approximately
$214 million and $208 million of the deferred tax liabilities recorded in
the
condensed consolidated financial statements at June
30,
2005
and
December 31, 2004, respectively relate to certain indirect subsidiaries of
Charter Holdco, which file separate income tax returns.
During
the three and six months ended June
30,
2005,
the Company recorded $31 million and $46 million of income tax expense,
respectively, and during the three and six months ended June 30, 2004, the
Company recorded $43 million and $97 million of income tax expense,
respectively. The sale of systems to Atlantic Broadband, LLC in March
and
April 2004 resulted in income tax expense of $1 million and $15 million for
the
three and six months ended June 30, 2004, respectively.
Income
tax expense is recognized through increases in the deferred tax liabilities
related to Charter’s investment in Charter Holdco, as well as current federal
and state income tax expense and increases to the deferred tax liabilities
of
certain of Charter’s indirect corporate subsidiaries. The Company recorded
an additional deferred tax asset of
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
approximately
$130 million and $265 million during the three and six months ended June
30,
2005, respectively, relating to net operating loss carryforwards, but recorded
a
valuation allowance with respect to these amounts because of the uncertainty
of
the ability to realize a benefit from these carryforwards in the future.
The
Company has deferred tax assets of approximately $3.8 billion and $3.5 billion
as of June 30, 2005 and December 31, 2004, respectively, which primarily
relate
to financial and tax losses allocated to Charter from Charter Holdco.
The
deferred tax assets include approximately $2.3 billion and $2.1 billion of
tax
net operating loss carryforwards as of June 30, 2005 and December 31, 2004,
respectively (generally expiring in years 2005 through 2025), of Charter
and its
indirect corporate subsidiaries. Valuation allowances of $3.4 billion
and
$3.2 billion as of June 30, 2005 and December 31, 2004 exist with respect
to
these deferred tax assets, respectively.
Realization
of any benefit from the Company’s tax net operating losses is dependent on: (1)
Charter and its indirect corporate subsidiaries’ ability to generate future
taxable income and (2) the absence of certain future "ownership changes"
of
Charter’s common stock. An "ownership change" as defined in the applicable
federal income tax rules, would place significant limitations, on an annual
basis, on the use of such net operating losses to offset any future taxable
income the Company may generate. Such limitations, in conjunction
with the
net operating loss expiration provisions, could effectively eliminate the
Company’s ability to use a substantial portion of its net operating losses to
offset any future taxable income. Future transactions and the timing
of
such transactions could cause an ownership change. Such transactions
include additional issuances of common stock by the Company (including but
not
limited to the
issuance of up to a total of 150 million shares of common stock (of which
27.2
million were issued in July 2005) under
the
share lending agreement, the issuance of shares of common stock upon future
conversion of Charter’s convertible senior notes and the issuance of common
stock in the class action settlement discussed in Note 15, reacquisition
of the
borrowed shares by Charter, or acquisitions or sales of shares by certain
holders of Charter’s shares, including persons who have held, currently hold, or
accumulate in the future five percent or more of Charter’s outstanding stock
(including upon an exchange by Paul Allen or his affiliates, directly or
indirectly, of membership units of Charter Holdco into CCI common stock)).
Many of the foregoing transactions are beyond management’s control.
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. Because of the uncertainties in projecting future
taxable income of Charter Holdco,
valuation allowances have been established except for deferred benefits
available to offset certain deferred tax liabilities.
Charter
Holdco is currently under examination by the Internal Revenue Service for
the
tax years ending December 31, 2000, 2002 and 2003. The results of
the
Company (excluding Charter and the indirect corporate subsidiaries) for these
years are subject to this examination. Management does not expect
the
results of this examination to have a material adverse effect on the Company’s
financial condition or results of operations.
Securities
Class Actions and Derivative Suits
Fourteen
putative federal class action lawsuits (the "Federal Class Actions")
were
filed against Charter and certain of its former and present officers and
directors in various jurisdictions allegedly on behalf of all purchasers
of
Charter’s securities during the period from either November 8 or
November 9, 1999 through July 17 or July 18, 2002. Unspecified
damages were sought by the plaintiffs. In general, the lawsuits alleged that
Charter utilized misleading accounting practices and failed to disclose these
accounting practices and/or issued false and misleading financial statements
and
press releases concerning Charter’s operations and prospects. The Federal
Class Actions were specifically and individually identified in public
filings made by Charter prior to the date of this quarterly report. On
March 12, 2003, the Panel transferred the six Federal Class Actions
not filed in the Eastern District of Missouri to that district for coordinated
or consolidated pretrial proceedings with the eight Federal Class Actions
already pending there. The Court subsequently consolidated the Federal
Class Actions into a single action (the "Consolidated Federal
Class Action") for pretrial purposes. On August 5, 2004, the
plaintiff’s representatives, Charter and the individual
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
defendants
who were the subject of the suit entered into a Memorandum of Understanding
setting forth agreements in principle to settle the Consolidated Federal
Class Action. These parties subsequently entered into Stipulations
of
Settlement dated as of January 24, 2005 (described more fully below)
which
incorporate the terms of the August 5, 2004 Memorandum of Understanding.
On
September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in the Circuit Court of the City of St. Louis,
State of
Missouri (the "Missouri State Court"), against Charter and its then current
directors, as well as its former auditors. The plaintiffs alleged that the
individual defendants breached their fiduciary duties by failing to establish
and maintain adequate internal controls and procedures. On March 12,
2004,
an action substantively identical to the State Derivative Action was filed
in
Missouri State Court against Charter and certain of its current and former
directors, as well as its former auditors. On July 14, 2004, the Court
consolidated this case with the State Derivative Action.
Separately,
on February 12, 2003, a shareholders derivative suit (the "Federal
Derivative Action"), was filed against Charter and its then current directors
in
the United States District Court for the Eastern District of Missouri. The
plaintiff in that suit alleged that the individual defendants breached their
fiduciary duties and grossly mismanaged Charter by failing to establish and
maintain adequate internal controls and procedures.
As
noted
above, Charter and the individual defendants entered into a Memorandum of
Understanding on August 5, 2004 setting forth agreements in principle
regarding settlement of the Consolidated Federal Class Action, the
State
Derivative Action(s) and the Federal Derivative Action (the "Actions"). Charter
and various other defendants in those actions subsequently entered into
Stipulations of Settlement dated as of January 24, 2005, setting forth
a
settlement of the Actions in a manner consistent with the terms of the
Memorandum of Understanding. The Stipulations of Settlement, along with various
supporting documentation, were filed with the Court on February 2,
2005. On
May 23, 2005 the United States District Court for the Eastern District
of
Missouri conducted the final fairness hearing for the Actions, and on
June 30, 2005, the Court issued its final approval of the settlements.
Members of the class had 30 days from the issuance of the June 30
order
approving the settlement to file an appeal challenging the approval.
Two
notices of appeal were filed relating to the settlement, but Charter does
not
yet know the specific issues presented by such appeals,
nor
have briefing schedules been set.
As
amended, the Stipulations of Settlement provide that, in exchange for a release
of all claims by plaintiffs against Charter and its former and present officers
and directors named in the Actions, Charter would pay to the plaintiffs a
combination of cash and equity collectively valued at $144 million,
which
will include the fees and expenses of plaintiffs’ counsel. Of this amount,
$64 million would be paid in cash (by Charter’s insurance carriers) and the
$80 million balance was to be paid (subject to Charter’s right to
substitute cash therefor described below) in shares of Charter Class A
common stock having an aggregate value of $40 million and ten-year
warrants
to purchase shares of Charter Class A common stock having an aggregate
warrant value of $40 million, with such values in each case being
determined pursuant to formulas set forth in the Stipulations of Settlement.
However, Charter had the right, in its sole discretion, to substitute cash
for
some or all of the aforementioned securities on a dollar for dollar basis.
Pursuant to that right, Charter elected to fund the $80 million obligation
with 13.4 million shares of Charter Class A common stock (having
an
aggregate value of approximately $15 million pursuant to the formula
set
forth in the Stipulations of Settlement) with the remaining balance (less
an
agreed upon $2 million discount in respect of that portion allocable
to
plaintiffs’ attorneys’ fees) to be paid in cash. In addition, Charter had agreed
to issue additional shares of its Class A common stock to its insurance
carrier having an aggregate value of $5 million; however, by agreement
with
its carrier Charter has paid $4.5 million in cash in lieu of issuing
such
shares. Charter delivered the settlement consideration to the claims
administrator on July 8, 2005, and it will be held in escrow pending
any
appeals of the approval. On July 14, 2005, the Circuit Court for the City
of St.
Louis dismissed with prejudice the State Derivative Actions.
As
part
of the settlements, Charter has committed to a variety of corporate governance
changes, internal practices and public disclosures, some of which have already
been undertaken and none of which are inconsistent with measures Charter
is
taking in connection with the recent conclusion of the SEC
investigation.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
Government
Investigations
In
August
2002, Charter became aware of a grand jury investigation being conducted
by the
U.S. Attorney’s Office for the Eastern District of Missouri into certain of
its accounting and reporting practices, focusing on how Charter reported
customer numbers, and its reporting of amounts received from digital set-top
terminal suppliers for advertising. The U.S. Attorney’s Office publicly
stated that Charter was not a target of the investigation. Charter was also
advised by the U.S. Attorney’s Office that no current officer or member of
its board of directors was a target of the investigation. On July 24,
2003,
a federal grand jury charged four former officers of Charter with conspiracy
and
mail and wire fraud, alleging improper accounting and reporting practices
focusing on revenue from digital set-top terminal suppliers and inflated
customer account numbers. Each of the indicted former officers pled guilty
to
single conspiracy counts related to the original mail and wire fraud charges
and
were sentenced April 22, 2005. Charter fully cooperated with the
investigation, and following the sentencings, the U.S. Attorney’s Office
for the Eastern District of Missouri announced that its investigation was
concluded and that no further indictments would issue.
Indemnification
Charter
was generally required to indemnify, under certain conditions, each of the
named
individual defendants in connection with the matters described above pursuant
to
the terms of its bylaws and (where applicable) such individual defendants’
employment agreements. In accordance with these documents, in connection
with
the grand jury investigation, a now-settled SEC investigation and the
above-described lawsuits, some of Charter’s current and former directors and
current and former officers have been advanced certain costs and expenses
incurred in connection with their defense. On February 22, 2005, Charter
filed suit against four of its former officers who were indicted in the course
of the grand jury investigation. These suits seek to recover the legal fees
and
other related expenses advanced to these individuals. One of these former
officers has counterclaimed against Charter alleging, among other things,
that
Charter owes him additional indemnification for legal fees that Charter did
not
pay and another of these former officers has counterclaimed against Charter
for
accrued sick leave.
Other
Litigation
In
addition to the matters set forth above, Charter is also party to other lawsuits
and claims that arose in the ordinary course of conducting its business.
In the
opinion of management, after taking into account recorded liabilities, the
outcome of these other lawsuits and claims are not expected to have a material
adverse effect on the Company’s consolidated financial condition, results of
operations or its liquidity.
16.
|
Stock
Compensation Plans
|
Prior
to
January 1, 2003, the Company accounted for stock-based compensation in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations, as permitted by SFAS No. 123, Accounting
for Stock-Based Compensation.
On
January 1, 2003, the Company adopted the fair value measurement provisions
of SFAS No. 123 using the prospective method, under which the Company
recognizes compensation expense of a stock-based award to an employee over
the
vesting period based on the fair value of the award on the grant date consistent
with the method described in Financial Accounting Standards Board Interpretation
No. 28, Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Award
Plans.
Adoption of these provisions resulted in utilizing a preferable accounting
method as the condensed consolidated financial statements will present the
estimated fair value of stock-based compensation in expense consistently
with
other forms of compensation and other expense associated with goods and services
received for equity instruments. In accordance with SFAS No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, the
fair
value method is being applied only to awards granted or modified after
January 1, 2003, whereas awards granted prior to such date will continue
to
be accounted for under APB No. 25, unless they are modified or settled
in
cash. The ongoing effect on consolidated results of operations or financial
condition will depend on future stock-based compensation awards granted by
the
Company.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
SFAS
No. 123 requires pro forma disclosure of the impact on earnings as
if the
compensation expense for these plans had been determined using the fair value
method. The following table presents the Company’s net loss and loss per share
as reported and the pro forma amounts that would have been reported using
the
fair value method under SFAS No. 123 for the periods presented:
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$
|
(356
|
)
|
$
|
(416
|
)
|
$
|
(709
|
)
|
$
|
(710
|
)
|
Add
back stock-based compensation expense related to stock
options
included in reported net loss
|
|
|
4
|
|
|
12
|
|
|
8
|
|
|
26
|
|
Less
employee stock-based compensation expense determined under fair
value
based method for all employee stock option awards
|
|
|
(4
|
)
|
|
(10
|
)
|
|
(8
|
)
|
|
(31
|
)
|
Effects
of unvested
options in stock
option exchange
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
48
|
|
Pro
forma
|
|
$
|
(356
|
)
|
$
|
(414
|
)
|
$
|
(709
|
)
|
$
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common shares, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(1.18
|
)
|
$
|
(1.39
|
)
|
$
|
(2.34
|
)
|
$
|
(2.39
|
)
|
Add
back stock-based compensation expense related to stock
options
included in reported net loss
|
|
|
0.01
|
|
|
0.04
|
|
|
0.03
|
|
|
0.09
|
|
Less
employee stock-based compensation expense determined under fair
value
based method for all employee stock option awards
|
|
|
(0.01
|
)
|
|
(0.03
|
)
|
|
(0.03
|
)
|
|
(0.10
|
)
|
Effects
of unvested options in stock option exchange
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
0.16
|
|
Pro
forma
|
|
$
|
(1.18
|
)
|
$
|
(1.38
|
)
|
$
|
(2.34
|
)
|
$
|
(2.24
|
)
|
In
January 2004, Charter began an option exchange program in which the Company
offered its employees the right to exchange all stock options (vested and
unvested) under the 1999 Charter Communications Option Plan and 2001 Stock
Incentive Plan that had an exercise price over $10 per share for shares
of
restricted Charter Class A common stock or, in some instances, cash.
Based
on
a sliding exchange ratio, which varied depending on the exercise price
of an
employee’s outstanding options, if an employee would have received more than 400
shares of restricted stock in exchange for tendered options, Charter issued
to
that employee shares of restricted stock in the exchange. If, based on
the
exchange ratios, an employee would have received 400 or fewer shares of
restricted stock in exchange for tendered options, Charter instead paid
the
employee cash in an amount equal to the number of shares the employee would
have
received multiplied by $5.00. The
offer
applied to options (vested and unvested) to purchase a total of 22,929,573
shares of Charter Class A common stock, or approximately 48% of the Company’s
47,882,365 total options (vested and unvested) issued and outstanding as
of
December 31, 2003. Participation by employees was voluntary. Those members
of
Charter’s board of directors who were not also employees of the Company were not
eligible to participate in the exchange offer.
In
the
closing of the exchange offer on February 20, 2004, the Company accepted
for
cancellation eligible options to purchase approximately 18,137,664 shares
of
Charter Class A common stock. In exchange, the Company granted 1,966,686
shares
of restricted stock, including 460,777 performance shares to eligible employees
of the rank of senior vice president and above, and paid a total cash amount
of
approximately $4 million (which amount includes applicable withholding taxes)
to
those employees who received cash rather than shares of restricted stock.
The
restricted stock was granted on February 25, 2004. Employees tendered
approximately 79% of the options exchangeable under the program.
The
cost
to the Company of the stock option exchange program was approximately $10
million, with a 2004 cash compensation expense of approximately $4 million
and a
non-cash compensation expense of approximately $6 million to be expensed
ratably
over the three-year vesting period of the restricted stock issued in the
exchange.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
In
January 2004, the Compensation Committee of the board of directors of Charter
approved Charter’s Long-Term Incentive Program ("LTIP"), which is a program
administered under the 2001 Stock Incentive Plan. Under the LTIP, employees
of
Charter and its subsidiaries whose pay classifications exceed a
certain
level are eligible to receive stock options, and more senior level employees
are
eligible to receive stock options and performance shares. The stock options
vest
25% on each of the first four anniversaries of the date of grant. The
performance units vest on the third anniversary of the grant date and shares
of
Charter Class A common stock are issued, conditional upon Charter’s performance
against financial performance targets established by Charter’s management and
approved by its board of directors. Charter granted 6.9 million performance
shares in January 2004 under this program and recognized expense of $3 million
and $6 million during the three and six months ended June 30, 2004,
respectively. However, in the fourth quarter of 2004, the Company reversed
the
$8 million of expense recorded in the first three quarters of 2004 based
on the
Company’s assessment of the probability of achieving the financial performance
measures established by Charter and required to be met for the performance
shares to vest. In March and April 2005, Charter granted 2.8 million performance
shares under the LTIP. The impact of such grants were de minimis to the
Company’s results of operations for the three and six months ended June 30,
2005.
17.
|
Related
Party Transactions
|
The
following sets forth certain transactions in which the Company and the
directors, executive officers and affiliates of the Company are involved.
Unless
otherwise disclosed, management believes that each of the transactions described
below was on terms no less favorable to the Company than could have been
obtained from independent third parties.
CC
VIII
As
part
of the acquisition of the cable systems owned by Bresnan Communications Company
Limited Partnership in February 2000, CC VIII, Charter’s indirect limited
liability company subsidiary, issued, after adjustments, 24,273,943 Class
A
preferred membership units (collectively, the "CC VIII interest")
with a
value and an initial capital account of approximately $630 million to certain
sellers affiliated with AT&T Broadband, subsequently owned by Comcast
Corporation (the "Comcast sellers"). While held by the Comcast sellers,
the
CC VIII interest was entitled to a 2% priority return on its initial
capital account and such priority return was entitled to preferential
distributions from available cash and upon liquidation of CC VIII. While
held by
the Comcast sellers, the CC VIII interest generally did not share
in the
profits and losses of CC VIII. Mr. Allen granted the Comcast
sellers
the right to sell to him the CC VIII interest for approximately
$630 million plus 4.5% interest annually from February 2000 (the "Comcast
put right"). In April 2002, the Comcast sellers exercised the Comcast put
right
in full, and this transaction was consummated on June 6, 2003. Accordingly,
Mr. Allen has become the holder of the CC VIII interest, indirectly
through an affiliate. Consequently, subject to the matters referenced in
the
next paragraph, Mr. Allen generally thereafter will be allocated his
pro
rata share (based on number of membership interests outstanding) of profits
or
losses of CC VIII. In
the
event of a liquidation of CC VIII, Mr. Allen would be entitled to a priority
distribution with respect to the 2% priority return (which will continue
to
accrete). Any remaining distributions in liquidation would be distributed
to CC
V Holdings, LLC and Mr. Allen in proportion to CC V Holdings, LLC's capital
account and Mr. Allen's capital account (which will equal the initial capital
account of the Comcast sellers of approximately $630 million, increased or
decreased by Mr. Allen's pro rata share of CC VIII’s profits or losses (as
computed for capital account purposes) after June 6, 2003). The
limited liability company agreement of CC VIII does not provide for
a
mandatory redemption of the CC VIII interest.
An
issue
has arisen as to whether the documentation for the Bresnan transaction was
correct and complete with regard to the ultimate ownership of the CC VIII
interest following consummation of the Comcast put right. Specifically, under
the terms of the Bresnan transaction documents that were entered into in
June
1999, the Comcast sellers originally would have received, after adjustments,
24,273,943 Charter Holdco membership units, but due to an FCC regulatory
issue raised by the Comcast sellers shortly before closing, the Bresnan
transaction was modified to provide that the Comcast sellers instead would
receive the preferred equity interests in CC VIII represented by the CC VIII
interest. As part of the last-minute changes to the Bresnan transaction
documents, a draft amended version of the Charter Holdco limited liability
company agreement was prepared, and contract provisions were drafted for
that
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
agreement
that would have required an automatic exchange of the CC VIII interest for
24,273,943 Charter Holdco membership units if the Comcast sellers exercised
the
Comcast put right and sold the CC VIII interest to Mr. Allen or his affiliates.
However, the provisions that would have required this automatic exchange
did not
appear in the final version of the Charter Holdco limited liability company
agreement that was delivered and executed at the closing of the Bresnan
transaction. The law firm that prepared the documents for the Bresnan
transaction brought this matter to the attention of Charter and representatives
of Mr. Allen in 2002.
Thereafter,
the board of directors of Charter formed a Special Committee (currently
comprised of Messrs. Merritt, Tory and Wangberg) to investigate the
matter
and take any other appropriate action on behalf of Charter with respect to
this
matter. After conducting an investigation of the relevant facts and
circumstances, the Special Committee determined that a "scrivener’s error" had
occurred in February 2000 in connection with the preparation of the last-minute
revisions to the Bresnan transaction documents and that, as a result, Charter
should seek the reformation of the Charter Holdco limited liability company
agreement, or alternative relief, in order to restore and ensure the obligation
that the CC VIII interest be automatically exchanged for Charter Holdco units.
The Special Committee further determined that, as part of such contract
reformation or alternative relief, Mr. Allen should be required to
contribute the CC VIII interest to Charter Holdco in exchange for
24,273,943 Charter Holdco membership units. The Special Committee also
recommended to the board of directors of Charter that, to the extent the
contract reformation is achieved, the board of directors should consider
whether
the CC VIII interest should ultimately be held by Charter Holdco or
Charter
Holdings or another entity owned directly or indirectly by them.
Mr. Allen
disagrees with the Special Committee’s determinations described above and has so
notified the Special Committee. Mr. Allen contends that the transaction is
accurately reflected in the transaction documentation and contemporaneous
and
subsequent company public disclosures.
The
parties engaged in a process of non-binding mediation to seek to resolve
this
matter, without success. The Special Committee is evaluating what further
actions or processes it may undertake to resolve this dispute. To accommodate
further deliberation, each party has agreed to refrain from initiating legal
proceedings over this matter until it has given at least ten days’ prior notice
to the other. In addition, the Special Committee and Mr. Allen have determined
to utilize the Delaware Court of Chancery’s program for mediation of complex
business disputes in an effort to resolve the CC VIII interest dispute. If
the
Special Committee and Mr. Allen are unable to reach a resolution through
that mediation process or to agree on an alternative dispute resolution process,
the Special Committee intends to seek resolution of this dispute through
judicial proceedings in an action that would be commenced, after appropriate
notice, in the Delaware Court of Chancery against Mr. Allen and his
affiliates seeking contract reformation, declaratory relief as to the respective
rights of the parties regarding this dispute and alternative forms of legal
and
equitable relief. The ultimate resolution and financial impact of the dispute
are not determinable at this time.
TechTV,
Inc.
TechTV,
Inc. ("TechTV")
operated a cable television network that offered programming mostly related
to
technology. Pursuant to an affiliation agreement that originated in 1998
and
that terminates in 2008, TechTV has provided the Company with programming
for
distribution via Charter’s cable systems. The affiliation agreement provides,
among other things, that TechTV must offer Charter certain terms and conditions
that are no less favorable in the affiliation agreement than are given to
any
other distributor that serves the same number of or fewer TechTV viewing
customers. Additionally, pursuant to the affiliation agreement, the Company
was
entitled to incentive payments for channel launches through December 31,
2003.
In
March
2004, Charter Holdco entered into agreements with Vulcan Programming and
TechTV,
which provide for (i) Charter Holdco and TechTV to amend the affiliation
agreement which, among other things, revises the description of the TechTV
network content, provides for Charter Holdco to waive certain claims against
TechTV relating to alleged breaches
of the affiliation agreement and provides for TechTV to make payment of
outstanding launch receivables due to Charter Holdco under the affiliation
agreement, (ii) Vulcan Programming to pay approximately $10 million and purchase
over a 24-month period, at fair market rates, $2 million of advertising time
across various cable networks on Charter cable systems in consideration of
the
agreements, obligations, releases and waivers under the agreements and
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
in
settlement of the aforementioned claims and (iii) TechTV to be a provider
of
content relating to technology and video gaming for Charter’s interactive
television platforms through December 31, 2006 (exclusive for the first year).
For each of the three and six months ended June 30, 2005 and 2004, the Company
recognized approximately $0.3 million and $0.6 million, respectively, of
the
Vulcan Programming payment as an offset to programming expense. For the three
and six months ended June 30, 2005, the Company paid approximately $0.5 million
and $1 million, respectively, and for the three and six months ended June
30,
2004, the Company paid approximately $0.4 million and $0.6 million,
respectively, under the affiliation agreement.
The
Company believes that Vulcan Programming, which is 100% owned by Mr. Allen,
owned an approximate 98% equity interest in TechTV at the time Vulcan
Programming sold TechTV to an unrelated third party in May 2004. Until September
2003, Mr. Savoy, a former Charter director, was the president and
director
of Vulcan Programming and was a director of TechTV. Mr. Wangberg,
one of
Charter’s directors, was the chairman, chief executive officer and a director of
TechTV. Mr. Wangberg resigned as the chief executive officer of TechTV in
July
2002. He remained a director of TechTV along with Mr. Allen until Vulcan
Programming sold TechTV.
Digeo,
Inc.
In
March
2001, a subsidiary of Charter, Charter Communications Ventures, LLC
("Charter
Ventures"),
and
Vulcan Ventures Incorporated formed DBroadband Holdings, LLC for the sole
purpose of purchasing equity interests in Digeo, Inc. ("Digeo"),
an
entity controlled by Paul Allen. In connection with the execution of the
broadband carriage agreement, DBroadband Holdings, LLC purchased an equity
interest in Digeo funded by contributions from Vulcan Ventures Incorporated.
The
equity interest is subject to a priority return of capital to Vulcan Ventures
up
to the amount contributed by Vulcan Ventures on Charter Ventures’ behalf. After
Vulcan Ventures recovers its amount contributed and any cumulative loss
allocations, Charter Ventures has a 100% profit interest in DBroadband Holdings,
LLC. Charter Ventures is not required to make any capital contributions,
including capital calls, to Digeo. DBroadband Holdings, LLC is therefore
not
included in the Company’s consolidated financial statements. Pursuant to an
amended version of this arrangement, in 2003, Vulcan Ventures contributed
a
total of $29 million to Digeo, $7 million of which was contributed
on
Charter Ventures’ behalf, subject to Vulcan Ventures’ aforementioned priority
return. Since the formation of DBroadband Holdings, LLC, Vulcan Ventures
has
contributed approximately $56 million on Charter Ventures’ behalf.
On
March 2, 2001, Charter Ventures entered into a broadband carriage
agreement
with Digeo Interactive, LLC ("Digeo Interactive"), a wholly owned subsidiary
of
Digeo. The carriage agreement provided that Digeo Interactive would provide
to
Charter a "portal" product, which would function as the television-based
Internet portal (the initial point of entry to the Internet) for Charter’s
customers who received Internet access from Charter. The agreement term was
for
25 years and Charter agreed to use the Digeo portal exclusively for
six
years. Before the portal product was delivered to Charter, Digeo terminated
development of the portal product.
On
September 27, 2001, Charter and Digeo Interactive amended the broadband
carriage agreement. According to the amendment, Digeo Interactive would provide
to Charter the content for enhanced "Wink" interactive television services,
known as Charter Interactive Channels ("i-channels"). In order to provide
the
i-channels, Digeo Interactive sublicensed certain Wink technologies to Charter.
Charter is entitled to share in the revenues generated by the i-channels.
Currently, the Company’s digital video customers who receive i-channels receive
the service at no additional charge.
On
September 28, 2002, Charter entered into a second amendment to its
broadband carriage agreement with Digeo Interactive. This amendment superseded
the amendment of September 27, 2001. It provided for the development
by
Digeo Interactive of future features to be included in the Basic i-TV service
to
be provided by Digeo and for Digeo’s development
of an interactive "toolkit"
to
enable Charter to develop interactive local content. Furthermore, Charter
could
request that Digeo Interactive manage local content for a fee. The amendment
provided for Charter to pay for development of the Basic i-TV service as
well as
license fees for customers who would receive the service, and for Charter
and
Digeo to split certain revenues earned from the service. The Company paid
Digeo
Interactive
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
approximately
$1 million and $1 million for the three and six months ended June 30, 2005,
respectively, and $1 million and $1 million for the three and six months
ended
June 30, 2004, respectively, for customized development of the i-channels
and
the local content tool kit. This amendment expired pursuant to its terms
on
December 31, 2003. Digeo Interactive is continuing to provide the Basic i-TV
service on a month-to-month basis.
On
June
30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for
the
purchase of 100,000 digital video recorder ("DVR") units. The software for
these
DVR units is being supplied by Digeo Interactive, LLC under a license agreement
entered into in April 2004. Under the license agreement Digeo Interactive
granted to Charter Holdco the right to use Digeo’s proprietary software for the
number of DVR units that Charter deployed from a maximum of 10 headends through
year-end 2004. This maximum number of headends was increased from 10 to 15
pursuant to a letter agreement executed on June 11, 2004 and the date for
entering into license agreements for units deployed was extended to June
30,
2005. The number of headends was increased from 15 to 20 pursuant to a letter
agreement dated August 4, 2004, from 20 to 30 pursuant to a letter agreement
dated September 28, 2004 and from 30 to 50 headends by a letter agreement
in
February 2005. The license granted for each unit deployed under the agreement
is
valid for five years. In addition, Charter will pay certain other fees including
a per-headend license fee and maintenance fees. Maximum license and maintenance
fees during the term of the agreement are expected to be approximately $7
million. The agreement provides that Charter is entitled to receive contract
terms, considered on the whole, and license fees, considered apart from other
contract terms, no less favorable than those accorded to any other Digeo
customer. Charter paid approximately $0.1 million and $0.2 million in license
and maintenance fees for the three and six months ended June 30, 2005,
respectively.
In
April
2004, the Company launched DVR service using units containing the Digeo software
in Charter’s Rochester, Minnesota market using a broadband media center that is
an integrated set-top terminal with a cable converter, DVR hard drive and
connectivity to other consumer electronics devices (such as stereos, MP3
players, and digital cameras).
In
May
2004, Charter Holdco entered into a binding term sheet with Digeo Interactive
for the development, testing and purchase of 70,000 Digeo PowerKey DVR units.
The term sheet provided that the parties would proceed in good faith to
negotiate, prior to year-end 2004, definitive agreements for the development,
testing and purchase of the DVR units and that the parties would enter into
a
license agreement for Digeo's proprietary software on terms substantially
similar to the terms of the license agreement described above. In November
2004,
Charter Holdco and Digeo Interactive executed the license agreement and in
December 2004, the parties executed the purchase agreement, each on terms
substantially similar to the binding term sheet. Product development and
testing
has been completed. Total purchase price and license and maintenance fees
during
the term of the definitive agreements are expected to be approximately $41
million. The definitive agreements are terminable at no penalty to Charter
in
certain circumstances.
Charter
paid approximately $1 million and $2 million in capital purchases under this
agreement for the three and six months ended June 30, 2005,
respectively.
In
late
2003, Microsoft sued Digeo for $9 million in a breach of contract
action,
involving an agreement that Digeo and Microsoft had entered into in 2001.
Digeo
informed us that it believed it had an indemnification claim against us for
half
that amount. Digeo settled with Microsoft agreeing to make a cash payment
and to
purchase certain amounts of Microsoft software products and consulting services
through 2008. In consideration of Digeo agreeing to release us from its
potential claim against us, after consultation with outside counsel we agreed,
in June 2005, to purchase a total of $2.3 million in Microsoft consulting
services through 2008, a portion of which amounts Digeo has informed us will
count against Digeo’s purchase obligations with Microsoft.
The
Company believes that Vulcan Ventures, an entity controlled by Mr. Allen,
owns an approximate 60% equity interest in Digeo, Inc., on a fully-converted
non-diluted basis. Mr. Allen, Lance Conn and Jo Allen Patton, directors
of
Charter, are directors of Digeo, and Mr. Vogel was a director of Digeo
in 2004.
During 2004 and 2005, Mr. Vogel held options to purchase 10,000
shares of
Digeo common stock.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
Oxygen
Media LLC
Oxygen
Media LLC ("Oxygen") provides programming content aimed at the female audience
for distribution over cable systems and satellite. On July 22, 2002,
Charter Holdco entered into a carriage agreement with Oxygen, whereby the
Company agreed to carry programming content from Oxygen. Under the carriage
agreement, the Company currently makes Oxygen programming available to
approximately 5 million of its video customers. The term of the carriage
agreement was retroactive to February 1, 2000, the date of launch
of Oxygen
programming by the Company, and runs for a period of five years from that
date.
For the three and six months ended June 30, 2005, the Company paid Oxygen
approximately $2 million and $5 million, respectively, and for the three
and six
months ended June 30, 2004, the Company paid Oxygen approximately $3 million
and
$7 million, respectively, for programming content. In addition, Oxygen pays
the
Company marketing support fees for customers launched after the first year
of
the term of the carriage agreement up to a total of $4 million. The
Company
recorded approximately $0.1 million related to these launch incentives as
a
reduction of programming expense for the six months ended June 30, 2005,
and
$0.4 million and $0.7 million for the three and six months ended June
30,
2004, respectively.
Concurrently
with the execution of the carriage agreement, Charter Holdco entered into
an
equity issuance agreement pursuant to which Oxygen’s parent company, Oxygen
Media Corporation ("Oxygen
Media"),
granted a subsidiary of Charter Holdco a warrant to purchase 2.4 million
shares of Oxygen Media common stock for an exercise price of $22.00 per share.
In February 2005, this warrant expired unexercised. Charter Holdco was also
to
receive unregistered shares of Oxygen Media common stock with a guaranteed
fair
market value on the date of issuance of $34 million, on or prior to
February 2, 2005, with the exact date to be determined by Oxygen Media,
but
this commitment was later revised as discussed below.
The
Company recognized the guaranteed value of the investment over the life of
the
carriage agreement as a reduction of programming expense. For the six months
ended June 30, 2005, the Company recorded approximately $2 million, as a
reduction of programming expense and for the three and six months ended June
30,
2004, the Company recorded approximately $3 million and $7 million,
respectively. The carrying value of the Company’s investment in Oxygen was
approximately $33 million and $32 million as of June 30, 2005 and
December 31, 2004, respectively.
In
August
2004, Charter Holdco and Oxygen entered into agreements that amended and
renewed
the carriage agreement. The amendment to the carriage agreement (a) revises
the
number of the Company’s customers to which Oxygen programming must be carried
and for which the Company must pay, (b) releases Charter Holdco from any
claims
related to the failure to achieve distribution benchmarks under the carriage
agreement, (c) requires Oxygen to make payment on outstanding receivables
for
marketing support fees due to the Company under the carriage agreement; and
(d)
requires that Oxygen provide its programming content to the Company on economic
terms no less favorable than Oxygen provides to any other cable or satellite
operator having fewer subscribers than the Company. The renewal of the carriage
agreement (a) extends the period that the Company will carry Oxygen programming
to the Company’s customers through January 31, 2008, and (b) requires license
fees to be paid based on customers receiving Oxygen programming, rather than
for
specific customer benchmarks.
In
August
2004, Charter Holdco and Oxygen also amended the equity issuance agreement
to
provide for the issuance of 1 million shares of Oxygen Preferred Stock with
a
liquidation preference of $33.10 per share plus accrued dividends to Charter
Holdco on February 1, 2005 in place of the $34 million of unregistered shares
of
Oxygen Media common stock. Oxygen Media delivered these shares in March 2005.
The preferred stock is convertible into common stock after December 31, 2007
at
a conversion ratio per share of preferred stock, the numerator of which is
the
liquidation preference and the denominator of which is the fair market value
per
share of Oxygen Media common stock on the conversion date.
As
of
June 30, 2005, through Vulcan Programming, Mr. Allen owned an approximate
31%
interest in Oxygen assuming no exercises of outstanding warrants or conversion
or exchange of convertible or exchangeable securities. Ms. Jo Allen Patton
is a
director and the President of Vulcan Programming. Mr. Lance Conn is a Vice
President of Vulcan Programming. Marc Nathanson has an indirect beneficial
interest of less than 1% in Oxygen.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
18.
|
Recently
Issued Accounting
Standards
|
In
November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
153, Exchanges
of Non-monetary Assets - An Amendment of APB No. 29.
This
statement eliminates the exception to fair value for exchanges of similar
productive assets and replaces it with a general exception for exchange
transactions that do not have commercial substance - that is, transactions
that
are not expected to result in significant changes in the cash flows of the
reporting entity. The Company adopted this pronouncement effective April
1,
2005. The exchange transaction discussed in Note 3 was accounted for under
this
standard.
In
December 2004, the Financial Accounting Standards Board issued the revised
SFAS
No. 123, Share-Based
Payment,
which
addresses the accounting for share-based payment transactions in which a
company
receives employee services in exchange for (a) equity instruments of that
company or (b) liabilities that are based on the fair value of the company’s
equity instruments or that may be settled by the issuance of such equity
instruments. This statement will be effective for the Company beginning January
1, 2006. Because the Company adopted the fair value recognition provisions
of
SFAS No. 123 on January 1, 2003, the Company does not expect this revised
standard to have a material impact on its financial statements.
Charter
does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on the
Company’s accompanying financial statements.
On
July
29, 2005, we issued 27.2 million shares of Class A common stock in a public
offering, which was effected pursuant to an effective registration statement
that initially covered the issuance and sale of up to 150 million shares
of
Class A common stock. The shares were issued pursuant to a share lending
agreement, pursuant to which Charter had previously agreed to loan up to
150
million shares to CGML. Because less than the full 150 million shares covered
by
the share lending agreement were sold in the offering, we remain obligated
to
issue, at CGML’s request, up to an additional 122.8 million additional loaned
shares in subsequent registered public offerings pursuant to the share lending
agreement.
This
offering of Charter’s Class A common stock was conducted to facilitate
transactions by which investors in Charter’s 5.875% convertible senior notes due
2009 issued on November 22, 2004 hedged their investments in the convertible
senior notes. Charter did not receive any of the proceeds from the sale of
this
Class A common stock. However, under the share lending agreement, Charter
received a loan fee of $.001 for each share that it lends to CGML
General
Charter
Communications, Inc. ("Charter")
is a
holding company whose principal assets as of June
30,
2005
are a
47% controlling common equity interest in Charter Communications Holding
Company, LLC ("Charter
Holdco")
and
"mirror" notes which are payable by Charter
Holdco to
Charter
and
have
the same principal amount and terms as Charter’s
convertible senior notes.
"We," "us"
and
"our"
refer to
Charter and its subsidiaries. We
are a
broadband communications company operating in the United States. We offer
our
customers traditional cable video programming (analog and digital video)
as well
as high-speed Internet services and in some areas advanced broadband services
such as high definition television, video on demand, telephone and interactive
television. We sell our cable video programming, high-speed Internet and
advanced broadband services on a subscription basis.
The
following table summarizes our customer statistics for analog and digital
video,
residential high-speed Internet and residential telephone as of June
30,
2005
and
2004:
|
|
Approximate
as of
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2005
(a)
|
|
|
2004
(a)
|
|
|
|
|
|
|
|
|
|
Cable
Video Services:
|
|
|
|
|
|
|
|
Analog
Video:
|
|
|
|
|
|
|
|
Residential
(non-bulk) analog video customers (b)
|
|
|
5,683,400
|
|
|
5,892,600
|
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
|
|
259,700
|
|
|
240,600
|
|
Total
analog video customers (b)(c)
|
|
|
5,943,100
|
|
|
6,133,200
|
|
|
|
|
|
|
|
|
|
Digital
Video:
|
|
|
|
|
|
|
|
Digital
video customers (d)
|
|
|
2,685,600
|
|
|
2,650,200
|
|
|
|
|
|
|
|
|
|
Non-Video
Cable Services:
|
|
|
|
|
|
|
|
Residential
high-speed Internet customers (e)
|
|
|
2,022,200
|
|
|
1,711,400
|
|
Telephone
customers (f)
|
|
|
67,800
|
|
|
31,200
|
|
|
(a)
|
"Customers"
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts (such as our employees). At June 30, 2005 and 2004, "customers"
include approximately 45,100 and 58,700 persons whose accounts
were over
60 days past due in payment, approximately 8,200 and 6,300 persons
whose
accounts were over 90 days past due in payment, and approximately
4,500
and 2,000 of which were over 120 days past due in payment, respectively.
|
|
(b)
|
"Residential
(non-bulk) analog video customers" include all customers who receive
video
services, except for complimentary accounts (such as our employees).
|
|
(c)
|
Included
within "video customers" are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit ("EBU")
basis.
EBU is calculated for a system by dividing the bulk price charged
to
accounts in an area by the most prevalent price charged to non-bulk
residential customers in that market for the comparable tier of
service.
The EBU method of estimating analog video customers is consistent
with the
methodology used in determining costs paid to programmers and has
been
consistently applied year over year. As we increase our effective
analog
prices to residential customers without a corresponding increase
in the
prices charged to commercial service or multi-dwelling customers,
our EBU
count will decline even if there is no real loss in commercial
service or
multi-dwelling customers.
|
|
(d)
|
"Digital
video customers" include all households that have one or more digital
set-top terminals. Included in "digital video customers" on June
30, 2005
and 2004 are approximately 9,700 and 11,400 customers, respectively,
that
receive digital video service directly through satellite transmission.
|
|
(e)
|
"High-speed
Internet customers" represent those customers who subscribe to
our
high-speed Internet service. At June 30, 2005 and 2004, approximately
1,787,600 and 1,543,000 of these high-speed Internet customers,
respectively, receive video services from us and are included within
our
video statistics above.
|
|
(f)
|
"Telephone
customers" include all households who subscribe to our telephone
service.
|
Overview
of Operations
We
have a
history of net losses. Further, we expect to continue to report net losses
for
the foreseeable future. Our net losses are principally attributable to
insufficient revenue to cover the combination
of operating costs and interest
costs we incur because of our high level of debt, depreciation expenses that
we
incur resulting from the capital investments we have made and continue to
make
in our business, and amortization and impairment of our franchise intangibles.
We expect that these expenses (other than amortization and impairment of
franchises) will remain significant, and we therefore expect to continue
to
report net losses for the foreseeable future. Additionally, reported losses
allocated to minority interest on the statement of operations are limited
to the
extent of any remaining minority interest balance on the balance sheet related
to Charter Holdco. Because minority interest in Charter Holdco is substantially
eliminated, Charter absorbs substantially all losses before income taxes
that
otherwise would be allocated to minority interest. Subject to any changes
in
Charter Holdco’s capital structure, future losses will continue to be absorbed
by Charter. Effective January 1, 2005, we ceased recognizing minority interest
in earnings or losses of CC VIII, LLC for financial reporting purposes until
the
resolution of the dispute between Charter and Mr. Allen regarding the preferred
membership units in CC VIII, LLC is determinable or other events
occur.
For
the
three months ended June 30, 2005 and 2004, our income from operations, which
includes depreciation and amortization expense and asset impairment charges
but
excludes interest expense, was $110 million and $15 million, respectively,
and
for the six months ended June 30, 2005 and 2004, our income from operations
was
$161 million and $190 million, respectively. We had operating margins of
8% and
1% for the three months ended June 30, 2005 and 2004, respectively, and 6%
and
8% for the six months ended June 30, 2005 and 2004, respectively. The increase
in income from operations and operating margins from the three months ended
June
30, 2004 compared to 2005 was principally due to approximately $85 million
recorded in special charges for the three months ended June 30, 2004 as part
of
the terms set forth in memoranda of understanding regarding settlement of
the
consolidated Federal Class Action and Federal Derivative Action which did
not
recur in 2005. See
"—
Legal Proceedings." The
decrease in income from operations and operating margins from the six months
ended June 30, 2004 compared to 2005 was principally due to the one-time
gain as
a result of the sale of certain cable systems in Florida, Pennsylvania,
Maryland, Delaware and West Virginia to Atlantic Broadband Finance, LLC of
approximately $106 million, recognized in the six months ended June 30, 2004,
offset by $85 million recorded in special charges discussed above.
Historically,
our ability to fund operations and investing activities has depended on our
continued access to credit under our credit facilities. We expect we will
continue to borrow under our credit facilities from time to time to fund
cash
needs. The occurrence of an event of default under our credit facilities
could
result in borrowings from these credit facilities being unavailable to us
and
could, in the event of a payment default or acceleration, also trigger events
of
default under the indentures governing our outstanding notes and would have
a
material adverse effect on us. Approximately $15 million of our debt matures
during the remainder of 2005, which we expect to fund through borrowings
under
our revolving credit facility. See "— Liquidity and Capital
Resources."
Critical
Accounting Policies and Estimates
For
a
discussion of our critical accounting policies and the means by which we
develop
estimates therefor, see "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations" in our 2004 Annual Report
on Form
10-K.
RESULTS
OF OPERATIONS
Three
Months Ended June
30, 2005
Compared to Three Months Ended June
30, 2004
The
following table sets forth the percentages of revenues that items in the
accompanying condensed consolidated statements of operations constituted
for the
periods presented (dollars in millions, except per share and share
data):
|
|
Three
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,323
|
|
|
100
|
%
|
$
|
1,239
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
569
|
|
|
43
|
%
|
|
515
|
|
|
42
|
%
|
Selling,
general and administrative
|
|
|
256
|
|
|
19
|
%
|
|
244
|
|
|
20
|
%
|
Depreciation
and amortization
|
|
|
378
|
|
|
29
|
%
|
|
364
|
|
|
29
|
%
|
Asset
impairment charges
|
|
|
8
|
|
|
1
|
%
|
|
--
|
|
|
--
|
|
Loss
on sale of assets, net
|
|
|
--
|
|
|
--
|
|
|
2
|
|
|
--
|
|
Option
compensation expense, net
|
|
|
4
|
|
|
--
|
|
|
12
|
|
|
1
|
%
|
Special
charges, net
|
|
|
(2
|
)
|
|
--
|
|
|
87
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,213
|
|
|
92
|
%
|
|
1,224
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
110
|
|
|
8
|
%
|
|
15
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(451
|
)
|
|
|
|
|
(410
|
)
|
|
|
|
Gain
(loss) on derivative instruments and hedging activities,
net
|
|
|
(1
|
)
|
|
|
|
|
63
|
|
|
|
|
Loss
on debt to equity conversions
|
|
|
--
|
|
|
|
|
|
(15
|
)
|
|
|
|
Gain
(loss) on extinguishment of debt
|
|
|
1
|
|
|
|
|
|
(21
|
)
|
|
|
|
Gain
on investments
|
|
|
20
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(431
|
)
|
|
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest and income taxes
|
|
|
(321
|
)
|
|
|
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(3
|
)
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(324
|
)
|
|
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(31
|
)
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(355
|
)
|
|
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock - redeemable
|
|
|
(1
|
)
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$
|
(356
|
)
|
|
|
|
$
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
$
|
(1.18
|
)
|
|
|
|
$
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
303,620,347
|
|
|
|
|
|
300,522,815
|
|
|
|
|
Revenues.
Revenues increased by $84 million, or 7%, from $1.2 billion for the three
months
ended June 30, 2004 to $1.3 billion for the three months ended June 30, 2005.
This increase is principally the result of an increase of 310,800 high-speed
Internet and 35,400 digital video customers, as well as price increases for
video and high-speed Internet services, and is offset partially by a decrease
of
190,100 analog video customers. Our
goal
is to increase revenues by improving customer service which we believe will
stabilize our analog video customer base, implementing price increases on
certain services and packages and increasing the number of customers who
purchase high-speed Internet services, digital video and advanced products
and
services such as telephone, video on demand ("VOD"), high definition television
and digital video recorder service.
Average
monthly revenue per analog video customer increased to $73.94 for the three
months ended June 30, 2005 from $67.02 for the three months ended June 30,
2004
primarily as a result of incremental revenues from advanced
services
and price increases. Average monthly revenue per analog video customer
represents total quarterly revenue, divided by three, divided by the average
number of analog video customers during the respective period.
Revenues
by service offering were as follows (dollars in millions):
|
|
Three
Months Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
over 2004
|
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
861
|
|
|
65
|
%
|
|
$
|
846
|
|
|
68
|
%
|
|
$
|
15
|
|
|
2
|
%
|
High-speed
Internet
|
|
|
226
|
|
|
17
|
%
|
|
|
181
|
|
|
15
|
%
|
|
|
45
|
|
|
25
|
%
|
Advertising
sales
|
|
|
76
|
|
|
6
|
%
|
|
|
73
|
|
|
6
|
%
|
|
|
3
|
|
|
4
|
%
|
Commercial
|
|
|
69
|
|
|
5
|
%
|
|
|
58
|
|
|
5
|
%
|
|
|
11
|
|
|
19
|
%
|
Other
|
|
|
91
|
|
|
7
|
%
|
|
|
81
|
|
|
6
|
%
|
|
|
10
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,323
|
|
|
100
|
%
|
|
$
|
1,239
|
|
|
100
|
%
|
|
$
|
84
|
|
|
7
|
%
|
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Video
revenues increased by $15 million, or 2%, from $846 million for the three
months
ended June 30, 2004 to $861 million for the three months ended June 30, 2005.
Approximately $35 million of the increase was the result of price increases
and
incremental video revenues from existing customers and approximately $3 million
was the result of an increase in digital video customers. The increase was
offset by approximately $23 million as a result of a decrease in analog video
customers.
Revenues
from high-speed Internet services provided to our non-commercial customers
increased $45 million, or 25%, from $181 million for the three months ended
June
30, 2004 to $226 million for the three months ended June 30, 2005.
Approximately $34 million of the increase related to the increase in the
average
number of customers receiving high-speed Internet services, whereas
approximately $11 million related to the
increase in average price of the service.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. Advertising sales increased $3
million, or 4%, from $73 million for the three months ended June 30, 2004
to $76
million for the three months ended June 30, 2005, primarily as a result of
an
increase in local advertising sales offset by a decline in national advertising
sales. For each of the three months ended June 30, 2005 and 2004, we received
$3
million in advertising sales revenues from vendors.
Commercial
revenues consist primarily of revenues from cable video and high-speed Internet
services to our commercial customers. Commercial revenues increased $11 million,
or 19%, from $58 million for the three months ended June 30, 2004 to $69
million
for the three months ended June 30, 2005, primarily as a result of an increase
in commercial high-speed Internet revenues.
Other
revenues consist of revenues from franchise fees, telephone revenue, equipment
rental, customer installations, home shopping, dial-up Internet service,
late
payment fees, wire maintenance fees and other miscellaneous revenues. Other
revenues increased $10 million, or 12%, from $81 million for the three months
ended June 30, 2004 to $91 million for the three months ended June 30, 2005.
The
increase was primarily the result of an increase in telephone revenue of
$4
million, franchise fees of $3 million and installation revenue of $2
million.
Operating
Expenses.
Operating expenses increased $54 million, or 10%, from $515 million for the
three months ended June 30, 2004 to $569 million for the three months ended
June
30, 2005. Programming costs included in the accompanying condensed consolidated
statements of operations were $351 million and $329 million, representing
29% and 27% of total costs and expenses for the three months ended June 30,
2005
and 2004, respectively. Key expense components as a percentage of revenues
were
as follows (dollars in millions):
|
|
Three
Months Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
over 2004
|
|
|
|
|
Expenses
|
|
|
%
of
Revenues
|
|
|
|
Expenses
|
|
|
%
of
Revenues
|
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming
|
|
$
|
351
|
|
|
26
|
%
|
|
$
|
329
|
|
|
27
|
%
|
|
$
|
22
|
|
|
7
|
%
|
Advertising
sales
|
|
|
25
|
|
|
2
|
%
|
|
|
25
|
|
|
2
|
%
|
|
|
--
|
|
|
--
|
|
Service
|
|
|
193
|
|
|
15
|
%
|
|
|
161
|
|
|
13
|
%
|
|
|
32
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
569
|
|
|
43
|
%
|
|
$
|
515
|
|
|
42
|
%
|
|
$
|
54
|
|
|
10
|
%
|
Programming
costs consist primarily of costs paid to programmers for analog, premium,
digital channels, VOD and pay-per-view programming. The increase in programming
costs of $22 million, or 7%, for the three months ended June 30, 2005 over
the
three months ended June 30, 2004, was a result of price increases, particularly
in sports programming, partially offset by a decrease in analog video customers.
Programming costs for the three months ended June 30, 2005, also include
an $8
million reduction related to changes in estimates of programming related
liabilities associated with contract renewals. Additionally,
programming costs
were offset by the amortization of payments received from programmers in
support
of launches of new channels of $9 million and $14 million for the three months
ended June 30, 2005 and 2004, respectively.
Our
cable
programming costs have increased in every year we have operated in excess
of
U.S. inflation and cost-of-living increases, and we expect them to continue
to
increase because of a variety of factors, including inflationary or negotiated
annual increases, additional programming being provided to customers and
increased costs to purchase or produce programming. In 2005, programming
costs
have and we expect they will continue to increase at a higher rate than in
2004.
These costs will be determined in part on the outcome of programming
negotiations in 2005 and will likely be subject to offsetting events or
otherwise affected by factors similar to the ones mentioned in the preceding
paragraph. Our increasing programming costs will result in declining operating
margins for our video services to the extent we are unable to pass on cost
increases to our customers. We expect to partially offset any resulting margin
compression from our traditional video services with revenue from advanced
video
services, increased high-speed Internet revenues, advertising revenues and
commercial service revenues.
Advertising
sales expenses consist of costs related to traditional advertising services
provided to advertising customers, including salaries, benefits and commissions.
Advertising sales expenses remained essentially flat for the three months
ended
June 30, 2005 compared to the three months ended June 30, 2004. Service costs
consist primarily of service personnel salaries and benefits, franchise fees,
system utilities, Internet service provider fees, maintenance and pole rent
expense. The increase in service costs of $32 million, or 20%, resulted
primarily from increased labor and maintenance costs to support our
infrastructure, increased equipment maintenance, an increase in franchise
fees
as a result of increased revenues and higher fuel prices.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses increased by $12 million, or 5%, from
$244
million for the three months ended June
30,
2004 to
$256
million for the three months ended June
30,
2005.
Key
components of expense as a percentage of revenues were as follows (dollars
in
millions):
|
|
Three
Months Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
over 2004
|
|
|
|
|
Expenses
|
|
|
%
of
Revenues
|
|
|
|
Expenses
|
|
|
%
of
Revenues
|
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
225
|
|
|
17
|
%
|
|
$
|
208
|
|
|
17
|
%
|
|
$
|
17
|
|
|
8
|
%
|
Marketing
|
|
|
31
|
|
|
2
|
%
|
|
|
36
|
|
|
3
|
%
|
|
|
(5
|
)
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
256
|
|
|
19
|
%
|
|
$
|
244
|
|
|
20
|
%
|
|
$
|
12
|
|
|
5
|
%
|
General
and administrative expenses consist primarily of salaries and benefits, rent
expense, billing costs, call center costs, internal network costs, bad debt
expense and property taxes. The increase in general and administrative expenses
of $17 million, or 8%, resulted primarily from increases in salaries
and
benefits of $9 million, property taxes of $8 million and professional fees
of $8
million offset by decreases in bad debt expense of $5 million.
Marketing
expenses decreased $5 million, or 14%, as a result of a decrease in
expenditures as a result of disciplined spending and more targeted marketing
tactics. We expect marketing expenditures to increase for the remainder of
2005.
Depreciation
and Amortization. Depreciation
and amortization expense increased by $14 million, or 4%, from $364 million
for
the
three months ended June
30,
2004 to $378 million for the three months ended June 30, 2005. The increase
in
depreciation was related to an increase in capital expenditures.
Asset
Impairment Charges. Asset
impairment charges for the three months ended June 30, 2005 represent the
write-down of assets related to a pending cable asset sale to fair value
less
costs to sell. See Note 3 to the condensed consolidated financial
statements.
Loss
on Sale of Assets, Net.
The loss
on sale of assets of $2 million for the three months ended June 30, 2004
primarily represents a $3 million pretax loss realized on the sale of the
New
York system to Atlantic Broadband Finance, LLC which closed on April 30,
2004,
partially offset by a $1 million gain recognized on the sale of fixed assets.
Option
Compensation Expense, Net.
Option
compensation expense decreased by $8 million, or 67%, from $12 million for
the
three months ended June
30,
2004
to
$4 million for the three months ended June 30, 2005 primarily as a result
of a
decrease in the fair value of such options related to a decrease in the price
of
our Class A common stock combined with a decrease in the number of options
issued.
Special
Charges, Net. Special
charges of $(2) million for
the
three months ended June 30, 2005
primarily represents an
agreed
upon cash discount on settlement of the consolidated Federal Class Action
and
Federal Derivative Action. See
"—
Legal Proceedings." Special charges of $87 million for the three months ended
June 30, 2004 represents approximately $85 million as part of the terms set
forth in memoranda of understanding regarding settlement of the consolidated
Federal Class Action and Federal Derivative Action, subject to final
documentation and court approval, and approximately $2 million of severance
and
related costs of our workforce reduction.
Interest
Expense, Net. Net
interest expense increased by $41 million, or 10%, from $410 million
for
the
three months ended June
30,
2004 to $451 million for
the
three months ended June
30,
2005. The increase in net interest expense was a result of approximately
$9
million of liquidated damages on our 5.875% convertible senior notes combined
with an increase in our average borrowing rate from 8.77% in the second quarter
of 2004 to 8.92% in the second quarter of 2005 and an increase of $930 million
in average debt outstanding from $18.3 billion for the second quarter
of
2004 compared to $19.2 billion for the second quarter of 2005. This was offset
partially by $8 million in gains related to embedded derivatives in Charter’s
5.875% convertible senior notes issued in November 2004. See Note 9 to the
condensed consolidated financial statements.
Gain
(Loss) on Derivative Instruments and Hedging Activities,
Net.
Net gain
on derivative instruments and hedging activities decreased $64 million from
a
gain of $63 million for the three months ended June 30, 2004 to a loss of
$1
million for the three months ended June 30, 2005. The decrease is primarily
the
result of a decrease in gains on interest rate agreements that do not qualify
for hedge accounting under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, which
decreased from a gain of $60 million for the three months ended June 30,
2004 to
a loss of $1 million for the three months ended June 30, 2005.
Loss
on Debt to Equity Conversions. Loss
on
debt to equity conversions of $15 million for the three months ended June
30,
2004 represents the loss recognized from a privately negotiated exchange
of $20
million principal amount of Charter’s 5.75% convertible senior notes held by a
single unrelated party for shares of Charter Class A common stock, which
resulted in the issuance of more shares in the exchange transaction than
would
have been issued pursuant to the original terms of the convertible senior
notes.
Gain
(Loss) on Extinguishment of Debt. Gain
on
extinguishment of debt of $1 million for the three months ended June 30,
2005
represents approximately $3 million related to the repurchase of $97 million
principal amount of our 4.75% convertible senior notes due 2006 offset by
a loss
on extinguishment of debt of approximately $1 million related to the issuance
of
$62 million principal amount of Charter Operating notes in exchange for $62
million principal amount of Charter Holdings notes. See Note 6 to the condensed
consolidated financial statements. Loss
on
extinguishment of debt of $21 million for the three months ended June 30,
2004
represents the write-off of deferred financing fees and third party costs
related to the Charter Operating refinancing in April 2004.
Gain
on investments. Gain
on
investments increased from $2 million for the three months ended June 30,
2004
to $20 million for the three months ended June 30, 2005 primarily as a result
of
a
gain
realized on an exchange of our interest in an equity investee for an investment
in a larger enterprise.
Minority
Interest. Minority
interest represents the 2% accretion of the preferred membership interests
in
our indirect subsidiary, CC VIII, LLC, and in the second quarter of 2004,
the
pro rata share of the profits and losses of CC VIII, LLC. Effective January
1,
2005, we ceased recognizing minority interest in earnings or losses of CC
VIII
for financial reporting purposes until the dispute between Charter and Mr.
Allen
regarding the preferred membership interests in CC VIII is resolved. See
Note 7
to the condensed consolidated financial statements. Additionally, reported
losses allocated to minority interest on the statement of operations are
limited
to the extent of any remaining minority interest on the balance sheet related
to
Charter Holdco. Because minority interest in Charter Holdco is substantially
eliminated, Charter absorbs substantially all losses before income taxes
that
otherwise would be allocated to minority interest. Subject to any changes
in
Charter Holdco’s capital structure, future losses will continue to be
substantially absorbed by Charter.
Income
Tax Expense. Income
tax expense of $31 million and $43 million was recognized for the three months
ended June 30, 2005 and 2004, respectively. The income tax expense is recognized
through increases in deferred tax liabilities related to our investment in
Charter Holdco, as well as through current federal and state income tax expense
and increases in the deferred tax liabilities of certain of our indirect
corporate subsidiaries.
Net
Loss.
Net
loss decreased by $60 million, or 14%, from $415 million for the three months
ended June
30,
2004
to $355
million for the three months ended June
30,
2005
as a
result of the factors described above.
Preferred
Stock Dividends. On
August
31, 2001, Charter issued 505,664 shares (and on February 28, 2003
issued an
additional 39,595 shares) of Series A Convertible Redeemable Preferred
Stock in connection with the Cable USA acquisition, on which Charter pays
or
accrues a quarterly cumulative cash dividend at an annual rate of 5.75% if
paid
or 7.75% if accrued on a liquidation preference of $100 per share. Beginning
January 1, 2005, Charter is accruing the dividend on its Series A Convertible
Redeemable Preferred Stock.
Loss
Per Common Share.
The loss
per common share decreased by $0.21 from $1.39 per common share for the three
months ended June
30,
2004
to $1.18
per common share for the three months ended June
30,
2005
as a
result of the factors described above.
Six
Months Ended June 30, 2005 Compared to Six Months Ended June 30,
2004
The
following table sets forth the percentages of revenues that items in the
accompanying consolidated statements of operations constituted for the periods
presented (dollars in millions, except per share and share data):
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,594
|
|
|
100
|
%
|
|
$
|
2,453
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
1,128
|
|
|
44
|
%
|
|
|
1,027
|
|
|
42
|
%
|
Selling,
general and administrative
|
|
|
493
|
|
|
19
|
%
|
|
|
483
|
|
|
19
|
%
|
Depreciation
and amortization
|
|
|
759
|
|
|
29
|
%
|
|
|
734
|
|
|
30
|
%
|
Asset
impairment charges
|
|
|
39
|
|
|
2
|
%
|
|
|
--
|
|
|
--
|
|
(Gain)
loss on sale of assets, net
|
|
|
4
|
|
|
--
|
|
|
|
(104
|
)
|
|
(4
|
)%
|
Option
compensation expense, net
|
|
|
8
|
|
|
--
|
|
|
|
26
|
|
|
1
|
%
|
Special
charges, net
|
|
|
2
|
|
|
--
|
|
|
|
97
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,433
|
|
|
94
|
%
|
|
|
2,263
|
|
|
92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
161
|
|
|
6
|
%
|
|
|
190
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(871
|
)
|
|
|
|
|
|
(803
|
)
|
|
|
|
Gain
on derivative instruments and hedging activities, net
|
|
|
26
|
|
|
|
|
|
|
56
|
|
|
|
|
Loss
on debt to equity conversions
|
|
|
--
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
Gain
(loss) on extinguishment of debt
|
|
|
8
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
Gain
on investments
|
|
|
21
|
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(816
|
)
|
|
|
|
|
|
(791
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest and income taxes
|
|
|
(655
|
)
|
|
|
|
|
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
(6
|
)
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(661
|
)
|
|
|
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(46
|
)
|
|
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(707
|
)
|
|
|
|
|
|
(708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock - redeemable
|
|
|
(2
|
)
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common stock
|
|
$
|
(709
|
)
|
|
|
|
|
$
|
(710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
$
|
(2.34
|
)
|
|
|
|
|
$
|
(2.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
303,465,474
|
|
|
|
|
|
|
297,814,091
|
|
|
|
|
Revenues. Revenues
increased by $141 million, or 6%, from $2.5 billion for the six months ended
June 30, 2004 to $2.6 billion for the six months ended June 30, 2005. This
increase is principally the result of an increase of 310,800 and 35,400
high-speed Internet and digital video customers, respectively, as well as
price
increases for video and high-speed Internet services, and is offset partially
by
a decrease of 190,100 analog video customers. The cable system sales to Atlantic
Broadband Finance, LLC, which closed in March and April 2004 (referred to
herein
as the "System Sales") reduced the increase in revenues by $29 million. Our
goal
is to increase revenues by improving customer service which we believe will
stabilize our analog video customer base, implementing price increases on
certain services and packages and increasing the number of customers who
purchase high-speed Internet services, digital video and advanced products
and
services such as telephone, VOD, high definition television and digital video
recorder service.
Average
monthly revenue per analog video customer increased to $72.38 for the six
months
ended June 30, 2005 from $65.39 for the six months ended June 30, 2004 primarily
as a result of incremental revenues from advanced services and price increases.
Average monthly revenue per analog video customer represents total revenue
for
the six months ended during the respective period, divided by six, divided
by
the average number of analog video customers during the respective
period.
Revenues
by service offering were as follows (dollars in millions):
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
over 2004
|
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
1,703
|
|
|
66
|
%
|
|
$
|
1,695
|
|
|
69
|
%
|
|
$
|
8
|
|
|
--
|
|
High-speed
Internet
|
|
|
441
|
|
|
17
|
%
|
|
|
349
|
|
|
14
|
%
|
|
|
92
|
|
|
26
|
%
|
Advertising
sales
|
|
|
140
|
|
|
5
|
%
|
|
|
132
|
|
|
5
|
%
|
|
|
8
|
|
|
6
|
%
|
Commercial
|
|
|
134
|
|
|
5
|
%
|
|
|
114
|
|
|
5
|
%
|
|
|
20
|
|
|
18
|
%
|
Other
|
|
|
176
|
|
|
7
|
%
|
|
|
163
|
|
|
7
|
%
|
|
|
13
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,594
|
|
|
100
|
%
|
|
$
|
2,453
|
|
|
100
|
%
|
|
$
|
141
|
|
|
6
|
%
|
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Video revenues increased by $8
million
for the six months ended June 30, 2005 compared to the six months ended June
30,
2004. Approximately $68 million of the increase was the result of price
increases and incremental video revenues from existing customers and
approximately $8 million resulted from an increase in digital video customers.
The increases were offset by decreases of approximately $21 million resulting
from the System Sales and approximately an additional $47 million related
to a
decrease in analog video customers.
Revenues
from high-speed Internet services provided to our non-commercial customers
increased $92 million, or 26%, from $349 million for the six months ended
June
30, 2004 to $441 million for the six months ended June 30, 2005.
Approximately $68 million of the increase related to the increase in the
average
number of customers receiving high-speed Internet services, whereas
approximately $27 million related to the increase in average price of the
service. The increase in high-speed Internet revenues was reduced by
approximately $3 million as a result of the System Sales.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. Advertising sales increased $8
million, or 6%, from $132 million for the six months ended June 30, 2004
to $140
million for the six months ended June 30, 2005, primarily as a result of
an
increase in new advertising sales customers and in advertising rates. The
increase was offset by a decrease of $1 million as a result of the System
Sales.
For the six months ended June 30, 2005 and 2004, we received $7 million and
$6
million in advertising sales revenues from vendors.
Commercial
revenues consist primarily of revenues from cable video and high-speed Internet
services to our commercial customers. Commercial revenues increased $20 million,
or 18%, from $114 million for the six months ended June 30, 2004 to $134
million
for the six months ended June 30, 2005, primarily as a result of an increase
in
commercial high-speed Internet revenues. The increase was reduced by
approximately $2 million as a result of the System Sales.
Other
revenues consist of revenues from franchise fees, telephone revenue, equipment
rental, customer installations, home shopping, dial-up Internet service,
late
payment fees, wire maintenance fees and other miscellaneous revenues. Other
revenues increased $13 million, or 8%, from $163 million for the six months
ended June 30, 2004 to $176 million for the six months ended June 30, 2005.
The
increase was primarily the result of an increase in telephone revenue of
$6
million, installation revenue of $5 million and franchise fees of $4 million
and
was partially offset by approximately $2 million as a result of the System
Sales.
Operating
Expenses.
Operating expenses increased $101 million, or 10%, from $1.0 billion for
the six
months ended June 30, 2004 to $1.1 billion for the six months ended June
30,
2005. The increase in operating expenses was reduced by $12 million as a
result
of the System Sales. Programming costs included in the accompanying condensed
consolidated statements of operations were $709 million and $663 million,
representing 29% of total costs and expenses for each of the six months ended
June 30, 2005 and 2004, respectively. Key expense components as a percentage
of
revenues were as follows (dollars in millions):
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
over 2004
|
|
|
|
|
Expenses
|
|
|
%
of
Revenues
|
|
|
|
Expenses
|
|
|
%
of
Revenues
|
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming
|
|
$
|
709
|
|
|
28
|
%
|
|
$
|
663
|
|
|
27
|
%
|
|
$
|
46
|
|
|
7
|
%
|
Advertising
sales
|
|
|
50
|
|
|
2
|
%
|
|
|
48
|
|
|
2
|
%
|
|
|
2
|
|
|
4
|
%
|
Service
|
|
|
369
|
|
|
14
|
%
|
|
|
316
|
|
|
13
|
%
|
|
|
53
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,128
|
|
|
44
|
%
|
|
$
|
1,027
|
|
|
42
|
%
|
|
$
|
101
|
|
|
10
|
%
|
Programming
costs consist primarily of costs paid to programmers for analog, premium,
digital channels, VOD and pay-per-view programming. The increase in programming
costs of $46 million, or 7%, for the six months ended June 30, 2005
over
the six months ended June 30, 2004 was a result of price increases, particularly
in sports programming, partially offset by decreases in analog video customers.
Additionally, the increase in programming costs was reduced by $9 million
as a
result of the System Sales. Programming costs were offset by the amortization
of
payments received from programmers in support of launches of new channels
of $18
million and $28 million for the six months ended June 30, 2005 and
2004,
respectively. Programming costs for the six months ended June 30, 2004 also
include a $4 million reduction related to the settlement of a dispute with
TechTV, Inc. See Note 17 to the condensed consolidated financial
statements.
Our
cable
programming costs have increased in every year we have operated in excess
of
U.S. inflation and cost-of-living increases, and we expect them to continue
to
increase because of a variety of factors, including inflationary or negotiated
annual increases, additional programming being provided to customers and
increased costs to purchase programming. In 2005, programming costs have
and we
expect they will continue to increase at a higher rate than in 2004. These
costs
will be determined in part on the outcome of programming negotiations in
2005
and will likely be subject to offsetting events or otherwise affected by
factors
similar to the ones mentioned in the preceding paragraph. Our increasing
programming costs will result in declining operating margins for our video
services to the extent we are unable to pass on cost increases to our customers.
We expect to partially offset any resulting margin compression from our
traditional video services with revenue from advanced video services, increased
high-speed Internet revenues, advertising revenues and commercial service
revenues.
Advertising
sales expenses consist of costs related to traditional advertising services
provided to advertising customers, including salaries, benefits and commissions.
Advertising sales expenses increased $2 million, or 4%, primarily as a result
of
increased salary, benefit and commission costs. Service costs consist primarily
of service personnel salaries and benefits, franchise fees, system utilities,
Internet service provider fees, maintenance and pole rent expense. The increase
in service costs of $53 million, or 17%, resulted primarily from increased
labor and maintenance costs to support our infrastructure, increased equipment
maintenance, an increase in franchise fees as a result of increased revenues
and
higher fuel prices. The increase in service costs was reduced by $3 million
as a
result of the System Sales.
Selling,
General and Administrative Expenses.
Selling,
general and administrative expenses increased by $10 million, or 2%, from
$483
million for the six months ended June
30,
2004 to
$493 million for the six months ended June
30,
2005.
The
increase in selling, general and administrative expenses was reduced by $4
million as a result of the System Sales. Key
components of expense as a percentage of revenues were as follows (dollars
in
millions):
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
over 2004
|
|
|
|
Expenses
|
|
%
of
Revenues
|
|
|
Expenses
|
|
%
of
Revenues
|
|
|
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$
|
427
|
|
|
16
|
%
|
|
$
|
416
|
|
|
17
|
%
|
|
$
|
11
|
|
|
3
|
%
|
Marketing
|
|
|
66
|
|
|
3
|
%
|
|
|
67
|
|
|
2
|
%
|
|
|
(1
|
)
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
493
|
|
|
19
|
%
|
|
$
|
483
|
|
|
19
|
%
|
|
$
|
10
|
|
|
2
|
%
|
General
and administrative expenses consist primarily of salaries and benefits, rent
expense, billing costs, call center costs, internal network costs, bad debt
expense and property taxes. The increase in general and administrative expenses
of $11 million, or 3%, resulted primarily from increases in professional
fees of $15 million and salaries and benefits of $13 million, offset by the
System Sales of $4 million and decreases in bad debt expense of $10
million.
Marketing
expenses decreased $1 million, or 1%, as a result of a decrease in
expenditures as a result of disciplined spending and more targeted marketing
tactics. We expect marketing expenditures to increase for the remainder of
2005.
Depreciation
and Amortization.
Depreciation
and amortization expense increased by $25 million, or 3%, from $734
million
for
the
six months ended June
30,
2004
to
$759
million for
the
six months ended June
30,
2005.
The
increase in depreciation was related to an increase in capital
expenditures.
Asset
Impairment Charges. Asset
impairment charges for the six months ended June 30, 2005 represent the
write-down of assets related to three pending cable asset sales to fair value
less costs to sell. See Note 3 to the condensed consolidated financial
statements.
(Gain)
Loss on Sale of Assets, Net. Loss
on
sale of assets of $4 million for the six months ended June 30, 2005 primarily
represents the loss recognized on the disposition of plant and equipment.
Gain
on sale of assets of $104 million for the six months ended June 30, 2004
primarily represents the pretax gain realized on the sale of systems to Atlantic
Broadband Finance, LLC which closed on March 1 and April 30, 2004.
Option
Compensation Expense, Net.
Option
compensation expense of $8 million for the six months ended June
30,
2005
primarily represents options expensed in accordance with SFAS
No. 123,
Accounting
for Stock-Based Compensation.
Option
compensation expense of $26 million for the six months ended June 30, 2004
primarily represents the expense of approximately $8 million related to a
stock
option exchange program, under
which
our employees were offered the right to exchange all stock options (vested
and
unvested) issued under the 1999 Charter Communications Option Plan and 2001
Stock Incentive Plan that had an exercise price over $10 per share for shares
of
restricted Charter Class A common stock or, in some instances, cash.
The
exchange offer closed in February 2004. Additionally, during the six months
ended June 30, 2004, we recognized approximately $6 million related to the
performance shares granted under the Charter Long-Term Incentive Program
and
approximately $12 million related to options granted following the adoption
of
Statement
of Financial Accounting Standards ("SFAS")
No. 123,
Accounting
for Stock-Based Compensation.
Special
Charges, Net.
Special
charges of $2 million for the six months ended June 30, 2005 represents $4
million of severance and related costs of our management realignment
offset
by
approximately $2 million related to an agreed upon cash discount on settlement
of the consolidated Federal Class Action and Federal Derivative
Action.
See "—
Legal Proceedings." Special charges of $97 million for the six months ended
June
30, 2004 represents approximately $85 million as part of the terms set forth
in
memoranda of understanding regarding settlement of the consolidated Federal
Class Action and Federal Derivative Action and approximately $9 million of
litigation costs related to the tentative settlement of the South Carolina
national class action suit, which settlements are subject to
final
documentation and court approval and approximately $3 million of severance
and
related costs of our workforce reduction.
Interest
Expense, Net.
Net
interest expense increased by $68 million, or 8%, from $803 million for
the
six months ended June
30,
2004
to
$871 million for
the
six months ended June
30,
2005.
The
increase in net interest expense was a result of approximately $9 million
of
liquidated damages on our 5.875% convertible senior notes combined with an
increase in our average borrowing rate from 8.50% in
the
six months ended June
30,
2004
to
8.89% in the
six
months ended June
30,
2005
and
an
increase of $997 million in average debt outstanding from $18.4 billion
for
the
six months ended June
30,
2004
compared
to $19.4 billion for
the
six months ended June
30,
2005.
This was
offset
partially by $27 million in gains related to embedded derivatives in Charter’s
5.875% convertible senior notes issued in November 2004. See Note 9 to the
condensed consolidated financial statements.
Gain
on Derivative Instruments and Hedging Activities, Net.
Net
gain
on derivative instruments and hedging activities decreased $30 million from
$56
million for the six months ended June 30, 2004 to $26 million for the six
months
ended June 30, 2005. The decrease is primarily a result of a decrease in
gains
on interest rate agreements, which do not qualify for hedge accounting under
SFAS No. 133, which decreased from $54 million for the six months ended June
30,
2004 to $25 million for the six months ended June 30, 2005.
Loss
on debt to equity conversions. Loss
on
debt to equity conversions of $23 million for the six months ended June 30,
2004
represents the loss recognized from privately negotiated exchanges in the
aggregate of $30 million principal amount of Charter’s 5.75% convertible senior
notes held by two unrelated parties for shares of Charter Class A common
stock,
which resulted in the issuance of more shares in the exchange transaction
than
would have been issued under the original terms of the convertible senior
notes.
Gain
(loss) on extinguishment of debt. Gain
on
extinguishment of debt of $8 million for the six months ended June 30, 2005
primarily represents approximately $10 million related to the issuance of
Charter Operating notes in exchange for Charter Holdings notes and approximately
$4 million related to the repurchase of $131 million principal amount of
our
4.75% convertible senior notes due 2006. These gains were offset by
approximately $5 million of losses related to the redemption of our
subsidiary’s, CC V Holdings, LLC, 11.875% notes due 2008. See Note 6 to the
condensed consolidated financial statements. Loss
on
extinguishment of debt of $21 million for the six months ended June 30, 2004
represents the write-off of deferred financing fees and third party costs
related to the Charter Operating refinancing in April 2004.
Gain
on investments. Gain
on
investments of $21 million for the six months ended June 30, 2005 primarily
represents a gain
realized on an exchange of our interest in an equity investee for an investment
in a larger enterprise.
Minority
Interest. Minority
interest represents the 2% accretion of the preferred membership interests
in
our indirect subsidiary, CC VIII, LLC, and in 2004, the pro rata share of
the
profits and losses of CC VIII, LLC. Effective January 1, 2005, we ceased
recognizing minority interest in earnings or losses of CC VIII for financial
reporting purposes until the dispute between Charter and Mr. Allen regarding
the
preferred membership interests in CC VIII is resolved. See Note 7 to the
condensed consolidated financial statements. Additionally, reported losses
allocated to minority interest on the statement of operations are limited
to the
extent of any remaining minority interest on the balance sheet related to
Charter Holdco. Because minority interest in Charter Holdco is substantially
eliminated, Charter absorbs substantially all losses before income taxes
that
otherwise would be allocated to minority interest. Subject to any changes
in
Charter Holdco’s capital structure, future losses will continue to be
substantially absorbed by Charter.
Income
Tax Expense. Income
tax expense of $46 million and $97 million was recognized for the six months
ended June 30, 2005 and 2004, respectively. The income tax expense is recognized
through increases in deferred tax liabilities related to our investment in
Charter Holdco, as well as through current federal and state income tax expense
and increases in the deferred tax liabilities of certain of our indirect
corporate subsidiaries. Additionally,
the sale of certain systems to Atlantic Broadband Finance, LLC on March 1,
2004
resulted in income tax expense of $15 million for the six months ended June
30,
2004.
Net
Loss.
Net
loss decreased by $1 million, from $708 million for the six months ended
June
30,
2004 to
$707 million for the six months ended June
30,
2005 as
a result of the factors described above.
Preferred
stock dividends. On
August
31, 2001, Charter issued 505,664 shares (and on February 28, 2003
issued an
additional 39,595 shares) of Series A Convertible Redeemable Preferred
Stock in connection with the Cable USA acquisition, on which Charter pays
a
quarterly cumulative cash dividends at an annual rate of 5.75% if paid or
7.75%
if accrued on a liquidation preference of $100 per share. Beginning January
1,
2005, Charter is accruing the dividend on its Series A Convertible Redeemable
Preferred Stock.
Loss
Per Common Share.
The
loss per common share decreased by $0.05, from $2.39 per common share for
the
six months ended June
30,
2004 to
$2.34 per common share for the six months ended June
30,
2005 as
a result of the factors described above.
Liquidity
and Capital Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities,
cash
needs, capital expenditures and outstanding debt.
Overview
We
have a
significant level of debt. For the remainder of 2005, $15 million of our
debt
matures, and in 2006, an additional $55 million matures. In 2007 and beyond,
significant additional amounts will become due under our remaining long-term
debt obligations.
Our
business requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. We have historically funded our debt
service costs, operating activities and capital requirements through cash
flows
from operating activities, borrowings under our credit facilities, sales
of
assets, issuances of debt and equity securities and cash on hand. However,
the
mix of funding sources changes from period to period. For the six months
ended
June 30, 2005, we generated $181 million of net cash flows from operating
activities after paying cash interest of $744 million. In addition, we used
approximately $542 million for purchases of property, plant and equipment.
Finally, we had net cash flows used in financing activities of $314 million,
which included, among other things, approximately $705 million in repayment
of
borrowings under the Charter Operating revolving credit facility. This repayment
was the primary reason cash on hand decreased by $610 million to $40 million
at
June 30, 2005. We expect that our mix of sources of funds will continue to
change in the future based on overall needs relative to our cash flow and
on the
availability of funds under our credit facilities, our access to the debt
and
equity markets, the timing of possible asset sales and our ability to generate
cash flows from operating activities. We continue to explore asset dispositions
as one of several possible actions that we could take in the future to improve
our liquidity, but we do not presently consider future asset sales as a
significant source of liquidity.
We
expect
that cash on hand, cash flows from operating activities and the amounts
available under our credit facilities will be adequate to meet our cash needs
for
the
remainder of
2005.
Cash flows from operating activities and amounts available under our credit
facilities may not be sufficient to fund our operations and satisfy our
principal repayment obligations that come due in 2006 and, we believe, such
amounts will not be sufficient to fund our operations and satisfy such repayment
obligations thereafter.
It
is
likely that we will require additional funding to repay debt maturing after
2006. We are working with our financial advisors to address such funding
requirements. However, there can be no assurance that such funding will be
available to us. Although Mr. Allen and his affiliates have purchased equity
from us in the past, Mr. Allen and his affiliates are not obligated to purchase
equity from, contribute to or loan funds to us in the future.
Credit
Facilities and Covenants
Our
ability to operate depends upon, among other things, our continued access
to
capital, including credit under the Charter Operating credit facilities.
These
credit facilities, along with our indentures, contain certain restrictive
covenants, some of which require us to maintain specified financial ratios
and
meet financial tests and to provide audited financial statements with an
unqualified opinion from our independent auditors. As of June 30, 2005, we
were
in compliance with the covenants under our indentures and credit facilities
and
we expect to remain in compliance with those covenants for the next twelve
months. As of June 30, 2005, we had borrowing availability
under
our
credit facilities of $870 million, none of which was restricted due to
covenants. Continued access to our credit facilities is subject to our remaining
in compliance with the covenants of these credit facilities, including covenants
tied to our operating performance. If our operating performance results in
non-compliance with these covenants, or if any of certain other events of
non-compliance under these credit facilities or indentures governing our
debt
occurs, funding under the credit facilities may not be available and defaults
on
some or potentially all of our debt obligations could occur. An event of
default
under the covenants governing any of our debt instruments could result in
the
acceleration of our payment obligations under that debt and, under certain
circumstances, in cross-defaults under our other debt obligations, which
could
have a material adverse effect on our consolidated financial condition and
results of operations.
The
Charter Operating credit facilities required us to redeem the CC V Holdings,
LLC
notes as a result of the Charter Holdings leverage ratio becoming less than
8.75
to 1.0. In satisfaction of this requirement, in March 2005, CC V Holdings,
LLC
redeemed all of its outstanding notes, at 103.958% of principal amount, plus
accrued and unpaid interest to the date of redemption. The total cost of
the
redemption including accrued and unpaid interest was approximately $122 million.
We funded the redemption with borrowings under the Charter Operating credit
facilities.
Specific
Limitations
Our
ability to make interest payments on our convertible senior notes, and, in
2006
and 2009, to repay the outstanding principal of our convertible senior notes
of
$25 million and $863 million, respectively, will depend on our ability to
raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco or its subsidiaries, including CCH II, CCO Holdings and Charter
Operating. Distributions
by Charter’s subsidiaries to a parent company (including Charter and Charter
Holdco) for
payment of principal on Charter’s convertible senior notes,
however, are restricted by the
indentures governing the CCH II notes, CCO Holdings notes, and Charter Operating
notes, unless under their respective indentures there is no default and a
specified leverage ratio test is met at the time of such event. During the
six
months ended June 30, 2005, Charter Holdings distributed $60 million to Charter
Holdco. As
of
June 30, 2005, Charter Holdco was owed $62 million in intercompany loans
from
its subsidiaries, which were available to pay interest and principal on
Charter's convertible senior notes. In addition, Charter has $122 million
of
governmental
securities
pledged as security for the next
five
semi-annual interest
payments on Charter's 5.875% convertible senior notes.
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on the
convertible senior notes, only if, after giving effect to the distribution,
Charter Holdings can incur additional debt under the leverage ratio of 8.75
to
1.0, there is no default under Charter Holdings' indentures and other specified
tests are met. For the quarter ended June 30, 2005, there was no default
under
Charter Holdings' indentures and other specified tests were met. However,
Charter Holdings did not meet the leverage ratio of 8.75 to 1.0 based on
June
30,
2005
financial
results. As a result, distributions from Charter Holdings to Charter or Charter
Holdco are currently
restricted and will continue to be restricted until that test is met. During
this restriction period,
the
indentures governing the Charter Holdings notes permit Charter Holdings and
its
subsidiaries to make specified investments in Charter Holdco or Charter,
up to
an amount determined by a formula, as long as there is no default under the
indentures.
In
accordance with the registration rights agreement entered into with our initial
sale, we were required to register for resale by April 21, 2005 our 5.875%
convertible senior notes due 2009, issued in November 2004. Since these
convertible notes were not registered by that date, we paid or will pay
liquidated damages totaling $0.5 million through July 14, 2005, the day prior
to
the effective date of the registration statement. In addition, in accordance
with the share lending agreement entered into in connection with the initial
sale of our 5.875% convertible senior notes due 2009, we were required to
register by April 1, 2005 150
million shares of our Class A common stock that Charter was obligated to
lend to
Citigroup Global Markets Limited ("CGML") at CGML’s request.
Because
this registration statement was not declared effective by such date, we paid
or
will pay liquidated damages totaling $11 million from April 2, 2005 through
July
17, 2005, the day before the effective date of the registration statement.
The
liquidated damages were recorded as interest expense in the accompanying
condensed consolidated statements of operations.
Our
significant amount of debt could negatively affect our ability to access
additional capital in the future. No assurances can be given that we will
not
experience liquidity problems if we do not obtain sufficient additional
financing on a timely basis as our debt becomes due or because of adverse
market
conditions, increased competition
or
other
unfavorable events. If, at any time, additional capital or borrowing capacity
is
required beyond amounts internally generated or available under our credit
facilities or through additional debt or equity financings, we would
consider:
|
·
|
issuing
equity that would significantly dilute existing
shareholders;
|
|
·
|
issuing
convertible debt or some other securities that may have structural
or
other priority over our existing notes and may also significantly
dilute
Charter's existing shareholders;
|
|
·
|
further
reducing our expenses and capital expenditures, which may impair
our
ability to increase revenue;
|
|
·
|
requesting
waivers or amendments with respect to our credit facilities, the
availability and terms of which would be subject to market
conditions.
|
If
the
above strategies are not successful, we could be forced to restructure our
obligations or seek protection under the bankruptcy laws. In addition, if
we
need to raise additional capital through the issuance of equity or find it
necessary to engage in a recapitalization or other similar transaction, our
shareholders could suffer significant dilution and our noteholders might
not
receive principal and interest payments to which they are contractually
entitled.
Sale
of Assets
In
March
2004, we closed the sale of certain cable systems in Florida, Pennsylvania,
Maryland, Delaware and West Virginia to Atlantic Broadband Finance, LLC.
We
closed the sale of an additional cable system in New York to Atlantic Broadband
Finance, LLC in April 2004. The total net proceeds from the sale of all of
these
systems were approximately $735 million. The proceeds were used to repay
a
portion of amounts outstanding under our revolving credit facility.
Long-Term
Debt
As
of
June
30,
2005 and
December 31, 2004, long-term debt totaled approximately $19.2 billion and
$19.5
billion, respectively. This debt was comprised of approximately $5.4 billion
and
$5.5 billion of
credit
facility debt,
$12.9
billion and $13.0 billion accreted value of high-yield notes and $863 million
and $990 million accreted value of convertible
senior notes,
respectively. As of June
30,
2005 and
December 31, 2004, the weighted average interest rate on the credit facility
debt was approximately 7.2% and 6.8%, respectively, the weighted average
interest rate on the high-yield notes was approximately 9.9% and 9.9%,
respectively, and the weighted average interest rate on the convertible notes
was approximately 5.8% and 5.7%, respectively, resulting in a blended weighted
average interest rate of 9.0% and 8.8%, respectively. The
interest rate on approximately 81% and 83% of the total principal amount
of our
debt was effectively fixed, including the effects of our interest rate hedge
agreements as of June 30, 2005 and December 31, 2004, respectively.
4.75%
Convertible Senior Notes due 2006. The
4.75%
convertible senior notes are convertible at the option of the holders into
shares of Class A common stock at a conversion rate, subject to certain
adjustments, of 38.0952 shares per $1,000 principal amount of notes, which
is
equivalent to a price of $26.25 per share. Certain anti-dilutive provisions
cause adjustments to occur automatically upon the occurrence of specified
events. Additionally, the conversion ratio may be adjusted by us when deemed
appropriate. During the six months ended June 30, 2005, we repurchased, in
private transactions, from a small number of institutional holders, a total
of
$131 million principal amount of our 4.75% convertible senior notes due 2006.
Approximately $25 million principal amount of these notes remain
outstanding.
Issuance
of Charter Operating Notes in Exchange for Charter Holdings Notes.
In
March
and June 2005, our subsidiary, Charter Operating, consummated exchange
transactions with a small number of institutional holders of Charter Holdings
8.25% Senior Notes due 2007 pursuant to which Charter Operating issued, in
private placement, approximately $333 million principal amount of its 8.375%
senior second lien Notes due 2014 in exchange for approximately $346 million
of
the Charter Holdings 8.25% senior notes due 2007. The Charter Holdings notes
received in the exchange were thereafter distributed to Charter Holdings
and
cancelled.
CC
V Holdings, LLC Notes. The
Charter Operating credit facilities required us to redeem the CC V Holdings,
LLC
notes as a result of the Charter Holdings leverage ratio becoming less than
8.75
to 1.0. In satisfaction of this requirement, in
March
2005, CC V Holdings, LLC redeemed all of its 11.875% notes due 2008, at 103.958%
of principal amount, plus accrued and unpaid interest to the date of redemption.
The total cost of redemption was approximately $122 million and was funded
through borrowings under our credit facilities. Following
such redemption, CC V Holdings, LLC and its subsidiaries (other than
non-guarantor subsidiaries) guaranteed the Charter Operating credit facilities
and granted a lien on all of their assets as to which a lien can be perfected
under the Uniform Commercial Code by the filing of a financing
statement.
Historical
Operating, Financing and Investing Activities
We
held
$40 million in cash and cash equivalents as of June 30, 2005 compared
to
$650 million as of December 31, 2004. The decrease in cash and cash
equivalents reflects the repayment of approximately $705 million of borrowings
under our revolving credit facilities.
Operating
Activities. Net
cash
provided by operating activities increased $13 million, or 8%, from $168
million
for the six months ended June 30, 2004 to $181 million for the six months
ended
June 30, 2005. For the six months ended June 30, 2005, net cash provided
by
operating activities increased primarily as a result of changes in operating
assets and liabilities that used $92 million less cash during the six months
ended June 30, 2005 than the corresponding period in 2004 combined with an
increase in revenue over cash costs year over year partially offset by an
increase in cash interest expense of $117 million over the corresponding
prior
period.
Investing
Activities. Net
cash
used by investing activities for the six months ended June 30, 2005 was $477
million and net cash provided by investing activities for the six months
ended
June 30, 2004 was $273 million. Investing activities used $750 million more
cash
during the six months ended June 30, 2005 than the corresponding period in
2004
primarily as a result of proceeds from the
sale of
certain cable systems to Atlantic Broadband Finance, LLC in 2004 offset
by
increased cash used for capital expenditures in 2005.
Financing
Activities. Net
cash
used in financing activities decreased $130 million from $444 million for
the
six months ended June 30, 2004 to $314 million for the six months ended June
30,
2005. The decrease in cash used during the six months ended June 30, 2005
as
compared to the corresponding period in 2004, was primarily the result of
a
decrease in payments for debt issuance costs and in net repayments of long-term
debt.
Capital
Expenditures
We
have
significant ongoing capital expenditure requirements. Capital expenditures
were
$542 million and $390 million for the six months ended June
30,
2005
and
2004, respectively. Capital expenditures increased as a result of increased
spending on support capital related to our investment in service improvements;
scalable infrastructure related to telephone services, VOD and digital
simulcast; and customer premise equipment primarily related to the continued
demand for advanced digital set-tops. See the table below for more
details.
Upgrading
our cable systems has enabled us to offer digital television, high-speed
Internet services, VOD, interactive services, additional channels and tiers,
and
expanded pay-per-view options to a larger customer base. Our capital
expenditures are funded primarily from cash flows from operating activities,
the
issuance of debt and borrowings under credit facilities. In addition, during
the
six months ended June
30,
2005
and
2004, our liabilities related to capital expenditures increased $45 million
and
decreased $52 million, respectively.
During
2005, we expect capital expenditures to be approximately $1 billion. The
increase in capital expenditures for 2005 compared to 2004 is the result
of
expected increases in telephone services and deployment of advanced digital
boxes. We expect that the nature of these expenditures will continue to be
composed primarily of purchases of customer premise equipment, support capital
and for scalable infrastructure costs. We expect to fund capital expenditures
for 2005 primarily from cash flows from operating activities and borrowings
under our credit facilities.
We
have
adopted capital expenditure disclosure guidance, which was developed by eleven
publicly traded cable system operators, including Charter, with the support
of
the National Cable & Telecommunications Association ("NCTA"). The disclosure
is intended to provide more consistency in the reporting of operating statistics
in capital
expenditures
and customers among peer companies in the cable industry. These disclosure
guidelines are not required disclosure under GAAP, nor do they impact our
accounting for capital expenditures under GAAP.
The
following table presents our major capital expenditures categories in accordance
with NCTA disclosure guidelines for the three and six months ended June 30,
2005
and 2004 (dollars in millions):
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
premise equipment (a)
|
|
$
|
142
|
|
$
|
112
|
|
$
|
228
|
|
$
|
226
|
|
Scalable
infrastructure (b)
|
|
|
47
|
|
|
14
|
|
|
89
|
|
|
33
|
|
Line
extensions (c)
|
|
|
48
|
|
|
30
|
|
|
77
|
|
|
53
|
|
Upgrade/Rebuild
(d)
|
|
|
12
|
|
|
5
|
|
|
22
|
|
|
16
|
|
Support
capital (e)
|
|
|
82
|
|
|
39
|
|
|
126
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures (f)
|
|
$
|
331
|
|
$
|
200
|
|
$
|
542
|
|
$
|
390
|
|
(a)
|
Customer
premise equipment includes costs incurred at the customer residence
to
secure new customers, revenue units and additional bandwidth revenues.
It
also includes customer installation costs in accordance with SFAS
51 and
customer premise equipment (e.g., set-top terminals and cable modems,
etc.).
|
(b)
|
Scalable
infrastructure includes costs, not related to customer premise
equipment
or our network, to secure growth of new customers, revenue units
and
additional bandwidth revenues or provide service enhancements (e.g.,
headend equipment).
|
(c)
|
Line
extensions include network costs associated with entering new service
areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment,
make-ready and design engineering).
|
(d)
|
Upgrade/rebuild
includes costs to modify or replace existing fiber/coaxial cable
networks,
including betterments.
|
(e)
|
Support
capital includes costs associated with the replacement or enhancement
of
non-network assets due to technological and physical obsolescence
(e.g.,
non-network equipment, land, buildings and
vehicles).
|
(f)
|
Represents
all capital expenditures made during the three and six months ended
June
30, 2005 and 2004, respectively.
|
Certain
Trends and Uncertainties
The
following discussion highlights a number of trends and uncertainties, in
addition to those discussed elsewhere in this quarterly report and in the
"Critical
Accounting Policies and Estimates"
section
of Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations"
in our
2004 Annual Report on Form 10-K, that could materially impact our business,
results of operations and financial condition.
Substantial
Leverage. We
have a
significant amount of debt. As of June 30, 2005, our total debt was
approximately $19.2 billion. For the remainder of 2005, $15 million of our
debt
matures and in 2006, an additional $55 million matures. In 2007 and beyond,
significant additional amounts will become due under our remaining obligations.
We believe that, as a result of our significant levels of debt and operating
performance, our access to the debt markets could be limited when substantial
amounts of our current indebtedness become due. If our business does not
generate sufficient cash flow from operating activities, and sufficient funds
are not available to us from borrowings under our credit facilities or from
other sources, we may not be able to repay our debt, fund our other liquidity
and capital needs, grow our business or respond to competitive challenges.
Further, if we are unable to repay or refinance our debt, as it becomes due,
we
could be forced to restructure our obligations or seek protection under the
bankruptcy laws. If we were to raise capital through the issuance of additional
equity or if we were to engage in a recapitalization or other similar
transaction, our shareholders could suffer significant dilution and our
noteholders might not receive all principal and interest payments to which
they
are contractually entitled on a timely basis or at all. For more information,
see the section above entitled "— Liquidity and Capital Resources."
Restrictive
Covenants. Our
credit facilities and the indentures governing our and our subsidiaries’ other
debt contain a number of significant covenants that could adversely impact
our
ability to operate our business, and therefore could adversely affect our
results of operations and the price of our Class A common stock. These covenants
restrict our and our subsidiaries’ ability to:
· incur
additional debt;
|
· repurchase
or redeem equity interests and debt;
|
· issue
equity;
|
· make
certain investments or acquisitions;
|
· pay
dividends or make other distributions;
|
· dispose
of assets or merge;
|
· enter
into related party transactions;
|
· grant
liens; and
|
· pledge
assets.
|
Furthermore,
our credit facilities require us to, among other things, maintain specified
financial ratios, meet specified financial tests and provide audited financial
statements with an unqualified opinion from our independent auditors. Our
ability to comply with these provisions may be affected by events beyond
our
control.
The
breach of any covenants or obligations in the foregoing indentures or credit
facilities, not otherwise waived or amended, could result in a default under
the
applicable debt agreement or instrument and could trigger acceleration of
the
related debt, which in turn could trigger defaults under other agreements
governing our long-term indebtedness. In addition, the secured lenders
under the Charter Operating credit facilities and the Charter Operating senior
second-lien notes could foreclose on their collateral, which includes equity
interests in our subsidiaries, and exercise other rights of secured
creditors. Any default under those credit facilities, the indentures
governing our convertible notes or our subsidiaries’ debt could adversely affect
our growth, our financial condition and our results of operations and our
ability to make payments on our notes and the credit facilities and other
debt
of our subsidiaries. For more information, see the section above
entitled
"— Liquidity and Capital Resources."
Liquidity.
Our
business requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. Our ongoing operations will depend on
our
ability to generate cash and to secure financing in the future. We have
historically funded liquidity and capital requirements through cash flows
from
operating activities, borrowings under our credit facilities, issuances of
debt
and equity securities and cash on hand.
Our
ability to operate depends upon, among other things, our continued access
to
capital, including credit under the Charter Operating credit facilities.
These
credit facilities are subject to certain restrictive covenants, some of which
require us to maintain specified financial ratios and meet financial tests
and
to provide audited financial statements with an unqualified opinion from
our
independent auditors. As of June 30, 2005, we were in compliance with the
covenants under our indentures and credit facilities, and we expect to remain
in
compliance with those covenants for the next twelve months. If our operating
performance results in non-compliance with these covenants, or if any of
certain
other events of non-compliance under these credit facilities or indentures
governing our debt occurs, funding under the credit facilities may not be
available and defaults on some or potentially all of our debt obligations
could
occur. An event of default under the credit facilities or indentures, if
not
waived, could result in the acceleration of those debt obligations and,
consequently, other debt obligations. Such acceleration could result in exercise
of remedies by our creditors and could force us to seek the protection of
the
bankruptcy laws, which could materially adversely impact our ability to operate
our business and to make payments under our debt instruments. As of June
30,
2005, we had borrowing availability under our credit facilities of $870 million,
none of which was restricted due to covenants.
If,
at
any time, additional capital or capacity is required beyond amounts internally
generated or available under our credit facilities or through additional
debt or
equity financings, we would consider:
· issuing
equity that would significantly dilute existing
shareholders;
|
· issuing
convertible debt or some other securities that may have structural
or
other priority over our existing notes and may also significantly
dilute
Charter’s existing
|
shareholders;
|
· further
reducing our expenses and capital expenditures, which may impair
our
ability to increase revenue;
|
· selling
assets; or
|
· requesting
waivers or amendments with respect to our credit facilities, the
availability and terms of which would be subject to market
conditions.
|
If
the
above strategies were not successful, we could be forced to restructure our
obligations or seek protection under the bankruptcy laws. If we were to raise
additional capital through the issuance of equity or find it necessary to
engage
in a recapitalization or other similar transaction, our shareholders could
suffer significant dilution and our noteholders might not receive all or
any
principal and interest payments to which they are contractually entitled.
For
more information, see the section above entitled "— Liquidity and Capital
Resources."
Acceleration
of Indebtedness of Charter’s Subsidiaries. In
the
event of a default under our credit facilities or notes, our creditors could
elect to declare all amounts borrowed, together with accrued and unpaid interest
and other fees, to be due and payable. In such event, our credit facilities
and
indentures would not permit Charter’s subsidiaries to distribute funds to
Charter Holdco or Charter to pay interest or principal on their notes. If
the
amounts outstanding under such credit facilities or notes are accelerated,
all
of the debt and liabilities of Charter’s subsidiaries would be payable from the
subsidiaries’ assets, prior to any distribution of the subsidiaries’ assets to
pay the interest and principal amounts on Charter’s notes. In addition, the
lenders under our credit facilities could foreclose on their collateral,
which
includes equity interests in Charter’s subsidiaries, and they could exercise
other rights of secured creditors. In any such case, we might not be able
to
repay or make any payments on our notes. Additionally, an acceleration or
payment default under our credit facilities would cause a cross-default in
the
indentures governing the Charter Holdings notes, CCH II notes, CCO Holdings
notes, Charter Operating notes and Charter’s convertible senior notes and would
trigger the cross-default provision of the Charter Operating credit agreement.
Any default under any of our credit facilities or notes might adversely affect
the holders of our notes and our growth, financial condition and results
of
operations and could force us to examine all options, including seeking the
protection of the bankruptcy laws.
Charter
Communications, Inc. Relies on its Subsidiaries to Meet its Liquidity Needs,
and
Charter’s Convertible Senior Notes are Structurally Subordinated to all
Liabilities of its Subsidiaries. We
rely
on our subsidiaries to make distributions or other payments to Charter Holdco
and Charter to enable Charter to make payments on its convertible senior
notes.
The borrowers and guarantors under the Charter Operating credit facilities
are
Charter’s indirect subsidiaries. A number of Charter’s subsidiaries are also
obligors under other debt instruments, including Charter Holdings, CCH II,
CCO
Holdings and Charter Operating, which are each a co-issuer of senior notes,
senior-second lien notes and/or senior discount notes. As of June 30, 2005,
our
total debt was approximately $19.2 billion, of which $18.4 billion was
structurally senior to the Charter convertible senior notes. The Charter
Operating credit facilities and the indentures governing the senior notes,
senior discount notes and senior second-lien notes issued by subsidiaries
of
Charter contain restrictive covenants that limit the ability of such
subsidiaries to make distributions or other payments to Charter Holdco or
Charter.
In
the
event of a default under our credit facilities or notes, our lenders or
noteholders could elect to declare all amounts borrowed, together with accrued
and unpaid interest and other fees, to be due and payable. An acceleration
or
certain payment events of default under our credit facilities would cause
a
cross-default in the indentures governing the Charter Holdings notes, CCH
II
notes, CCO Holdings notes, Charter Operating notes and Charter’s convertible
senior notes. Similarly, such a default or acceleration under any of these
notes
would cause a cross-default under the notes of the parent entities of the
relevant entity. If the amounts outstanding under the credit facilities or
notes
are accelerated, all of the debt and liabilities of Charter’s subsidiaries would
be payable from the subsidiaries’ assets, prior to any distribution of the
subsidiaries’ assets to pay the interest and principal amounts on Charter’s
notes. In addition, the lenders under our credit facilities and noteholders
under our Charter Operating notes could foreclose on their collateral, which
includes equity interests in Charter’s subsidiaries, and they could exercise
other rights of secured creditors. Any default under any of our credit
facilities or notes could force us to examine all options, including seeking
the
protection of the bankruptcy laws. In the event of the bankruptcy, liquidation
or dissolution of a subsidiary, following payment by such subsidiary of its
liabilities, the lenders under our credit facilities and the holders of the
other debt instruments and all other creditors of Charter’s subsidiaries would
have the right to be paid before holders of Charter’s convertible senior notes
from any of Charter’s subsidiaries’ assets. Such subsidiaries may not have
sufficient assets remaining to make any payments to Charter as an equity
holder
or otherwise and may be restricted by bankruptcy and insolvency laws from
making
any such payments.
The
foregoing contractual and legal restrictions could limit Charter’s ability to
make payments of principal and/or interest to the holders of its convertible
senior notes. Further, if Charter made such payments by causing a subsidiary
to
make a distribution to it, and such transfer were deemed a fraudulent transfer
or an unlawful distribution, the holders of
Charter’s convertible senior notes could be
required to return the payment to (or for the benefit of) the creditors of
its
subsidiaries.
Securities
Litigation. A
number
of putative federal class action lawsuits were filed against Charter and
certain
of its former and present officers and directors alleging violations of
securities laws, which have been consolidated for pretrial purposes. In
addition, a number of shareholder derivative lawsuits were filed against
Charter
in the same and other jurisdictions. A shareholders derivative suit was filed
in
the U.S. District Court for the Eastern District of Missouri against Charter
and
its then current directors. Also, three shareholders derivative suits were
filed
in Missouri state court against Charter, its then current directors and its
former independent auditor. These state court actions have been consolidated.
The federal shareholders derivative suit and the consolidated derivative
suit
each alleged that the defendants breached their fiduciary duties.
Charter
entered into Stipulations of Settlement setting forth proposed terms of
settlement for the above-described class actions and derivative suits. On
May 23, 2005 the United States District Court for the Eastern District
of
Missouri conducted the final fairness hearing for the Actions, and on
June 30, 2005, the Court issued its final approval of the settlements.
Members of the class had 30 days from the issuance of the June 30
order
approving the settlement to file an appeal challenging the approval. Two
notices
of appeal were filed relating to the settlement, but Charter does not yet
know
the specific issues presented by such appeals, nor have briefing schedules
been
set. See "Part II, Item 1. Legal Proceedings."
Moreover,
due to (i) the inherent uncertainties of litigation and investigations, (ii)
the
remaining conditions to the finalization of our anticipated settlements,
(iii)
the possibility of appeals and objections to the settlements and (iv) the
need
for us to comply with, and/or otherwise implement certain covenants, conditions,
undertakings, procedures and other obligations that would be or have been
imposed under the terms of the settlements, Charter cannot predict with
certainty the ultimate outcome of these proceedings. An unfavorable outcome
in
the lawsuits described above could result in substantial potential liabilities
and have a material adverse effect on our consolidated financial condition
and
results of operations or our liquidity. Further, these proceedings, and our
actions in response to these proceedings, could result in substantial additional
defense costs and the diversion of management’s attention, and could adversely
affect our ability to execute our business and financial
strategies.
Competition.
The
industry in which we operate is highly competitive, and has become more so
in
recent years. In some instances, we compete against companies with fewer
regulatory burdens, easier access to financing, greater personnel resources,
greater brand name recognition and long-established relationships with
regulatory authorities and customers. Increasing consolidation in the cable
industry and the repeal of certain ownership rules may provide additional
benefits to certain of our competitors, either through access to financing,
resources or efficiencies of scale.
Our
principal competitor for video services throughout our territory is direct
broadcast satellite television services, also known as DBS. Competition from
DBS, including intensive marketing efforts, aggressive pricing, and the ability
of DBS to provide certain services that we are in the process of developing,
has
had an adverse impact on our ability to retain customers. DBS has grown rapidly
over the last several years and continues to do so. The cable industry,
including Charter, has lost a significant number of subscribers to DBS
competition, and we face serious challenges in this area in the future. We
believe that competition from DBS service providers may present greater
challenges in areas of lower population density, and that our systems serve
a
higher concentration of such areas than those of other major cable service
providers.
Local
telephone companies and electric utilities can offer video and other services
in
competition with us, and they increasingly may do so in the future. Certain
telephone companies have begun more extensive deployment of fiber in their
networks that will enable them to begin providing video services, as well
as
telephone and high-bandwidth Internet access services, to residential and
business customers. Some of these telephone companies have obtained, and
are now
seeking, franchises or alternative authorizations that are less burdensome
than
existing Charter franchises. The subscription television industry also faces
competition from free broadcast television and from other communications
and
entertainment media. Further loss of customers to DBS or other alternative
video
and data services could have a material negative impact on the value of our
business and its performance.
With
respect to our Internet access services, we face competition, including
intensive marketing efforts and aggressive pricing, from telephone companies
and
other providers of "dial-up" and digital subscriber line technology, also
known
as DSL. DSL service is competitive with high-speed Internet service over
cable
systems.
In
addition, DBS providers have entered into joint marketing arrangements with
Internet access providers to offer bundled video and Internet service, which
competes with our ability to provide bundled services to our customers. In
addition, as we expand our telephone offerings, we will face considerable
competition from established telephone companies.
In
order
to attract new customers, from time to time we make promotional offers,
including offers of temporarily reduced-price or free service. These promotional
programs result in significant advertising, programming and operating expenses,
and also require us to make capital expenditures to acquire additional digital
set-top terminals. Customers who subscribe to our services as a result of
these
offerings may not remain customers for any significant period of time following
the end of the promotional period. A failure to retain existing customers
and
customers added through promotional offerings or to collect the amounts they
owe
us could have an adverse effect on our business and financial
results.
Mergers,
joint ventures and alliances among franchised, wireless or private cable
operators, satellite television providers, telephone companies and others,
and
the repeal of certain ownership rules may provide additional benefits to
some of
our competitors, either through access to financing, resources or efficiencies
of scale, or the ability to provide multiple services in direct competition
with
us.
Long-Term
Indebtedness — Change of Control Payments.
We may
not have the ability to raise the funds necessary to fulfill our obligations
under Charter’s convertible senior notes, our senior and senior discount notes
and our credit facilities following a change of control. Under the indentures
governing the Charter convertible senior notes, upon the occurrence of specified
change of control events, Charter is required to offer to repurchase all
of the
outstanding Charter convertible senior notes. However, we may not have
sufficient funds at the time of the change of control event to make the required
repurchase of the Charter convertible senior notes and Charter’s subsidiaries
are limited in their ability to make distributions or other payments to Charter
to fund any required repurchase. In addition, a change of control under our
credit facilities and indentures governing our notes could require the repayment
of borrowings under those credit facilities and indentures. Because such
credit
facilities and notes are obligations of Charter’s subsidiaries, the credit
facilities and the notes would have to be repaid by Charter’s subsidiaries
before their assets could be available to Charter to repurchase the Charter
convertible senior notes. Charter’s failure to make or complete a change of
control offer would place it in default under the Charter convertible senior
notes. The failure of Charter’s subsidiaries to make a change of control offer
or repay the amounts outstanding under their credit facilities would place
them
in default under these agreements and could result in a default under the
indentures governing the Charter convertible senior notes. See "— Certain Trends
and Uncertainties — Liquidity."
Variable
Interest Rates.
At June
30, 2005, excluding the effects of hedging, approximately 31% of our debt
bears
interest at variable rates that are linked to short-term interest rates.
In
addition, a significant portion of our existing debt, assumed debt or debt
we
might arrange in the future will bear interest at variable rates. If interest
rates rise, our costs relative to those obligations will also rise. As of
June
30, 2005 and December 31, 2004, the weighted average interest rate
on the
credit facility debt was approximately 7.2% and 6.8%, respectively, the weighted
average interest rate on the high-yield notes was approximately 9.9% and
9.9%,
respectively, and the weighted average interest rate on the convertible notes
was approximately 5.8% and 5.7%, respectively, resulting in a blended weighted
average interest rate of 9.0% and 8.8%, respectively. The interest rate on
approximately 81% and 83% of the total principal amount of our debt was
effectively fixed, including the effects of our interest rate hedge agreements
as of June 30, 2005 and December 31, 2004, respectively.
Services.
We
expect
that a substantial portion of our near-term growth will be achieved through
revenues from high-speed Internet services, digital video, bundled service
packages, and to a lesser extent various commercial services that take advantage
of cable’s broadband capacity. We may not be able to offer these advanced
services successfully to our customers or provide adequate customer service
and
these advanced services may not generate adequate revenues. Also, if the
vendors
we use for these services are not financially viable over time, we may
experience disruption of service and incur costs to find alternative vendors.
In
addition, the technology involved in our product and service offerings generally
requires that we have permission to use intellectual property and that such
property not infringe on rights claimed by others. If it is determined that
the
product or service being utilized infringes on the rights of others, we may
be
sued or be precluded from using the technology.
Increasing
Programming Costs. Programming
has been, and is expected to continue to be, our largest operating expense
item.
In recent years, the cable industry has experienced a rapid escalation in
the
cost of programming,
particularly
sports programming. We expect programming costs to continue to increase because
of a variety of factors, including inflationary or negotiated annual increases,
additional programming being provided to customers and increased costs to
purchase programming. The inability to fully pass these programming cost
increases on to our customers would have an adverse impact on our cash flow
and
operating margins. As measured by programming costs, and excluding premium
services (substantially all of which were renegotiated and renewed in 2003),
as
of July 7, 2005 approximately 9% of our current programming contracts were
expired, and approximately another 21% are scheduled to expire at or before
the
end of 2005. There can be no assurance that these agreements will be renewed
on
favorable or comparable terms. To the extent that we are unable to reach
agreement with certain programmers on terms that we believe are reasonable
we
may be forced to remove such programming channels from our line-up, which
could
result in a further loss of customers.
Share
Lending Agreement. The
issuance of up to a total of 150 million shares of common stock (of which
27.2
million were issued in July 2005) pursuant to a share lending agreement executed
by Charter in connection with the issuance of the 5.875% convertible senior
notes in November 2004, is essentially analogous to a sale of shares coupled
with a forward contract for the reacquisition of the shares at a future date.
An
instrument that requires physical settlement by repurchase of a fixed number
of
shares in exchange for cash is considered a forward purchase instrument.
While
the share lending agreement does not require a cash payment upon return of
the
shares, physical settlement is required (i.e., the shares borrowed must be
returned at the end of the arrangement.) The net effect on shareholders’ deficit
of the share lending agreement (exclusive of the adjustment for the fair
value
of the stock borrow facility discussed below) which includes our requirement
to
lend the shares and the counterparties’ requirement to return the shares, is
expected to be de minimis and will represent the cash received upon lending
of
the shares and will be equal to the par value of the common stock to be issued.
The
shares to be issued are required to be returned, in accordance with the
contractual arrangement, and will be treated in basic and diluted earnings
per
share as if they were already returned and retired. Consequently, there will
be
no impact of the shares of common stock lent under the share lending agreement
in the earnings per share calculation.
The
share
lending agreement was entered into to facilitate the ability of the purchasers
of the 5.875% convertible senior notes to improve or enhance their yield
on the
notes and as such was a cost of the 5.875% notes issuance transaction. We
determined that the fair value of the stock borrow facility was approximately
$13 million on the date of issuance of these notes. Therefore, we recorded
such
value at issuance as an increase to deferred financing fees and additional
paid
in capital in our consolidated financial statements. We are amortizing the
value
of the stock borrow facility to interest expense over the 5-year term of
these
notes.
Utilization
of Net Operating Loss Carryforwards.
As
of
June 30, 2005, we had approximately $5.9 billion of tax net operating losses
(resulting in a gross deferred tax asset of approximately $2.3 billion),
expiring in the years 2005 through 2025. Due to uncertainties in
projected
future taxable income, valuation allowances have been established against
the
gross deferred tax assets for book accounting purposes except for deferred
benefits available to offset certain deferred tax liabilities. Currently,
such
tax net operating losses can accumulate and be used to offset any of our
future
taxable income. An "ownership change" as defined in the applicable
federal
income tax rules, would place significant limitations, on an annual basis,
on
the use of such net operating losses to offset any future taxable income
we may
generate. Such limitations, in conjunction with the net operating
loss
expiration provisions, could effectively eliminate our ability to use a
substantial portion of our net operating losses to offset future taxable
income.
The
issuance of up to a total of 150 million shares of common stock (of which
27.2
million were issued in July 2005) offered pursuant to a share lending agreement
executed by Charter in connection with the issuance of the 5.875% convertible
senior notes in November 2004, as well as possible future conversions of
our
convertible notes, significantly increases the risk that we will experience
an
ownership change in the future for tax purposes, resulting in a material
limitation on the use of a substantial amount of our existing net operating
loss
carryforwards. We do not believe that the issuance of shares associated
with the share lending agreement would result in our experiencing an ownership
change. However, future transactions and the timing of such transactions
could cause an ownership change. Such transactions include additional
issuances of common stock by us (including but not limited to issuances upon
future conversion of our 5.875% convertible senior notes or as issued in
the
proposed settlement of derivative class action litigation), reacquisitions
of
the borrowed shares by us, or acquisitions or sales of shares by certain
holders
of our shares, including persons who have held, currently hold, or accumulate
in
the future five percent or more of our outstanding stock (including upon
an
exchange by Paul Allen or his affiliates, directly or
indirectly, of membership units
of Charter
Holdco into our Class A common stock). Many of the foregoing transactions
are beyond our control.
Class
A Common Stock and Notes Price Volatility. The
market price of our Class A common stock and our publicly traded notes has
been
and is likely to continue to be highly volatile. We expect that the price
of our
securities may fluctuate in response to various factors, including the factors
described in this section and various other factors, which may be beyond
our
control. These factors beyond our control could include: financial forecasts
by
securities analysts; new conditions or trends in the cable or telecommunications
industry; general economic and market conditions and specifically, conditions
related to the cable or telecommunications industry; any change in our debt
ratings; the development of improved or competitive technologies; the use
of new
products or promotions by us or our competitors; changes in accounting rules
or
interpretations; new regulatory legislation adopted in the United States;
and
any action taken or requirements imposed by NASDAQ if our Class A common
stock
trades below $1.00 per share for over 30 consecutive trading days. On June
30,
2005, our Class A common stock closed on NASDAQ at $1.18 per share.
In
addition, the securities market in general, and the Nasdaq National Market
and
the market for cable television securities in particular, have experienced
significant price fluctuations. Volatility in the market price for companies
may
often be unrelated or disproportionate to the operating performance of those
companies. These broad market and industry factors may seriously harm the
market
price of our Class A common stock and our notes, regardless of our
operating performance. In the past, securities litigation has often commenced
following periods of volatility in the market price of a company’s securities,
and several purported class action lawsuits were filed against us in 2001
and
2002, following a decline in our stock price.
Economic
Slowdown; Global Conflict.
It
is
difficult to assess the impact that the general economic slowdown and global
conflict will have on future operations. However, the economic slowdown has
resulted and could continue to result in reduced spending by customers and
advertisers, which could reduce our revenues, and also could affect our ability
to collect accounts receivable and maintain customers. Reductions in operating
revenues would likely negatively affect our ability to make expected capital
expenditures and could also result in our inability to meet our obligations
under our financing agreements. These developments could also have a negative
impact on our financing and variable interest rate agreements through
disruptions in the market or negative market conditions.
Regulation
and Legislation.
Cable
system operations are extensively regulated at the federal, state, and local
level, including rate regulation of basic service and equipment and municipal
approval of franchise agreements and their terms, such as franchise requirements
to upgrade cable plant and meet specified customer service standards. Additional
legislation and regulation is always possible.
Cable
operators also face significant regulation of their channel carriage. They
currently can be required to devote substantial capacity to the carriage
of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access programming,
and unaffiliated commercial leased access programming. This carriage burden
could increase in the future, particularly if cable systems were required
to
carry both the analog and digital versions of local broadcast signals (dual
carriage) or to carry multiple program streams included with a single digital
broadcast transmission (multicast carriage). Additional government mandated
broadcast carriage obligations could disrupt existing programming commitments,
interfere with our preferred use of limited channel capacity and limit our
ability to offer services that would maximize customer appeal and revenue
potential. Although the FCC issued a decision on February 10, 2005, confirming
an earlier ruling against mandating either dual carriage or multicast carriage,
that decision has been appealed. In addition, the FCC could modify its position
or Congress could legislate additional carriage obligations.
Over
the
past several years, proposals have been advanced that would require cable
operators offering Internet service to provide non-discriminatory access
to its
network to competing Internet service providers. In a June 2005 ruling, commonly
referred to as Brand
X,
the
Supreme Court upheld an FCC decision making it less likely that any
non-discriminatory "open" access requirements (which are generally associated
with common carrier regulation of "telecommunications services") will be
imposed
on the cable industry by local, state or federal authorities. The Supreme
Court
held that the FCC was correct in classifying cable-provided Internet service
as
an "information service," rather than a "telecommunications service." This
favorable regulatory classification limits the ability of various governmental
authorities to impose open access requirements on cable-provided Internet
service. Given the recency of the Brand
X decision,
however, the nature of any legislative or regulatory response remains uncertain.
The imposition of open access requirements could materially affect our business.
No
material changes in reported market risks have occurred since the filing
of our
December 31, 2004 Form 10-K.
As
of the
end of the period covered by this report, management, including our Interim
Chief Executive Officer and Interim Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with respect to the information generated for use in this quarterly
report. The evaluation was based in part upon reports and affidavits provided
by
a number of executives. Based upon, and as of the date of that evaluation,
our
Interim Chief Executive Officer and Interim Chief Financial Officer concluded
that the disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file
or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Commission’s
rules and forms.
There
was
no change in our internal control over financial reporting during the quarter
ended June 30, 2005 that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial reporting.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed
and
operated, can provide only reasonable, not absolute, assurance of achieving
the
desired control objectives and management necessarily was required to apply
its
judgment in evaluating the cost-benefit relationship of possible controls
and
procedures. Based upon the above evaluation, Charter’s management believes that
its controls provide such reasonable assurances.
PART
II. OTHER INFORMATION.
Securities
Class Actions and Derivative Suits
Fourteen
putative federal class action lawsuits (the "Federal Class Actions")
were
filed against Charter and certain of its former and present officers and
directors in various jurisdictions allegedly on behalf of all purchasers
of
Charter’s securities during the period from either November 8 or
November 9, 1999 through July 17 or July 18, 2002. Unspecified
damages were sought by the plaintiffs. In general, the lawsuits alleged that
Charter utilized misleading accounting practices and failed to disclose these
accounting practices and/or issued false and misleading financial statements
and
press releases concerning Charter’s operations and prospects. The Federal
Class Actions were specifically and individually identified in public
filings made by Charter prior to the date of this quarterly report. On
March 12, 2003, the Panel transferred the six Federal Class Actions
not filed in the Eastern District of Missouri to that district for coordinated
or consolidated pretrial proceedings with the eight Federal Class Actions
already pending there. The Court subsequently consolidated the Federal
Class Actions into a single action (the "Consolidated Federal
Class Action") for pretrial purposes. On August 5, 2004, the
plaintiff’s representatives, Charter and the individual defendants who were the
subject of the suit entered into a Memorandum of Understanding setting forth
agreements in principle to settle the Consolidated Federal Class Action.
These parties subsequently entered into Stipulations of Settlement dated
as of
January 24, 2005 (described more fully below) which incorporate the
terms
of the August 5, 2004 Memorandum of Understanding.
The
Consolidated Federal Class Action is entitled:
|
·
|
In
re Charter Communications, Inc. Securities Litigation, MDL Docket
No. 1506
(All Cases), StoneRidge Investments Partners, LLC, Individually
and On
Behalf of All Others Similarly Situated, v. Charter Communications,
Inc.,
Paul Allen, Jerald L. Kent, Carl E. Vogel, Kent Kalkwarf, David
G.
Barford, Paul E. Martin, David L. McCall, Bill Shreffler, Chris
Fenger,
James H. Smith, III, Scientific-Atlanta, Inc., Motorola, Inc. and
Arthur
Andersen, LLP, Consolidated Case No.
4:02-CV-1186-CAS.
|
On
September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in the Circuit Court of the City of St. Louis,
State of
Missouri (the "Missouri State Court"), against Charter and its then current
directors, as well as its former auditors. The plaintiffs alleged that the
individual defendants breached their fiduciary duties by failing to establish
and maintain adequate internal controls and procedures.
The
consolidated State Derivative Action is entitled:
|
·
|
Kenneth
Stacey, Derivatively on behalf of Nominal Defendant Charter
Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc
B.
Nathanson, Nancy B. Peretsman, William Savoy, John H. Tory, Carl
E. Vogel,
Larry W. Wangberg, and Charter Communications, Inc.
|
On
March 12, 2004, an action substantively identical to the State Derivative
Action was filed in Missouri State Court against Charter and certain of its
current and former directors, as well as its former auditors. On July 14,
2004, the Court consolidated this case with the State Derivative Action.
This
action is entitled:
|
·
|
Thomas
Schimmel, Derivatively on behalf on Nominal Defendant Charter
Communications, Inc., v. Ronald L. Nelson, Paul G. Allen, Marc
B.
Nathanson, Nancy B. Peretsman, William D. Savoy, John H. Tory,
Carl E.
Vogel, Larry W. Wangberg, and Arthur Andersen, LLP, and Charter
Communications, Inc.
|
Separately,
on February 12, 2003, a shareholders derivative suit (the "Federal
Derivative Action"), was filed against Charter and its then current directors
in
the United States District Court for the Eastern District of Missouri. The
plaintiff in that suit alleged that the individual defendants breached their
fiduciary duties and grossly mismanaged Charter by failing to establish and
maintain adequate internal controls and procedures.
The
Federal Derivative Action is entitled:
|
·
|
Arthur
Cohn, Derivatively on behalf of Nominal Defendant Charter Communications,
Inc., v. Ronald L. Nelson, Paul G. Allen, Marc B. Nathanson, Nancy
B.
Peretsman, William Savoy, John H. Tory, Carl E. Vogel, Larry W.
Wangberg,
and Charter Communications, Inc.
|
As
noted
above, Charter and the individual defendants entered into a Memorandum of
Understanding on August 5, 2004 setting forth agreements in principle
regarding settlement of the Consolidated Federal Class Action, the
State
Derivative Action(s) and the Federal Derivative Action (the "Actions"). Charter
and various other defendants in those actions subsequently entered into
Stipulations of Settlement dated as of January 24, 2005, setting forth
a
settlement of the Actions in a manner consistent with the terms of the
Memorandum of Understanding. The Stipulations of Settlement, along with various
supporting documentation, were filed with the Court on February 2,
2005. On
May 23, 2005 the United States District Court for the Eastern District
of
Missouri conducted the final fairness hearing for the Actions, and on
June 30, 2005, the Court issued its final approval of the settlements.
Members of the class had 30 days from the issuance of the June 30
order
approving the settlement to file an appeal challenging the approval. Two
notices
of appeal were filed relating to the settlement, but Charter does not yet
know
the specific issues presented by such appeals, nor have briefing schedules
been
set.
As
amended, the Stipulations of Settlement provide that, in exchange for a release
of all claims by plaintiffs against Charter and its former and present officers
and directors named in the Actions, Charter would pay to the plaintiffs a
combination of cash and equity collectively valued at $144 million,
which
will include the fees and expenses of plaintiffs’ counsel. Of this amount,
$64 million would be paid in cash (by Charter’s insurance carriers) and the
$80 million balance was to be paid (subject to Charter’s right to
substitute cash therefor described below) in shares of Charter Class A
common stock having an aggregate value of $40 million and ten-year
warrants
to purchase shares of Charter Class A common stock having an aggregate
warrant value of $40 million, with such values in each case being
determined pursuant to formulas set forth in the Stipulations of Settlement.
However, Charter had the right, in its sole discretion, to substitute cash
for
some or all of the aforementioned securities on a dollar for dollar basis.
Pursuant to that right, Charter elected to fund the $80 million obligation
with 13.4 million shares of Charter Class A common stock (having
an
aggregate value of approximately $15 million pursuant to the formula
set
forth in the Stipulations of Settlement) with the remaining balance (less
an
agreed upon $2 million discount in respect of that portion allocable
to
plaintiffs’ attorneys’ fees) to be paid in cash. In addition, Charter had agreed
to issue additional shares of its Class A common stock to its insurance
carrier having an aggregate value of $5 million; however, by agreement
with
its carrier Charter has paid $4.5 million in cash in lieu of issuing
such
shares. Charter delivered the settlement consideration to the claims
administrator on July 8, 2005, and it will be held in escrow pending
any
appeals of the approval. On July 14, 2005, the Circuit Court for the City
of St.
Louis dismissed with prejudice the State Derivative Actions.
As
part
of the settlements, Charter has committed to a variety of corporate governance
changes, internal practices and public disclosures, some of which have already
been undertaken and none of which are inconsistent with measures Charter
is
taking in connection with the recent conclusion of the SEC
investigation.
Government
Investigations
In
August
2002, Charter became aware of a grand jury investigation being conducted
by the
U.S. Attorney’s Office for the Eastern District of Missouri into certain of
its accounting and reporting practices, focusing on how Charter reported
customer numbers, and its reporting of amounts received from digital set-top
terminal suppliers for advertising. The U.S. Attorney’s Office publicly
stated that Charter was not a target of the investigation. Charter was also
advised by the U.S. Attorney’s Office that no current officer or member of
its board of directors was a target of the investigation. On July 24,
2003,
a federal grand jury charged four former officers of Charter with conspiracy
and
mail and wire fraud, alleging improper accounting and reporting practices
focusing on revenue from digital set-top terminal suppliers and inflated
customer account numbers. Each of the indicted former officers pled guilty
to
single conspiracy counts related to the original mail and wire fraud charges
and
were sentenced April 22, 2005. Charter fully cooperated with the
investigation, and following the sentencings, the U.S. Attorney’s Office
for the Eastern District of Missouri announced that its investigation was
concluded and that no further indictments would issue.
Indemnification
Charter
was generally required to indemnify, under certain conditions, each of the
named
individual defendants in connection with the matters described above pursuant
to
the terms of its bylaws and (where applicable) such individual defendants’
employment agreements. In accordance with these documents, in connection
with
the grand jury investigation, a now-settled SEC investigation and the
above-described lawsuits, some of Charter’s current and former directors and
current and former officers have been advanced certain costs and expenses
incurred in connection with their defense. On February 22, 2005, Charter
filed suit against four of its former officers who were indicted in the course
of the grand jury investigation. These suits seek to recover the legal fees
and
other related expenses advanced to these individuals. One of these former
officers has counterclaimed against Charter alleging, among other things,
that
Charter owes him additional indemnification for legal fees that Charter did
not
pay and another of these former officers has counterclaimed against Charter
for
accrued sick leave.
Other
Litigation
In
addition to the matters set forth above, Charter is also party to other lawsuits
and claims that arose in the ordinary course of conducting its business.
In the
opinion of management, after taking into account recorded liabilities, the
outcome of these other lawsuits and claims are not expected to have a material
adverse effect on our consolidated financial condition, results of operations
or
our liquidity.
Item
3. Defaults
Upon Senior Securities
We
did
not declare or pay the scheduled dividend payments on our Series A Convertible
Redeemable Preferred Stock at March 31, 2005 or June 30, 2005. Accordingly,
such
amounts were accrued, and, since March 31, 2005, dividends have accrued at
an
increased rate of 7.75% of the redemption value of the shares (which totals
approximately $55 million) and will continue to accrue at that rate until
accrued dividends have been paid in full. At June 30, 2005, the total accrued
dividends equaled $2 million.