body.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the quarterly period ended September 30, 2007
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the transition period from ________ to _________
Commission
file number: 000-27927
Charter
Communications, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
43-1857213
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification
Number)
|
12405
Powerscourt Drive
St.
Louis, Missouri 63131
(Address
of principal executive offices including zip code)
(314)
965-0555
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo þ
Number
of
shares of Class A common stock outstanding as of September 30, 2007:
403,224,161
Number
of
shares of Class B common stock outstanding as of September 30, 2007:
50,000
Charter
Communications, Inc.
Quarterly
Report on Form 10-Q for the Period ended September 30,
2007
Table
of Contents
PART
I. FINANCIAL INFORMATION
|
Page
|
|
|
Item
1. Financial
Statements - Charter Communications, Inc. and
Subsidiaries
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2007
|
|
and
December 31, 2006
|
4
|
Condensed
Consolidated Statements of Operations for the three and
nine
|
|
months
ended September 30, 2007 and 2006
|
5
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
nine
months ended September 30, 2007 and 2006
|
6
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
20
|
|
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
31
|
|
|
Item
4. Controls and Procedures
|
32
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
33
|
|
|
Item
1A. Risk Factors
|
33
|
|
|
Item
6. Exhibits
|
39
|
|
|
SIGNATURES
|
S-1
|
|
|
EXHIBIT
INDEX
|
E-1
|
This
quarterly report on Form 10-Q is for the three and nine months ended
September 30, 2007. 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 "Risk Factors" under Part II, Item
1A. 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," "aim," "on track," "target," "opportunity" 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, in general, 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 and, in particular, our ability to fund
debt
obligations (by dividend, investment or otherwise) to the applicable
obligor of such debt;
|
|
·
|
our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which could trigger a default of our
other
obligations under cross-default
provisions;
|
|
·
|
our
ability to pay or refinance debt prior to or when it becomes due
and/or
refinance that debt through new issuances, exchange offers or otherwise,
including restructuring our balance sheet and leverage
position;
|
|
·
|
competition
from other distributors, including incumbent telephone companies,
direct
broadcast satellite operators, wireless broadband providers, and
DSL
providers;
|
|
·
|
difficulties
in introducing, growing, and operating our telephone services, such
as our
ability to adequately meet customer expectations for the reliability
of
voice services; |
|
·
|
our
ability to adequately meet demand for installations and customer
service; |
|
·
|
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 and grow our customer base, particularly
in the
face of increasingly aggressive
competition;
|
|
·
|
our
ability to obtain programming at reasonable prices or to adequately
raise
prices to offset the effects of higher programming
costs;
|
|
·
|
general
business conditions, economic uncertainty or slowdown;
and
|
|
·
|
the
effects of governmental regulation, including but not limited to
local and
state 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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(DOLLARS
IN MILLIONS, EXCEPT PER SHARE
DATA)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
59
|
|
|
$ |
60
|
|
Accounts
receivable, less allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$18
and $16, respectively
|
|
|
223
|
|
|
|
195
|
|
Prepaid
expenses and other current assets
|
|
|
62
|
|
|
|
84
|
|
Total
current assets
|
|
|
344
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated
|
|
|
|
|
|
|
|
|
depreciation
of $8,608 and $7,644, respectively
|
|
|
5,108
|
|
|
|
5,217
|
|
Franchises,
net
|
|
|
9,144
|
|
|
|
9,223
|
|
Total
investment in cable properties, net
|
|
|
14,252
|
|
|
|
14,440
|
|
|
|
|
|
|
|
|
|
|
OTHER
NONCURRENT ASSETS
|
|
|
323
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
14,919
|
|
|
$ |
15,100
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
1,410
|
|
|
$ |
1,298
|
|
Total
current liabilities
|
|
|
1,410
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT
|
|
|
19,691
|
|
|
|
19,062
|
|
NOTE
PAYABLE – RELATED PARTY
|
|
|
63
|
|
|
|
57
|
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
|
|
14
|
|
|
|
14
|
|
OTHER
LONG-TERM LIABILITIES
|
|
|
874
|
|
|
|
692
|
|
MINORITY
INTEREST
|
|
|
196
|
|
|
|
192
|
|
PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
|
|
|
|
|
|
|
|
shares
authorized; 36,713 shares issued and outstanding
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
|
Class
A Common stock; $.001 par value; 10.5 billion shares
authorized;
|
|
|
|
|
|
|
|
|
403,224,161
and 407,994,585 shares issued and outstanding,
respectively
|
|
|
--
|
|
|
|
--
|
|
Class
B Common stock; $.001 par value; 4.5 billion
|
|
|
|
|
|
|
|
|
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
|
|
|
5,328
|
|
|
|
5,313
|
|
Accumulated
deficit
|
|
|
(12,637 |
) |
|
|
(11,536 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
(25 |
) |
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders’ deficit
|
|
|
(7,334 |
) |
|
|
(6,219 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ deficit
|
|
$ |
14,919
|
|
|
$ |
15,100
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSEDCONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS
IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
1,525
|
|
|
$ |
1,388
|
|
|
$ |
4,449
|
|
|
$ |
4,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
679
|
|
|
|
615
|
|
|
|
1,957
|
|
|
|
1,830
|
|
Selling,
general and administrative
|
|
|
341
|
|
|
|
309
|
|
|
|
961
|
|
|
|
860
|
|
Depreciation
and amortization
|
|
|
334
|
|
|
|
334
|
|
|
|
999
|
|
|
|
1,024
|
|
Asset
impairment charges
|
|
|
56
|
|
|
|
60
|
|
|
|
56
|
|
|
|
159
|
|
Other
operating expenses, net
|
|
|
8
|
|
|
|
4
|
|
|
|
13
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,418
|
|
|
|
1,322
|
|
|
|
3,986
|
|
|
|
3,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
107
|
|
|
|
66
|
|
|
|
463
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(452 |
) |
|
|
(466 |
) |
|
|
(1,387 |
) |
|
|
(1,409 |
) |
Other
income (expense), net
|
|
|
(21 |
) |
|
|
131
|
|
|
|
(55 |
) |
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(473 |
) |
|
|
(335 |
) |
|
|
(1,442 |
) |
|
|
(1,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(366 |
) |
|
|
(269 |
) |
|
|
(979 |
) |
|
|
(1,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(41 |
) |
|
|
(64 |
) |
|
|
(169 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(407 |
) |
|
|
(333 |
) |
|
|
(1,148 |
) |
|
|
(1,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX
|
|
|
--
|
|
|
|
200
|
|
|
|
--
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(407 |
) |
|
$ |
(133 |
) |
|
$ |
(1,148 |
) |
|
$ |
(974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE, BASIC AND DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(1.10 |
) |
|
$ |
(1.02 |
) |
|
$ |
(3.12 |
) |
|
$ |
(3.77 |
) |
Net
loss
|
|
$ |
(1.10 |
) |
|
$ |
(0.41 |
) |
|
$ |
(3.12 |
) |
|
$ |
(3.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
369,239,742
|
|
|
|
326,960,632
|
|
|
|
367,671,479
|
|
|
|
320,730,698
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(1,148 |
) |
|
$ |
(974 |
) |
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
999
|
|
|
|
1,032
|
|
Asset
impairment charges
|
|
|
56
|
|
|
|
159
|
|
Noncash
interest expense
|
|
|
33
|
|
|
|
108
|
|
Deferred
income taxes
|
|
|
161
|
|
|
|
123
|
|
(Gain)
loss on sale of assets
|
|
|
5
|
|
|
|
(198 |
) |
(Gain)
loss on extinguishment of debt
|
|
|
23
|
|
|
|
(101 |
) |
Other,
net
|
|
|
37
|
|
|
|
(10 |
) |
Changes
in operating assets and liabilities, net of effects from acquisitions
and
dispositions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(33 |
) |
|
|
46
|
|
Prepaid
expenses and other assets
|
|
|
21
|
|
|
|
23
|
|
Accounts
payable, accrued expenses and other
|
|
|
173
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from operating activities
|
|
|
327
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(890 |
) |
|
|
(795 |
) |
Change
in accrued expenses related to capital expenditures
|
|
|
(51 |
) |
|
|
4
|
|
Proceeds
from sales of assets, including cable systems
|
|
|
37
|
|
|
|
988
|
|
Other,
net
|
|
|
(31 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
Net
cash flows from investing activities
|
|
|
(935 |
) |
|
|
196
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
of long-term debt
|
|
|
7,472
|
|
|
|
5,970
|
|
Repayments
of long-term debt
|
|
|
(6,841 |
) |
|
|
(6,846 |
) |
Proceeds
from issuance of debt
|
|
|
--
|
|
|
|
440
|
|
Payments
for debt issuance costs
|
|
|
(33 |
) |
|
|
(44 |
) |
Other,
net
|
|
|
9
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Net
cash flows from financing activities
|
|
|
607
|
|
|
|
(480 |
) |
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(1 |
) |
|
|
64
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
60
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$ |
59
|
|
|
$ |
85
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$ |
1,230
|
|
|
$ |
1,121
|
|
|
|
|
|
|
|
|
|
|
NONCASH
TRANSACTIONS:
|
|
|
|
|
|
|
|
|
Cumulative
adjustment to Accumulated Deficit for the adoption of FIN
48
|
|
$ |
56
|
|
|
$ |
--
|
|
Issuance
of debt by CCH I, LLC
|
|
$ |
--
|
|
|
$ |
419
|
|
Issuance
of debt by CCH II, LLC
|
|
$ |
--
|
|
|
$ |
410
|
|
Issuance
of debt by Charter Communications Operating, LLC
|
|
$ |
--
|
|
|
$ |
37
|
|
Retirement
of Charter Communications Holdings, LLC debt
|
|
$ |
--
|
|
|
$ |
(796 |
) |
Retirement
of Renaissance Media Group LLC debt
|
|
$ |
--
|
|
|
$ |
(37 |
) |
Issuance
of Class A common stock
|
|
$ |
--
|
|
|
$ |
68
|
|
Retirement
of convertible senior notes
|
|
$ |
--
|
|
|
$ |
(255 |
) |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
1. Organization
and Basis of Presentation
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets
at
September 30, 2007 are the 54% controlling common equity interest (52% for
accounting purposes) in Charter Communications Holding Company, LLC ("Charter
Holdco") and "mirror" notes that 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 CCHC, LLC ("CCHC"),
which is the sole owner of Charter Communications Holdings, LLC ("Charter
Holdings"). The condensed consolidated financial statements include
the accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of
their
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." Charter has 100% voting control
over Charter Holdco and consolidates Charter Holdco as a variable interest
entity under Financial Accounting Standards Board ("FASB") Interpretation
("FIN") 46(R) Consolidation of Variable Interest
Entities. 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 to residential and commercial customers
traditional cable video programming (analog and digital video), high-speed
Internet services, advanced broadband services such as high definition
television, Charter OnDemand™, and digital video recorder service, and, in many
of our markets, telephone service. The Company sells its cable video
programming, high-speed Internet, telephone, and advanced broadband services
on
a subscription basis. The Company also sells local advertising on
cable 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 (the "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.
2. Liquidity
and
Capital Resources
The
Company incurred net losses of $407 million and $133 million for the three
months ended September 30, 2007 and 2006, respectively, and $1.1 billion and
$974 million for the nine months ended September 30, 2007 and 2006,
respectively. The Company’s net cash flows from operating activities
were $327 million and $348 million for the nine months ended September 30,
2007
and 2006, respectively.
The
Company has a significant amount of debt. The Company's long-term
financing as of September 30, 2007 totaled $19.7 billion, consisting of $7.0
billion of credit facility debt, $12.3 billion accreted value of high-yield
notes, and $412 million accreted value of convertible senior
notes. For the remainder of 2007, none of the Company’s debt
matures. As of September 30, 2007, the Company’s 2008 and 2009 debt
maturities totaled $65 million and $666 million, respectively. Of the
debt scheduled to mature in 2009, $364 million was exchanged in October 2007
for
notes maturing in 2027, subject to earlier mandatory redemption at the election
of the holders in 2012 and at each five-year
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
anniversary. In
2010 and beyond, significant additional amounts will become due under the
Company’s remaining long-term debt obligations.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically
funded these requirements through cash flows from operating activities,
borrowings under its 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 nine months ended
September 30, 2007, the Company generated $327 million of net cash flows from
operating activities, after paying cash interest of $1.2 billion. In
addition, the Company used $890 million for purchases of property, plant and
equipment. Finally, the Company generated net cash flows from
financing activities of $607 million, as a result of refinancing transactions
completed during the period.
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 through 2008. The Company believes that 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 interest and
principal repayment obligations in 2009, and will not be sufficient to fund
such
needs in 2010 and beyond. The Company continues to work with its
financial advisors concerning its approach to addressing liquidity, debt
maturities, and overall balance sheet leverage.
Credit
Facility Availability
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. The Charter Operating
credit facilities, along with the Company’s indentures and the CCO Holdings, LLC
(“CCO Holdings”) credit facility, contain certain restrictive covenants, some of
which require the Company to maintain specified leverage ratios, meet financial
tests, and provide annual audited financial statements with an unqualified
opinion from the Company’s independent auditors. As of September 30,
2007, 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 September 30, 2007, the
Company’s potential availability under Charter Operating’s revolving credit
facility totaled approximately $1.3 billion, none of which was limited by
covenant restrictions. Continued access to the Company’s credit
facilities is subject to the Company remaining in compliance with these
covenants, including covenants tied to the Company’s leverage
ratio. If any event of non-compliance were to occur, 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 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
and results of operations.
Limitations
on Distributions
As
long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. In October
2007, Charter Holdco completed an exchange offer, in which $364 million of
Charter’s 5.875% convertible senior notes due November 2009 were exchanged for
$479 million of Charter’s 6.50% convertible senior
notes. Approximately $49 million of Charter’s 5.875% convertible
senior notes remain outstanding, net of $814 million of the 5.875% convertible
senior notes now held by Charter Holdco. Charter’s ability to make
interest payments on its convertible senior notes, and to repay the outstanding
principal of its convertible senior notes will depend on its ability to
raise additional capital and/or on receipt of payments or distributions from
Charter Holdco and its subsidiaries. As of September 30, 2007, Charter
Holdco was owed $123 million in intercompany loans from Charter Communications
Operating, LLC and had $44 million in cash, which amounts were available to
pay
interest and principal on Charter's convertible senior notes. In addition,
Charter has $25 million of U.S. government securities pledged as security for
the semi-annual interest payments on Charter’s 5.875% convertible senior notes
scheduled in November 2007. As long as Charter Holdco continues to
hold the $814 million of Charter’s 5.875% convertible senior notes, Charter
Holdco will
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
receive
interest payments from the government securities pledged for Charter’s 5.875%
convertible senior notes. The remaining amount of interest payments
expected to be received by Charter Holdco in November 2007 is approximately
$24
million, which may be available to pay semiannual interest on the outstanding
principal amount of $49 million of Charter’s 5.875% convertible senior notes and
$479 million of Charter’s 6.50% convertible senior notes, although Charter
Holdco may use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted
under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings notes, Charter Operating
notes, and under the CCO Holdings credit facilities, unless there is no default
under the applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended September 30, 2007, there was no
default under any of these indentures or credit facilities. However,
certain of the Company’s subsidiaries did not meet their applicable leverage
ratio tests based on September 30, 2007 financial results. As a
result, distributions from certain of the Company’s subsidiaries to their parent
companies will continue to be restricted unless those tests are
met. Distributions by Charter Operating for payment of principal on
parent company notes are further restricted by the covenants in its credit
facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facilities.
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on
Charter’s 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 September
30, 2007, there was no default under Charter Holdings’ indentures and the other
specified tests were met. However, Charter Holdings did not meet the
leverage ratio test of 8.75 to 1.0 based on September 30, 2007 financial
results. As a result, distributions from Charter Holdings to Charter or
Charter Holdco would have been restricted at such time and will continue to
be
restricted unless that test is met. During periods in which
distributions are restricted, the indentures governing the Charter Holdings
notes permit Charter Holdings and its subsidiaries to make specified investments
(that are not restricted payments) in Charter Holdco or Charter, up to an amount
determined by a formula, as long as there is no default under the
indentures.
Recent
Financing Transactions
In
March
2007, Charter Operating entered into an Amended and Restated Credit Agreement
(the “Charter Operating Credit Agreement”) which provides for a $1.5 billion
senior secured revolving line of credit, a continuation of the existing $5.0
billion term loan facility (which was refinanced with new term loans in April
2007), and a $1.5 billion new term loan facility, which was funded in March
and
April 2007. In March 2007, CCO Holdings entered into a credit
agreement which consisted of a $350 million term loan facility funded in March
and April 2007. In April 2007, Charter Holdings completed a cash
tender offer and purchased $97 million of its outstanding notes. In
addition, Charter Holdings redeemed $187 million of its 8.625% senior notes
due
April 1, 2009 and CCO Holdings redeemed $550 million of its senior floating
rate
notes due December 15, 2010. These redemptions closed in April
2007. See Note 6.
3. Sale
of
Assets
In
2006,
the Company sold certain cable television systems serving approximately 356,000
analog video customers in 1) West Virginia and Virginia to Cebridge Connections,
Inc. (the “Cebridge Transaction”); 2) Illinois and Kentucky to
Telecommunications Management, LLC, doing business as New Wave Communications
(the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to
Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total
sales price of approximately $971 million. The Company used the net
proceeds from the asset sales to reduce borrowings, but not commitments, under
the revolving portion of the Company’s credit
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
facilities. These
cable systems met the criteria for assets held for sale. As such, the
assets were written down to fair value less estimated costs to sell, resulting
in asset impairment charges during the nine months ended September 30, 2006
of
approximately $99 million related to the New Wave Transaction and the Orange
Transaction. The Company determined that the West Virginia and
Virginia cable systems comprise operations and cash flows that for financial
reporting purposes meet the criteria for discontinued
operations. Accordingly, the results of operations for the West
Virginia and Virginia cable systems have been presented as discontinued
operations, net of tax, for the three and nine months ended September 30, 2006,
including a gain of $200 million on the sale of cable systems.
Summarized
consolidated financial information for the three and nine months ended September
30, 2006 for the West Virginia and Virginia cable systems is as
follows:
|
|
Three
Months
Ended
September 30, 2006
|
|
|
Nine
Months
Ended
September 30, 2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
--
|
|
|
$ |
109
|
|
Income
before income taxes
|
|
$ |
200
|
|
|
$ |
238
|
|
Income
tax expense
|
|
$ |
--
|
|
|
$ |
(4 |
) |
Net
income
|
|
$ |
200
|
|
|
$ |
234
|
|
Earnings
per common share, basic and diluted
|
|
$ |
0.61
|
|
|
$ |
0.73
|
|
Also,
during the three months ended September 30, 2007 and 2006, the Company recorded
asset impairment charges of $56 million and $60 million, respectively, related
to other cable systems meeting the criteria of assets held for sale during
the
respective periods.
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 Statement of Financial Accounting
Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets. Franchises that qualify for indefinite-life treatment
under SFAS No. 142 are tested for impairment annually each October 1 based
on valuations, or more frequently as warranted by events or changes in
circumstances. The October 1, 2007 annual impairment test will be
finalized in the fourth quarter of 2007 and any impairment resulting from such
test will be recorded in the fourth quarter. Franchises are
aggregated into essentially inseparable asset groups to conduct the
valuations. The asset groups generally represent geographical
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.
As
of
September 30, 2007 and December 31, 2006, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
|
September
30, 2007
|
|
|
December 31,
2006
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with indefinite lives
|
|
$ |
9,131
|
|
|
$ |
--
|
|
|
$ |
9,131
|
|
|
$ |
9,207
|
|
|
$ |
--
|
|
|
$ |
9,207
|
|
Goodwill
|
|
|
79
|
|
|
|
--
|
|
|
|
79
|
|
|
|
61
|
|
|
|
--
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,210
|
|
|
$ |
--
|
|
|
$ |
9,210
|
|
|
$ |
9,268
|
|
|
$ |
--
|
|
|
$ |
9,268
|
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises
with finite lives
|
|
$ |
23
|
|
|
$ |
10
|
|
|
$ |
13
|
|
|
$ |
23
|
|
|
$ |
7
|
|
|
$ |
16
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
For
the
nine months ended September 30, 2007, the net carrying amount of
indefinite-lived franchises was reduced by $20 million, related to cable asset
sales completed in the first nine months of 2007, and $56 million as a result
of
asset impairment charges recorded related to other cable asset
sales. Franchise amortization expense represents the amortization
relating to franchises that did not qualify for indefinite-life treatment under
SFAS No. 142, including costs associated with franchise
renewals. Franchise amortization expense for the three and nine
months ended September 30, 2007 was approximately $1 million and $3 million,
respectively, and for the three and nine months ended September 30, 2006 was
approximately $0 and $1 million, respectively. 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.
For
the
nine months ended September 30, 2007, goodwill increased $18 million as a result
of the Company’s purchase of certain cable systems in June and August of
2007. The amount recorded to goodwill is based on a preliminary
allocation of purchase price and is subject to change based on finalization
of
the fair value allocations.
5. Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of September 30, 2007
and December 31, 2006:
|
|
September
30,
2007
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
Accounts
payable - trade
|
|
$ |
124
|
|
|
$ |
92
|
|
Accrued
capital expenditures
|
|
|
46
|
|
|
|
97
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
534
|
|
|
|
410
|
|
Programming
costs
|
|
|
277
|
|
|
|
268
|
|
Franchise-related
fees
|
|
|
56
|
|
|
|
68
|
|
Compensation
|
|
|
110
|
|
|
|
110
|
|
Other
|
|
|
263
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,410
|
|
|
$ |
1,298
|
|
6. Long-Term
Debt
Long-term
debt consists of the following as of September 30, 2007 and December 31,
2006:
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Principal
Amount
|
|
|
Accreted
Value
|
|
|
Principal
Amount
|
|
|
Accreted
Value
|
|
Long-Term
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter
Communications, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
5.875%
convertible senior notes due November 16, 2009
|
|
$ |
413
|
|
|
$ |
412
|
|
|
$ |
413
|
|
|
$ |
408
|
|
Charter
Communications Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.250%
senior notes due April 1, 2007
|
|
|
--
|
|
|
|
--
|
|
|
|
105
|
|
|
|
105
|
|
8.625%
senior notes due April 1, 2009
|
|
|
--
|
|
|
|
--
|
|
|
|
187
|
|
|
|
187
|
|
10.000%
senior notes due April 1, 2009
|
|
|
88
|
|
|
|
88
|
|
|
|
105
|
|
|
|
105
|
|
10.750%
senior notes due October 1, 2009
|
|
|
63
|
|
|
|
63
|
|
|
|
71
|
|
|
|
71
|
|
9.625%
senior notes due November 15, 2009
|
|
|
37
|
|
|
|
37
|
|
|
|
52
|
|
|
|
52
|
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
10.250%
senior notes due January 15, 2010
|
|
|
18
|
|
|
|
18
|
|
|
|
32
|
|
|
|
32
|
|
11.750%
senior discount notes due January 15, 2010
|
|
|
16
|
|
|
|
16
|
|
|
|
21
|
|
|
|
21
|
|
11.125%
senior notes due January 15, 2011
|
|
|
47
|
|
|
|
47
|
|
|
|
52
|
|
|
|
52
|
|
13.500%
senior discount notes due January 15, 2011
|
|
|
60
|
|
|
|
60
|
|
|
|
62
|
|
|
|
62
|
|
9.920%
senior discount notes due April 1, 2011
|
|
|
51
|
|
|
|
51
|
|
|
|
63
|
|
|
|
63
|
|
10.000%
senior notes due May 15, 2011
|
|
|
69
|
|
|
|
69
|
|
|
|
71
|
|
|
|
71
|
|
11.750%
senior discount notes due May 15, 2011
|
|
|
54
|
|
|
|
54
|
|
|
|
55
|
|
|
|
55
|
|
12.125%
senior discount notes due January 15, 2012
|
|
|
75
|
|
|
|
75
|
|
|
|
91
|
|
|
|
91
|
|
CCH
I Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.125%
senior notes due January 15, 2014
|
|
|
151
|
|
|
|
151
|
|
|
|
151
|
|
|
|
151
|
|
13.500%
senior discount notes due January 15, 2014
|
|
|
581
|
|
|
|
581
|
|
|
|
581
|
|
|
|
581
|
|
9.920%
senior discount notes due April 1, 2014
|
|
|
471
|
|
|
|
471
|
|
|
|
471
|
|
|
|
471
|
|
10.000%
senior notes due May 15, 2014
|
|
|
299
|
|
|
|
299
|
|
|
|
299
|
|
|
|
299
|
|
11.750%
senior discount notes due May 15, 2014
|
|
|
815
|
|
|
|
815
|
|
|
|
815
|
|
|
|
815
|
|
12.125%
senior discount notes due January 15, 2015
|
|
|
217
|
|
|
|
217
|
|
|
|
217
|
|
|
|
216
|
|
CCH
I, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.000%
senior notes due October 1, 2015
|
|
|
3,987
|
|
|
|
4,084
|
|
|
|
3,987
|
|
|
|
4,092
|
|
CCH
II, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250%
senior notes due September 15, 2010
|
|
|
2,198
|
|
|
|
2,192
|
|
|
|
2,198
|
|
|
|
2,190
|
|
10.250% senior notes due October 1, 2013
|
|
|
250
|
|
|
|
261
|
|
|
|
250
|
|
|
|
262
|
|
CCO
Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
floating notes due December 15, 2010
|
|
|
--
|
|
|
|
--
|
|
|
|
550
|
|
|
|
550
|
|
8
3/4% senior notes due November 15, 2013
|
|
|
800
|
|
|
|
795
|
|
|
|
800
|
|
|
|
795
|
|
Credit
facility
|
|
|
350
|
|
|
|
350
|
|
|
|
--
|
|
|
|
--
|
|
Charter
Communications Operating, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.000%
senior second lien notes due April 30, 2012
|
|
|
1,100
|
|
|
|
1,100
|
|
|
|
1,100
|
|
|
|
1,100
|
|
8
3/8% senior second lien notes due April 30, 2014
|
|
|
770
|
|
|
|
770
|
|
|
|
770
|
|
|
|
770
|
|
Credit
facilities
|
|
|
6,615
|
|
|
|
6,615
|
|
|
|
5,395
|
|
|
|
5,395
|
|
|
|
$ |
19,595
|
|
|
$ |
19,691
|
|
|
$ |
18,964
|
|
|
$ |
19,062
|
|
The
accreted values presented above generally represent the principal amount of
the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, certain of the CCH I notes and
CCH II notes issued in exchange for Charter Holdings notes and Charter
convertible senior notes in 2006 and 2005 are recorded for financial reporting
purposes at values different from the current accreted value for legal purposes
and notes indenture purposes (the amount that is currently payable if the debt
becomes immediately due). As of September 30, 2007, the accreted
value of the Company’s debt for legal purposes and notes indenture purposes is
approximately $19.6 billion.
In
March
2007, Charter Operating entered into the Charter Operating Credit Agreement
which provides for a $1.5 billion senior secured revolving line of credit,
a
continuation of the existing $5.0 billion term loan facility (the “Existing Term
Loan”), and a $1.5 billion new term loan facility (the “New Term Loan”), which
was funded in March and April 2007. Borrowings under the Charter
Operating Credit Agreement bear interest at a variable interest rate based
on
either LIBOR or a base rate, plus in either case, an applicable
margin. The applicable margin for LIBOR loans under the New Term Loan
and revolving loans is 2.00% above LIBOR. The revolving line of
credit commitments terminate in March 2013. The Existing Term Loan
and the New Term Loan are subject to amortization at 1% of their initial
principal amount per annum commencing on March 31, 2008 with the remaining
principal amount of the New Term Loan due in March 2014. The Charter
Operating Credit Agreement also modified the quarterly consolidated leverage
ratio to be less restrictive.
In
March
2007, CCO Holdings entered into a credit agreement (the “CCO Holdings Credit
Agreement”) which consisted of a $350 million term loan facility (the “Term
Facility”). The Term Facility matures in September 2014 (the
“Maturity Date”). Borrowings under the CCO Holdings Credit Agreement
bear interest at a variable interest rate
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
based
on
either LIBOR or a base rate plus, in either case, an applicable
margin. The applicable margin for LIBOR term loans is 2.50% above
LIBOR. The CCO Holdings Credit Agreement is secured by the equity
interests of Charter Operating, and all proceeds thereof.
As
part
of the refinancing, the existing $350 million revolving/term credit facility
was
terminated. The refinancing resulted in a loss on extinguishment of
debt of approximately $13 million for the nine months ended September 30, 2007,
included in other income (expense), net on the Company’s condensed consolidated
statements of operations.
In
April
2007, Charter Holdings completed a tender offer, in which $97 million of Charter
Holdings’ notes were accepted in exchange for $100 million of total
consideration, including premiums and accrued interest. In addition,
Charter Holdings redeemed $187 million of its 8.625% senior notes due April
1,
2009 and CCO Holdings redeemed $550 million of its senior floating rate notes
due December 15, 2010. These redemptions closed in April
2007. The redemptions and tender resulted in a loss on extinguishment
of debt of approximately $22 million for the nine months ended September 30,
2007, included in other income (expense), net on the Company’s condensed
consolidated statements of operations.
On
April
1, 2007, $105 million of Charter Holdings 8.25% notes matured and were paid
off
with proceeds from the CCO Holdings Credit Agreement.
In
October 2007, Charter Holdco completed a tender offer, in which $364 million
of
Charter’s 5.875% convertible senior notes due 2009 were accepted for $479
million of Charter’s 6.50% convertible senior notes due 2027. The
6.50% convertible senior notes will have an initial conversion price of $3.41
and initial conversion rate of 293.3868 per $1,000 principal amount of 6.50%
convertible senior notes, with a maturity date of October 1, 2027, subject
to
earlier redemption at the option of the Company or repurchase at the option
of
the holders. The 6.50% convertible senior notes provide the holders
with the right to require Charter to repurchase some or all of the 6.50%
convertible senior notes for cash on October 1, 2012, 2017 and 2022 at a
repurchase price equal to the principal amount plus accrued
interest.
Charter
may redeem the 6.50% convertible senior notes in whole or in part for cash
at
any time at a redemption price equal to 100% of the principal amount, plus
accrued and unpaid interest, if any, but only if for any 20 trading days in
any
30 consecutive trading day period the closing price has exceeded 180% of the
conversion price provided such 30 trading day period begins prior to October
1,
2010, or 150% of the conversion price provided such 30 trading period begins
thereafter up until October 1, 2012, or at the redemption price regardless
of
the closing price of Charter’s Class A common stock
thereafter. Holders who convert any 6.50% convertible senior notes
prior to October 1, 2012 that Charter has called for redemption shall receive,
in addition to the early conversion make whole amount, if applicable, the
present value of the interest on the notes converted that would have been
payable for the period from the redemption date to, but excluding, October
1,
2012.
Charter
expects to record a loss on extinguishment of debt in the fourth quarter of
2007
related to this transaction. Approximately $49 million of Charter’s
5.875% convertible senior notes remain outstanding.
7. Minority
Interest and Equity Interest of Charter Holdco
Charter
is a holding company whose primary assets are a controlling equity interest
in
Charter Holdco, the indirect owner of the Company’s cable systems, and $413
million (at September 30, 2007 and December 31, 2006) of mirror notes payable
by
Charter Holdco to Charter, and which have the same principal amount and terms
as
those of Charter’s 5.875% convertible senior notes. Minority interest
on the Company’s condensed consolidated balance sheets represents Mr. Allen’s,
Charter’s chairman and controlling shareholder, 5.6% preferred membership
interests in CC VIII, LLC ("CC VIII"), an indirect subsidiary of Charter Holdco,
of $196 million and $192 million as of September 30, 2007 and December 31,
2006,
respectively.
In
connection with the issuance of the 6.50% convertible senior notes described
in
Note 6, Charter entered into certain agreements with Charter Holdco to provide
for the issuance of $479 million original principal amount of a 6.50%
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
mirror
convertible senior note due 2027 of Charter Holdco (the “Mirror Note”) to
Charter. These agreements facilitated compliance with the certificate
of incorporation of Charter and the governing documents of Charter Holdco
regarding the required issuance of mirror securities by Charter
Holdco. The terms of the Mirror Note mirror the terms of the 6.50%
convertible senior notes.
8. Share
Lending
Agreement
As
of
September 30, 2007, there were 29.8 million shares of Charter Class A common
stock outstanding that were issued in various offerings as required by the
share
lending agreement, pursuant to which Charter had previously agreed to loan
up to
150 million shares to Citigroup Global Markets Limited
("CGML"). These offerings of Charter’s Class A common stock were
conducted to facilitate transactions by which investors in Charter’s 5.875%
convertible senior notes, issued on November 22, 2004, hedged their investments
in these convertible senior notes. In conjunction with the October
2007 exchange of Charter convertible senior notes, Charter and CGML amended
the
share lending agreement in October 2007 to allow the use of the borrowed shares
to hedge investments in Charter’s 6.50% 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 lent
to
CGML. Charter has no further obligation to issue shares pursuant to
this share lending agreement.
The
issuance of shares pursuant to this share lending agreement 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 fair value of the 29.8
million loaned shares outstanding was approximately $77 million as of September
30, 2007. However, the net effect on shareholders’ deficit of the
shares lent pursuant to the share lending agreement, which includes Charter’s
requirement to lend the shares and the counterparties’ requirement to return the
shares, is de minimis and represents the cash received upon lending of the
shares and is equal to the par value of the common stock to be
issued.
9. Rights
Agreement
In
August
2007, Charter’s Board of Directors adopted a rights plan and declared a dividend
of one preferred share purchase right for each issued and outstanding share
of
Charter’s Class A common stock and Class B common stock (a “Right”). The
dividend was payable to stockholders of record as of August 31, 2007 and
403,219,728 Rights were issued. In connection with the adoption of the rights
plan, the Company increased the authorized Class A common stock and Class B
common stock to 10.5 billion and 4.5 billion shares, respectively. The
terms of the Rights and rights plan were set forth in a Rights Agreement, by
and
between Charter and Mellon Investor Services LLC, dated as of August 14, 2007
(the “Rights Plan” or “Rights Agreement”).
The
Rights Plan was adopted in an effort to protect stockholder value by attempting
to protect against a possible limitation on Charter’s ability to use its net
operating loss carryforwards, which could significantly impair the value of
that
asset. See Note 14. The Rights Plan is intended to act as a
deterrent to any person or group from acquiring 5.0% or more of Charter’s Class
A common stock or any person or group holding 5.0% or more of Charter’s Class A
common stock (“Acquiring Person”) from acquiring more shares without the
approval of Charter’s Board of Directors. The Rights will not be
exercisable until 10 days after a public announcement by Charter that a person
or group has become an Acquiring Person. Except as may be determined
by Charter’s Board of Directors, with the consent of the holders of the majority
of the Class B common stock, all outstanding, valid, and exercisable Rights,
except for those Rights held by any Acquiring Person, will be exchanged for
2.5
shares of Class A common stock and/or Class B common stock, as applicable,
or an
equivalent security. If Charter’s Board of Directors and holders of the
Class B common stock determine that such an exchange does not occur, all holders
of Rights, except any Acquiring Person, may exercise their Rights upon payment
of the purchase price to purchase five shares of Charter’s Class A common stock
and/or Class B common stock, as applicable (or other securities or assets as
determined by Charter’s Board of Directors) at a 50% discount to the then
current market price. The Rights and Rights Agreement will expire on
December 31, 2008, if not terminated earlier.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
10. Comprehensive
Loss
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 income (loss). Comprehensive loss was
$480 million and $134 million for the three months ended September 30, 2007
and
2006, respectively, and $1.2 billion and $975 million for the nine months ended
September 30, 2007 and 2006, respectively.
11. Accounting
for Derivative Instruments and Hedging Activities
The
Company uses interest rate derivative instruments, including but not limited
to
interest rate swap agreements and interest rate collar agreements (collectively
referred to herein as interest rate agreements) to manage its interest costs
and
reduce the Company’s exposure to increases in floating interest
rates. The Company’s policy is to manage its exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within
a
targeted range. Using interest rate swap agreements, the Company has
agreed to exchange, at specified intervals through 2013, the difference between
fixed and variable interest amounts calculated by reference to agreed-upon
notional principal amounts.
The
Company’s hedging policy does not permit it to 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 each of the three months ended September
30, 2007 and 2006, other income (expense), net includes $0, and for the
nine months ended September 30, 2007 and 2006, other income (expense), net
includes $0 and gains of $2 million, respectively, which represent cash flow
hedge ineffectiveness on interest rate hedge agreements. This
ineffectiveness arises from differences between critical terms of the agreements
and the related hedged obligations.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating rate
debt
obligations, and that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive income (loss). For the
three months ended September
30, 2007 and 2006, losses of $73 million and $1 million, respectively,
and for the nine months ended September 30, 2007 and 2006, losses of $25 million
and $1 million, respectively, related to derivative instruments designated
as
cash flow hedges, were recorded in accumulated other comprehensive income
(loss). The amounts are subsequently reclassified as an increase or
decrease to interest expense in the same periods 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 other income (expense) in the Company’s condensed consolidated
statements of operations. For the three months ended September
30, 2007 and 2006, other income (expense), net, includes losses of $21
million and $3 million, respectively, and for the nine months ended September
30, 2007 and 2006, other income (expense), net includes losses of $16 million
and gains of $6 million, respectively, resulting from interest rate derivative
instruments not designated as hedges.
As
of
September
30, 2007 and December 31, 2006, the Company had outstanding $4.3 billion
and $1.7 billion, respectively, in notional amounts of interest rate
swaps. 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.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
Certain
provisions of the Company’s 5.875% convertible senior notes due 2009 are
considered embedded derivatives for accounting purposes and are 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 months ended September 30,
2007 and 2006, the Company recognized gains of $7 million and $0, respectively,
and for the nine months ended September 30, 2007 and 2006, the Company
recognized losses of $2 million and gains of $2 million,
respectively. The losses resulted in an increase in interest expense
related to these derivatives and the gains resulted in a decrease in interest
expense. At September
30, 2007 and December 31, 2006, $6 million and $12 million, respectively,
is recorded in accounts payable and accrued expenses relating to the short-term
portion of these derivatives and $8 million and $0, respectively, is recorded
in
other long-term liabilities related to the long-term portion.
12. Other
Operating Expenses, Net
Other
operating expenses, net consist of the following for the three and nine months
ended September 30, 2007 and 2006:
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on sale of assets, net
|
|
$ |
2
|
|
|
$ |
2
|
|
|
$ |
5
|
|
|
$ |
2
|
|
Special
charges, net
|
|
|
6
|
|
|
|
2
|
|
|
|
8
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8
|
|
|
$ |
4
|
|
|
$ |
13
|
|
|
$ |
14
|
|
Special
charges, net for the three and nine months ended September 30, 2007 and 2006,
primarily represent severance associated with the closing of call centers and
divisional restructuring.
13. Other
Income
(Expense), Net
Other
income (expense), net consists of the following for the three and nine months
ended September 30, 2007 and 2006:
|
|
Three
Months
Ended
September 30,
|
|
|
Nine
Months
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on derivative instruments and
hedging
activities, net
|
|
$ |
(21 |
) |
|
$ |
(3 |
) |
|
$ |
(16 |
) |
|
$ |
8
|
|
Gain
(loss) on extinguishment of debt
|
|
|
--
|
|
|
|
128
|
|
|
|
(35 |
) |
|
|
101
|
|
Minority
interest
|
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(3 |
) |
Gain
on investments
|
|
|
2
|
|
|
|
8
|
|
|
|
1
|
|
|
|
12
|
|
Other,
net
|
|
|
(1 |
) |
|
|
--
|
|
|
|
(1 |
) |
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(21 |
) |
|
$ |
131
|
|
|
$ |
(55 |
) |
|
$ |
121
|
|
The
Charter Operating refinancing in April 2006 resulted in a loss on extinguishment
of debt for the nine months ended September 30, 2006 of approximately $27
million. The exchange in September 2006 of Charter Holdings notes for CCH
I and
CCH II notes resulted in a gain on extinguishment of debt for the three and
nine
months ended September 30, 2006 of approximately $108 million. The exchange
in
September 2006 of Charter convertible senior notes for a combination of cash,
Charter common stock, and CCH II notes resulted in a gain on extinguishment
of
debt for the three and nine months ended September 30, 2006 of approximately
$20
million.
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
14. Income
Taxes
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are
generally limited liability companies that are not subject to income
tax. However, certain of these limited liability companies are
subject to state income tax. In addition, the subsidiaries that are
corporations are subject to federal and state income tax. All of the
remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter, Charter
Investment,
Inc. (“CII”) and Vulcan Cable III Inc. ("Vulcan
Cable"). Charter is responsible for its allocated share of taxable
income or loss of Charter Holdco in accordance with the Charter Holdco limited
liability company agreement (the "LLC Agreement") and partnership tax rules
and
regulations. Charter also records financial statement deferred tax
assets and liabilities related to its investment in Charter Holdco.
During
the three and nine months ended September 30, 2007, the Company recorded $41
million and $169 million of income tax expense, respectively. During
the three and nine months ended September 30, 2006, the Company recorded $64
million and $128 million of income tax expense, respectively. Income
tax expense of $0 and $4 million was associated with discontinued operations
for
the three and nine months ended September 30, 2006, respectively. Income tax
expense is recognized through increases in the deferred tax liabilities related
to Charter’s investment in Charter Holdco, as well as for certain of Charter’s
subsidiaries, current federal and state income tax expense and increases to
the
related deferred tax liabilities.
As
of
September 30, 2007 and December 31, 2006, the Company had net deferred income
tax liabilities of approximately $629 million and $514 million,
respectively. Included in these deferred tax liabilities is
approximately $230 million and $200 million of deferred tax liabilities at
September 30, 2007 and December 31, 2006, respectively, relating to certain
indirect subsidiaries of Charter Holdco that file separate income tax returns.
The remainder of the Company’s deferred tax liability arises from Charter’s
investment in Charter Holdco, and is largely attributable to the
characterization of franchises for financial reporting purposes as
indefinite-lived.
As
of
September 30, 2007 and December 31, 2006, the Company had approximately $7.6
billion and $6.7 billion, respectively, of tax net operating loss carryforwards,
resulting in gross deferred tax assets of $3.0 billion and $2.7 billion,
respectively, expiring in years 2007 through 2027. Such tax net
operating loss carryforwards accumulate and can be used to offset any of our
future taxable income. However, due to uncertainties in projected
future taxable income, valuation allowances of $2.6 billion and $2.2 billion
as
of September 30, 2007 and December 31, 2006, respectively, have been established
against these gross deferred tax assets except for deferred benefits available
to offset specific deferred tax liabilities. The Company recorded
approximately $341 million of additional gross deferred tax assets during the
nine months ended September 30, 2007, relating to net operating loss
carryforwards, but recorded a valuation allowance with respect to this amount
because of the uncertainty of the ability to realize a benefit from the
Company’s carryforwards in the future. The Company also had deferred
tax assets of approximately $2.0 billion as of September 30, 2007 and December
31, 2006, representing financial losses in excess of the tax losses that
were allocated to Charter from Charter Holdco. Valuation allowances
of $2.0 billion as of September 30, 2007 and December 31, 2006, existed with
respect to these deferred tax assets.
The
amount of any potential benefit from the Company’s tax net operating losses is
dependent on: (1) Charter and its subsidiaries’ ability to generate future
taxable income and (2) the unexpired amount of net operating loss carryforwards
available to offset amounts payable on such taxable income. Any
future “ownership changes” of Charter's common stock, 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 future taxable income. Although the
Company has adopted the Rights Plan as an attempt to protect against an
“ownership change,” certain transactions and the timing of such transactions
could cause such an ownership change including, but not limited to, the
following: The issuance
of shares of common stock upon future conversion of Charter’s convertible senior
notes; reacquisition of the shares borrowed under the share lending agreement
by
Charter (of which 29.8 million remain outstanding as of
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
September
30, 2007); 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 an exchange by
Mr. Allen or his affiliates, directly or indirectly, of membership units of
Charter Holdco into CCI common stock). Many of the foregoing
transactions, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond management’s control.
If
certain exchanges, as described above, were to take place, Charter would likely
record for financial reporting purposes additional deferred tax liability
related to any increased interest in Charter Holdco.
Charter
Holdco is currently under examination by the Internal Revenue Service for the
tax years ending December 31, 2002 through 2005. In addition, Charter
is under
examination by the Internal Revenue Service for the tax year ended December
31,
2004. Management does not expect the results of these
examinations to have a material adverse effect on the Company’s consolidated
financial condition or results of operations.
In
January 2007, the Company adopted FIN 48, Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109, which
provides criteria for the recognition, measurement, presentation and disclosure
of uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. The adoption of FIN 48 resulted in a
deferred tax benefit of $56 million related to a settlement with Mr. Allen
regarding ownership of the CC VIII preferred membership interests, which was
recognized as a cumulative adjustment to the accumulated deficit in the first
quarter of 2007.
15. Contingencies
The
Company is a defendant or co-defendant in several unrelated lawsuits claiming
infringement of various patents relating to various aspects of its
businesses. Other industry participants are also defendants in
certain of these cases, and, in many cases, the Company expects that any
potential liability would be the responsibility of its equipment vendors
pursuant to applicable contractual indemnification provisions. In the event
that
a court ultimately determines that the Company infringes on any intellectual
property rights, it may be subject to substantial damages and/or an injunction
that could require the Company or its vendors to modify certain products
and services the Company offers to its subscribers. While the Company
believes the lawsuits are without merit and intends to defend the actions
vigorously, the lawsuits could be material to the Company’s consolidated results
of operations of any one period, and no assurance can be given that any
adverse outcome would not be material to the Company’s consolidated financial
condition, results of operations, or liquidity.
Charter
is a party to other lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal
matters pending against the Company or its subsidiaries cannot be predicted,
and
although such lawsuits and claims are not expected individually to have a
material adverse effect on the Company’s consolidated financial condition,
results of operations, or liquidity, such lawsuits could have, in the aggregate,
a material adverse effect on the Company’s consolidated financial condition,
results of operations, or liquidity.
16. Stock
Compensation Plans
The
Company has stock option plans (the “Plans”) which provide for the grant of
non-qualified stock options, stock appreciation rights, dividend equivalent
rights, performance units and performance shares, share awards, phantom stock
and/or restricted stock (not to exceed 20.0 million shares of Charter Class
A
common stock), as each term is defined in the Plans. Employees,
officers, consultants and directors of the Company and its subsidiaries and
affiliates are eligible to receive grants under the Plans. Options
granted generally vest over four years from the grant date, with 25% generally
vesting on the anniversary of the grant date and ratably
thereafter. Generally, options expire 10 years from the grant
date. The Plans allow for the issuance of up to a total of 90.0
million shares of Charter Class A common stock (or units convertible into
Charter Class A common stock). During the three and nine months ended
September 30, 2007, Charter granted 0.1 million and 4.0 million stock options,
respectively, and 2.6 million and 9.5 million performance units, respectively,
under Charter’s Long-Term Incentive Program. During the three and
nine months ended September 30, 2007, Charter issued 2.5 million and 2.8 million
shares of restricted Class A common
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
stock. The
Company recorded $5 million and $3 million of stock compensation expense for
the
three months ended September 30, 2007 and 2006, respectively, and $15 million
and $10 million for the nine months ended September 30, 2007 and 2006, which
is
included in selling, general, and administrative expense.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
General
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets
at
September 30, 2007 are the 54% controlling common equity interest (52% for
accounting purposes) in Charter Communications Holding Company, LLC ("Charter
Holdco") and "mirror" notes that 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 residential and commercial customers traditional cable video
programming (analog and digital video, which we refer to as “video service”),
high-speed Internet services, advanced broadband cable services (such as Charter
OnDemand™ video service (“OnDemand”), high definition television service, and
digital video recorder (“DVR”) service) and, in many of our markets, telephone
service. We sell our cable video programming, high-speed Internet,
telephone, 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 September 30,
2007 and 2006:
|
|
Approximate
as of
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
(a)
|
|
|
2006
(a)
|
|
|
|
|
|
|
|
|
Video
Cable Services:
|
|
|
|
|
|
|
Analog
Video:
|
|
|
|
|
|
|
Residential
(non-bulk) analog video customers (b)
|
|
|
5,073,900
|
|
|
|
5,216,900
|
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
|
|
273,900
|
|
|
|
259,700
|
|
Total
analog video customers (b)(c)
|
|
|
5,347,800
|
|
|
|
5,476,600
|
|
|
|
|
|
|
|
|
|
|
Digital
Video:
|
|
|
|
|
|
|
|
|
Digital
video customers (d)
|
|
|
2,882,900
|
|
|
|
2,767,900
|
|
|
|
|
|
|
|
|
|
|
Non-Video
Cable Services:
|
|
|
|
|
|
|
|
|
Residential
high-speed Internet customers (e)
|
|
|
2,639,200
|
|
|
|
2,343,200
|
|
Telephone
customers (f)
|
|
|
802,600
|
|
|
|
339,600
|
|
After
giving effect to sales of cable systems in January 2007 and May 2007, and the
acquisition of cable systems in August 2007, analog video customers, digital
video customers, high-speed Internet customers and telephone customers would
have been 5,442,300, 2,753,700, 2,342,900, and 339,600, respectively, as of
September 30, 2006.
(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 September 30, 2007 and
2006, "customers" include approximately 33,800 and 43,500 persons
whose accounts were over 60 days past due in payment, approximately
5,700
and 8,400 persons whose accounts were over 90 days past due in payment,
and approximately 2,100 and 5,100 of which were over 120 days past
due in
payment, respectively.
|
(b)
|
"Analog
video customers" include all customers who receive video
services.
|
(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 used
consistently.
|
(d)
|
"Digital
video customers" include all households that have one or more digital
set-top boxes or cable cards
deployed.
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers
who
subscribe to our high-speed Internet
service.
|
(f)
|
"Telephone
customers" include all customers receiving telephone
service.
|
Overview
For
the
three months ended September 30, 2007 and 2006, our operating income from
continuing operations was $107 million and $66 million, respectively, and for
the nine months ended September 30, 2007 and 2006, our operating income from
continuing operations was $463 million and $204 million,
respectively. We had operating margins of 7% and 5% for the three
months ended September 30, 2007 and 2006, respectively, and 10% and 5% for
the
nine months ended September 30, 2007 and 2006, respectively. The
increase in operating income from continuing operations and operating margins
for the three and nine months ended September 30, 2007 compared to the three
and
nine months ended September 30, 2006 was principally due to revenues increasing
at a faster rate than expenses, reflecting increased operational efficiencies,
improved geographic footprint, and benefits from improved third-party contracts,
coupled with a decrease of $103 million in asset impairment charges during
the
nine months ended September 30, 2007 compared to the nine months ended September
30, 2006.
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
expenses and interest expenses we incur because of our high amounts of debt,
and
depreciation expenses resulting from the capital investments we have made and
continue to make in our cable properties. We expect that these
expenses will remain significant.
Sales
of Assets
In
2006,
we sold certain cable television systems serving approximately 356,000 analog
video customers in 1) West Virginia and Virginia to Cebridge Connections, Inc.
(the “Cebridge Transaction”); 2) Illinois and Kentucky to
Telecommunications Management, LLC, doing business as New Wave Communications
(the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico and Utah to
Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total
sales price of approximately $971 million. We used the net proceeds
from the asset sales to reduce borrowings, but not commitments, under the
revolving portion of our credit facilities. These cable systems met
the criteria for assets held for sale. As such, the assets were
written down to fair value less estimated costs to sell, resulting in asset
impairment charges during the nine months ended September 30, 2006 of
approximately $99 million related to the New Wave Transaction and the Orange
Transaction. We determined that the West Virginia and Virginia cable
systems comprise operations and cash flows that for financial reporting purposes
meet the criteria for discontinued operations. Accordingly, the
results of operations for the West Virginia and Virginia cable systems have
been
presented as discontinued operations, net of tax, for the three and nine months
ended September 30, 2006, including a gain of $200 million on the sale of cable
systems.
Also,
during the three months ended September 30, 2007 and 2006, we recorded asset
impairment charges of $56 million and $60 million, respectively, related to
other cable systems meeting the criteria of assets held for sale during the
respective periods.
Critical
Accounting Policies and Estimates
For
a
discussion of our critical accounting policies and the means by which we develop
estimates therefore, see "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations" in our 2006 Annual Report on
Form
10-K.
RESULTS
OF OPERATIONS
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 data):
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$ |
1,525
|
|
|
|
100 |
% |
|
$ |
1,388
|
|
|
|
100 |
% |
|
$ |
4,449
|
|
|
|
100 |
% |
|
$ |
4,091
|
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(excluding depreciation and amortization)
|
|
|
679
|
|
|
|
45 |
% |
|
|
615
|
|
|
|
44 |
% |
|
|
1,957
|
|
|
|
44 |
% |
|
|
1,830
|
|
|
|
45 |
% |
Selling,
general and administrative
|
|
|
341
|
|
|
|
22 |
% |
|
|
309
|
|
|
|
22 |
% |
|
|
961
|
|
|
|
22 |
% |
|
|
860
|
|
|
|
21 |
% |
Depreciation
and amortization
|
|
|
334
|
|
|
|
22 |
% |
|
|
334
|
|
|
|
24 |
% |
|
|
999
|
|
|
|
23 |
% |
|
|
1,024
|
|
|
|
25 |
% |
Asset
impairment charges
|
|
|
56
|
|
|
|
4 |
% |
|
|
60
|
|
|
|
5 |
% |
|
|
56
|
|
|
|
1 |
% |
|
|
159
|
|
|
|
4 |
% |
Other
operating expenses, net
|
|
|
8
|
|
|
|
--
|
|
|
|
4
|
|
|
|
--
|
|
|
|
13
|
|
|
|
--
|
|
|
|
14
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,418
|
|
|
|
93 |
% |
|
|
1,322
|
|
|
|
95 |
% |
|
|
3,986
|
|
|
|
90 |
% |
|
|
3,887
|
|
|
|
95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income from continuing operations
|
|
|
107
|
|
|
|
7 |
% |
|
|
66
|
|
|
|
5 |
% |
|
|
463
|
|
|
|
10 |
% |
|
|
204
|
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME AND (EXPENSES):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(452 |
) |
|
|
|
|
|
|
(466 |
) |
|
|
|
|
|
|
(1,387 |
) |
|
|
|
|
|
|
(1,409 |
) |
|
|
|
|
Other
income (expense), net
|
|
|
(21 |
) |
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
(55 |
) |
|
|
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(473 |
) |
|
|
|
|
|
|
(335 |
) |
|
|
|
|
|
|
(1,442 |
) |
|
|
|
|
|
|
(1,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(366 |
) |
|
|
|
|
|
|
(269 |
) |
|
|
|
|
|
|
(979 |
) |
|
|
|
|
|
|
(1,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX EXPENSE
|
|
|
(41 |
) |
|
|
|
|
|
|
(64 |
) |
|
|
|
|
|
|
(169 |
) |
|
|
|
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(407 |
) |
|
|
|
|
|
|
(333 |
) |
|
|
|
|
|
|
(1,148 |
) |
|
|
|
|
|
|
(1,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM DISCONTINUED OPERATIONS, NET OF TAX
|
|
|
--
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
--
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(407 |
) |
|
|
|
|
|
$ |
(133 |
) |
|
|
|
|
|
$ |
(1,148 |
) |
|
|
|
|
|
$ |
(974 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER COMMON SHARE, BASIC AND DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(1.10 |
) |
|
|
|
|
|
$ |
(1.02 |
) |
|
|
|
|
|
$ |
(3.12 |
) |
|
|
|
|
|
$ |
(3.77 |
) |
|
|
|
|
Net
loss
|
|
$ |
(1.10 |
) |
|
|
|
|
|
$ |
(0.41 |
) |
|
|
|
|
|
$ |
(3.12 |
) |
|
|
|
|
|
$ |
(3.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
369,239,742
|
|
|
|
|
|
|
|
326,960,632
|
|
|
|
|
|
|
|
367,671,479
|
|
|
|
|
|
|
|
320,730,698
|
|
|
|
|
|
Revenues. Average
monthly revenue per analog video customer increased to $95 for the three months
ended September 30, 2007 from $83 for the three months ended September 30,
2006
and increased to $92 for the nine months ended September 30, 2007 from $81
for
the nine months ended September 30, 2006, primarily as a result of increases
in
customers purchasing combinations of digital, high-speed Internet, and telephone
services, incremental revenues from OnDemand, DVR, high-definition television
services, and rate adjustments. Average monthly revenue per analog
video customer represents total quarterly revenue, divided by the number of
respective months, 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 September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
over 2006
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
845
|
|
|
|
55 |
% |
|
$ |
836
|
|
|
|
60 |
% |
|
$ |
9
|
|
|
|
1 |
% |
High-speed
Internet
|
|
|
320
|
|
|
|
21 |
% |
|
|
267
|
|
|
|
19 |
% |
|
|
53
|
|
|
|
20 |
% |
Telephone
|
|
|
94
|
|
|
|
6 |
% |
|
|
37
|
|
|
|
3 |
% |
|
|
57
|
|
|
|
154 |
% |
Advertising
sales
|
|
|
77
|
|
|
|
5 |
% |
|
|
81
|
|
|
|
6 |
% |
|
|
(4 |
) |
|
|
(5 |
%) |
Commercial
|
|
|
87
|
|
|
|
6 |
% |
|
|
78
|
|
|
|
6 |
% |
|
|
9
|
|
|
|
12 |
% |
Other
|
|
|
102
|
|
|
|
7 |
% |
|
|
89
|
|
|
|
6 |
% |
|
|
13
|
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,525
|
|
|
|
100 |
% |
|
$ |
1,388
|
|
|
|
100 |
% |
|
$ |
137
|
|
|
|
10 |
% |
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
over 2006
|
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Revenues
|
|
|
%
of
Revenues
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
2,542
|
|
|
|
57 |
% |
|
$ |
2,520
|
|
|
|
62 |
% |
|
$ |
22
|
|
|
|
1 |
% |
High-speed
Internet
|
|
|
926
|
|
|
|
21 |
% |
|
|
773
|
|
|
|
19 |
% |
|
|
153
|
|
|
|
20 |
% |
Telephone
|
|
|
236
|
|
|
|
5 |
% |
|
|
86
|
|
|
|
2 |
% |
|
|
150
|
|
|
|
174 |
% |
Advertising
sales
|
|
|
216
|
|
|
|
5 |
% |
|
|
228
|
|
|
|
6 |
% |
|
|
(12 |
) |
|
|
(5 |
%) |
Commercial
|
|
|
251
|
|
|
|
6 |
% |
|
|
227
|
|
|
|
5 |
% |
|
|
24
|
|
|
|
11 |
% |
Other
|
|
|
278
|
|
|
|
6 |
% |
|
|
257
|
|
|
|
6 |
% |
|
|
21
|
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,449
|
|
|
|
100 |
% |
|
$ |
4,091
|
|
|
|
100 |
% |
|
$ |
358
|
|
|
|
9 |
% |
Video
revenues consist primarily of revenues from analog and digital video services
provided to our non-commercial customers. Analog video customers
decreased by 128,800 customers from September 30, 2006, 34,300 of which was
related to asset sales, net of acquisitions, compared to September 30,
2007. Digital video customers increased by 115,000, offset by a loss
of 14,200 customers related to asset sales, net of acquisitions. The
increase in video revenues is attributable to the following (dollars in
millions):
|
|
Three
months ended
September
30, 2007
compared
to
three
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2007
compared
to
nine
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Rate
adjustments and incremental video services
|
|
$ |
16
|
|
|
$ |
59
|
|
Increase
in digital video customers
|
|
|
13
|
|
|
|
45
|
|
Decrease
in analog video customers
|
|
|
(9 |
) |
|
|
(27 |
) |
System
sales, net of acquisitions
|
|
|
(11 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
9
|
|
|
$ |
22
|
|
High-speed
Internet customers grew by 296,000 customers, offset by a loss of 300 customers
related to asset sales, net of acquisitions, from September 30, 2006 to
September 30, 2007. The increase in high-speed Internet revenues from
our non-commercial customers is attributable to the following (dollars in
millions):
|
|
Three
months ended
September
30, 2007
compared
to
three
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2007
compared
to
nine
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Increase
in high-speed Internet customers
|
|
$ |
39
|
|
|
$ |
114
|
|
Rate
adjustments and service upgrades
|
|
|
16
|
|
|
|
49
|
|
System
sales, net of acquisitions
|
|
|
(2 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
53
|
|
|
$ |
153
|
|
Revenues
from telephone services increased primarily as a result of an increase of
463,000 telephone customers from September 30, 2006 to September 30,
2007.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers, and other vendors. Advertising sales revenues
decreased primarily as a result of a decrease in national advertising sales,
including political advertising, and as a result of decreases in advertising
sales revenues from programmers. For the three months ended September
30, 2007 and 2006, we received $1 million and $3 million, and for the nine
months ended September 30, 2007 and 2006, we received $9 million and $13
million, in advertising sales revenues from programmers,
respectively.
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of an
increase in commercial video and high-speed Internet revenues, offset by
decreases of $2 million and $7 million related to asset sales, net of
acquisitions, for the three months and nine months ended September 30, 2007,
respectively.
Other
revenues consist of franchise fees, equipment rental, customer installations,
home shopping, dial-up Internet service, late payment fees, wire maintenance
fees and other miscellaneous revenues. For the three months ended
September 30, 2007 and 2006, franchise fees represented approximately 42% and
51%, respectively, of total other revenues. For the nine months ended
September 30, 2007 and 2006, franchise fees represented approximately 47% and
52%, respectively, of total other revenues. The increase in other
revenues was primarily the result of increases in Universal Service Fund
revenues, wire maintenance fees, and late payment fees.
Operating
expenses. The increase in operating
expenses is attributable to the following (dollars in millions):
|
|
Three
months ended
September
30, 2007
compared
to
three
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2007
compared
to
nine
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Programming
costs
|
|
$ |
30
|
|
|
$ |
77
|
|
Labor
costs
|
|
|
13
|
|
|
|
30
|
|
Costs
of providing telephone services
|
|
|
9
|
|
|
|
30
|
|
Maintenance
costs
|
|
|
6
|
|
|
|
14
|
|
Universal
Service Fund fees
|
|
|
11
|
|
|
|
11
|
|
Other,
net
|
|
|
4
|
|
|
|
9
|
|
System
sales
|
|
|
(9 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
64
|
|
|
$ |
127
|
|
Programming
costs were approximately $396 million and $371 million, representing 58% and
60%
of total operating expenses for the three months ended September 30, 2007 and
2006, respectively, and were approximately $1.2 billion and $1.1 billion,
representing 60% and 62% of total operating expenses for the nine months ended
September 30, 2007 and 2006, respectively. Programming costs consist
primarily of costs paid to programmers for analog, premium, digital, OnDemand,
and pay-per-view programming. The increase in programming costs is
primarily a result of contractual rate increases and a decrease in favorable
programming contract settlements of $5 million and $3 million in the three
and
nine months ended September 30, 2007. Programming costs were also
offset by the amortization of payments received from programmers in support
of
launches of new channels of $6 million for each of the three months ended
September 30, 2007 and 2006 and $16 million and $17 million for the nine months
ended September 30, 2007 and 2006, respectively. System sales, net of
acquisitions, include decreases in expense of approximately $5 million and
$26
million, respectively, for the three and nine months ended September 30, 2007
related to programming. We expect programming expenses to continue to
increase due to a variety of factors, including annual increases imposed by
programmers, and additional programming, including high-definition and OnDemand
programming, being provided to our customers.
Selling,
general and administrative expenses. The increase in
selling, general and administrative expenses is attributable to the following
(dollars in millions):
|
|
Three
months ended
September
30, 2007
compared
to
three
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
Nine
months ended
September
30, 2007
compared
to
nine
months ended
September
30, 2006
Increase
/ (Decrease)
|
|
|
|
|
|
|
|
|
Customer
care costs
|
|
$ |
14
|
|
|
$ |
51
|
|
Marketing
costs
|
|
|
5
|
|
|
|
40
|
|
Employee
costs
|
|
|
6
|
|
|
|
21
|
|
Other,
net
|
|
|
10
|
|
|
|
2
|
|
System
sales, net of acquisitions
|
|
|
(3 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
32
|
|
|
$ |
101
|
|
Depreciation
and amortization. Depreciation and amortization
expense decreased by $0 and $25 million for the three and nine months ended
September 30, 2007 compared to September 30, 2006, respectively, and was
primarily the result of systems sales and certain assets becoming fully
depreciated offset by depreciation on capital expenditures.
Asset
impairment charges. Asset impairment charges for the
three and nine months ended September 30, 2007 and 2006 represent the write-down
of assets related to cable asset sales to fair value less costs to sell. See Note 3 to
the condensed consolidated financial statements.
Other
operating expenses, net. For the three months ended
September 30, 2007 compared to September 30, 2006, the increase in other
operating expenses, net is attributable to a $4 million increase in special
charges. For the nine months ended September 30, 2007 compared to the
nine months ended September 30, 2006, the decrease in other operating expenses,
net is attributable to a $4 million decrease in special charges, offset by
a $3
million increase in losses on sales of assets. For more information,
see Note 12 to the accompanying condensed consolidated financial statements
contained in “Item 1. Financial Statements.”
Interest
expense, net. For the three months ended September
30, 2007 compared to the three months ended September 30, 2006, net interest
expense decreased by $14 million, which was a result of a decrease in our
average borrowing rate from 9.5% in the third quarter of 2006 to 9.2% in the
third quarter of 2007. Average debt outstanding for the third
quarter of 2007 and 2006 was $19.3 billion. For the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006, net
interest expense decreased by $22 million, which was a result of a decrease
in
our average debt outstanding from $19.5 billion for the nine months ended
September 30, 2006 to $19.2 billion for the nine months ended September 30,
2007, respectively, as well as a decrease in our average borrowing rate from
9.5% for the nine months ended September 30, 2006 to 9.2% for the nine months
ended September 30, 2007, respectively.
Other
income (expense), net. The decrease in other income is
attributable to the following (dollars in millions):
|
|
Three
months ended
September
30, 2007
compared
to
three
months ended
September
30, 2006
|
|
|
Nine
months ended
September
30, 2007
compared
to
nine
months ended
September
30, 2006
|
|
|
|
|
|
|
|
|
Increase
in loss on derivative instruments
and
hedging activities, net
|
|
$ |
(18 |
) |
|
$ |
(24 |
) |
Decrease
in gain on extinguishment of debt
|
|
|
(128 |
) |
|
|
(136 |
) |
(Increase)
decrease in minority interest
|
|
|
1
|
|
|
|
(1 |
) |
Decrease
in gain on investments
|
|
|
(6 |
) |
|
|
(11 |
) |
Other,
net
|
|
|
(1 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
(152 |
) |
|
$ |
(176 |
) |
For
more
information, see Note 13 to the accompanying condensed consolidated financial
statements contained in “Item 1. Financial Statements.”
Income
tax expense. Income tax expense was 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
subsidiaries. Income tax expense was offset by adjustments for
divestitures and impairments for a benefit of $14 million and an expense of
$5
million in the three and nine months ended September 30, 2007, respectively,
and
a benefit of $1 million and $23 million in the three and nine months ended
September 30, 2006, respectively.
Income
from discontinued operations, net of tax. Income from
discontinued operations, net of tax, decreased in the three and nine months
ended September 30, 2007 compared to the corresponding prior year periods,
due
to the sale of the West Virginia and Virginia systems in July 2006. For
more information, see Note 3 to the accompanying condensed consolidated
financial statements contained in “Item 1. Financial
Statements.”
Net
loss. Net loss increased by $274 million, or 206%,
for the three months ended September 30, 2007 compared to the three months
ended
September 30, 2006 and by $174 million, or 18%, for the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006 as
a
result of the factors described above. The impact to net loss in the three
and
nine months ended September 30, 2007 of asset impairment charges and gains
(losses) on extinguishment of debt, was to increase net loss by $42 million
and
$96 million, respectively. The impact to net loss in the three and
nine months ended September 30, 2006 of the asset impairment charges, gain
on
sale of assets, and gains (losses) on extinguishment of debt was to decrease
net
loss by $269 million and $165 million, respectively.
Loss
per common share. During the three months ended
September 30, 2007 compared to the three months ended September 30, 2006, net
loss per common share increased by $0.69, or 168%, and during the nine months
ended September 30, 2007, net loss per common share increased by $0.08, or
3%,
compared to the nine months ended September 30, 2006, 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.
We
have
significant amounts of debt. Our long-term financing as of September
30, 2007 totaled $19.7 billion, consisting of $7.0 billion of credit facility
debt, $12.3 billion accreted value of high-yield notes, and $412 million
accreted value of convertible senior notes. For the remainder of
2007, none of our debt matures. As of September 30, 2007, our 2008
and 2009 debt maturities totaled $65 million and $666 million,
respectively. Of the debt
scheduled
to mature in 2009, $364 million was exchanged in October 2007 for notes maturing
in 2027, subject to earlier mandatory redemption at the election of the holders
in 2012 and at each five-year anniversary. In 2010 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
these 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 nine months ended September
30, 2007, we generated $327 million of net cash flows from operating activities
after paying cash interest of $1.2 billion. In addition, we used $890
million for purchases of property, plant and equipment. Finally, we
had net cash flows provided by financing activities of $607 million, as a result
of refinancing transactions completed during the period. 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 based on 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 believe future asset sales to be 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
through 2008. We believe that cash flows from operating activities and
amounts available under our credit facilities may not be sufficient to fund
our
operations and satisfy our interest and principal repayment obligations in
2009,
and will not be sufficient to fund such needs in 2010 and beyond. We
continue to work with our financial advisors concerning our approach to
addressing liquidity, debt maturities and our overall balance sheet
leverage.
Credit
Facility Availability
Our
ability to operate depends upon, among other things, our continued access to
capital, including credit under the Charter Communications Operating, LLC
(“Charter Operating”) credit facilities. The Charter Operating credit
facilities, along with our indentures and the CCO Holdings, LLC (“CCO Holdings”)
credit facility, contain certain restrictive covenants, some of which require
us
to maintain specified leverage ratios and meet financial tests and to provide
annual audited financial statements with an unqualified opinion from our
independent auditors. As of September 30, 2007, 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 September 30, 2007, our potential availability under
Charter Operating’s revolving credit facility totaled approximately $1.3
billion, none of which was limited by covenant
restrictions. Continued access to our credit facilities is subject to
our remaining in compliance with these covenants, including covenants tied
to
our leverage ratio. If any events of non-compliance occur, 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 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.
Limitations
on Distributions
As
long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. In October
2007, Charter Holdco completed an exchange offer, in which $364 million of
Charter’s 5.875% convertible senior notes due November 2009 were exchanged for
$479 million of Charter’s 6.50% convertible senior
notes. Approximately $49 million of Charter’s 5.875% convertible
senior notes remain outstanding, net of $814 million of the 5.875% convertible
senior notes now held by Charter Holdco. Charter’s ability to make
interest payments on its convertible senior notes and to repay the outstanding
principal of its convertible senior notes will depend on its ability to raise
additional capital and/or on receipt of payments or distributions from Charter
Holdco and its subsidiaries. As of September 30, 2007, Charter Holdco was
owed $123 million in intercompany loans from Charter Communications Operating,
LLC and had $44 million in cash, which amounts were available to pay interest
and principal on Charter's convertible senior notes. In addition, Charter
has $25 million of U.S. government securities pledged as security for the
semi-annual interest payments on Charter’s 5.875% convertible senior notes
scheduled in 2007. As long as Charter Holdco continues to hold the
$814 million of Charter’s 5.875% convertible senior notes, Charter Holdco will
receive interest payments from the government securities pledged for Charter’s
5.875%
convertible senior notes. The remaining amount of interest payments
expected to be received by Charter Holdco in November 2007 is approximately
$24
million, which may be available to pay semiannual interest on the outstanding
principal amount of $49 million of Charter’s 5.875% convertible senior notes and
$479 million of Charter’s 6.50% convertible senior notes, although Charter
Holdco may use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted
under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II, LLC (“CCH II”) notes, CCO Holdings notes, Charter Operating
notes, and under the CCO Holdings credit facilities, unless there is no default
under the applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended September 30, 2007, there was no
default under any of these indentures or credit facilities. However,
certain of our subsidiaries did not meet their applicable leverage ratio tests
based on September 30, 2007 financial results. As a result,
distributions from certain of our subsidiaries to their parent companies will
continue to be restricted unless those tests are met. Distributions
by Charter Operating for payment of principal on parent company notes are
further restricted by the covenants in its credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings Credit
facilities.
The
indentures governing the Charter Holdings notes permit Charter Holdings to
make
distributions to Charter Holdco for payment of interest or principal on
Charter’s 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 September
30, 2007, there was no default under Charter Holdings’ indentures, the other
specified tests were met. However, Charter Holdings did not meet its
leverage ratio test of 8.75 to 1.0 based on September 30, 2007 financial
results. As a result, distributions from Charter Holdings to Charter or
Charter Holdco would have been restricted at such time and will continue to
be
restricted unless that test is met. During periods in which
distributions are restricted, the indentures governing the Charter Holdings
notes permit Charter Holdings and its subsidiaries to make specified investments
(that are not restricted payments) in Charter Holdco or Charter, up to an amount
determined by a formula, as long as there is no default under the
indentures.
In
addition to the limitation on distributions under the various indentures
discussed above, distributions by our subsidiaries may be limited by applicable
law. See “Risk Factors — Because of our holding company structure,
our outstanding notes are structurally subordinated in right of payment to
all
liabilities of our subsidiaries. Restrictions in our subsidiaries’
debt instruments and under applicable law limit their ability to provide funds
to us or our various debt issuers.”
Access
to Capital
Our
significant amount of debt could negatively affect our ability to access
additional capital in the future. Additionally, our ability to incur
additional debt may be limited by the restrictive covenants in our indentures
and credit facilities. 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, in the case
of
convertible debt, significantly dilute Charter’s existing
shareholders;
|
|
•
|
further
reducing our expenses and capital expenditures, which may impair
our
ability to increase revenue and grow operating cash
flows;
|
|
•
|
selling
assets; or
|
|
•
|
requesting
waivers or amendments with respect to our credit facilities, which
may not
be available on acceptable terms; and cannot be
assured.
|
If
the
above strategies were 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 the full principal and interest payments to which
they are contractually entitled.
Recent
Financing Transactions
On
March
6, 2007, Charter Operating entered into an Amended and Restated Credit Agreement
among Charter Operating, CCO Holdings, the several lenders from time to time
that are parties thereto, JPMorgan Chase Bank, N.A., as administrative agent,
and certain other agents (the “Charter Operating Credit
Agreement”).
The
Charter Operating Credit Agreement provides for a $1.5 billion senior secured
revolving line of credit, a continuation of the existing $5.0 billion term
loan
facility (which was refinanced with new term loans in April 2007) (“Replacement
Existing Term Loan”), and a $1.5 billion new term loan facility (the “New Term
Loan”) which was funded in March and April 2007. Borrowings under the
Charter Operating Credit Agreement bear interest at a variable interest rate
based on either LIBOR or a base rate, plus in either case, an applicable
margin. The applicable margin for LIBOR loans under the Replacement
Existing Term Loan, the New Term Loan, and revolving loans is 2.00% above
LIBOR. The revolving line of credit commitments terminate on March 6,
2013. The Replacement Existing Term Loan and the New Term Loan are
subject to amortization at 1% of their initial principal amount per annum and
amortization commences on March 31, 2008. The remaining principal
amount of the Replacement Existing Term Loan and the New Term Loan will be
due
on March 6, 2014. The Charter Operating Credit Agreement contains
financial covenants requiring Charter Operating to maintain a quarterly
consolidated leverage ratio not to exceed 5 to 1 and a first lien leverage
ratio
not to exceed 4 to 1.
On
March
6, 2007, CCO Holdings entered into a credit agreement among CCO Holdings, the
several lenders from time to time that are parties thereto, Bank of America,
N.A., as administrative agent, and certain other agents (the “CCO Holdings
Credit Agreement”). The CCO Holdings Credit Agreement consists of a
$350 million term loan facility (the “Term Facility”). The term loan
matures on September 6, 2014 (the “Maturity Date”). Borrowings under
the CCO Holdings Credit Agreement bear interest at a variable interest rate
based on either LIBOR or a base rate plus, in either case, an applicable
margin. The applicable margin for LIBOR term loans is 2.50% above
LIBOR. The CCO Holdings Credit Agreement is secured by the equity
interests of Charter Operating, and all proceeds thereof.
We
used a
portion of the additional proceeds from the Charter Operating Credit Agreement
and CCO Holdings Credit Agreement to redeem $550 million of CCO Holdings’
outstanding floating rate notes due 2010, to redeem approximately $187 million
of Charter Holdings’ outstanding 8.625% senior notes due 2009, to fund the
purchase of notes in a tender offer for total consideration (including premiums
and accrued interest) of $100 million of certain notes outstanding at Charter
Holdings, and to repay $105 million of Charter Holdings’ notes maturing in April
2007. The remainder was used for other general corporate
purposes.
Historical
Operating, Financing and Investing Activities
Our
cash
flows for the nine months ended September 30, 2006 include the cash flows
related to our discontinued operations.
We
held
$59 million in cash and cash equivalents as of September 30, 2007 compared
to
$60 million as of December 31, 2006. For the nine months ended
September 30, 2007, we generated $327 million of net cash flows from operating
activities after paying cash interest of $1.2 billion. In addition,
we used $890 million for purchases of property, plant and
equipment. Finally, we had net cash flows provided by financing
activities of $607 million.
Operating
Activities. Net
cash
provided by operating activities decreased $21 million, or 6%, from $348 million
for the nine months ended September 30, 2006 to $327 million for the nine months
ended September 30, 2007, primarily as a result of changes in operating assets
and liabilities that provided $48 million less cash during the nine months
ended
September 30, 2007 than the corresponding period in 2006, offset by revenues
increasing at a faster rate than cash expenses, and an increase of $53 million
in interest on cash pay obligations during the same period.
Investing
Activities. Net cash used by investing activities
was $935 million for the nine months ended September 30, 2007 compared to net
cash provided by investing activities of $196 million for the nine months ended
September 30, 2006, with the difference between the two periods primarily
related to a decrease of $951 million in proceeds from sales of assets, an
increase of $95 million in cash used for the purchase of property, plant, and
equipment, and a decrease in accrued expenses related to capital
expenditures.
Financing
Activities. Net cash provided by financing
activities was $607 million for the nine months ended September 30, 2007 and
net
cash used by financing activities was $480 million for the nine months ended
September 30, 2006. The increase in cash provided during the nine
months ended September 30, 2007 as compared to the corresponding period in
2006,
was primarily the result of increased borrowings of long-term debt.
Capital
Expenditures
We
have
significant ongoing capital expenditure requirements. Capital
expenditures were $890 million and $795 million for the nine months ended
September 30, 2007 and 2006, respectively. Capital expenditures
increased as a result of spending on customer premise equipment and support
capital to meet increased digital, high-speed Internet, and telephone customer
growth. See the table below for more details.
Our
capital expenditures are funded primarily from cash flows from operating
activities, the issuance of debt, and borrowings under our credit
facilities. In addition, during the nine months ended September 30,
2007 and 2006, our liabilities related to capital expenditures decreased $51
million and increased $4 million, respectively.
During
2007, we expect capital expenditures to be approximately $1.2
billion. We expect that the nature of these expenditures will
continue to be composed primarily of purchases of customer premise equipment
related to telephone and other advanced services, support capital, and for
scalable infrastructure costs. We have funded and expect to continue
to fund capital expenditures for 2007 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 us, 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 among peer companies in the cable
industry. These disclosure guidelines are not required disclosure
under Generally Accepted Accounting Principles ("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 nine months ended September
30, 2007 and 2006 (dollars in millions):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
premise equipment (a)
|
|
$ |
139
|
|
|
$ |
120
|
|
|
$ |
428
|
|
|
$ |
378
|
|
Scalable
infrastructure (b)
|
|
|
64
|
|
|
|
49
|
|
|
|
164
|
|
|
|
146
|
|
Line
extensions (c)
|
|
|
27
|
|
|
|
23
|
|
|
|
76
|
|
|
|
82
|
|
Upgrade/Rebuild
(d)
|
|
|
11
|
|
|
|
13
|
|
|
|
35
|
|
|
|
36
|
|
Support
capital (e)
|
|
|
70
|
|
|
|
51
|
|
|
|
187
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$ |
311
|
|
|
$ |
256
|
|
|
$ |
890
|
|
|
$ |
795
|
|
(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 No. 51, Financial Reporting by Cable Television
Companies, and customer premise equipment (e.g., set-top boxes 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).
|
Interest
Rate Risk
We
are
exposed to various market risks, including fluctuations in interest
rates. We use interest rate risk management derivative instruments,
including but not limited to interest rate swap agreements and interest rate
collar agreements (collectively referred to herein as interest rate agreements)
to manage our interest costs and reduce our exposure to increases in floating
interest rates. Our policy is to manage our exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within
a
targeted range. Using interest rate swap agreements, we agree to
exchange, at specified intervals through 2013, the difference between fixed
and
variable interest amounts calculated by reference to agreed-upon notional
principal amounts. Interest rate risk management agreements are not
held or issued for speculative or trading purposes.
As
of
September 30, 2007 and December 31, 2006, our long-term debt totaled
approximately $19.7 billion and $19.1 billion, respectively. This
debt was comprised of approximately $7.0 billion and $5.4 billion of credit
facilities debt, $12.3 billion and $13.3 billion accreted amount of high-yield
notes and $412 million and $408 million accreted amount of convertible senior
notes, respectively.
As
of
September 30, 2007 and December 31, 2006, the weighted average interest rate
on
the credit facility debt was approximately 7.0% and 7.9%, respectively; the
weighted average interest rate on the high-yield notes was approximately 10.3%,
and the weighted average interest rate on the convertible senior notes was
approximately 5.9%, resulting in a blended weighted average interest rate of
9.1% and 9.5%, respectively. The interest rate on approximately 86%
and 78% of the total principal amount of our debt was effectively fixed,
including the effects of our interest rate hedge agreements as of September
30,
2007 and December 31, 2006, respectively. The fair value of our
high-yield notes was $12.1 billion and $13.3 billion at September 30, 2007
and
December 31, 2006, respectively. The fair value of our convertible
senior notes was $527 million and $576 million at September 30, 2007 and
December 31, 2006, respectively. The fair value of our credit
facilities was $6.8 billion and $5.4 billion at September 30, 2007 and December
31, 2006, respectively. The fair value of high-yield and convertible
notes was based on quoted market prices, and the fair value of the credit
facilities was based on dealer quotations.
We
do not
hold or issue derivative instruments for trading purposes. We do,
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. We have formally documented, designated and
assessed the effectiveness of transactions that receive hedge
accounting. For each of the three months ended September 30, 2007 and
2006, other income (expense), net includes $0, and for the nine months ended
September 30, 2007 and 2006, other income (expense), net includes $0 and gains
of $2 million, respectively, which represent cash flow hedge ineffectiveness
on
interest rate hedge agreements arising from differences between critical terms
of the agreements and the related hedged obligations. Changes in the
fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate
debt
obligations, and that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive income (loss). For the three months
ended
September 30, 2007 and 2006,
losses of $73
million and $1 million, respectively, and for the nine months ended September
30, 2007 and 2006, losses of $25 million and $1 million, respectively, related
to derivative instruments designated as cash flow hedges, was recorded in
accumulated other comprehensive income (loss). The amounts are
subsequently reclassified as an increase or decrease to interest expense in
the
same periods 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 other income (expense) in the Company’s
condensed consolidated statements of operations. For the three months
ended September
30, 2007 and 2006, other income (expense),
net
includes losses of $21 million and $3 million, respectively, and for the nine
months ended September 30, 2007 and 2006, other income (expense), net includes
losses of $16 million and gains of $6 million, respectively, resulting from
interest rate derivative instruments not designated as hedges.
The
table
set forth below summarizes the fair values and contract terms of financial
instruments subject to interest rate risk maintained by us as of September
30,
2007 (dollars in millions):
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
Fair
Value at September 30,
2007
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
$
|
-- |
|
$
|
-- |
|
$ |
601 |
|
$ |
2,232 |
|
$ |
282 |
|
$ |
1,175 |
|
$ |
8,340 |
|
$ |
12,630 |
|
$ |
12,617 |
Average
Interest Rae
|
|
-- |
|
|
-- |
|
|
7.22% |
|
|
10.26% |
|
|
11.25% |
|
|
8.26% |
|
|
10.70% |
|
|
10.24% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
Rate
|
$
|
--
|
|
$
|
65
|
|
$
|
65
|
|
$
|
65
|
|
$
|
65
|
|
$
|
65
|
|
$
|
6,640
|
|
$
|
6,965
|
|
$
|
6,751
|
Average
Interest
Rate
|
|
--
|
|
|
6.44%
|
|
|
6.48%
|
|
|
6.76%
|
|
|
6.99%
|
|
|
7.13%
|
|
|
6.83%
|
|
|
6.83%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
to Fixed Swaps
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
500
|
|
$
|
300
|
|
$
|
2,500
|
|
$
|
1,000
|
|
$
|
4,300
|
|
$
|
(41)
|
Average
Pay
Rate
|
|
--
|
|
|
--
|
|
|
--
|
|
|
6.81%
|
|
|
6.98%
|
|
|
6.95%
|
|
|
6.94%
|
|
|
6.93%
|
|
|
|
Average
Receive
Rate
|
|
--
|
|
|
--
|
|
|
--
|
|
|
6.79%
|
|
|
6.86%
|
|
|
7.20%
|
|
|
7.22%
|
|
|
7.13%
|
|
|
|
The
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of our exposure to credit
loss. The amounts exchanged are determined by reference to the
notional amount and the other terms of the contracts. The estimated
fair value approximates the costs (proceeds) to settle the outstanding
contracts. Interest rates on variable debt are estimated using the
average implied forward London Interbank Offering Rates (LIBOR) for the
year of maturity based on the yield curve in effect at September 30,
2007.
At
September 30, 2007 and December 31, 2006, we had outstanding $4.3 billion and
$1.7 billion, respectively, in notional amounts of interest rate
swaps. 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.
Item
4. Controls and
Procedures.
As
of the
end of the period covered by this report, management, including our Chief
Executive Officer and 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 certifications provided by a
number of executives. Based upon, and as of the date of that
evaluation, our Chief Executive Officer and 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
were no changes in our internal control over financial reporting during the
quarter ended September 30, 2007 that materially affected, or are reasonably
likely to materially affect, our internal controls 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, we believe that our
controls provide such reasonable assurances.
PART
II. OTHER INFORMATION.
Item
1. Legal
Proceedings.
We
are a
defendant or co-defendant in several unrelated lawsuits claiming infringement
of
various patents relating to various aspects of our businesses. Other
industry participants are also defendants in certain of these cases, and, in
many cases, we expect that any potential liability would be the responsibility
of our equipment vendors pursuant to applicable contractual indemnification
provisions. In the event that a court ultimately determines that we infringe
on
any intellectual property rights, we may be subject to substantial damages
and/or an injunction that could require us or our vendors to modify certain
products and services we offer to our subscribers. While we believe
the lawsuits are without merit and intend to defend the actions vigorously,
the
lawsuits could be material to our consolidated results of operations of any
one
period, and no assurance can be given that any adverse outcome would not be
material to our consolidated financial condition, results of operations or
liquidity.
We
are a
party to other lawsuits and claims that arise in the ordinary course of
conducting our business. The ultimate outcome of these other legal
matters pending against us or our subsidiaries cannot be predicted, and although
such lawsuits and claims are not expected individually to have a material
adverse effect on our consolidated financial condition, results of operations
or
liquidity, such lawsuits could have, in the aggregate, a material adverse effect
on our consolidated financial condition, results of operations or
liquidity.
Item
1A. Risk
Factors.
Our
Annual Report on Form 10-K for the year ended December 31, 2006 includes “Risk
Factors” under Item 1A of Part I. Except for the updated risk factors
described below, there have been no material changes from the risk factors
described in our Form 10-K. The information below updates, and should
be read in conjunction with, the risk factors and information disclosed in
our
Form 10-K.
Risks
Related to Significant Indebtedness of Us and Our
Subsidiaries
We
and our subsidiaries have a significant amount of debt and may incur significant
additional debt, including secured debt, in the future, which could adversely
affect our financial health and our ability to react to changes in our
business.
We
and
our subsidiaries have a significant amount of debt and may (subject to
applicable restrictions in their debt instruments) incur additional debt in
the
future. As of September 30, 2007, our total debt was approximately
$19.7 billion, our shareholders’ deficit was approximately $7.3 billion and the
deficiency of earnings to cover fixed charges for the three and nine months
ended September 30, 2007 was $365 million and $975 million,
respectively.
In
October 2007, Charter Holdco completed a tender offer, in which $364 million
of
Charter’s 5.875% convertible senior notes due 2009 were accepted for $479
million of Charter’s 6.50% convertible senior notes due
2027. Approximately $49 million of Charter’s 5.875% convertible
senior notes remain outstanding. We will need to raise additional
capital and/or receive distributions or payments from our subsidiaries in order
to satisfy these debt obligations. An additional $814 million
aggregate principal amount of Charter’s convertible senior notes are held by
Charter Holdco.
Because
of our significant indebtedness, our ability to raise additional capital at
reasonable rates or at all is uncertain, and the ability of our subsidiaries
to
make distributions or payments to their parent companies is subject to
availability of funds and restrictions under our subsidiaries’ applicable debt
instruments and under applicable law. 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 in the case of a recapitalization or other similar
transaction, our noteholders might not receive principal and interest payments
to which they are contractually entitled.
Our
significant amount of debt could have other important
consequences. For example, the debt will or could:
|
·
|
require
us to dedicate a significant portion of our cash flow from operating
activities to make payments on our debt, which will reduce our funds
available for working capital, capital expenditures and other general
corporate expenses;
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our
business,
the cable and telecommunications industries and the economy at
large;
|
|
·
|
place
us at a disadvantage as compared to our competitors that have
proportionately less debt;
|
|
·
|
make
us vulnerable to interest rate increases, because approximately
14% of our
borrowings are, and will continue to be, subject to variable rates
of
interest;
|
|
·
|
expose
us to increased interest expense as we refinance existing lower
interest
rate instruments;
|
|
·
|
adversely
affect our relationship with customers and
suppliers;
|
|
·
|
limit
our ability to borrow additional funds in the future, due to applicable
financial and restrictive covenants in our
debt;
|
|
·
|
make
it more difficult for us to satisfy our obligations to the holders
of our
notes and for our subsidiaries to satisfy their obligations to
the lenders
under their credit facilities and to their noteholders;
and
|
|
·
|
limit
future increases in the value, or cause a decline in the value
of our
equity, which could limit our ability to raise additional capital
by
issuing equity.
|
A
default
by one of our subsidiaries under its debt obligations could result in the
acceleration of those obligations, which in turn could trigger cross defaults
under other agreements governing our long-term indebtedness. In
addition, the secured lenders under our credit facilities and the holders of
the
Charter Operating senior second-lien notes could foreclose on their collateral,
which includes equity interest in our subsidiaries, and exercise other rights
of
secured creditors. Any default under those credit facilities or the
indentures governing our convertible senior notes or our subsidiaries’ debt
could adversely affect our growth, our financial condition, our results of
operations, and our ability to make payments on our convertible senior notes,
our credit facilities, and other debt of our subsidiaries, and could force
us to
seek the protection of the bankruptcy laws. We and our subsidiaries
may incur significant additional debt in the future. If current debt
amounts increase, the related risks that we now face will
intensify.
We
may not be able to access funds under the Charter Operating credit facilities
if
we fail to satisfy the covenant restrictions in such credit facilities, which
could adversely affect our financial condition and our ability to conduct our
business.
Our
subsidiaries have historically relied on access to credit facilities in order
to
fund operations and to service parent company debt, and we expect such reliance
to continue in the future. Our total potential borrowing availability
under our revolving credit facility was approximately $1.3 billion as of
September 30, 2007, none of which is limited by covenant
restrictions. There can be no assurance that our actual availability
under our credit facilities will not be limited by covenant restrictions in
the
future.
One
of
the conditions to the availability of funding under our credit facilities is
the
absence of a default under such facilities, including as a result of any failure
to comply with the covenants under the facilities. Among other
covenants, the Charter Operating credit facilities require us to maintain
specific leverage ratios. The Charter Operating credit facilities
also provide that Charter Operating has to obtain an unqualified audit opinion
from its independent accountants for each fiscal year. There can be
no assurance that Charter Operating will be able to continue to comply with
these or any other of the covenants under the credit facilities.
An
event
of default under the credit facilities or indentures, if not waived, could
result in the acceleration of those debt obligations and, consequently, could
trigger cross defaults under other agreements governing our long-term
indebtedness. In addition, the secured lenders under the Charter
Operating credit facilities and the holders of the Charter Operating senior
second-lien notes could foreclose on their collateral, which includes equity
interest in our subsidiaries, and exercise other rights of secured
creditors. Any default under those credit facilities or the
indentures governing our convertible senior notes or our subsidiaries’ debt
could adversely affect our growth, our financial condition, our results of
operations, and our ability to make payments on our convertible senior notes,
our credit facilities, and other debt of our subsidiaries, 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.
We
depend on generating sufficient cash flow and having access to additional
external liquidity sources to fund our debt obligations, capital expenditures,
and ongoing operations.
Our
ability to service our debt and to fund our planned capital expenditures and
ongoing operations will depend on both our ability to generate cash flow and
our
access to additional external liquidity sources. Our ability to generate
cash flow is dependent on many factors, including:
·
|
competition
from other distributors, including incumbent telephone companies,
direct
broadcast satellite operators, wireless broadband providers and DSL
providers;
|
·
|
difficulties
in introducing, growing, and operating our telephone services, such
as our
ability to adequately meet customer expectations for the reliability
of
voice services;
|
·
|
our
ability to adequately meet demand for installations and customer
service;
|
·
|
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 and grow our customer base, particularly
in the
face of increasingly aggressive
competition;
|
·
|
our
ability to obtain programming at reasonable prices or to adequately
raise
prices to offset the effects of higher programming
costs;
|
·
|
general
business conditions, economic uncertainty or slowdown;
and
|
·
|
the
effects of governmental regulation, including but not limited to
local and
state franchise authorities, on our
business.
|
Some
of
these factors are beyond our control. If we are unable to generate
sufficient cash flow or access additional external liquidity sources, we may
not
be able to service and repay our debt, operate our business, respond to
competitive challenges, or fund our other liquidity and capital needs.
Although we and our subsidiaries have been able to raise funds through issuances
of debt in the past, we may not be able to access additional sources of external
liquidity on similar terms, if at all. 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 through 2008. We
believe that cash flows from operating activities and amounts available under
our credit facilities may not be sufficient to fund our operations and satisfy
our interest and principal repayment obligations in 2009, and will not be
sufficient to fund such needs in 2010 and beyond. See “Part
I. Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and Capital
Resources.”
Because
of our holding company structure, our outstanding notes are structurally
subordinated in right of payment to all liabilities of our
subsidiaries. Restrictions in our subsidiaries’ debt instruments and
under applicable law limit their ability to provide funds to us or our various
debt issuers.
Charter’s
primary assets are its equity interests in its subsidiaries. Our
operating subsidiaries are separate and distinct legal entities and are not
obligated to make funds available to us for payments on our notes or other
obligations in the form of loans, distributions or otherwise. Our
subsidiaries’ ability to make distributions to us is subject to their compliance
with the terms of their credit facilities and indentures and restrictions under
applicable law. Under the Delaware limited liability company act, our
subsidiaries may only make distributions to us if they have “surplus” as defined
in the act. Under fraudulent transfer laws, our subsidiaries may not
make distributions to us or the applicable debt issuers to service debt
obligations if they are insolvent or are rendered insolvent
thereby. The measures of insolvency for purposes of these fraudulent
transfer laws vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, an entity would
be considered insolvent if:
·
|
the
sum of its debts, including contingent liabilities, was greater than
the
fair saleable value of all its
assets;
|
·
|
the
present fair saleable value of its assets was less than the amount
that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they became absolute and mature;
or
|
·
|
it
could not pay its debts as they became
due.
|
While
we
believe that our relevant subsidiaries currently have surplus and are not
insolvent, there can be no assurance that these subsidiaries will be permitted
to make distributions in the future in compliance with these restrictions in
amounts needed to service our indebtedness. Our direct or indirect
subsidiaries include the borrowers and guarantors under the Charter Operating
and CCO Holdings credit facilities. Several of our subsidiaries are
also
obligors
and guarantors under other senior high yield notes. Our convertible
senior notes are structurally subordinated in right of payment to all of the
debt and other liabilities of our subsidiaries. As of September 30,
2007, our total debt was approximately $19.7 billion, of which approximately
$19.3 billion was structurally senior to our convertible senior
notes.
In
the
event of bankruptcy, liquidation or dissolution of one or more of our
subsidiaries, that subsidiary’s assets would first be applied to satisfy its own
obligations, and following such payments, such subsidiary may not have
sufficient assets remaining to make payments to us as an equity holder or
otherwise. In that event:
|
·
|
the
lenders under Charter Operating’s credit facilities whose interests are
secured by substantially all of our operating assets, will have the
right
to be paid in full before us from any of our subsidiaries’ assets;
and
|
|
·
|
the
holders of preferred membership interests in our subsidiary, CC VIII,
would have a claim on a portion of its assets that may reduce the
amounts
available for repayment to holders of our outstanding
notes.
|
Risks
Related to Our Business
We
operate in a very competitive business environment, which affects our ability
to
attract and retain customers and can adversely affect our business and
operations
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 competitors for video services throughout our territory are direct
broadcast satellite operators (“DBS”). The two largest DBS providers
are The DIRECTV Group, Inc. and Echostar Communications,
Inc. Competition from DBS, including intensive marketing efforts with
aggressive pricing and exclusive programming has had an adverse impact on our
ability to retain customers. DBS has grown rapidly over the last several years.
The cable industry, including us, has lost a significant number of video
customers 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 service a higher concentration of such areas than those of certain
other
major cable service providers.
Local
telephone companies, including two major local telephone companies,
AT&T and Verizon, and electric utilities can offer video and other services
in competition with us, and we expect they will increasingly do so in the
future. AT&T and Verizon have both announced, and are making,
upgrades of their networks. Some upgraded portions of these networks
carry two-way video services comparable to ours, high-speed data services that
operate at speeds as high or higher than ours, and digital voice services that
are similar to ours, and these services are offered at prices similar to those
for comparable Charter services. Based on internal estimates, we
believe that AT&T and Verizon are actively marketing these services in
areas serving approximately 6% to 7% of our homes passed as of September 30,
2007, an increase from an estimated 2% at March 31, 2007. Additional
upgrades and product launches are expected in markets in which we
operate. In addition, in many of our markets, these companies have entered
into co-marketing arrangements with DBS operators to offer service bundles
combining video services provided by a DBS operator with digital subscriber
line
Internet services (“DSL”) and traditional telephone and wireless
services offered by the telephone companies and their
affiliates. These service bundles substantially resemble our
bundles.
The
existence of more than one cable system operating in the same territory is
referred to as an overbuild. Overbuilds could adversely affect our
growth, financial condition, and results of operations, by creating or
increasing competition. Based on internal estimates, as of September
30, 2007, we are aware of traditional overbuild situations impacting
approximately 7% to 8% of our estimated homes passed, and potential traditional
overbuild situations in areas servicing approximately an additional 1% of our
estimated homes passed. Additional overbuild situations may occur in
other systems.
With
respect to our Internet access services, we face competition, including
intensive marketing efforts and aggressive pricing, from telephone companies
and
other providers of 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. Moreover, as we expand our
telephone offerings, we will face considerable competition from established
telephone companies and other carriers.
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
and install customer premise equipment. Customers who subscribe to
our services as a result of these offerings may not remain customers following
the end of the promotional period. A failure to retain customers or
to collect the amounts they owe us, could have a material adverse effect on
our
business and financial results.
Mergers,
joint ventures, and alliances among franchised, wireless, or private cable
operators, DBS providers, local exchange carriers, and others, 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.
In
addition to the various competitive factors discussed above, our business
is
subject to risks relating to increasing competition for the leisure and
entertainment time of consumers. Our business competes with all other sources
of
entertainment and information delivery, including broadcast television, movies,
live events, radio broadcasts, home video products, console games, print
media,
and the Internet. Technological advancements, such as video-on-demand, new
video formats, and Internet streaming and downloading, have increased the
number
of entertainment and information delivery choices available to consumers,
and
intensified the challenges posed by audience fragmentation. The increasing
number of choices available to audiences could negatively impact not only
consumer demand for our products and services, but also advertisers’ willingness
to purchase advertising from us. If we do not respond appropriately to
further increases in the leisure and entertainment choices available to
consumers, our competitive position could deteriorate, and our financial
results
could suffer.
We
cannot
assure you that our cable systems will allow us to compete
effectively. Additionally, as we expand our offerings to include
other telecommunications services, and to introduce new and enhanced services,
we will be subject to competition from other providers of the services we
offer. We cannot predict the extent to which competition may affect
our business and operations in the future.
For
tax purposes, there is significant risk that we will experience an ownership
change resulting in a material limitation on the use of a substantial amount
of
our existing net operating loss carryforwards.
As
of
September 30, 2007, we had approximately $7.6 billion of tax net operating
losses, resulting in a gross deferred tax asset of approximately $3.0 billion,
expiring in the years 2007 through 2027. 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. However, an “ownership change” as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, would place
significant limitations, on an annual basis, on the use of such net operating
losses to offset future taxable income we may generate. Although we have
instituted a Rights Plan designed with the goal of attempting to prevent
ownership change, we cannot provide any assurance that the Rights Plan will
actually prevent an ownership change from occurring. A limitation on
our ability to use our net operating losses, 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 any future
taxable income.
Future
transactions and the timing of such transactions could cause an ownership change
for U.S. federal income tax purposes.
Future
transactions and the timing of such transactions could cause an ownership change
for income tax purposes. Such transactions may include additional issuances
of
common stock by us (including but not limited to issuances upon future
conversion of our 5.875% convertible senior notes and 6.50% convertible senior
notes), the return to us of the borrowed shares loaned by us in connection
with
the issuance of the 5.875% convertible senior notes and the 6.50% convertible
senior notes, or acquisitions or sales of shares by certain holders of our
shares, including persons who have held, currently hold, or may accumulate
in
the future five percent or more of our outstanding stock (including upon an
exchange by Mr. Allen or his affiliates, directly or indirectly, of membership
units of Charter
Holdco
into our Class B common stock). Many of the foregoing transactions,
including whether Mr. Allen exchanges his Charter Holdco units, are beyond
our
control.
Risks
Related to Regulatory and Legislative Matters
Our
cable system franchises are non-exclusive. Accordingly, local franchising
authorities can grant additional franchises and create competition in market
areas where none existed previously, resulting in overbuilds, which could
adversely affect results of operations.
Our
cable
system franchises are non-exclusive. Consequently, local franchising
authorities can grant additional franchises to competitors in the same
geographic area or operate their own cable systems. In addition, certain
telephone companies are seeking authority to operate in communities without
first obtaining a local franchise. As a result, competing operators may
build systems in areas in which we hold franchises. In some cases, municipal
utilities may legally compete with us without obtaining a franchise from the
local franchising authority.
Legislative
proposals have been introduced in many state legislatures that would greatly
streamline cable franchising. This legislation is intended to facilitate
entry by new competitors, particularly local telephone companies. Such
legislation has passed in numerous states, including states where we have
significant operations. Although most of these states have provided some
regulatory relief for incumbent cable operators, some of these proposals are
viewed as being more favorable to new entrants due to a number of factors,
including efforts to withhold streamlined cable franchising from incumbents
until after the expiration of their existing franchises, and the potential
for
new entrants to serve only higher-income areas of a particular community.
To the extent we are not able to avail ourselves of this streamlined
franchising process, we may continue to be subject to more onerous franchise
requirements at the local level than new entrants. In March 2007, the FCC
released a ruling designed to streamline competitive cable
franchising. Among other things, the FCC prohibited local franchising
authorities from imposing “unreasonable” build-out requirements and established
a mechanism whereby competing providers can secure “interim authority” to offer
cable service if the local franchising authority has not acted on a franchise
application within 90 days (in the case of competitors with existing right
of
way authority) or 180 days (in the case of competitors without existing right
of
way authority). Local regulators have appealed the FCC’s
ruling. On October 31, 2007, the FCC announced that it had decided to
grant incumbent cable operators some, but not all, of the local franchising
relief it granted to new entrants in December 2006. For example,
while the FCC granted incumbents relief from unreasonable public, education
and
government access (“PEG”) channel and institutional network for non-commercial,
intra-governmental purposes (“I-net”) requirements, it did not extend to cable
incumbents the relief it granted to new entrants from unreasonable delays in
granting franchises or unreasonable build out requirements; and the relief
granted to incumbents is effective only upon franchise renewal.
We
may be required to provide access to our network to other Internet service
providers, which could significantly increase our competition and adversely
affect our ability to provide new products and
services.
A
number
of companies, including independent Internet service providers, or ISPs, have
requested local authorities and the FCC to require cable operators to provide
non-discriminatory access to cable’s broadband infrastructure, so that these
companies may deliver Internet services directly to customers over cable
facilities. In a 2005 ruling, commonly referred to as Brand
X, the Supreme Court upheld an FCC decision making it less likely that
any
nondiscriminatory “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.” Notwithstanding Brand X, there has been continued
advocacy by certain Internet content providers and consumer groups for new
federal laws or regulations to adopt so-called “net neutrality” principles
limiting the ability of broadband network owners (like us) to manage and control
their own networks. The proposals might prevent network owners, for
example, from charging bandwidth intensive content providers, such as certain
online gaming, music, and video service providers, an additional fee to ensure
quality delivery of the services to consumers. If we were not allowed
to manage our network as we see best serves our customers, or were prohibited
from charging heavy bandwidth intensive services a fee for expanding our network
capacity or for use of our networks, we believe that it could impair our ability
to provide high quality service to our customers or use our bandwidth in ways
that would generate maximum revenues. In April 2007, the FCC issued a
notice of inquiry regarding the marketing practices of broadband providers
as a
precursor to considering the need for any FCC regulation of internet service
providers.
Changes
in channel carriage regulations could impose significant additional costs on
us.
Cable
operators also face significant regulation of their channel
carriage. We can be required to devote substantial capacity to the
carriage of programming that we might not carry, absent contractual obligations,
including certain local broadcast signals; local PEG programming; and
unaffiliated commercial leased access programming (required channel capacity
for
use by persons unaffiliated with the cable operator who desire to distribute
programming over a cable system). This carriage burden could increase
in the future, particularly if we are required to carry multiple program streams
included with a single digital broadcast transmission (multicast
carriage). The FCC recently adopted a new transition plan addressing
the cable industry’s carriage obligations once the broadcast industry migration
from analog to digital transmission is completed in February
2009. Under the FCC’s three year transition plan, most cable systems
will be required to offer both an analog and digital version of local broadcast
signals for three years after the digital transition date. The FCC is
also considering whether it should adjust its existing rules governing
commercial leased access to encourage greater use by interested
programmers. 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 our revenue potential.
Item
6. Exhibits.
The
index
to the exhibits begins on page E-1 of this quarterly report.
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, Charter
Communications, Inc. has duly caused this quarterly report to be signed on
its
behalf by the undersigned, thereunto duly authorized.
CHARTER
COMMUNICATIONS,
INC.,
Registrant
Dated:
November 8, 2007
|
By:
/s/ Kevin D. Howard
|
|
Name:
|
Kevin
D. Howard
|
|
Title:
|
Vice
President, Controller and
|
|
|
Chief
Accounting Officer
|
Exhibit
Number
|
|
Description
of Document
|
|
|
|
1.1
|
|
Dealer
Manager Agreement, dated August 29, 2007, by and between Charter
Communications Holding Company, LLC, Citigroup and Morgan
Stanley & Co. Incorporated (incorporated by reference to Exhibit
1.1 to the registration statement on Form S-4 of Charter Communications,
Inc. filed on August 29, 2007 (File No. 333-145766)).
|
3.1(a)
|
|
Restated
Certificate of Incorporation of Charter Communications, Inc. (Originally
incorporated July 22, 1999) (incorporated by reference to Exhibit
3.1 to
Amendment No. 3 to the registration statement on Form S-1 of Charter
Communications, Inc. filed on October 18, 1999 (File No.
333-83887)).
|
3.1(b)
|
|
Certificate
of Amendment of Restated Certificate of Incorporation of Charter
Communications, Inc. filed May 10, 2001 (incorporated by reference
to
Exhibit 3.1(b) to the annual report on Form 10-K filed by Charter
Communications, Inc. on March 29, 2002 (File No.
000-27927)).
|
3.1(c)*
|
|
Certificate
of Amendment of Restated Certificate of Incorporation of Charter
Communications, Inc. filed October 11, 2007 (File No.
000-27927).
|
3.2
|
|
Certificate
of Designation of Series B Junior Preferred Stock of Charter
Communications, Inc., as filed with the Secretary of State of the
State of
Delaware on August 14, 2007 (incorporated by reference to Exhibit
3.1 to
the current report on Form 8-K of Charter Communications, Inc. filed
on
August 15, 2007 (File No. 000-27927)).
|
3.3
|
|
Amended
and Restated By-laws of Charter Communications, Inc. as of October
30,
2006 (incorporated by reference to Exhibit 3.1 to the quarterly report
on
Form 10-Q of Charter Communications, Inc. filed on October 31, 2006
(File
No. 000-27927)).
|
4.1
|
|
Form
of Rights Certificate (incorporated by reference to Exhibit 4.1 to
the
current report on Form 8-K of Charter Communications, Inc. filed
on August
15, 2007 (File No. 000-27927)).
|
4.2
|
|
Rights
Agreement, dated as of August 14, 2007, by and between Charter
Communications, Inc. and Mellon Investor Services LLC, as Rights
Agent
(incorporated by reference to Exhibit 4.2 to the current report on
Form
8-K of Charter Communications, Inc. filed on August 15, 2007 (File
No.
000-27927)).
|
4.3
|
|
Letter
Agreement for Mirror Rights, dated as of August 14, 2007, by and
among
Charter Communications, Inc., Charter Investment, Inc., and Vulcan
Cable
III Inc. (incorporated by reference to Exhibit 4.3 to the current
report
on Form 8-K of Charter Communications, Inc. filed on August 15, 2007
(File
No. 000-27927)).
|
4.4
|
|
Indenture
relating to the 6.50% Convertible Senior Notes due 2027, dated as
of
October 2,2007, between Charter Communications, Inc., as Issuer,
and The
Bank of New York Trust Company, N.A., as Trustee (incorporated by
reference to Exhibit 4.1 to the current report on Form 8-K of Charter
Communications,
Inc.
filed on October 5, 2007 (File No. 000-27927)).
|
10.1
|
|
Amended
and Restated Share Lending Agreement, dated October 2, 2007, between
Charter Communications, Inc., Citigroup Global Markets Limited, through
Citigroup Global Markets, Inc. (incorporated by reference to Exhibit
10.1
to the current report on Form 8-K of Charter Communications, Inc.
filed on
October 5, 2007 (File No. 000-27927)).
|
10.2
|
|
Amended
and Restated Unit Lending Agreement, dated as of October 2, 2007,
between
Charter Communications Holding Company, LLC as Lender and Charter
Communications, Inc. as Borrower (incorporated by reference to Exhibit
10.2 to the current report on Form 8-K of Charter Communications,
Inc.
filed on October 5, 2007(File No. 000-27927)).
|
10.3
|
|
6.50%
Mirror Convertible Senior Note due 2027 in the principal amount of
$479
million, dated as of October 2, 2007, made by Charter Communications
Holding Company, LLC in favor of Charter Communications, Inc.
(incorporated by reference to Exhibit 10.3 to the current report
on Form
8-K of Charter Communications, Inc. filed on October 5, 2007 (File
No.
000-27927)).
|
12.1*
|
|
Computation
of Ratio of Earnings to Fixed Charges.
|
31.1*
|
|
Certificate
of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
under
the Securities Exchange Act of 1934.
|
31.2*
|
|
Certificate
of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
under
the Securities Exchange Act of 1934.
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32.1*
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
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32.2*
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
|
*
Document attached
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Management compensatory plan or arrangement