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SCHEDULE 14A
(RULE 14a-101)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Charter Communications, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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[ ] Fee paid previously with preliminary materials.
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0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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[CHARTER COMMUNICATIONS LOGO]
CHARTER COMMUNICATIONS, INC.
2001 PROXY MATERIALS &
2000 FINANCIAL REPORT
TABLE OF CONTENTS
PAGE
----
Letter to Shareholders...................................... 1
Notice of Annual Meeting of Shareholders.................... 2
Proxy Statement............................................. 3
General Information About Voting and the Meeting.......... 3
Proposal No. 1: Election of Class A/Class B Director...... 6
Executive Compensation.................................... 11
Security Ownership of Certain Beneficial Owners and
Management............................................. 15
Certain Relationships and Related Transactions............ 18
Proposal Nos. 2 and 3: Ratification of the 1999 Option
Plan and Approval of the 2001 Incentive Plan........... 27
Accounting Matters........................................ 36
Other Matters............................................. 37
Audit Committee Charter..................................... Appendix A
2000 Financial Report and Other Information................. Appendix B
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[CHARTER COMMUNICATIONS LOGO]
May 1, 2001
Dear Shareholder:
You are cordially invited to attend the annual meeting of shareholders of
Charter Communications, Inc. ("the Company"), which will be held at the
Meydenbauer Center, 11100 NE Sixth Street, Bellevue, Washington on Wednesday,
June 6, 2001 at 10:00 a.m. (Pacific Daylight Time).
An admission ticket admitting you to the meeting is attached to the
enclosed proxy form. Please detach and present it at the door when you arrive.
Details of the business to be conducted at the annual meeting are given in
the attached Notice of Annual Meeting and Proxy Statement. Certain financial and
other important information about the Company can be found in Appendix B to the
Proxy Statement.
Whether or not you attend the annual meeting, it is important that your
shares be represented and voted at the meeting. Therefore, I urge you to sign,
date, and promptly return the enclosed proxy in the postage-paid envelope which
is provided. If you decide to attend the annual meeting, you will have the
opportunity to vote in person.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company.
Sincerely,
/s/ JERALD L. KENT
JERALD L. KENT
President and Chief Executive Officer
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[CHARTER COMMUNICATIONS LOGO]
12444 POWERSCOURT DRIVE, SUITE 100
ST. LOUIS, MO 63131
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
OF
CHARTER COMMUNICATIONS, INC.
------------------------
DATE: Wednesday, June 6, 2001
TIME: 10:00 a.m. (Pacific Daylight Time)
PLACE: Meydenbauer Center
11100 NE 6th Street
Bellevue, Washington
MATTERS TO BE VOTED ON:
1. Election of directors.
- One Class A/Class B director
- Six Class B directors
2. Ratification of the Charter Communications 1999 Option Plan
3. Approval of the Charter Communications, Inc. 2001 Stock Incentive Plan
4. Any other matters properly brought before the shareholders at the meeting.
By order of the Board of Directors,
/s/ CURTIS S. SHAW
CURTIS S. SHAW
Secretary
May 1, 2001
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CHARTER COMMUNICATIONS, INC.
PROXY STATEMENT
Your vote at the annual meeting is important to us. Please vote your shares
of common stock by completing the enclosed proxy card and returning it to us in
the envelope provided. This proxy statement was first mailed to shareholders on
or about May 1, 2001.
GENERAL INFORMATION ABOUT VOTING AND THE MEETING
WHAT ARE YOU VOTING ON AT THE MEETING?
As a holder of Class A common stock, you are being asked to vote, together
with the holder of Class B common stock, for the following:
- election of one director to serve on the Board of Directors of the
Company (the "Class A/Class B director");
- the ratification of the Charter Communications 1999 Option Plan (the
"1999 Option Plan"), a plan originally implemented in 1999 providing for
the grant of equity options to employees, directors and consultants of
the Company and its subsidiaries and affiliates; and
- the adoption of the Charter Communications, Inc. 2001 Stock Incentive
Plan (the "2001 Incentive Plan"), a plan adopted by the Board of
Directors (subject to shareholder approval) that would provide for grants
of options and other stock-based benefits and performance awards to
current and prospective employees, non-employee directors and consultants
of the Company and its subsidiaries and affiliates.
WHY ARE WE VOTING ON ONLY ONE DIRECTOR?
There currently are a total of seven directors on the Board of Directors.
The Company's Certificate of Incorporation provides that all but one of the
directors will be elected by vote of the holder of the Class B shares voting
alone (the "Class B directors"), and that the Class A/Class B director will be
elected by the holders of the Class A and Class B shares voting together.
WHO HAS BEEN NOMINATED FOR ELECTION AS A DIRECTOR AT THE ANNUAL MEETING?
The Company's Board of Directors has nominated all seven current directors
for re-election. As noted above, however, the holders of Class A shares will be
voting for only one director. The Class A/Class B director nominee who is up for
election by vote of the Class A and Class B shares voting together at the annual
meeting is Ronald L. Nelson.
WHO WILL THE OTHER SIX DIRECTORS BE?
The six other directors who have been nominated by the Board of Directors
are: Paul G. Allen, Jerald L. Kent, Marc B. Nathanson, Nancy B. Peretsman,
William D. Savoy and Howard L. Wood.
We have been advised by Paul G. Allen, the sole holder of Class B shares,
that he intends to vote "FOR" these six nominees.
WHAT ARE MY CHOICES IN THE ELECTION OF A DIRECTOR?
You can vote your shares "FOR," or you can withhold your vote, for the
Class A/Class B director nominee, Ronald L. Nelson.
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WHO CAN VOTE?
In the proposals being voted on at the annual meeting, a total of
233,750,212 shares of Class A common stock, representing approximately 6.7% of
the total voting power of all of the issued and outstanding stock of the
Company, and 50,000 shares of Class B common stock, representing approximately
93.3% of the total voting power, can vote. Each share of Class A common stock is
entitled to one vote.
You can vote your Class A shares if our records show that you owned the
shares at the close of business on April 10, 2001. The enclosed proxy card
indicates the number of Class A shares that our records show you are entitled to
vote.
You will not have a vote in the election of the Class B directors. Paul G.
Allen, the sole holder of Class B shares, will be the only person voting in that
election.
WHAT IS THE VOTE REQUIRED FOR THE ITEMS ON THE AGENDA?
A plurality of votes cast is required for the election of the Class A/Class
B director.
The affirmative vote of a majority of the outstanding Class A and Class B
shares, voting together as a single class, is required to ratify the 1999 Option
Plan and to approve the 2001 Incentive Plan. For purposes of determining whether
the shareholders have ratified the 1999 Option Plan and approved the 2001
Incentive Plan, abstentions and broker "non-votes" are not counted. We have been
advised by Paul G. Allen, the holder of 93.5% of the voting power of the Class A
and Class B shares combined, that he intends to vote "FOR" ratification of the
1999 Option Plan and "FOR" approval of the 2001 Incentive Plan.
HOW DO I VOTE BY PROXY?
Follow the instructions on the enclosed proxy card. Sign and date the proxy
card and mail it back to us in the enclosed envelope. The proxyholder named on
the proxy card will vote your shares as you instruct. If you sign and return the
proxy card but do not indicate your vote, the proxyholder will vote on your
behalf "FOR" the named Class A/Class B director nominee, "FOR" ratification of
the 1999 Option Plan and "FOR" approval of the 2001 Incentive Plan.
WHAT IF OTHER MATTERS COME UP AT THE ANNUAL MEETING?
The items listed on the Notice of Annual Meeting of Shareholders are the
only matters that we know will be voted on at the annual meeting. On such other
business as may properly come before the meeting, your shares will be voted in
the discretion of the proxyholder.
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. At any time before the vote at the annual meeting, you can change your
vote either by giving the Company's Secretary a written notice revoking your
proxy card, or by signing, dating and submitting a new proxy card. We will honor
the latest dated proxy card which has been received.
CAN I VOTE IN PERSON AT THE ANNUAL MEETING RATHER THAN BY COMPLETING THE PROXY
CARD?
Although we encourage you to complete and return the proxy card to ensure
that your vote is counted, you can attend the annual meeting and vote your
shares in person.
WHAT DO I DO IF MY SHARES ARE HELD IN "STREET NAME"?
If your shares are held in the name of your broker, a bank or other
nominee, you should return your proxy in the envelope provided by such broker,
bank or nominee or instruct the person responsible for holding your shares to
execute a proxy on your behalf. In either case, your shares will be voted
according to your instructions.
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If you wish to attend the annual meeting and vote your shares in person,
you should obtain from your broker, bank or other nominee prior to the annual
meeting, the documents required to vote your shares in person at the annual
meeting.
If your shares are held in the name of a broker, and you do not provide
instructions on how to vote your shares, the nominee can vote them as it sees
fit, but only on routine matters and not on any other matters.
Shares held by nominees who do not have discretionary authority to vote on
a particular matter and who have not received voting instructions from their
customers are not counted or deemed to be present or represented for purposes of
determining whether that matter has been approved by shareholders, but they are
counted as present for purposes of determining the existence of a quorum at the
annual meeting.
WHAT IS THE QUORUM REQUIRED FOR THE MEETING?
We will hold the annual meeting if holders of shares having a majority of
the combined voting power of the Class A and Class B common stock either sign
and return their proxy cards or attend the meeting. If you sign and return your
proxy card, your shares will be counted to determine whether we have a quorum,
even if you fail to indicate your vote.
Abstentions and broker "non-votes" will be counted as present for purposes
of determining whether a quorum exists at the annual meeting.
WHAT IS A BROKER "NON-VOTE"?
A broker "non-vote" occurs when a nominee holding shares for a beneficial
owner does not vote on a particular matter because the nominee does not have
discretionary voting power for that particular item and has not received
instructions from the beneficial owner.
WHO IS SOLICITING MY VOTE?
The Board of Directors is soliciting your vote.
WHO PAYS FOR THIS PROXY SOLICITATION?
The Company pays for the proxy solicitation.
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PROPOSAL NO. 1: ELECTION OF CLASS A/CLASS B DIRECTOR
We currently have seven directors, each of whom is elected on an annual
basis. In accordance with the Company's Bylaws, the number of directors has been
fixed at seven. The Certificate of Incorporation of the Company provides that
the holders of the Class B common stock elect all but one of the directors. The
holders of the Class A common stock and Class B common stock, voting together,
elect one director (the Class A/Class B director). This election of one Class
A/Class B director by the holders of Class A and Class B common stock voting
together is scheduled to take place at the annual meeting of the Company's
shareholders. The Board of Directors is soliciting your vote for the Class
A/Class B director to be elected at the annual meeting of shareholders. Once
elected, the Class A/Class B director will hold office until his or her
successor is elected, which should occur at next year's annual meeting of
shareholders. You do not have a vote, and your vote is not being solicited, with
respect to the election of the six Class B directors who will be elected at the
meeting.
VOTE REQUIRED. The person receiving the highest number of votes cast by
the Class A and Class B shares, voting together, will be elected as the Class
A/Class B director. You will have one vote for each of your shares of Class A
common stock. Abstentions will not be counted.
NOMINATIONS. At the annual meeting, Ronald L. Nelson will be nominated for
election as the Class A/Class B director. Although we don't know of any reason
why Mr. Nelson might not be able to serve, the Board of Directors will propose a
substitute nominee to serve if Mr. Nelson is not available for election for any
reason.
Generally, shareholders can nominate persons to be directors. If a
shareholder wants to nominate someone, he or she must follow the procedures set
forth in the Company's Bylaws. In short, these procedures require the
shareholder to timely deliver a notice to the Company's Secretary at the
Company's principal executive offices. That notice must contain the information
required by the Bylaws about the shareholder proposing the nominee and about the
nominee.
No shareholder nominees have been proposed for this year's meeting.
GENERAL INFORMATION ABOUT THE CLASS A/CLASS B DIRECTOR NOMINEE
Ronald L. Nelson is the director nominee proposed for election by the
holders of our Class A and Class B common stock. Mr. Nelson has agreed to be
named in this proxy statement and to serve as a director if elected. Further
information as of April 10, 2001 about the nominee is set forth below.
RONALD L. NELSON, 48, has been a director of the Company since November
1999. Mr. Nelson is chief operating officer of DreamWorks LLC, a multi-media
entertainment company, of which he was a founding member and has served in
executive management since 1994. Prior to that time, during his 15 years at
Paramount Communications Inc., he served in a variety of operating and executive
positions. He currently serves as a member of the board of directors of Advanced
Tissue Sciences, Inc. and Centre Pacific, L.L.C., a registered investment
advisor. Mr. Nelson has a B.S. degree from the University of California at
Berkeley and an M.B.A. degree from the University of California at Los Angeles.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS VOTING "FOR" THE CLASS
A/CLASS B DIRECTOR NOMINEE.
INFORMATION ABOUT THE COMPANY'S CLASS B DIRECTOR NOMINEES
The following information as of April 10, 2001 concerns the six currently
serving Class B directors, all of whom have been nominated by the Board of
Directors for election by the Class B holder, voting as a separate class.
PAUL G. ALLEN, 48, has been Chairman of the Board of Directors of the
Company since July 1999, and chairman of the board of directors of Charter
Investment, Inc. (a predecessor to, and currently an affiliate of, the Company)
since December 1998. Mr. Allen, a co-founder of Microsoft Corporation, has been
a private
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investor for more than five years, with interests in over 140 companies, many of
which contribute to the Wired World(TM) vision that the Company shares. Mr.
Allen's investments include Vulcan Ventures Incorporated, Portland Trail Blazers
NBA team, Seattle Seahawks NFL franchise, Vulcan Programming, Inc. and Vulcan
Cable III Inc. and he has investments in USA Networks, Inc., TechTV, L.L.C.,
DreamWorks LLC, High Speed Access Corp., Oxygen Media, LLC and Wink
Communications, Inc. He is a director of USA Networks, Inc., TechTV, L.L.C. and
numerous privately held companies.
JERALD L. KENT, 44, has been the President, Chief Executive Officer and a
director of the Company since July 1999 and of Charter Investment since April
1995. He previously held the position of chief financial officer of Charter
Investment. Prior to co-founding Charter Investment in 1993, Mr. Kent was
executive vice president and chief financial officer of Cencom Cable Associates,
Inc. Before that, he held other executive positions at Cencom. Earlier, he was
with Arthur Andersen LLP, where he attained the position of tax manager. Mr.
Kent is a member of the board of directors of High Speed Access Corp., Cable
Television Laboratories, Inc., Com21 Inc. and C-Span. He is also a member of the
executive committee and the board of directors of the National Cable Television
Association. Mr. Kent, a certified public accountant, received his undergraduate
and M.B.A. degrees from Washington University (St. Louis). Mr. Kent's employment
agreement provides that he serve on the Company's Board of Directors. See
"Certain Relationships and Related Transactions - Employment and Consulting
Arrangements."
MARC B. NATHANSON, 55, has been a director of the Company since January
2000. Mr. Nathanson is the chairman of Mapleton Investments LLC, an investment
vehicle formed in 1999. He also founded and served as chairman and chief
executive officer of Falcon Holding Group, Inc., a cable operator, and its
predecessors, from 1975 until 1999. He served as chairman and chief executive
officer of Enstar Communications Corporation, a cable operator, from 1988 until
November 1999. Prior to 1975, Mr. Nathanson held executive positions with
Teleprompter Corporation, Warner Cable and Cypress Communications Corporation.
In 1995, he was appointed by the President of the United States, and since 1998
has served as chairman of The Broadcasting Board of Governors. Pursuant to a May
1999 letter agreement, Mr. Nathanson serves as Vice-Chairman and as a director
of the Company. See "Certain Relationships and Related Transactions - Employment
and Consulting Arrangements."
NANCY B. PERETSMAN, 47, has been a director of the Company since November
1999. Ms. Peretsman has been a managing director and executive vice president of
Allen & Company Incorporated, an investment bank unrelated to Paul G. Allen,
since 1995. From 1983 to 1995, she was an investment banker at Salomon Brothers
Inc., where she was a managing director since 1990. She is a director of
Priceline.com Incorporated and several privately held companies. She has a B.A.
degree from Princeton University and an M.P.P.M. degree from Yale University.
WILLIAM D. SAVOY, 36, has been a director of the Company since July 1999
and a director of Charter Investment since December 1998. Since 1990, Mr. Savoy
has been an officer and a director of many affiliates of Mr. Allen, including
vice president and a director of Vulcan Ventures Incorporated, president of
Vulcan Northwest, Inc., and president and a director of Vulcan Programming, Inc.
and Vulcan Cable III Inc. Mr. Savoy also serves on the advisory board of
DreamWorks LLC and as a director of drugstore.com, High Speed Access Corp.,
Metricom, Inc., Peregrine Systems, Inc., RCN Corporation, Telescan, Inc., USA
Networks, Inc., TechTV, L.L.C. and digeo, inc. Mr. Savoy holds a B.S. degree in
computer science, accounting and finance from Atlantic Union College.
HOWARD L. WOOD, 61, has been a director of the Company since January 2000.
Mr. Wood co-founded Charter Investment in 1993 and served in various executive
capacities there until November 1999, when he became a consultant to the
Company. Prior to 1993, Mr. Wood was chief executive officer of Cencom Cable
Associates, Inc., where he also served in various other executive positions.
Earlier he was partner-in-charge of the St. Louis Tax Division of Arthur
Andersen LLP. He is a director of First State Community Bank, Gaylord
Entertainment Company and Data Research, Inc. Mr. Wood, a certified public
accountant, graduated from Washington University (St. Louis) School of Business.
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COMMITTEES OF THE BOARD
The Audit Committee oversees the Company's internal accounting and auditing
procedures, reviews audit and examination results and procedures with
independent accountants, oversees reporting of financial information including
review of quarterly and annual financial information prior to filing with the
SEC, determines the objectivity and independence of the independent accountants
and makes recommendations to the Board of Directors as to selection of
independent accountants. The members of the Audit Committee are Ronald L.
Nelson, Nancy B. Peretsman and Howard L. Wood. The Audit Committee's functions
are detailed in a written Audit Committee Charter adopted by the Board of
Directors, which is attached as Appendix A to this Proxy Statement. The Audit
Committee met four times in 2000.
The Compensation Committee was formed in February 2000 for the purpose of
reviewing and approving Company compensation and benefits programs, and
approving compensation for senior management. The members of the Compensation
Committee are Paul G. Allen, Marc B. Nathanson, William D. Savoy and Howard L.
Wood. The Compensation Committee met five times in 2000.
The Option Plan Committee was formed in June 2000 for the purpose of
administering the 1999 Option Plan. The Option Plan Committee, consisting of
directors Nancy B. Peretsman and Ronald L. Nelson, met three times in 2000.
The Executive Committee may act in place of the full Board of Directors and
exercise such powers of the full Board as the Board may delegate to such
Committee from time to time. The Executive Committee, consisting of directors
Paul G. Allen, Jerald L. Kent and William D. Savoy, met nine times in 2000.
The Board of Directors does not have a standing Nominating Committee.
The full Board of Directors had six meetings in 2000 and there were four
actions of the Board by written consent. No director attended fewer than 75% of
the total number of meetings of the Board and of committees on which he or she
served.
DIRECTOR COMPENSATION
Mr. Kent, the only director who is also an employee of the Company, does
not receive any additional compensation for serving as a director or attending
any meeting of the Board of Directors. Each non-employee director, other than
Mr. Allen, was issued 40,000 fully vested options for agreeing to join the Board
of Directors. All non-employee directors received a grant of 10,000 vested
options in February 2001, subject to approval of the 2001 Incentive Plan by the
Company's shareholders at the Annual Meeting as described in this Proxy
Statement. All directors are entitled to reimbursement for costs incurred in
connection with attendance at Board and committee meetings and may receive
additional compensation to be determined.
Mr. Kent is a party to an employment agreement with the Company. Mr. Wood
is a party to a consulting agreement with the Company and Mr. Nathanson is a
party to a letter agreement with the Company. These agreements are summarized in
"Certain Relationships and Related Transactions - Employment and Consulting
Arrangements."
EXECUTIVE OFFICERS
Unless otherwise noted below, our executive officers were elected to their
positions, and became employees of the Company in November 1999. Prior to that
time, they were employees of our affiliate, Charter Investment. The executive
officers are elected by the Board of Directors annually following the Annual
Meeting of Shareholders, and each serves until his or her successor is elected
and qualified or until his or her earlier resignation or removal. Biographical
information about each executive officer as of April 10, 2001 follows.
DAVID C. ANDERSEN, 52, Senior Vice President -- Communications. Prior to
joining the Company in May 2000, Mr. Andersen served as vice president of
Communications for CNBC, the worldwide cable and satellite business news network
subsidiary of NBC. Before that, starting in 1982 when he established their
public relations department, Mr. Andersen served in various management positions
at Cox Communications,
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Inc., most recently as vice president of Public Affairs. Mr. Andersen serves on
the board of KIDSNET, and is a former chairman of the National Captioning
Institute's Cable Advisory Board. He received a B.S. degree in Journalism from
the University of Kansas.
DAVID G. BARFORD, 42, Executive Vice President and Chief Operating
Officer. Mr. Barford was promoted to his current position in July 2000, having
previously served as Senior Vice President of Operations - Western Division.
Prior to joining Charter Investment in 1995, Mr. Barford held various senior
marketing and operating roles during nine years at Comcast Cable Communications,
Inc. He received a B.A. degree from California State University, Fullerton, and
an M.B.A. degree from National University.
MARY PAT BLAKE, 45, Senior Vice President -- Marketing and Charter
Media. Prior to joining Charter Investment in 1995, Ms. Blake was active in the
emerging business sector and formed Blake Investments, Inc. in 1993. She has 18
years of experience with senior management responsibilities in marketing, sales,
finance, systems and general management. Ms. Blake received a B.S. degree from
the University of Minnesota and an M.B.A. degree from the Harvard Business
School.
ERIC A. FREESMEIER, 48, Senior Vice President -- Administration. From 1986
until joining Charter Investment in 1998, Mr. Freesmeier served in various
executive management positions at Edison Brothers Stores, Inc. Earlier he held
management and executive positions at Montgomery Ward. Mr. Freesmeier holds
bachelor's degrees from the University of Iowa and a master's degree from
Northwestern University's Kellogg Graduate School of Management.
THOMAS R. JOKERST, 51, Senior Vice President -- Advanced Technology
Development. Mr. Jokerst joined Charter Investment in 1994. Previously he
served as a vice president of Cable Television Laboratories and as a regional
director of engineering for Continental Cablevision. Mr. Jokerst is a graduate
of Ranken Technical Institute and of Southern Illinois University.
KENT D. KALKWARF, 41, Executive Vice President and Chief Financial
Officer. Mr. Kalkwarf was promoted to the position of Executive Vice President
in July 2000, having previously served as Senior Vice President. Prior to
joining Charter Investment in 1995, Mr. Kalkwarf was employed for 13 years by
Arthur Andersen LLP, where he attained the position of senior tax manager. He
has extensive experience in cable, real estate and international tax issues. Mr.
Kalkwarf has a B.S. degree from Illinois Wesleyan University and is a certified
public accountant.
RALPH G. KELLY, 44, Senior Vice President -- Treasurer. Prior to joining
Charter Investment in 1993, Mr. Kelly was controller and then treasurer of
Cencom Cable Associates. He left Charter Investment in 1994, to become chief
financial officer of CableMaxx, Inc., and returned in 1996. Mr. Kelly received
his bachelor's degree in accounting from the University of Missouri - Columbia
and his M.B.A. degree from Saint Louis University.
JERALD L. KENT, 44, President, Chief Executive Officer and Director. Mr.
Kent has held these positions with the Company since July 1999 and with Charter
Investment since April 1995. He previously held the position of chief financial
officer of Charter Investment. Prior to co-founding Charter Investment in 1993,
Mr. Kent was executive vice president and chief financial officer of Cencom
Cable Associates, Inc. Before that, he held other executive positions at Cencom.
Earlier, he was with Arthur Andersen LLP, where he attained the position of tax
manager. Mr. Kent is a member of the board of directors of High Speed Access
Corp., digeo, inc., Cable Television Laboratories, Inc., Com21 Inc. and C-Span.
He is also a member of the executive committee and the board of directors of the
National Cable Television Association. Mr. Kent, a certified public accountant,
received his undergraduate and M.B.A. degrees from Washington University (St.
Louis).
DAVID L. MCCALL, 45, Senior Vice President -- Operations -- Eastern
Division. Prior to joining Charter Investment in 1995, Mr. McCall was
associated with Crown Cable and its predecessor company, Cencom Cable
Associates, Inc., from 1983 to 1994. Mr. McCall is a member of the Southern
Cable Association's Tower Club.
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MAJID R. MIR, 50, Senior Vice President -- Telephony and Advanced
Services. From 1999 until joining the Company in April 2001, Mr. Mir was
employed by Genuity, Inc. where he was vice president for local fiber
engineering. Prior to that, he was assistant vice president of global network
infrastructure for GTE Internetworking. Mr. Mir has been working in the field of
telephony since 1979. Mr. Mir earned a B.S. degree in computer science from the
University of West Florida and an M.B.A. degree from the University of South
Florida.
JOHN C. PIETRI, 51, Senior Vice President -- Engineering. Prior to joining
Charter Investment in 1998, Mr. Pietri was with Marcus Cable for nine years,
most recently serving as senior vice president and chief technical officer.
Earlier he was in operations with West Marc Communications and Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
MICHAEL E. RIDDLE, 42, Senior Vice President and Chief Information
Officer. Prior to joining the Company in December 1999, Mr. Riddle was
director, applied technologies of Cox Communications for four years. Prior to
that, he held technical and management positions during 17 years at Southwestern
Bell and its subsidiaries. Mr. Riddle attended Fort Hays State University.
STEVEN A. SCHUMM, 48, Executive Vice President and Assistant to the
President. Prior to joining Charter Investment in 1998, Mr. Schumm was managing
partner of the St. Louis office of Ernst & Young LLP for 14 years. He had joined
Ernst & Young in 1974. He served as one of 10 members of the firm's National Tax
Committee. Mr. Schumm earned a B.S. degree from Saint Louis University.
CURTIS S. SHAW, 52, Senior Vice President, General Counsel and
Secretary. From 1988 until he joined Charter Investment in 1997, Mr. Shaw
served as corporate counsel to NYNEX. Since 1973, Mr. Shaw has practiced as a
corporate lawyer, specializing in mergers and acquisitions, joint ventures,
public offerings, financings, and federal securities and antitrust law. Mr. Shaw
received a B.A. degree from Trinity College and a J.D. degree from Columbia
University School of Law.
STEPHEN E. SILVA, 41, Senior Vice President -- Corporate Development and
Technology. Mr. Silva joined Charter Investment in 1995 and has also served as
vice president responsible for billing services and new product development. Mr.
Silva previously served in various management positions at U.S. Computer
Services, Inc., a billing service provider specializing in the cable industry.
He is a member of the board of directors of High Speed Access Corp. and Diva
Systems Corporation.
JAMES H. (TREY) SMITH, III, 53, Senior Vice
President -- Operations -- Western Division. Mr. Smith was appointed to his
current position in September 2000, previously serving as a division president
of AT&T Broadband. Before that, he was president and chief executive officer of
Rogers Cablesystems Ltd., senior vice president of the Western Region for
MediaOne/Continental Cable and executive vice president of operations for Times
Mirror Cable TV, Inc. He received B.B.A. and M.B.A. degrees from Georgia State
University and is a certified public accountant.
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EXECUTIVE COMPENSATION
The following report and the performance graph on page 17 do not constitute
soliciting materials and are not considered filed or incorporated by reference
into any other Company filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, unless we state otherwise.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
making recommendations to the Board regarding the annual salaries and other
compensation of the officers of the Company and providing assistance and
recommendations with respect to compensation plans. In October 2000, the Board
of Directors retained Towers, Perrin as an independent consultant concerning
compensation. In February 2001, the Compensation Committee approved bonuses for
2000 and salary adjustments with respect to 2001 for executive officers other
than Mr. Kent.
In accordance with Mr. Kent's employment agreement, Mr. Kent's base salary
for 2000 was $1,250,000, and for 2001, has been increased to $1,500,000 by
action of the Board of Directors. In March 2001, based upon the recommendation
of the Compensation Committee, the Board of Directors approved a bonus for
calendar year 2000 for Mr. Kent in the amount of $1,000,000 based on the
following factors: (a) his formula bonus entitlement provisions under his
employment agreement; (b) the Company's successes in integrating acquired cable
systems; (c) the Company's accomplishments in rebuilding its cable systems and
rolling out additional services; (d) the Company's successful capital debt
financing; (e) the operating performance of the Company and its subsidiaries
during 2000; and (f) the level and value of the contributions that the Board of
Directors believes Mr. Kent made to the Company in 2000.
In order to attract and retain well qualified executives, which the
Compensation Committee believes is crucial to the Company's success, the
Committee's general approach to compensating executives is to pay cash salaries
which are commensurate with the executives' experience and expertise and, where
relevant, are competitive with the salaries paid to executives in the cable or
competitive telecommunications industries. In addition, to align executive
compensation with the Company's business strategies, values and management
initiatives, both short and long term, the Compensation Committee may recommend
to the Board of Directors or authorize the payment of discretionary bonuses
based upon an assessment of each executive's contributions to the Company and
the Company's performance during the period covered by the bonus consideration.
Most executive officer compensation determinations have been made based upon the
recommendations of Mr. Kent. The Board's practices in determining executive
compensation reflect subjective criteria, and in large part are influenced by
reported operating results.
The Compensation Committee believes that stock ownership by key executives
provides a valuable and important incentive for their continued best efforts and
diligence, and helps align their interests with those of the shareholders. To
facilitate these objectives, options have been granted to executives (as well as
other employees and directors) under the Charter Communications 1999 Option Plan
and the Charter Communications, Inc. 2001 Stock Incentive Plan. Since June 2000,
the Company's option plans have been administered by the Option Plan Committee,
comprised of directors Nancy B. Peretsman and Ronald L. Nelson. The option
grants under the 1999 Option Plan prior to June 2000 were approved by the entire
Board of Directors.
PAUL G. ALLEN HOWARD L. WOOD
MARC B. NATHANSON WILLIAM D. SAVOY
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In February 2000, the Company's Board of Directors appointed a Compensation
Committee comprised of Messrs. Allen, Savoy, Nathanson and Wood, and executive
officer compensation matters, including option grants, were delegated to the
Compensation Committee. In June 2000, the Company's Board of Directors appointed
Nancy B. Peretsman and Ronald L. Nelson to serve as a separate committee to
administer the 1999 Option Plan.
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During 2000 and through the date hereof, no member of the Compensation
Committee or the Option Plan Committee was an officer or employee of the Company
or any of its subsidiaries. Mr. Wood served as an officer of the Company for
several months in 1999, and served as a consultant to the Company in 2000. Mr.
Nathanson served as an officer of certain of the Company's subsidiaries prior to
their acquisition by the Company. Transactions between the Company and certain
members of the Compensation Committee are more fully described in "Certain
Relationships and Related Transactions."
None of the Company's executive officers serve on the compensation
committee of any other company that has an executive officer currently serving
on the Board of Directors of the Company or any of its affiliates, the
Compensation Committee or the Option Plan Committee.
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SUMMARY COMPENSATION TABLE
The following table sets forth information regarding the compensation paid
for services rendered in 2000 to executive officers of the Company for the
fiscal years ended December 31, 1998, 1999 and 2000, including the Chief
Executive Officer and each of the other four most highly compensated executive
officers as of December 31, 2000. Through the beginning of November 1999, such
executive officers had received their compensation from Charter Investment.
Since November 1999, such officers receive their compensation from the Company.
LONG-TERM
COMPENSATION
AWARD
ANNUAL COMPENSATION ------------
YEAR --------------------------------------------- SECURITIES
NAME AND ENDED OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($)(1) COMPENSATION($)(2) OPTIONS(#) COMPENSATION($)(3)
------------------ ------- ---------- ----------- ------------------ ------------ ------------------
Jerald L. Kent.............. 2000 1,250,000 1,000,000 127,005(4) -- 5,250
President and Chief 1999 1,250,000 625,000 76,799(5) -- 4,000
Executive Officer 1998 790,481 641,353 -- 7,044,127 18,821
Steven A. Schumm (6)........ 2000 410,000 444,000 -- -- 2,040
Executive Vice President 1999 400,000 60,000 -- 782,681 1,920
1998 12,307 12,300 -- -- --
David G. Barford............ 2000 255,000 250,500 -- 40,000 5,250
Executive Vice President
and 1999 235,000 80,000 -- 200,000 7,000
Chief Operating Officer 1998 220,000 225,000(7) -- -- 8,395,235(8)
Kent D. Kalkwarf............ 2000 225,000 250,500 -- 40,000 5,250
Executive Vice President 1999 180,000 80,000 -- 200,000 2,856
and Chief Financial
Officer 1998 135,000 55,000 -- -- 7,768,091(8)
David L. McCall............. 2000 225,000 283,625 -- 25,000 4,237
Senior Vice President of 1999 149,656 108,800 -- 200,000 505
Operations -- Eastern 1998 133,414 107,180 -- -- 4,193,495(8)
Division
---------------
(1) Includes "stay" bonus of $321,000 for Mr. Schumm and $160,500 for each of
Messrs. Barford, Kalkwarf and McCall in the form of principal and interest
forgiven during 2000 under employee's promissory note, as more fully
described in "Certain Relationships and Related Transactions - Employment
and Consulting Arrangements."
(2) Includes other annual non-cash compensation, such as Company-paid health,
disability and life insurance premiums pursuant to plans covering all
employees, unless the total amount does not exceed the lesser of $50,000 or
10% of such officer's total annual salary and bonus shown in the table.
(3) Includes matching contributions under the Company's 401(k) plan.
(4) Includes $35,499 attributed to personal use of a corporate airplane and
$85,214 as reimbursement for purchase of a car.
(5) Includes $55,719 paid for club membership and dues and $20,351 attributed to
personal use of a corporate airplane.
(6) Mr. Schumm became affiliated with Charter Investment on December 16, 1998.
(7) Includes $150,000 received as a one-time bonus.
(8) Received in March 1999 in connection with a one-time change of control
payment under the terms of a previous equity appreciation rights plan. This
payment was triggered by Mr. Allen's acquisition of control on December 23,
1998, but was income for 1999.
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2000 OPTION GRANTS
The following table shows individual grants of options made to executive
officers named in the Summary Compensation Table during 2000. All such grants
were made under the 1999 Option Plan and the exercise price was based upon the
fair market value of the underlying securities on the date of grant.
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE EXPIRATION ---------------------------
NAME GRANTED(1) IN 2000 PRICE DATE 5% 10%
---- ---------- ---------- -------- ---------- ----------- -------------
Jerald L. Kent................ -- -- -- -- -- --
Steven A. Schumm.............. -- -- -- -- -- --
David G. Barford.............. 40,000 0.4% $19.47 2/15/10 $489,783 $2,020,007
Kent D. Kalkwarf.............. 40,000 0.4% $19.47 2/15/10 489,783 2,020,007
David L. McCall............... 25,000 0.2% $19.47 2/15/10 306,114 1,262,504
---------------
(1) These options are exercisable as to 25% of the underlying securities at the
fifteenth month after grant, and thereafter, as to 1/45 of the remaining
securities in each of the next 45 months. These options were granted under
the 1999 Option Plan and, when vested, are exercisable for membership units
of Charter Communications Holding Company, which are immediately exchanged
on a one-for-one basis for shares of the Company's Class A common stock.
(2) This column shows the hypothetical gains on the options granted based on
assumed annual compound price appreciation of 5% and 10% over the full
ten-year term of the options. The assumed rates of appreciation are mandated
by the SEC and do not represent our estimate or projection of future prices.
2000 AGGREGATED OPTION EXERCISES AND DECEMBER 31, 2000 OPTION VALUE TABLE
There were no option exercises by executive officers named in the Summary
Compensation Table in 2000. The following table sets forth, for such officers,
information concerning options, including the number of securities for which
options were held at December 31, 2000, the value of unexercised "in-the-money"
options (i.e., the positive spread between the exercise price of outstanding
options and the market value of the Company's Class A common stock on December
31, 2000) and the value of unexercised options as of December 31, 2000.
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SECURITIES DECEMBER 31, 2000(1) DECEMBER 31, 2000(2)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
Jerald L. Kent............... -- -- 3,522,063 3,522,064 $80,901,787 $80,901,810
Steven A. Schumm............. -- -- 300,027 482,654 6,891,620 11,086,103
David G. Barford............. -- -- 76,666 163,334 1,761,018 3,751,782
Kent D. Kalkwarf............. -- -- 76,666 163,334 1,761,018 3,751,782
David L. McCall.............. -- -- 76,666 148,334 1,761,018 3,407,232
---------------
(1) These options are exercisable as to 25% of the underlying securities at the
fifteenth month after grant, and thereafter, as to 1/45 of the remaining
securities in each of the next 45 months. These options were granted under
the 1999 Option Plan and, when vested, are exercisable for membership units
of Charter Communications Holding Company, which are immediately exchanged
on a one-for-one basis for shares of the Company's Class A common stock.
(2) Based on a per share market value of $22.97 for the Company's Class A common
stock.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Class A common stock as of April 10, 2001 by:
- each of our directors;
- each of our executive officers named in the Summary Compensation Table;
- all directors and executive officers of the Company as a group; and
- each person known by us to own beneficially 5% or more of the Company's
outstanding Class A common stock.
With respect to the percentage of voting power set forth in the following
table:
- each holder of the Company's Class A common stock is entitled to one vote
per share; and
- each holder of the Company's Class B common stock is entitled to a number
of votes based on the number of such holder's and his affiliates' shares
of Class B common stock and membership units of Charter Communications
Holding Company exchangeable for Class B common stock. For example, Mr.
Allen is entitled to 10 votes for each share of Class B common stock held
by him or his affiliates and 10 votes for each membership unit of Charter
Communications Holding Company held by him or his affiliates.
SHARES CLASS A COMMON STOCK
RECEIVABLE ON -----------------------------------------------
NUMBER OF EXERCISE OF SHARES ISSUABLE
CLASS A SHARES VESTED UPON EXCHANGE % OF % OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OPTIONS(2) OR CONVERSION(3) EQUITY(4) VOTING POWER(5)
------------------------------------ -------------- ------------- ---------------- --------- ---------------
Paul G. Allen(6)................ 8,900,883 10,000 324,300,479(7) 48.21% 93.5%
Charter Investment, Inc.(8)..... -- -- 217,585,246(9) 48.20% *
Vulcan Cable III Inc.(6)........ -- -- 106,715,233(11) 31.34% *
Jerald L. Kent.................. 22,000 4,109,074 1.74% *
Howard L. Wood.................. -- 155,000 * *
Marc B. Nathanson(10)........... 9,967,435 50,000 4.28% *
Ronald L. Nelson................ 17,500 50,000 * *
Nancy B. Peretsman.............. 10,000 50,000 * *
William D. Savoy................ -- 50,000 735,126(11) * *
Steven A. Schumm(12)............ 3,700 339,161 * *
David G. Barford................ 2,500 86,666 * *
Kent D. Kalkwarf................ 9,000 86,666 * *
David L. McCall................. 4,700 86,666 * *
All current directors and executive
officers as a group (22
persons)...................... 19,040,893 6,143,954 324,300,479 61.91% 93.9%
TCID of Michigan, Inc........... -- -- 15,117,743 6.1% *
---------------
* Less than 1%.
(1) Includes shares for which the named person has:
- sole voting and investment power; or
- shared voting and investment power with a spouse.
Does not include shares that may be acquired through exercise of options.
(2) Includes shares of the Company's Class A common stock issuable upon
exercise of options vested on or before June 9, 2001 under the 1999 Option
Plan. Furthermore, because the Company's controlling shareholder has
advised the Company of his intent to vote to approve the 2001 Incentive
Plan, this number also includes options granted to directors under the 2001
Incentive Plan, which were fully vested upon grant, but the exercise of
which is conditioned on the approval of the plan by the Company's
shareholders at the upcoming annual meeting.
(3) Beneficial ownership is determined in accordance with Rule 13d-3. The
beneficial owners of the Company's Class B common stock, Charter
Communications Holding Company membership units and CC VIII, LLC membership
units are deemed to be beneficial owners of an equal number of shares of
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the Company's Class A common stock because such holdings are either
convertible into Class A shares (in the case of Class B shares) or
exchangeable (directly or indirectly) for Class A shares (in the case of
the membership units) on a one-for-one basis. Unless otherwise noted, the
named holders have sole investment and voting power with respect to the
shares listed as beneficially owned.
(4) The calculation of this percentage assumes for each person that:
- 33,750,212 shares of Class A common stock are currently issued and
outstanding;
- 50,000 shares of Class B common stock held by Mr. Allen have been
converted into shares of Class A common stock;
- the acquisition by such person of all shares of Class A common stock
that such person or affiliates of such person has the right to acquire
upon exchange of membership units in subsidiaries;
- the acquisition by such person of all shares that may be acquired upon
exercise of options to purchase shares or exchangeable membership
units that have vested or will vest by June 9, 2001; and
- that none of the other listed persons or entities has received any
shares of Class A common stock that are issuable to any of such
persons pursuant to the exercise of options or otherwise.
A person is deemed to have the right to acquire shares of Class A common
stock with respect to options outstanding under the 1999 Option Plan. When
vested, these options are exercisable for membership units of Charter
Communications Holding Company, which are immediately exchanged on a
one-for-one basis for shares of Class A common stock. A person is also
deemed to have the right to acquire shares of Class A common stock
issuable upon the exercise of vested options under the 2001 Incentive
Plan.
(5) The calculation of this percentage assumes that Mr. Allen's equity
interests are retained in the form that maximizes voting power (i.e., the
50,000 shares of Class B common stock held by Mr. Allen have not been
converted into shares of Class A common stock; that the membership units of
Charter Communications Holding Company owned by both Vulcan Cable III Inc.
and Charter Investment have not been exchanged for shares of Class A common
stock); and that outstanding membership units of CC VIII, LLC owned by TCID
of Michigan, Inc. have not been exchanged for shares of Class A common
stock.
(6) The address of these persons is 505 Fifth Avenue, Suite 900, Seattle, WA
98104.
(7) The total listed is comprised of:
- 217,585,246 membership units in Charter Communications Holding Company
held by Charter Investment;
- 106,715,233 membership units in Charter Communications Holding Company
held by Vulcan Cable III Inc.; and
- 50,000 shares of Class B common stock held directly by Mr. Allen (100%
of the Class B common stock issued and outstanding).
(8) Includes 217,585,246 membership units in Charter Communications Holding
Company which are exchangeable for shares of Class B common stock on a
one-for-one basis, which are convertible to shares of Class A common stock
on a one-for-one basis. The address of this person is 12444 Powerscourt
Drive, Suite 100, St. Louis, MO 63131.
(9) These membership units in Charter Communications Holding Company are
exchangeable for shares of Class A common stock at any time on a
one-for-one basis.
(10) Consists of the following shares:
- 4,023,336 shares for which Mr. Nathanson has sole investment and
voting power;
- 5,543,654 shares for which he has shared investment and voting power;
and
- 400,445 shares for which he has sole investment power and shared
voting power.
(11) Includes 735,126 shares of Class A common stock that may be acquired by Mr.
Savoy upon exercise of options from Vulcan Cable III Inc. to purchase
membership units in Charter Communications Holding Company that have vested
or will vest by June 9, 2001.
(12) Includes 3,700 shares for which Mr. Schumm has shared investment and voting
power.
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PERFORMANCE GRAPH
The graph below shows the cumulative total return on the Company's Class A
common stock for the period from November 8, 1999, the date of the initial
public offering of the Company's Class A common stock, through December 31,
2000, in comparison to the cumulative total return on Standard & Poor's 500
Index and a peer group consisting of the four national cable operators that are
most comparable to the Company in terms of size and nature of operations. These
four are: Adelphia Communications Corporation, Cablevision Systems Corporation,
Comcast Corporation, and Cox Communications, Inc. The results shown assume that
$100 was invested on November 9, 1999 and that all dividends were reinvested.
COMPARISON OF 14-MONTH CUMULATIVE TOTAL RETURN*
AMONG CHARTER COMMUNICATIONS, INC., THE S & P 500 INDEX
AND A PEER GROUP
CHARTER COMMUNICATIONS,
INC. S & P 500 PEER GROUP
----------------------- --------- ----------
11/9/1999 100.00 100.00 100.00
12/99 115.13 108.04 115.20
3/00 75.41 110.52 101.03
6/00 87.32 107.58 96.51
9/00 86.40 106.54 88.74
12/00 121.43 98.20 102.14
* $100 INVESTED ON 11/9/99 IN STOCK OR ON 10/31/99
IN INDEX -- INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31, 2000.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth certain transactions in which we and our
directors, executive officers and affiliates are involved. We believe that each
of the transactions described below was on terms no less favorable to us than
could have been obtained from independent third parties.
MANAGEMENT AND CONSULTING ARRANGEMENTS
MANAGEMENT ARRANGEMENTS. The Company has entered into management
arrangements with Charter Communications Holding Company and certain of its
subsidiaries. Under these agreements, the Company provides management services
for and operates the cable television systems owned or to be acquired. The
management agreements covering the CC VI and CC VII Companies limit management
fees payable to the Company to 5% of gross revenues. Under the arrangement
covering all of our other operating subsidiaries, there is no limit on the
dollar amount or percentage of revenues payable as management fees. However, the
total amount paid by Charter Communications Holding Company and all of its
subsidiaries is limited to the amount necessary to reimburse the Company for all
of its expenses, costs, losses, liabilities and damages paid or incurred by it
in connection with the performance of its services under the various management
agreements. The expenses subject to reimbursement include any fees the Company
is obligated to pay under the mutual services agreement described below. Payment
of management fees by the Company's operating subsidiaries is subject to certain
restrictions under the credit facilities of such subsidiaries. In the event any
portion of the management fee due and payable is not paid, it is deferred by
Charter Communications, Inc. and accrued as a liability of such subsidiaries.
Any deferred amount of the management fee will bear interest at the rate of 10%
per annum, compounded annually, from the date it was due and payable until the
date it is paid.
In 2000, the Company received a total of $4,957,000 as management fees from
Charter Communications Holding Company and its subsidiaries, exclusive of
amounts being paid to Charter Investment pursuant to the mutual services
agreement described below.
MUTUAL SERVICES AGREEMENT WITH CHARTER INVESTMENT AND CHARTER
COMMUNICATIONS HOLDING COMPANY. The Company has only 15 employees, all of whom
are also executive officers of Charter Communications Holding Company. Charter
Communications, Inc., Charter Investment and Charter Communications Holding
Company are parties to a mutual services agreement. The mutual services
agreement provides that each party shall provide rights and services to the
others as may be reasonably requested for the management of Charter
Communications Holding Company and Charter Holdings and the cable systems owned
by their subsidiaries. The officers and employees of each party are available to
the other parties to provide these rights and services, and all expenses and
costs incurred in providing these rights and services are paid by the Company.
Each of the parties will indemnify and hold harmless the other parties and their
directors, officers and employees from and against any and all claims that may
be made against any of them in connection with the mutual services agreement
except due to its or their gross negligence or willful misconduct. The mutual
services agreement expires on November 12, 2009, and may be terminated at any
time by any party upon thirty days' written notice to the other. During 2000,
the Company paid $50,285,700 to Charter Investment for services rendered
pursuant to the mutual services agreement. All such amounts are reimbursable to
the Company pursuant to a management arrangement with subsidiaries. See
"--Management Arrangements."
CONSULTING AGREEMENT. Charter Communications Holding Company is a party to
a consulting agreement with Vulcan Northwest and Charter Investment. Pursuant to
this consulting agreement, Vulcan Northwest and Charter Investment provide
advisory, financial and other consulting services with respect to the
acquisitions by Charter Communications Holding Company of the business, assets
or stock of other companies. Such services include participation in the
evaluation, negotiation and implementation of these acquisitions. The original
agreement had an expiration date of December 31, 2000, but automatically renewed
by its terms and automatically renews for successive one-year terms unless
otherwise terminated. For services rendered, the consulting agreement provides
for payment of a fee equal to 1% of the aggregate value of the acquisition for
their services rendered for each acquisition made by Charter Communications
Holding Company or any of its affiliates, reimbursement of reasonable
out-of-pocket expenses incurred and indemnification. In 2000, no fees were paid
with respect to consulting services by an affiliate of Mr. Allen.
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PREVIOUS MANAGEMENT AGREEMENT WITH CHARTER INVESTMENT. Prior to November
12, 1999, Charter Investment provided management and consulting services to our
operating subsidiaries for a fee equal to 3% of the gross revenues of the
systems then owned plus reimbursement of expenses. The balance of management
fees payable under the previous management agreement was accrued with payment at
the discretion of Charter Investment, with interest payable on unpaid amounts.
During 2000, the Company's subsidiaries paid $5,369,000 to Charter Investment to
reduce management fees payable. At December 31, 2000, total management fees
payable to Charter Investment were $13,751,000, exclusive of any interest that
may be charged.
ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN
As described under "Business Relationships" in this section, Mr. Allen and
a number of his affiliates have interests in various entities that provide
services or programming to our subsidiaries. Given the diverse nature of Mr.
Allen's investment activities and interests, and to avoid the possibility of
future disputes as to potential business, Charter Communications Holding Company
and the Company, under the terms of their respective organizational documents,
may not, and may not allow their subsidiaries to, engage in any business
transaction outside the cable transmission business except for the digeo, inc.
joint venture; the joint venture to develop a digital video recorder set-top
terminal; the investment in High Speed Access Corp.; the investment in Cable
Sports Southeast, LLC, a provider of regional sports programming; as an owner
and operator of the business of Interactive Broadcaster Services Corporation
(Chat TV); and incidental businesses engaged in as of the closing of the
Company's initial public offering in November 1999. This restriction will remain
in effect until all of the shares of the Company's high-vote Class B common
stock have been converted into shares of Class A common stock due to Mr. Allen's
equity ownership falling below specified thresholds.
Should the Company or Charter Communications Holding Company or any of
their subsidiaries wish to pursue, or allow their subsidiaries to pursue, a
business transaction outside of this scope, it must first offer Mr. Allen the
opportunity to pursue the particular business transaction. If he decides not to
pursue the business transaction and consents to the Company or its subsidiaries
engaging in the business transaction, they will be able to do so. In any such
case, the restated certificate of incorporation of the Company and the amended
and restated limited liability company agreement of Charter Communications
Holding Company would be amended accordingly to modify the current restrictions
on the ability of such entities to engage in any business other than the cable
transmission business. The cable transmission business means the business of
transmitting video, audio, including telephony, and data over cable television
systems owned, operated or managed by the Company, Charter Communications
Holding Company or any of their subsidiaries from time to time. The businesses
of RCN Corporation, a company in which Mr. Allen has made a significant
investment, are not considered cable transmission businesses under these
provisions. See "--Business Relationships - RCN Corporation."
Under Delaware corporate law, each director of the Company, including Mr.
Allen, is generally required to present to the Company, any opportunity he or
she may have to acquire any cable transmission business or any company whose
principal business is the ownership, operation or management of cable
transmission businesses, so that we may determine whether we wish to pursue such
opportunities. However, Mr. Allen and the other directors generally will not
have an obligation to present other types of business opportunities to the
Company and they may exploit such opportunities for their own account.
INTERCOMPANY LOANS
From time to time, there are intercompany borrowings and repayments between
or among the Company and its subsidiaries and between or among its subsidiaries.
For amounts borrowed, our practice is for the borrowing party to pay interest to
the lending party based on the borrower's cost of funds on its revolving credit
facility, which is based on a spread over LIBOR. On occasion, indebtedness
between companies has been forgiven in lieu of a contribution to capital. The
average month-end principal balance of indebtedness from our subsidiaries to our
parent companies during 2000 was $250 million. The total interest paid by our
operating subsidiaries for parent company indebtedness was $22.8 million, and
accrued interest on such debt at December 31, 2000 was $2.3 million.
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EMPLOYMENT AND CONSULTING ARRANGEMENTS
Jerald L. Kent is employed by the Company under an employment agreement
that terminates on December 23, 2001 with automatic one-year renewals. Under
this agreement, Mr. Kent serves as President and Chief Executive Officer of the
Company, with responsibility for the nationwide general management,
administration and operation of all present and future business of the Company
and its subsidiaries. The agreement provides that during the initial term, Mr.
Kent would receive an annual base salary of $1,250,000, or such higher rate as
may from time to time be determined by the Company's Board of Directors in its
discretion and an annual bonus up to $625,000, in an amount to be determined by
the Board based on an assessment of the performance of Mr. Kent as well as the
achievement of certain financial targets. The Company also agreed to cause Mr.
Kent to be elected to the Company's Board of Directors without any additional
compensation. Effective for 2001, Mr. Kent's base salary was increased to
$1,500,000. Also in 2001, he received a $1,000,000 bonus for services rendered
in 2000.
Under the agreement, Mr. Kent is entitled to participate in any disability
insurance, pension or other benefit plan afforded to employees generally or to
executives of the Company. Mr. Kent will be reimbursed by the Company for life
insurance premiums of up to $30,000 per year and is granted personal use of the
corporate airplane. Mr. Kent also is entitled to the use of a car valued at up
to $100,000 and the fees and dues for his membership in a country club of his
choice. In 2000, Mr. Kent did not avail himself of reimbursement for life
insurance premiums or country club dues.
In connection with this agreement, Mr. Kent received options to purchase
7,044,127 Charter Communications Holding Company membership units with an
exercise price of $20.00. The options have a term of 10 years and vested 25% on
December 23, 1998. The remaining 75% vest 1/36 on the first day of each of the
36 months commencing January 1, 2000. The terms of these options provide that
immediately following the issuance of membership units received upon exercise of
such options, these units will be automatically exchanged for shares of the
Company's Class A common stock on a one-for-one basis.
The agreement further provides that the Company will indemnify and hold
harmless Mr. Kent to the maximum extent permitted by law from and against any
claims, damages, liabilities, losses, costs or expenses in connection with or
arising out of the performance by Mr. Kent of his duties.
If the agreement expires because the Company gives Mr. Kent notice of its
intention not to extend the initial term, or if the agreement is terminated by
Mr. Kent for good reason or by the Company without cause:
- The Company will pay to Mr. Kent an amount equal to the total base salary
due to Mr. Kent for the remaining term and the Board of Directors will
consider additional amounts, if any, to be paid to Mr. Kent; and
- any unvested options held by Mr. Kent shall immediately vest.
Pursuant to an automatically renewing consulting agreement between the
Company and Howard L. Wood, Mr. Wood provides consulting services to the Company
and also is responsible for such other duties as the Chief Executive Officer
determines. Mr. Wood receives annual cash compensation at a rate of $60,000, and
is entitled to receive health benefits as well as use of an office and a
full-time secretary. The cost of the office and secretary in 2000 was $40,000.
The Company will indemnify and hold harmless Mr. Wood to the maximum extent
permitted by law from and against any claims, damages, liabilities, losses,
costs or expenses incurred in connection with or arising out of the performance
by him of his duties.
Effective as of May 25, 1999, Marc B. Nathanson entered into a letter
agreement with the Company for a three-year term. Under this agreement, Mr.
Nathanson serves as Vice-Chairman and as a director of the Company. During the
term of this agreement, Mr. Nathanson receives a benefit equal to $193,197 per
year, which amount is being paid by the Company to a company controlled by Mr.
Nathanson. In addition, Mr. Nathanson is entitled to the rights and benefits
provided to other directors of the Company. The Company will indemnify and hold
harmless Mr. Nathanson to the maximum extent permitted by law from and against
any claims, damages, liabilities, losses, costs or expenses incurred in
connection with or arising out of the performance by Mr. Nathanson of his
duties.
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Charter Investment issued 1999 "stay bonuses" and the Company issued 2000
"stay bonuses" to executive officers in the form of three-year promissory notes.
One-third of the original outstanding principal amount of each of these notes
and interest is forgiven at the end of each of the first three anniversaries of
the issue date, as long as the employee is still employed by the issuer of the
bonus or any of its affiliates. Generally, the promissory notes bear interest at
7% per year. The following table provides certain information about such notes
as of December 31, 2000 for executive officers employed as of that date.
OUTSTANDING
BALANCE
INDIVIDUAL ISSUE DATE AS OF 12/31/00
---------- --------------- --------------
David C. Andersen...................................... April, 2000 $150,000
David G. Barford....................................... January, 1999 300,000
Mary Pat Blake......................................... January, 1999 300,000
Eric A. Freesmeier..................................... January, 1999 300,000
Thomas R. Jokerst...................................... January, 1999 300,000
Kent D. Kalkwarf....................................... January, 1999 300,000
Ralph G. Kelly......................................... January, 1999 300,000
David L. McCall........................................ January, 1999 300,000
John C. Pietri......................................... January, 1999 150,000
Steven A. Schumm....................................... January, 1999 600,000
Curtis S. Shaw......................................... January, 1999 300,000
Stephen E. Silva....................................... January, 1999 200,000
James H. (Trey) Smith.................................. September, 2000 200,000
OTHER RELATIONSHIPS
David L. McCall, Senior Vice President - Operations - Eastern Division, is
a partner in a partnership that leases office space to us. In 2000, the
partnership received approximately $126,470 pursuant to such lease and related
agreements. In addition, approximately $457,000 was paid to a construction
company controlled by Mr. McCall's brother and $270,695 to a construction
company controlled by Mr. McCall's son.
A company controlled by Mr. Wood occasionally leases an airplane to the
Company and its subsidiaries and affiliates for business travel. An hourly time
share rate is paid for such usage. Mr. Wood's affiliated company reimburses the
Company for the full annual cost of two individuals qualified to operate the
plane and who are otherwise available to the Company in connection with its own
flight operations, which amount was $123,843 in 2000. The Company paid Mr.
Wood's affiliate $2,200 in 2000 for time share usage of the airplane. In
addition, Mr. Wood has also used the Company's airplane for occasional personal
use in 2000, a benefit valued at $19,900.
In addition, Mr. Wood's daughter, a Vice President of Charter
Communications Holding Company, received a bonus in the form of a three-year
promissory note bearing interest at 7% per year. One-third of the original
outstanding principal amount of the note and interest are forgiven as long as
she remains employed by our subsidiary at the end of each of the first three
anniversaries of the issue date in February 1999. The amount of principal and
interest forgiven on this note in 2000 was $80,250 and the outstanding balance
on the note as of December 31, 2000 was $150,000.
In addition, companies controlled by Mr. Nathanson lease certain office
space in Pasadena, California, and warehouse space in Riverside, California, to
our subsidiaries. Mr. Nathanson's affiliates received total annual rent in 2000
of $430,918 and $122,581, respectively, for these premises.
BUSINESS RELATIONSHIPS
Mr. Allen or his affiliates own equity interests or warrants to purchase
equity interests in various entities with which we do business or which provide
us with services or programming. Among these entities are High Speed Access
Corp., WorldGate Communications, Inc., Wink Communications, Inc., TechTV,
L.L.C., USA Networks, Inc., Oxygen Media, LLC, digeo, inc., RCN Corporation and
Interval Research Corporation.
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Mr. Allen owns 100% of the equity of Vulcan Ventures and is its chief executive
officer. Mr. Savoy is also a vice president and a director of Vulcan Ventures.
The various cable, Internet and telephony companies that Mr. Allen has invested
in may mutually benefit one another. The agreements governing our relationship
with digeo, inc. are an example of a cooperative business relationship among his
affiliated companies. We can give no assurance, nor should you expect, that any
of these business relationships will be successful, that we will realize any
benefits from these relationships or that we will enter into any business
relationships in the future with Mr. Allen's affiliated companies.
Mr. Allen and his affiliates have made, and in the future likely will make,
numerous investments outside of us and our business. We cannot assure you that,
in the event that we or any of our subsidiaries enter into transactions in the
future with any affiliate of Mr. Allen, such transactions will be on terms as
favorable to us as terms we might have obtained from an unrelated third party.
Also, conflicts could arise with respect to the allocation of corporate
opportunities between us and Mr. Allen and his affiliates. We have not
instituted any formal plan or arrangement to address potential conflicts of
interest.
In June 1999, Charter Communications Holding Company entered into the
Bresnan purchase agreement. In February 2000, Charter Communications Holding
Company assigned its rights under the Bresnan purchase agreement to purchase
certain assets to Charter Holdings and Charter Holdings accepted such assignment
and assumed all obligations of Charter Communications Holding Company under the
Bresnan purchase agreement with respect to those assets.
VULCAN VENTURES. Vulcan Ventures Incorporated, Charter Communications,
Inc., Charter Investment and Charter Communications Holding Company are parties
to an agreement dated September 21, 1999 regarding the right of Vulcan Ventures
to use up to eight of our digital cable channels. Specifically, we will provide
Vulcan Ventures with exclusive rights for carriage of up to eight digital cable
television programming services or channels on each of the digital cable
television systems with local control of the digital product owned, operated,
controlled or managed by us now or in the future of 550 megahertz or more. If
the system offers digital services but has less than 550 megahertz of capacity,
then the programming services will be equitably reduced. Upon request of Vulcan
Ventures, we will attempt to reach a comprehensive programming agreement
pursuant to which we will pay the programmer, if possible, a fee per digital
subscriber. If such fee arrangement is not achieved, then we and the programmer
shall enter into a standard programming agreement. We believe that this
transaction is on terms at least as favorable to us as Mr. Allen would negotiate
with other cable operators.
HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet
access over cable modems. Charter Communications Holding Company is a party to a
systems access and investment agreement with Vulcan Ventures and High Speed
Access and a related network services agreement with High Speed Access. These
agreements provide High Speed Access with exclusive access to at least 750,000
of our homes that have either an installed cable drop from our cable system or
that are eligible for a cable drop by virtue of our cable system passing the
home. The term of the network services agreement is, as to a particular cable
system, five years from the date revenue billing commences for that cable
system. The programming content agreement provides each of Vulcan Ventures and
High Speed Access with a license to use certain content and materials of the
other on a non-exclusive, royalty-free basis. Net receipts received from High
Speed Access in 2000 were approximately $461,000.
Additionally, Charter Communications Holding Company, as the assignee of
Vulcan Ventures, now holds warrants that were amended and restated on May 12,
2000, giving the Company the right to purchase up to 12,000,000 shares of High
Speed Access common stock at an exercise price of $3.23 per share. A portion of
the warrants may be earned under the agreements described above, and the other
portion relates to warrants that may be earned under an agreement entered into
with High Speed Access on May 12, 2000, described below. Warrants earned under
the agreements described above become vested at the time systems are committed
by us and are based upon the number of homes passed. Warrants under these
agreements can only be earned until July 31, 2003, and are earned at the rate of
1.55 shares of common stock for each home passed
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in excess of 750,000. Warrants earned under the agreements described above are
exercisable until May 25, 2006. Such warrants may be forfeited in certain
circumstances, generally if we withdraw a committed system. As of December 31,
2000, the Company has earned 1,932,931 warrants under the agreements described
above.
On May 12, 2000, the Company entered into a separate agreement with High
Speed Access, which was assigned by the Company to Charter Communications
Holding Company on August 1, 2000. Under the agreement, we agreed to commit
homes passed by our cable television systems to High Speed Access for which High
Speed Access will provide residential Tier 2 and above technical support and
network operations center support. Such systems will be in locations where we
have launched or intend to launch cable modem-based Internet access to
residential customers. Tier 2 support is customer service support beyond the
initial screening of a problem.
We have agreed to commit a total of 5,000,000 homes passed, including all
homes passed in systems previously committed by us, to High Speed Access (other
than full turnkey systems), on or prior to May 12, 2003. We may also commit
additional homes passed in excess of the initial 5,000,000. With respect to each
system launched or intended to be launched, we will pay a per customer fee to
High Speed Access according to agreed pricing terms. In addition, we will also
compensate High Speed Access for services that exceed certain minimum
thresholds.
Warrants that may be earned under the agreement become vested at the time
we authorize High Speed Access to proceed with respect to a system, and will be
based upon the number of homes passed in such system. With respect to the
initial total 5,000,000 homes passed, the warrant provides that Charter
Communications Holding Company will have the right to purchase 0.775 shares of
common stock for every home passed. With respect to any additional homes passed
in excess of 5,000,000, the warrant provides that Charter Communications Holding
Company will have the right to purchase 1.55 shares of common stock for every
home passed. Warrants earned under the agreement are exercisable until 7 1/2
years from the date they are earned. Such warrants are generally not subject to
forfeiture, even if the agreement is terminated. High Speed Access has agreed to
increase the number of shares of common stock subject to the amended and
restated warrant, upon Charter Communications Holding Company's request, if the
number of warrants earned exceeds 11,500,000. High Speed Access also granted
Charter Communications Holding Company certain registration rights with respect
to shares of common stock held by Charter Communications Holding Company and its
direct and indirect subsidiaries, including shares of common stock issuable upon
exercise of the amended and restated warrant.
The agreement governing the services to be provided by High Speed Access
has a term of five years starting in May 2000. Charter Communications Holding
Company has the option to renew the agreement for additional successive
five-year terms on similar terms. On each renewal date, High Speed Access will
issue Charter Communications Holding Company an additional warrant for each
renewal term. These renewal warrants will grant Charter Communications Holding
Company the right to purchase additional shares of common stock at a price of
$10.00 per share. The number of shares of common stock subject to a renewal
warrant will be determined based upon 0.50 shares of common stock for every home
passed in each system committed to High Speed Access during the initial
five-year term and each five-year renewal term.
Either party may terminate the agreement, in whole or in part, if the other
party defaults, becomes insolvent or files for bankruptcy. Charter
Communications Holding Company may terminate the agreement if High Speed Access
merges with another party or experiences a change of control. If Charter
Communications Holding Company terminates the agreement, it may, in certain
circumstances, be required to pay a termination fee.
Additionally, on December 5, 2000, one of our subsidiaries, Charter
Communications Ventures, LLC, and Vulcan Ventures purchased 37,000 shares and
38,000 shares, respectively, of senior convertible preferred stock of High Speed
Access for $37.0 million and $38.0 million, respectively. The preferred stock
has a liquidation preference of $1,000 per share. The preferred stock generally
shares in dividends on High Speed Access common stock on an "as converted to
common stock" basis and will be convertible into common stock of High Speed
Access at a conversion rate of $5.01875 per share of High Speed Access common
stock, subject
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to certain adjustments. Charter Communications Ventures and Vulcan Ventures were
granted certain preemptive, first refusal, registration and board representation
rights as part of the transaction.
Jerald L. Kent, the President and Chief Executive Officer and a director of
Charter Communications Holding Company and the Company; Stephen E. Silva, Senior
Vice President - Corporate Development and Technology of Charter Communications
Holding Company and the Company; and Mr. Savoy, a member of the boards of
directors of Charter Communications Holding Company and the Company, are all
members of the board of directors of High Speed Access.
Through the various investments described above, Vulcan Ventures owns
20,222,139 shares of common stock and 38,000 shares of Series D convertible
preferred stock of High Speed Access. Charter Communications Ventures owns
37,000 shares of Series D convertible preferred stock. If all shares of
preferred stock owned by affiliates of Mr. Allen were converted into common
stock, then Mr. Allen, through such affiliates, would beneficially own 47.8% of
the stock of High Speed Access.
WORLDGATE. WorldGate Communications, Inc. is a provider of Internet access
through cable systems. The Company has an affiliation agreement with WorldGate
for an initial term which expired in November 2000. The agreement automatically
renews for additional successive two-year periods upon expiration of the initial
five-year term, unless terminated by either party for failure of the other party
to perform any of its obligations or undertakings required under the agreement.
We started offering WorldGate service in 1998. Pursuant to the agreement, we
have agreed to use our reasonable best efforts to deploy the WorldGate Internet
access service within a portion of our cable systems and to install the
appropriate headend equipment in all of our major markets in those systems.
Major markets for purposes of this agreement include those in which we have more
than 25,000 customers. We incur the cost for the installation of headend
equipment. In addition, to the extent we determine that it is economically
practical, we have agreed to use our reasonable best efforts to deploy such
service in all non-major markets that are technically capable of providing
interactive pay-per-view service. When WorldGate has a telephone return path
service available, we will, if economically practical, use all reasonable
efforts to install the appropriate headend equipment and deploy the WorldGate
service in our remaining markets. Telephone return path service is the usage of
telephone lines to connect to the Internet to transmit data or receive data. We
have also agreed to market the WorldGate service within our market areas. We pay
a monthly subscriber access fee to WorldGate based on the number of subscribers
to the WorldGate service. We have the discretion to determine what fees, if any,
we will charge our subscribers for access to the WorldGate service. For the year
ended December 31, 2000, we paid WorldGate approximately $5,089,200 consisting
of $4,985,200 for equipment purchases and $104,000 for subscriber access fees.
We charged our subscribers approximately $393,830 for the year ended December
31, 2000. The Company also owns 138,765 shares of WorldGate's common stock for
which it paid a total of $2,000,000.
On July 25, 2000, Charter Communications Holding Company entered into a
joint venture, named TV Gateway LLC, with WorldGate and several other cable
operators to develop and deploy a server-based interactive program guide.
Charter Communications Holding Company invested $850,000, providing it a 16.25%
ownership interest in the joint venture. For the first four years after the
formation of TV Gateway, Charter Communications Holding Company will earn
additional ownership units, up to a maximum of 750,000 ownership units, as the
interactive program guide is deployed to our customers. In connection with the
formation of the joint venture, on August 15, 2000, Charter Communications
Holding Company purchased 31,211 shares of common stock of WorldGate at $16.02
per share for a total purchase price of $500,000. As a result of this purchase,
Charter Communications Holding Company received a $125,000 credit from WorldGate
against future equipment purchases relating to the deployment of its service.
Additionally, WorldGate granted Charter Communications Holding Company warrants
to purchase up to 500,000 shares of WorldGate common stock for a period of seven
years at a purchase price of $24.78. For a period of three years from the date
of closing, Charter Communications Holding Company will also be issued warrants
to purchase common stock of WorldGate based on the number of two-way digital
homes passed in the systems in which Charter Communications Holding Company has
deployed WorldGate service.
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WINK. Wink Communications, Inc. offers an enhanced broadcasting system
that adds interactivity and electronic commerce opportunities to traditional
programming and advertising. Viewers can, among other things, find news, weather
and sports information on-demand and order products through use of a remote
control. The existing agreement between Wink and Charter Communications Holding
Company expired in October 2000 and a new agreement is being negotiated. Either
party has the right to terminate the agreement for the other party's failure to
comply with any of its respective material obligations under the agreement.
Pursuant to the agreement, Wink granted us the non-exclusive license to use
their software to deliver the enhanced broadcasting to all of our cable systems.
We pay a fixed monthly license fee to Wink. We also supply all server hardware
required for deployment of Wink services. In addition, we agreed to promote and
market the Wink service to our customers within the area of each system in which
such service is being provided. We share in the revenue generated by Wink from
all fees collected for transactions generated by our customers. The amount of
revenue shared is based on the number of transactions per month. For the year
ended December 31, 2000, minimal revenue and expenses have been recognized as a
result of this agreement. Vulcan Ventures owns 985,200 shares of Wink's stock
and warrants to purchase shares of common stock and has a 3.2% equity interest
in Wink.
TECHTV. TechTV, L.L.C. operates a cable television channel which
broadcasts shows about technology and the Internet. Pursuant to a carriage
agreement terminating in 2008, TechTV has provided us with programming for
broadcast via our cable television systems at no cost. Carriage fee amounts per
subscriber are determined based on the percentage of subscribers in a particular
system receiving the services. These fees will be waived for systems with higher
penetration levels until December 31, 2003, and for systems with lower
penetration levels through April 30, 2001. In certain circumstances, we are
entitled to a percentage of TechTV's net product revenues from infomercials and
home shopping and attributed to our carriage of the service. Additionally, we
receive incentive payments for channel launches through December 31, 2003.
TechTV may not offer its services to any other cable operator which serves the
same or fewer number of customers at a more favorable rate or on more favorable
carriage terms.
On February 5, 1999, Vulcan Programming, which is 100% owned by Mr. Allen,
acquired an approximate one-third interest in TechTV. Mr. Savoy is the president
and director of Vulcan Programming. In January 2000, Vulcan Ventures acquired an
additional 64% in TechTV for $204.8 million bringing its interest in TechTV to
approximately 98.7%. The remaining 1.3% of TechTV is owned by its management and
employees. Mr. Allen is a director of TechTV and Mr. Savoy is vice president of
TechTV.
USA NETWORKS. USA Networks, Inc. operates the USA Network and The Sci-Fi
Channel cable television networks. USA Networks also operates Home Shopping
Network, which is a retail sales program available via cable television systems.
Pursuant to an agreement terminating in 2005, Charter Communications Holding
Company is a party to a non-exclusive affiliation agreement with USA Networks
for the cablecast of USA Network programming. Mr. Allen and Mr. Savoy are also
directors of USA Networks. As of March 15, 2001, Mr. Allen owned approximately
8.2% and Mr. Savoy owned less than 1% of the capital stock of USA Networks.
OXYGEN MEDIA, LLC. Oxygen Media provides programming content aimed at the
female audience for distribution over the Internet and cable television systems.
Vulcan Ventures invested $50 million in 1999 in Oxygen Media. Vulcan Ventures
has made equity investments in Oxygen Media of $50 million in 2000, with an
additional investment of $100 million contemplated in 2001. In addition, by
mid-year 2001, Charter Communications Holding Company expects to enter into a
carriage agreement with Oxygen Media pursuant to which we will carry Oxygen
Media programming content on certain of our cable systems. Mr. Savoy, a director
of the Company and Charter Communications Holding Company, serves on the board
of directors of Oxygen Media. Mr. Allen owns an approximate 19% interest in
Oxygen Media.
PORTLAND TRAIL BLAZERS. On October 7, 1996, the former owner of our Falcon
cable systems entered into a letter agreement and a cable television agreement
with Trail Blazers Inc. for the cable broadcast in the metropolitan area
surrounding Portland, Oregon of pre-season, regular season and playoff
basketball games of the Portland Trail Blazers, a National Basketball
Association basketball team. Mr. Allen is the 100% owner of the Portland Trail
Blazers and Trail Blazers Inc. We continue to operate under the terms of these
agreements
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since our acquisition of the Falcon cable systems in November 1999. Under the
letter agreement, Trail Blazers Inc. is paid a fixed fee for each subscriber in
areas directly served by the Falcon cable systems. Under the cable television
agreement, we share subscription revenues with Trail Blazers Inc. Trail Blazers
Inc. provides technical facilities and services in connection with the cable
broadcast of the Portland Trail Blazers basketball games. The letter agreement
and the cable television agreement will terminate on September 30, 2001. We paid
approximately $1.1 million for the year ended December 31, 2000 in connection
with the cable broadcast of Portland Trail Blazers basketball games under the
cable television agreement.
DIGEO, INC. During 2001, we expect to offer digeo's television-based
Internet access service in several markets. The digeo product is designed to
blend the power of the Internet with the convenience of the television. Through
the use of an advanced digital set-top terminal, customers will be able to
access Internet-based streaming media on the television, including both local
and national news, sports and entertainment. The Internet domain name of
customers using this service will be "Charter TV." The digeo product is a
"portal," which is an Internet web site that serves as a user's initial point of
entry to the World Wide Web. By offering selected content, services and links to
other web sites and a portal guide, it directs users through the World Wide Web.
In addition, the portal generates revenues from advertising on it own web pages
and by sharing revenues generated by linked or featured web sites.
On March 5, 2001, the Company finalized a carriage agreement with digeo,
which will function as the Company's television-based Internet portal for an
initial six-year period. In connection with the execution of the carriage
agreement on March 5, 2001, the Company (through Digeo Broadband Holdings, LLC
("Digeo Holdings")) also received an equity interest in digeo funded by Vulcan's
contribution to Digeo Holdings of approximately $21.2 million, which is subject
to a priority return of capital to Vulcan up to the amount so funded. Vulcan
also agreed to make, through January 24, 2004, certain additional contributions
through Digeo Holdings to acquire digeo equity in order to maintain the
Company's pro rata interest in digeo in the event of certain future digeo equity
financings by digeo's founders. These additional equity interests will also be
subject to a priority return of capital to Vulcan up to the amount so
contributed. Mr. Allen and Mr. Savoy are directors of digeo.
RCN CORPORATION. Vulcan Ventures, an entity controlled by Mr. Allen, owns
an approximate 26% equity interest in RCN Corporation, including its investment
of $1.65 billion in 2000. In October 1999, Charter Communications Holding
Company entered into a term sheet with RCN containing the principal terms of a
non-exclusive joint venture to provide telephony services to customers in our
Los Angeles cable systems. The Company's certificate of incorporation and
Charter Communications Holding Company's limited liability company agreement
provide that the businesses of RCN are not deemed to be "cable transmission
businesses." Mr. Savoy, a director of the Company is also a director of RCN. To
date, we have had only preliminary discussions with RCN and have not entered
into definitive agreements.
JOINT VENTURE FOR DEVELOPMENT OF DIGITAL VIDEO RECORDER SET-TOP TERMINAL.
In September 2000, our subsidiary, Charter Communications Ventures entered into
a joint venture with General Instrument Corporation (doing business as the
Broadband Communications Sector of Motorola, Inc.), ReplayTV, Inc. and Interval
Research Corporation, an entity controlled by Mr. Allen, to develop and
integrate digital video recording capabilities in digital set-top terminals.
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PROPOSAL NO. 2: RATIFICATION OF 1999 OPTION PLAN
AND
PROPOSAL NO. 3: APPROVAL OF THE 2001 INCENTIVE PLAN
GENERAL INFORMATION
The Company proposes to have a total of 60,000,000 shares of its Class A
common stock available for the grant of options and other stock-based benefits.
The 1999 Option Plan provides for options covering up to 25,009,798 membership
units in Charter Communications Holding Company, which are exchanged immediately
upon issuance for shares of Class A common stock on a one-for-one basis. In
February 2001, the Board of Directors adopted the 2001 Incentive Plan to
supplement the 1999 Option Plan. With the 2001 Incentive Plan, the Company can
issue options under both plans for a total of 60,000,000 shares, or, in the
alternative, the Company can use shares available under the 2001 Incentive Plan
for stock-based benefits other than options. To ensure that the combined number
of shares covered by both plans would be 60,000,000, the 1999 Option Plan was
amended to provide that any unused shares, including those that become available
as a result of termination of an option, be cancelled from the 1999 Option Plan
and be added to the 2001 Incentive Plan. The 2001 Incentive Plan, in turn,
provides that it starts with 38,895,911 shares available, with the number to
increase automatically by the number of options terminated under the 1999 Option
Plan. Thus, the number of shares covered by each plan changes on a daily basis,
but in no event will the total exceed 60,000,000 shares.
As a Nasdaq-listed company, the Company is subject to Nasdaq's listing
standards. Under Nasdaq rules, shareholder approval of the 1999 Option Plan and
the 2001 Incentive Plan was not, and is not required. However, the Nasdaq has
recently announced that it is considering the adoption of new rules that would
(1) require shareholder approval of all option plans in which officers and
directors participate and (2) limit the number of shares that may be awarded
without shareholder approval, to a "basket" of shares equal to 10% of the total
number of options covered by shareholder-approved plans. In the event that such
rules are adopted, shareholder ratification of the 1999 Option Plan and
shareholder approval of the 2001 Incentive Plan would give the Company greater
flexibility to grant non-shareholder approved options under certain
circumstances (e.g. as inducement to new employees or in connection with
acquisitions) subject to the 10% basket. In anticipation of certain changes to
the Nasdaq's listing standards, the Company's Board of Directors, when it voted
to approve adoption of the 2001 Incentive Plan, also voted to submit the Plan to
the Company's shareholders for approval. The Board of Directors believes that it
is in the best interest of the Company to obtain a shareholder vote to ratify
the 1999 Option Plan and to approve the adoption of the 2001 Incentive Plan.
RATIFICATION OF THE 1999 OPTION PLAN
VOTE REQUIRED. The affirmative vote of a majority of the outstanding Class
A and Class B shares, voting together, is required.
DESCRIPTION OF 1999 OPTION PLAN
The 1999 Option Plan was adopted in February 1999 and was most recently
amended in February 2001. This plan provides for the grant of options to
purchase up to 25,009,798 membership units in Charter Communications Holding
Company. Under the terms of the plan, membership units acquired as a result of
the exercise of options will be exchanged automatically for shares of the
Company's Class A common stock on a one-for-one basis. The plan provides for
grants of options to current and prospective employees and consultants of
Charter Communications Holding Company and its affiliates (including the
Company) and current and prospective non-employee directors of the Company. The
plan is intended to promote the long-term financial interests of Charter
Communications Holding Company and its affiliates, including the Company, by
encouraging eligible individuals to acquire an ownership position in the Company
and providing incentives for performance. The options expire after 10 years from
the date of grant. Under the plan, the plan administrator has the discretion to
accelerate the vesting of any options. Options are granted at fair market value,
which is determined by averaging the high and low sales prices on the grant
date. As of March 15, 2001
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a total of 20,913,384 options were outstanding under the plan, with exercise
prices ranging from $14.31 to $20.73. Because the 1999 Option Plan has been
amended to transfer to the 2001 Incentive Plan any shares not subject to
outstanding options and any shares covered by options that are terminated under
the 1999 Option Plan, there are no options available for future grant under the
1999 Option Plan.
Any unvested options issued under the 1999 Option Plan vest immediately
upon a change of control of Charter Communications Holding Company. Options will
not vest upon a change of control, however, to the extent that any such
acceleration of vesting would result in the disallowance of specified tax
deductions that would otherwise be available to Charter Communications Holding
Company or any of its affiliates or to the extent that any optionee would be
liable for any excise tax under a specified section of the tax code. In the
plan, a change of control includes:
(1) a sale of more than 49.9% of the outstanding membership units in
Charter Communications Holding Company, except where Mr. Allen and his
affiliates retain effective voting control of Charter Communications
Holding Company;
(2) a merger or consolidation of Charter Communications Holding
Company with or into any other corporation or entity, except where Mr.
Allen and his affiliates retain effective voting control of Charter
Communications Holding Company; or
(3) any other transaction or event, including a sale of the assets of
Charter Communications Holding Company, that results in Mr. Allen holding
less than 50.1% of the voting power of the surviving entity, except where
Mr. Allen and his affiliates retain effective voting control of Charter
Communications Holding Company.
If an optionee's employment with or service to Charter Communications Holding
Company or its affiliates is terminated other than for cause, death or
disability, the optionee has the right to exercise any vested options within 60
days of the termination of employment. After this 60-day period, all vested and
unvested options held by the optionee are automatically canceled. If an
optionee's employment or service is terminated for cause, any unexercised
options are automatically canceled. If an optionee's employment is terminated
because of death or disability, the option can be exercised until the first
anniversary of the optionee's death or disability, with any options not so
exercised being automatically canceled.
APPROVAL OF THE 2001 OPTION PLAN
We are asking for your vote to approve the 2001 Incentive Plan in light of
proposed Nasdaq listing standards that could require shareholder approval of all
broad-based plans above a certain threshold. The 2001 Incentive Plan was adopted
by the Board of Directors in February 2001, subject to shareholder approval.
VOTE REQUIRED. The affirmative vote of a majority of the outstanding Class
A and Class B shares, voting together, is required.
DESCRIPTION OF THE 2001 INCENTIVE PLAN
GENERAL
On February 12, 2001, the Board of Directors unanimously adopted the
Charter Communications, Inc. 2001 Stock Incentive Plan, subject to approval by
the Company's shareholders. Under this plan, up to 59,964,013 shares of Class A
common stock of the Company would be available for issuance (38,895,911 newly
authorized shares under the 2001 Incentive Plan and up to 21,068,102 previously
authorized shares based on forfeitures, cancellations and terminations under the
1999 Option Plan). The Board of Directors believes that, in order to attract,
retain and reward valuable personnel, it is important for the Company to adopt a
flexible, long-term incentive plan. The principal provisions of the 2001
Incentive Plan are summarized below. This summary, however, does not purport to
be complete and is qualified in its entirety by reference to the provisions of
the 2001 Incentive Plan. Terms not defined herein shall have the meanings set
forth in the 2001 Incentive Plan.
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PURPOSE
The purpose of the 2001 Incentive Plan is to strengthen the Company by
providing an incentive to the employees (including future employees who have
received a formal offer of employment), officers, consultants and directors of
the Company, as well as subsidiaries and affiliates of the Company, and thereby
encouraging them to devote their abilities and industry to the success of the
Company's business enterprise. It is intended that this purpose be achieved by
extending to such persons an added long-term incentive for high levels of
performance and unusual efforts through 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 (as each term is defined in the 2001 Incentive Plan).
ADMINISTRATION; AMENDMENT AND TERMINATION OF THE 2001 INCENTIVE PLAN
Upon approval by the Company's shareholders, the 2001 Incentive Plan would
be administered by at least one committee, which would consist of one or more
directors and could consist of the entire Board of Directors. If the committee
consists of less than the entire Board, then with respect to any option or award
to an individual who is subject to Section 16 of the Securities Exchange Act of
1934, the committee would consist of at least two directors, each of whom shall
be a non-employee director, and to the extent necessary for any option or award
under the 2001 Incentive Plan to qualify as performance-based compensation for
the purposes of Section 162(m) of the Internal Revenue Code, the committee would
consist of at least two directors, each of whom would be an outside director.
The 2001 Incentive Plan would terminate as of the tenth anniversary of
February 12, 2001, and no option or award could be granted thereafter. The Board
of Directors may sooner terminate the plan and the Board may at any time and
from time to time amend, modify or suspend the plan, but it could not impair or
adversely alter any options or awards theretofore granted under the plan, except
with the consent of the optionee or grantee. To the extent necessary under any
applicable law, regulation or exchange requirement, no amendment would be
effective unless approved by the shareholders of the Company.
Each option and award under the 2001 Incentive Plan will be evidenced by an
agreement that sets forth the terms of the grant. Under the 2001 Incentive Plan,
the committee has the authority to, among other things: (i) select the
individuals to whom options and awards will be granted, (ii) determine the type,
size and the terms and conditions of options and awards, and (iii) establish the
terms for treatment of options and awards upon a termination of employment.
SHARES AVAILABLE FOR ISSUANCE
Under the 2001 Incentive Plan, up to 59,964,013 authorized and unissued
shares (including up to 21,068,102 shares based on forfeitures, cancellations
and terminations under the 1999 Option Plan) will be available for the grant of
options and awards to eligible individuals, provided that the maximum number of
shares with respect to which options and stock appreciation rights may be
granted to any individual during any calendar year is 3,860,000. In the event of
any change in capitalization, however, the committee may adjust the maximum
number and class of shares with respect to which options and awards may be
granted, the number and class of shares which are subject to outstanding options
and awards and the purchase price thereof. Of the total number of shares
allotted under the 2001 Incentive Plan, no more than 3,000,000 of the allotted
shares may be used for grants of restricted stock.
ELIGIBILITY
Employees (including future employees who have received a written offer of
employment), officers, consultants and directors of the Company and its
subsidiaries and affiliates are eligible to receive awards of options, stock
appreciation rights, dividend equivalent rights, performance units and
performance shares, share awards, phantom stock and restricted stock. Eligible
employees do not include members of collective bargaining units if, as a result
of good faith bargaining with a designated collective bargaining representative,
either (i) such members are excluded from participation in the 2001 Incentive
Plan or (ii) such members'
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participation in the 2001 Incentive Plan has not been expressly provided under
the applicable collective bargaining agreement.
STOCK OPTIONS
The per share exercise price of an option granted under the 2001 Incentive
Plan will be determined by the committee at the time of grant and set forth in
the option agreement, provided that the purchase price per share must not be
less than 100% of the fair market value of the Class A common stock of the
Company subject to the option at the date of grant. Options will be exercisable
25% on each of the first four anniversaries following the grant date unless the
committee determines otherwise. The committee reserves the authority to
accelerate the exercisability of any option at any time. Each option terminates
at the time determined by the committee provided that the term of each option
generally may not exceed 10 years.
Options are not transferable except by will or the laws of descent and
distribution or pursuant to a domestic relations order. Options may be exercised
during the optionee's lifetime only by the optionee or his guardian or legal
representative. The committee may, however, provide in the option agreement, at
the time of grant or at any time thereafter, that the option may be transferred
to members of the optionee's immediate family, to trusts solely for the benefit
of such immediate family members and to partnerships in which such family
members and/or trusts are the only partners. In the discretion of the committee,
the purchase price for shares may be paid (i) in cash, (ii) by transferring
shares to the Company (provided such shares have been held by the optionee for
at least six months prior to the exercise of the option or such lesser period as
permitted by the committee in its discretion), or (iii) by a combination of the
foregoing or such other methods as determined by the committee in its
discretion. In addition, options may be exercised through a registered
broker-dealer pursuant to such cashless exercise procedures which are, from time
to time, deemed acceptable by the committee.
If an optionee's employment with or service to the Company or its
affiliates is terminated other than for cause, death or disability, the optionee
has the right to exercise any vested options within 60 days of the termination
of employment. After this 60-day period, all vested and unvested options held by
the optionee are automatically canceled. If an optionee's employment or service
is terminated for cause, any unexercised options are automatically canceled. If
an optionee's employment is terminated because of death, the option can be
exercised until the first anniversary of the optionee's death, or if terminated
because of retirement or disability, until the second anniversary of the event,
with any options not so exercised being automatically canceled.
STOCK APPRECIATION RIGHTS ("SARS")
The 2001 Incentive Plan permits the granting of SARs either in connection
with the grant of an option or as a freestanding right. A SAR permits a grantee
to receive upon exercise of the SAR, cash and/or shares, at the discretion of
the Committee, in an amount equal in value to the excess, if any, of the then
per share fair market value over the per share fair market value on the date
that the SAR was granted (or option exercise price in the case of a SAR granted
in connection with an option). When a SAR is granted, however, the committee may
establish a limit on the maximum amount a grantee may receive upon exercise. The
committee will decide at the time the SAR is granted, the date or dates at which
it will become vested and exercisable.
DIVIDEND EQUIVALENT RIGHTS ("DERS")
DERs represent a right to receive all or some portion of the cash dividends
that are or would be payable with respect to shares. DERs may be granted in
tandem with any award under the 2001 Incentive Plan and may be payable currently
or deferred until the lapsing of the restrictions on the DERs or until the
vesting, exercise, payment, settlement or other lapse of restrictions on the
related award. DERs may be settled in cash or shares or a combination thereof,
in a single or multiple installments, as the committee determines.
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RESTRICTED STOCK
The committee will determine the terms of each restricted stock award at
the time of grant, including the price, if any, to be paid by the grantee for
the restricted stock, the restrictions placed on the shares, and the time or
times when the restrictions will lapse. In addition, at the time of grant, the
committee, in its discretion, may decide: (i) whether any deferred dividends
will be held for the account of the grantee or deferred until the restrictions
thereon lapse, (ii) whether any deferred dividends will be reinvested in
additional shares or held in cash, (iii) whether interest will be accrued on any
dividends not reinvested in additional shares of restricted stock and (iv)
whether any stock dividends paid will be subject to the restrictions applicable
to the restricted stock award.
PERFORMANCE UNITS AND PERFORMANCE SHARES
Performance units and performance shares will be awarded as the committee
may determine, and the vesting of performance units and performance shares will
be based upon specified performance objectives to be determined by the committee
among the following: revenue, net income, operating income, earnings, net
earnings, share price, cash flow, earnings before interest, taxes, depreciation
and amortization (EBITDA), total shareholder return, total shareholder return
relative to peers, financial returns (including, without limitation, return on
assets, return on equity and return on investment), cost reduction targets,
customer satisfaction, customer growth, employee satisfaction, pre-tax profits,
net earnings, or any combination of the foregoing. Performance objectives (and
underlying business criteria, as applicable) may be in respect of: (i) the
performance of the Company, (ii) the performance of any of its subsidiaries,
(iii) the performance of any of its divisions, (iv) a per share basis, (v) a per
subscriber basis, or (vi) any combination of the foregoing. Performance
objectives may be absolute or relative (to prior performance of the Company or
to the performance of one or more other entities or external indices) and may be
expressed in terms of a progression within a specified range. The formula for
determining performance objectives may include or exclude items to measure
specific objectives, such as losses from discontinued operations, extraordinary,
unusual or non-recurring gains and losses, the cumulative effect of accounting
changes, acquisitions or divestitures, core process redesigns, structural
changes/outsourcing, and foreign exchange impacts. The performance objectives
with respect to a performance cycle shall be established in writing by the
committee by the earlier of (x) the date on which a quarter of the performance
cycle has elapsed or (y) the date which is 90 days after the commencement of the
performance cycle, and in any event while the performance relating to the
performance objectives remains substantially uncertain.
Upon granting performance units or performance shares, the committee may
provide, to the extent permitted under Section 162(m) of the Internal Revenue
Code, the manner in which performance will be measured against the performance
objectives, or may adjust the performance objectives as set forth above.
Performance units may be denominated in dollars or in shares, and payments in
respect of performance units will be made in cash, shares, shares of restricted
stock or any combination of the foregoing, as determined by the committee. The
agreement evidencing the award of performance shares or performance units will
set forth the terms and conditions thereof, including those applicable in the
event of the grantee's termination of employment. The maximum dollar amount that
an individual may receive in any one calendar year in respect of performance
units denominated in dollars may not exceed $15 million.
OTHER STOCK-BASED AWARDS; PHANTOM STOCK
The committee may, in its discretion, grant other share awards to any
eligible individual on such terms and conditions as the committee may determine
in its sole discretion. Share awards may include grants of phantom stock. Upon
the vesting of a phantom stock award, the grantee shall be entitled to receive a
cash payment in respect of each share of phantom stock which shall be equal to
the fair market value of a share as of the date the phantom stock award was
granted, or such other date as determined by the committee in its discretion at
the time the phantom stock award was granted. The committee may, in its
discretion, at the time a phantom stock award is granted, provide a limitation
on the amount payable in respect of each share of phantom stock. In lieu of a
cash payment, the committee may, in its discretion, settle phantom stock awards
with shares having a fair market value equal to the cash payment to which the
grantee has become entitled.
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CHANGE IN CONTROL; RELOCATION OF COMPANY HEADQUARTERS
If an optionee's or grantee's employment is terminated without "cause" or
for "good reason" during the 12-month period following a "change in control" (as
those terms are defined in the 2001 Incentive Plan), unless otherwise provided
in an agreement, with respect to such optionee's or grantee's awards under the
2001 Incentive Plan, all outstanding options will become immediately and fully
exercisable, all outstanding SARs will become immediately and fully exercisable,
the restrictions on the outstanding restricted stock will lapse, and all or a
portion of the outstanding performance units will vest and the restrictions on
all or a portion of the outstanding performance shares will lapse. Upon a change
of control, the committee can shorter the exercise period, have the survivor or
successor entity assume the options, or cancel options and pay out in cash.
Under the 2001 Incentive Plan, a change of control occurs: (a) in the event of
an acquisition by any person of beneficial ownership of more than 50% of the
outstanding voting securities of the Company; (b) if at least one-half of the
Board of Directors ceases to be made up of those individuals who are directors
as of February 12, 2001; or (c) upon the consummation of a merger, consolidation
or reorganization with or into the Company in which securities of the Company
are issued, except for certain transactions, including, among other things, a
merger where the Company's shareholders own more than 50% of the surviving
corporation or constitute a majority of the board of the surviving corporation.
In the event the Company relocates its existing headquarters outside the
greater St. Louis, Missouri area on or before December 23, 2001 without the
prior written consent of our president, Jerald L. Kent, and unless otherwise
provided in an agreement, with respect to any optionee or grantee who is a
member of the corporate staff employed and located at the St. Louis corporate
headquarters and who does not relocate: (i) if less than 40% of each of the
options or awards held by such optionee or grantee have vested or the
restrictions on less than 40% thereof have lapsed, as applicable, then 40% of
the options or awards shall be deemed vested or the restrictions thereon lapsed,
as applicable and (ii) with respect to such options or awards which have vested
or for which the restrictions have lapsed (or are deemed to have vested or
lapsed as provided above), and which have not already been exercised or paid,
the Company will pay the greater of (x) an amount equal to the fair market value
of such options and awards (less any applicable exercise price) and (y) an
amount equal to the annual base salary of such optionee or grantee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the principal federal
income tax consequences under current law relating to options and awards granted
to employees under the 1999 Option Plan and the 2001 Incentive Plan. The summary
is not intended to be exhaustive and, among other things, does not describe
state, local or foreign income and other tax consequences.
Stock Options
An optionee will not recognize any taxable income upon the grant of a
non-qualified stock option and the Company will not be entitled to a tax
deduction with respect to such grant. Generally, upon exercise of a non-
qualified option, the excess of the fair market value of a share on the date of
exercise over the exercise price will be taxable as ordinary income to the
optionee. If the Company complies with applicable income reporting requirements,
the Company will be entitled to a federal income tax deduction in the same
amount and at the same time as the optionee recognizes ordinary income, subject
to any deduction limitation under Section 162(m) of the Code (which is discussed
below). The subsequent disposition of shares acquired upon the exercise of a
non-qualified option will ordinarily result in capital gain or loss, provided
that any gain will be subject to reduced tax rates if the shares have been held
for more than twelve months.
If an option is exercised through the use of shares previously owned by the
holder, such exercise generally will not be considered a taxable disposition of
the previously owned shares and thus no gain or loss will be recognized with
respect to such shares upon such exercise.
Special rules may apply in the case of an optionee who is subject to
Section 16 of the Exchange Act.
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Stock Appreciation Rights
Generally, a grantee will not recognize any taxable income upon the grant
of a stock appreciation right and the Company will not be entitled to a tax
deduction with respect to such grant. The amount of any cash (or the fair market
value of any shares) received upon the exercise of a stock appreciation right
under the 2001 Incentive Plan will be includible in the grantee's ordinary
income. If the Company complies with applicable income reporting requirements,
the Company will be entitled to a federal income tax deduction in the same
amount and at the same time as the grantee recognizes ordinary income, subject
to any deduction limitation under Section 162(m) of the Internal Revenue Code
(which is discussed below).
Restricted Stock
A grantee will not recognize taxable income upon the grant of restricted
stock, and the recognition of any income will be postponed until the restricted
stock is no longer subject to the restriction or the risk of forfeiture. When
either the restrictions or the risk of forfeiture lapses, the grantee will
recognize ordinary income equal to the fair market value of the restricted stock
at the time that such restrictions lapse and the amount paid, if any, for such
shares. A grantee may elect to be taxed at the time of the grant of restricted
stock and, if this election is made, the grantee will recognize ordinary income
equal to the excess of the fair market value of the restricted stock at the time
of grant (determined without regard to any of the restrictions thereon) over the
amount paid, if any, by the grantee for such shares. If the Company complies
with applicable income reporting requirements, the Company will be entitled to a
federal income tax deduction in the same amount and at the same time as the
grantee recognizes ordinary income, subject to any deduction limitation under
Section 162(m) of the Code (which is discussed below).
Performance Shares and Performance Units
Generally, a grantee will not recognize any taxable income and the Company
will not be entitled to a deduction upon the award of performance share or
performance units. At the time performance shares vest or the grantee receives a
distribution with respect to performance units, the fair market value of the
vested shares or the amount of any cash or shares received in payment for such
awards generally is taxable to the grantee as ordinary income. If the Company
complies with applicable income reporting requirements, the Company will be
entitled to a federal income tax deduction in the same amount and at the same
time as the grantee recognizes ordinary income, subject to any deduction
limitation under Section 162(m) of the Code (which is discussed below).
Share Awards and Phantom Stock Awards
Unless subject to restriction or risk of forfeiture, a grantee will
generally recognize ordinary income upon the grant of a share award equal to the
difference between the fair market value of the shares awarded under the share
award and the amount paid, if any, for the shares. A grantee generally will not
recognize taxable income with respect to a phantom stock award until the phantom
stock award is no longer subject to restriction or risk of forfeiture, at which
time the grantee will recognize ordinary income equal to the amount of cash, or
the fair market value (as designated by the committee) of shares, received. If
the Company complies with applicable income reporting requirements, the Company
will generally be entitled to a federal income tax deduction with respect to a
share award or a phantom stock award in the same amount and at the same time as
the grantee recognizes ordinary income, subject to any deduction limitation
under Section 162(m) of the Code (which is discussed below).
Dividend Equivalent Rights
Generally, a grantee will not recognize any taxable income upon the grant
of a dividend equivalent right and the Company will not be entitled to a tax
deduction with respect to such grant. A grantee recognizes ordinary income with
respect to dividend equivalent rights in an amount equal to any cash received or
the fair market value of any shares received in settlement of the dividend
equivalent rights. If the Company complies with applicable income reporting
requirements, the Company will be entitled to a federal income tax
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deduction in the same amount and at the same time as the grantee recognizes
ordinary income, subject to any deduction limitation under Section 162(m) of the
Code (which is discussed below).
Section 162(m) of the Code
Section 162(m) of the Code generally disallows a federal income tax
deduction to any publicly held corporation for compensation paid in excess of $1
million in any taxable year to the chief executive officer or any of the four
other most highly compensated executive officers who are employed by the
corporation on the last day of the taxable year, but does allow a deduction for
"performance-based compensation." The Company has structured and intends to
implement and administer the 2001 Incentive Plan so that compensation resulting
from options, SARs and performance awards can qualify as "performance-based
compensation." The committee, however, has the discretion to grant such options
and awards with terms that will result in the options and awards not
constituting performance-based compensation. To allow the Company to qualify
such compensation, the Company is seeking shareholder approval of the 2001
Incentive Plan and the material terms of the performance goals applicable to
performance awards under the 2001 Incentive Plan.
Section 280G of the Code
Under certain circumstances, the accelerated vesting or exercise of options
or stock appreciation rights, or the accelerated lapse of restrictions with
respect to other awards, in connection with a change of control of the Company
might be deemed an "excess parachute payment" for purposes of the golden
parachute tax provisions of Section 280G of the Code. To the extent it is so
considered, the optionee or grantee may be subject to a 20% excise tax and the
Company may be denied a federal income tax deduction. Benefits to an optionee or
grantee under the 2001 Incentive Plan will be reduced to the extent necessary to
prevent any portion of such benefits from being subject to excise taxes, if to
do so would result in the optionee or grantee retaining a larger amount, on an
after-tax basis, taking into account the excise and income taxes imposed on
parachute payments.
AWARDS GRANTED UNDER THE 2001 INCENTIVE PLAN
On February 12, 2001, the committee granted non-qualified stock options
under the 2001 Incentive Plan to approximately 2,100 eligible individuals in
respect of a total of 6,742,830 shares. Each option was granted at an exercise
price of $23.0938 per share, the fair market value for such shares on the date
of grant. The fair market value for such shares as of April 10, 2001 was $21.10
per share. The terms and conditions of each grant were set forth in a form
option agreement, which is identical for each of the optionees. The option
agreement incorporates by reference the terms and conditions of the 2001
Incentive Plan.
Under the option agreement, if an optionee's employment is terminated as a
result of the optionee's death, "disability" or at "retirement" (as defined in
the 2001 Incentive Plan), the option becomes immediately and fully vested and is
exercisable at any time within two years after the date of such termination of
employment even if the period exceeds the tenth anniversary of the grant date.
If the optionee's employment is terminated for any other reason other than
"cause" (as defined in the 2001 Incentive Plan) (including the optionee ceasing
to be employed by a subsidiary or division of the Company as a result of the
sale of such subsidiary or division), the option shall, to the extent vested on
the date of such termination, remain exercisable for 60 days thereafter but not
beyond its stated term of ten years, provided that special provision apply if
such termination occurs after a "change in control" (as defined in the 2001
Incentive Plan). In the event that an optionee's employment is terminated within
two years following a change in control, the option shall remain exercisable for
two years following such termination even if the period exceeds the tenth
anniversary of the grant date. In the event the optionee's employment is
terminated for cause, the option shall terminate immediately prior to the
optionee's termination of employment.
Other than the non-qualified stock options discussed above, the committee
has not granted any other awards under the 2001 Incentive Plan.
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OPTIONS OUTSTANDING UNDER THE 1999 OPTION PLAN AND THE 2001 INCENTIVE PLAN
The following table sets forth the outstanding options of certain
individuals and groups of individuals under the 1999 Option Plan and the 2001
Incentive Plan:
NUMBER OF SECURITIES UNDERLYING
OPTIONS AT APRIL 10, 2001
-----------------------------------------
NAME 1999 OPTION PLAN 2001 INCENTIVE PLAN(1)
---- ---------------- ----------------------
Jerald L. Kent.............................................. -0-(2) -0-
President and Chief Executive Officer
Steven A. Schumm............................................ 782,681 25,000
Executive Vice President
David G. Barford............................................ 240,000 185,000
Executive Vice President and Chief Operating Officer
Kent D. Kalkwarf............................................ 240,000 210,000
Executive Vice President and Chief Financial Officer
David L. McCall............................................. 225,000 150,000
Senior Vice President -- Operations Eastern Division
All current executive officers as a group (16 in number).... 3,397,681(2) 1,445,000
All directors who are not executive officers as a group (6
in number)................................................ 305,000(3) 60,000
All employees as a group (13,893 in number)................. 20,878,328(2) 6,742,830
---------------
(1) Options granted under the 2001 Incentive Plan are conditioned on shareholder
approval of the plan.
(2) Does not include an option that would enable Mr. Kent to acquire 7,044,127
shares. This option was granted pursuant to his employment agreement and not
pursuant to the 1999 Option Plan.
(3) Includes options for 105,000 shares granted to Mr. Wood in 1999 in
connection with termination of his employment agreement and entering into a
consulting agreement.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS VOTING "FOR" THE RATIFICATION
OF THE 1999 OPTION PLAN AND "FOR" THE APPROVAL OF THE 2001 INCENTIVE PLAN.
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ACCOUNTING MATTERS
PRINCIPAL ACCOUNTING FIRM
Arthur Andersen LLP acted as the Company's principal accountant in 2000 and
is expected to continue in such capacity in 2001. Representatives of Arthur
Andersen will be in attendance at the Annual Meeting and will have an
opportunity to make a statement if they so desire. The representatives will also
be available to respond to appropriate questions.
SUMMARY OF ARTHUR ANDERSEN FEES
The following provides a detailed listing of the various services provided
by Arthur Andersen for the fiscal year 2000. Detailed below are amounts billed
or expected to be billed by Arthur Andersen for services performed during this
time period:
AMOUNT
--------------
(IN THOUSANDS)
Audit Services:
Annual audit and quarterly reviews..................... $ 750.0
---------
Financial Information Systems:
Design and Implementation.............................. $ 1,715.9
---------
All Other Services.......................................... $ 9,387.3
---------
Total....................................................... $11,853.2
=========
The composition of other fees is mainly comprised of approximately $2.6 million
for various Registration Statements and related SEC filings, approximately $2.0
million related to tax services covering federal, state and local compliance and
tax related projects, approximately $3.4 million of non-financial system design
and implementation projects, approximately $1.1 million related to tax and
financial due diligence and related work on acquisitions, and the remainder
being items such as benefit plan audits and other miscellaneous projects.
REPORT OF THE AUDIT COMMITTEE
The following report does not constitute soliciting materials and is not
considered filed or incorporated by reference into any other Company filing
under the Securities Act of 1933 or the Securities Exchange Act of 1934, unless
we state otherwise.
The Audit Committee presently consists of the following members of the
Company's Board of Directors: Ronald L. Nelson, Nancy B. Peretsman and Howard L.
Wood. Ms. Peretsman and Mr. Nelson are "independent" as defined under the
listing standards of the National Association of Securities Dealers (NASD). Mr.
Wood is not considered to be "independent" under the NASD definition. In order
to comply with NASD rules governing Audit Committee membership which will become
effective on June 14, 2001, the Company expects to replace Mr. Wood on the Audit
Committee with a Board member who is independent under the new rules.
The Audit Committee has reviewed and discussed the audited financial
statements of the Company for the year ended December 31, 2000 with the
Company's management. The Audit Committee has discussed with Arthur Andersen
LLP, the Company's independent public accountants, the matters required to be
discussed by Statement on Auditing Standards No. 61 (Communication with Audit
Committees).
The Audit Committee has also received the written disclosures and the
letter from Arthur Andersen LLP required by Independence Standards Board
Standard No. 1 (Independence Discussion with Audit Committees) and the Audit
Committee has discussed the independence of Arthur Andersen LLP with that firm
and has considered the compatibility of non-audit services with Arthur Andersen
LLP's independence.
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Based on the Audit Committee's review and discussions noted above, the
Audit Committee recommended to the Board of Directors that the Company's audited
financial statements be included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 for filing with the Securities and
Exchange Commission.
RONALD L. NELSON
NANCY B. PERETSMAN
HOWARD L. WOOD
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING REQUIREMENT
Our directors and executive officers must file reports with the Securities
and Exchange Commission indicating the number of shares of the Company's common
stock they beneficially own and any changes in their beneficial ownership.
Copies of these reports must be provided to us. Based solely on our review of
these reports and written representations from the persons required to file
them, we believe that, with the possible exception of the matters described
below, each of our directors and executive officers timely filed all the
required reports during 2000. In addition, Paul G. Allen filed in March 2000 the
Form 4 reflecting his purchase of shares of our Class A common stock in January
2000 as the result of the exercise of a put of such shares by third parties to
Mr. Allen. On October 30, 2000, James H. (Trey) Smith filed his Form 3 reporting
his insider status commencing September 11, 2000. On March 12, 2001, Marc B.
Nathanson filed a Form 4 reporting his acquisition of shares issued in March
2000 pursuant to the terms of a 1999 agreement that required a subsequent
additional issuance without consideration, based on valuation adjustments in
connection with an acquisition completed in February 2000. In April 2001, Mr.
Nathanson filed an amended Form 3 to reflect the agreements which provide his
right, subject to certain terms and conditions, to put to Paul G. Allen certain
shares over which Mr. Nathanson has control.
SHAREHOLDER PROPOSALS FOR 2002 ANNUAL MEETING
If you want to include a shareholder proposal in the proxy statement for
the 2002 annual meeting, it must be delivered to the Company's Secretary at the
Company's executive offices before January 2, 2002.
OTHER MATTERS
At the date of mailing of this proxy statement, we are not aware of any
business to be presented at the annual meeting other than the matters discussed
above. If other proposals are properly brought before the meeting, any proxies
returned to us will be voted as the proxyholder sees fit.
By order of the Board of Directors,
/s/ CURTIS S. SHAW
CURTIS S. SHAW
Secretary
May 1, 2001
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 IS
AVAILABLE WITHOUT CHARGE BY ACCESSING THE "INVESTOR" SECTION OF OUR WEBSITE AT
www.charter.com. YOU ALSO MAY OBTAIN A PAPER COPY OF THE 2000 10-K AT NO CHARGE
BY WRITING TO THE COMPANY AT 12444 POWERSCOURT DRIVE, SUITE 100, ST. LOUIS, MO
63131, ATTENTION: INVESTOR RELATIONS. IN ADDITION, CERTAIN COMPANY FINANCIAL AND
OTHER RELATED INFORMATION, WHICH IS REQUIRED TO BE FURNISHED TO COMPANY
SHAREHOLDERS, IS ATTACHED HERETO AS "APPENDIX B -- 2000 FINANCIAL REPORT AND
OTHER INFORMATION."
37
40
APPENDIX A
AUDIT COMMITTEE CHARTER
FUNCTION
The Audit Committee shall aid the Board of Directors in undertaking and
fulfilling its responsibilities for appropriate, credible and accurate financial
reporting to the public, shall provide support for management's efforts to
enhance the quality of the Company's controls and shall work to provide
appropriate avenues of communication between the Board of Directors and the
Company's independent public accountants and internal auditors.
COMPOSITION AND TERM
The Committee shall be a committee of the Board of Directors and shall consist
of directors (not less than three). The definition of Independent Directors will
be based on NASD rules for audit committees, as amended or in effect from time
to time.
The Committee members shall be appointed for one-year terms at the annual
meeting of the Board of Directors, upon the recommendation of the Board. The
Chairman shall be designated by the Board of Directors.
ADMINISTRATIVE MATTERS
The Committee shall meet at such times and from time to time as it deems to be
appropriate, but not less than once each year. The Committee shall report to the
Board of Directors at the first Board meeting following each such Committee
meeting. Annually, the Committee shall review and assess the adequacy of this
charter. If the Audit Committee recommends any changes, the Board of Directors
must review those changes. This charter will be filed as an exhibit to the proxy
statement in accordance with SEC requirements.
The Company's independent public accountants and internal auditors shall attend
the Committee's meetings upon request. The Committee may request members of
management or others to attend meetings and provide pertinent information as
necessary. The Committee shall provide management, the independent public
accountants and internal auditors with appropriate opportunities to meet
privately with the Committee.
DUTIES AND RESPONSIBILITIES
The duties of the Committee shall include the following:
1. Make recommendations to the Board of Directors as to:
(a) the selection of the firm of independent public accountants to
examine the books and accounts of the Company and its subsidiaries
for each fiscal year;
(b) the proposed arrangement for the independent public accountants for
each fiscal year, including their risk assessment process in
establishing the scope of the examination, the proposed fees and
the reports to be rendered; and
(c) the results of review of the written disclosures and letter from
the independent public accountants regarding their independence.
2. Review the results of the quarterly reviews and the year end audit of
the Company, including:
(a) the audit report, the published financial statements, the
management representation letter, the "Memorandum Regarding
Accounting Procedures and Internal Controls" prepared by the
independent public accountants, any other pertinent reports and
management's responses concerning that memorandum;
A-1
41
(b) any material accounting issues with management, the Company's
internal audit staff and the independent public accountants; and
(c) other matters required to be communicated to the Committee under
generally accepted auditing standards, as amended, by the
independent public accountants.
With respect to interim financial information, the Committee's Chairman
or designated Committee members will meet and communicate with
management and the independent public accountants to discuss the
quarterly review results and required communications prior to any
interim filings with the SEC.
3. Review with management and the independent public accountants such
accounting policies (and changes therein) of the Company, including any
financial reporting issues which could have a material impact on the
Company's financial statements as are deemed appropriate for review by
the Committee prior to any interim or year end filings with the SEC or
other regulators.
4. Meet annually at the Audit Committee or full Board level with the
General Counsel, and outside counsel when appropriate, to review legal
and regulatory matters, if any, that may have a material impact on the
financial statements.
5. Recommend annually to the Board of Directors that based upon reviews and
discussions described in items 1- 4 above that the financial statements
for the fiscal year then ended should be included in the Company's
Annual Report on Form 10-K.
6. Review the coordination between the independent public accountants and
internal auditors and review the risk assessment process, scopes and
procedures of the Company's internal audit work and whether such risk
assessment process, scopes and procedures are adequate to attain the
internal audit objectives, as determined by the Company's management and
approved by the Committee as well as any significant changes to the
internal audit plan; review the significant findings of the internal
auditors for each fiscal year; review the quality and composition of the
Company's internal audit staff; approve the internal audit charter on a
periodic basis; and inquire of any difficulties encountered by internal
audit in the course of their audits, including any restrictions in scope
on their work or access to information.
7. Make a periodic self assessment of the Committee, including a review of
this charter, using assessment tools available through third parties or
developed internally.
The Committee shall also undertake such additional activities within the scope
of its primary function as the Committee may from time to time determine. The
Committee may retain independent counsel, accountants, or others to assist it in
the conduct of any investigation.
A-2
42
APPENDIX B
CHARTER COMMUNICATIONS, INC.
2000 FINANCIAL REPORT AND OTHER INFORMATION
Cautionary Statement Regarding Forward-Looking Statements... B-2
Business of the Company..................................... B-3
Market for the Company's Common Equity and Related
Shareholder Matters....................................... B-3
Selected Consolidated Financial Data........................ B-4
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. B-5
Quantitative and Qualitative Disclosure about Market Risk... B-26
Financial Statements, Notes and Reports of Independent
Public Accountants and Independent Auditors............... B-27
NOTE: THIS APPENDIX DOES NOT CONSTITUTE SOLICITING MATERIAL AND IS NOT TO BE
CONSIDERED "FILED," OR INCORPORATED BY REFERENCE INTO ANY OTHER COMPANY FILING
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, UNLESS WE SPECIFICALLY STATE OTHERWISE
B-1
43
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement includes forward-looking statements regarding, among
other things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Many of the forward-looking statements contained in this Proxy
Statement may be identified by the use of forward-looking words such as
"believe," "expect," "anticipate," "should," "planned," "will," "may," "intend,"
"estimate," and "potential," among others. Important factors that could cause
actual results to differ materially from the forward-looking statements we make
in this Proxy Statement are set forth in this Proxy Statement and in other
reports or documents that we file from time to time with the SEC and include,
but are not limited to:
- Our plans to offer advanced products and services;
- Our anticipated capital expenditures for our upgrades and new equipment
and facilities;
- Our beliefs regarding the effects of governmental regulation on our
business;
- Our ability to effectively compete in a highly competitive and changing
environment;
- Our ability to fund anticipated capital expenditures and any future
acquisitions; and
- Our ability to obtain equipment, inventory and programming as needed and
at a reasonable price.
All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by this cautionary statement.
B-2
44
OUR BUSINESS
We, operating through our subsidiaries, are the fourth largest operator of
cable systems in the United States. Through our broadband network of coaxial and
fiber optic cable, we provide video, data, interactive and private business
network services, to approximately 6.4 million customers in 40 states. All of
our systems offer traditional analog cable television. We also offer digital
television, along with an array of advanced products and services such as
high-speed Internet access, interactive video programming and video-on-demand,
in an increasing number of our systems. We continue to explore opportunities to
offer telephony through our broadband network. The introduction and roll-out of
new products and services represents an important step toward the realization of
our Wired World(TM) vision, where cable's ability to transmit voice, video and
data at high speeds enables it to serve as the primary platform for the delivery
of new services to the home and workplace.
We have grown rapidly over the past several years. In 16 acquisitions
completed in 1999 and 2000, we added approximately 3.9 million customers. In
addition, we have expanded our customer base through significant internal
growth. For the year ended December 31, 2000, our internal customer growth,
without giving effect to the cable systems we acquired in 2000, was 2.5%, almost
twice the industry average of 1.3%.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Class A common stock is quoted on the Nasdaq National Market System
under the ticker symbol "CHTR."
QUARTERLY MARKET INFORMATION -- CLASS A COMMON STOCK
2000 HIGH LOW
---- ------- -------
First quarter............................................ $22.625 $14.000
Second quarter........................................... $16.563 $10.000
Third quarter............................................ $17.063 $12.375
Fourth quarter........................................... $24.188 $16.188
1999
---------------------------------------------------------
Fourth quarter*.......................................... 27.750 19.500
---------------
* We completed our initial public offering of Class A common stock on November
8, 1999. The initial public offering price per share was $19.00.
HOLDERS
As of April 20, 2001, there were approximately 2,700 holders of our Class A
common stock (representing a total of approximately 174,729 beneficial holders)
and one holder of our Class B common stock. No preferred stock is outstanding.
DIVIDENDS
There have been no stock dividends paid on any of our equity securities. We
do not intend to pay cash dividends in the foreseeable future. We intend to
retain future earnings, if any, to finance the expansion of our business.
Charter Communications Holding Company is required under certain circumstances
to pay distributions pro rata to all holders of its common membership units,
including us, to the extent necessary for any holder of common membership units
to pay income taxes incurred with respect to its share of taxable income
attributed to Charter Communications Holding Company. Covenants in the
indentures and credit agreements governing the debt obligations of Charter
Communications Holdings and its subsidiaries restrict their ability to make
distributions to us, and accordingly, limit our ability to declare or pay cash
dividends.
B-3
45
RECENT SALES OF UNREGISTERED SECURITIES
On February 14, 2000, we purchased Bresnan Communications Company Limited
Partnership for a total purchase price of approximately $3.1 billion, consisting
of approximately $1.1 billion in cash, $1.0 billion in Class C membership units
in Charter Communications Holding Company and Class A membership units in CC
VIII, LLC that are exchangeable for Charter Communications, Inc. Class A common
stock, and $963.3 million in assumed debt. The Bresnan sellers have unlimited
"piggyback" registration rights and up to four "demand" registration rights with
respect to the Class A common stock issued in exchange for the membership units
in Charter Communications Holding Company and CC VIII, LLC. The demand
registration rights must be exercised with respect to tranches of Class A common
stock worth at least $40 million at the time of notice of demand or at least $60
million at the initial public offering price. The above securities were offered
and sold by Charter in reliance upon the exemption from registration pursuant to
Section 4(2) of the Securities Act.
SELECTED FINANCIAL DATA
CHARTER COMMUNICATIONS
PROPERTIES HOLDINGS CHARTER COMMUNICATIONS, INC.
---------------------------- ---------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1/1/98 12/24/98 DECEMBER 31,
----------------- THROUGH THROUGH --------------------------
1996 1997 12/23/98 12/31/98 1999 2000
------- ------- -------- ---------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Operations:
Revenues........................ $14,881 $18,867 $ 49,731 $ 13,713 $ 1,428,244 $ 3,249,222
------- ------- -------- ---------- ----------- ------------
Operating Expenses:
Operating, general and
administrative................ 8,123 11,767 25,952 7,134 737,957 1,651,353
Depreciation and amortization... 4,593 6,103 16,864 8,318 745,315 2,473,082
Option compensation expense..... -- -- -- 845 79,979 40,978
Management fees/corporate
expense charges............... 446 566 6,176 473 51,428 55,243
------- ------- -------- ---------- ----------- ------------
Total operating expenses........ 13,162 18,436 48,992 16,770 1,614,679 4,220,656
------- ------- -------- ---------- ----------- ------------
Income (loss) from operations..... 1,719 431 739 (3,057) (186,435) (971,434)
Interest expense.................. (4,415) (5,120) (17,277) (2,353) (477,799) (1,059,130)
Interest income................... 20 41 44 133 34,467 7,348
Loss on equity investments........ -- -- -- -- -- (19,262)
Other income (expense)............ (47) 25 (728) -- (8,039) (12,467)
------- ------- -------- ---------- ----------- ------------
Income (loss) before income taxes
and minority interest........... (2,723) (4,623) (17,222) (5,277) (637,806) (2,054,945)
Income tax expense................ -- -- -- -- (1,030) --
------- ------- -------- ---------- ----------- ------------
Income (loss) before minority
interest........................ (2,723) (4,623) (17,222) (5,277) (638,836) (2,054,945)
------- ------- -------- ---------- ----------- ------------
Minority interest in loss of
subsidiary...................... -- -- -- 5,275 572,607 1,226,295
------- ------- -------- ---------- ----------- ------------
Net income (loss)................. $(2,723) $(4,623) $(17,222) $ (2) $ (66,229) $ (828,650)
------- ------- -------- ---------- ----------- ------------
Loss per common share, basic and
diluted......................... N/A N/A N/A $ (0.04) $ (2.22) $ (3.67)
------- ------- -------- ---------- ----------- ------------
Weighted-average common shares
outstanding..................... N/A N/A N/A 50,000 29,811,202 225,697,775
------- ------- -------- ---------- ----------- ------------
Balance sheet data (at end of
period)
Total assets...................... $67,994 $55,811 $281,969 $4,335,527 $18,966,507 $ 23,043,566
Total debt........................ 59,222 41,500 274,698 2,002,206 8,936,455 13,060,455
Minority interest................. -- -- -- 2,146,549 5,381,331 4,089,329
Redeemable securities............. -- -- -- -- 750,937 1,104,327
Member's equity (deficit)/
Shareholders' equity............ 2,648 (1,975) (8,397) 830 3,011,079 3,123,204
B-4
46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Reference is made to the "Certain Trends and Uncertainties" section below
in this Management's Discussion and Analysis for a discussion of important
factors that could cause actual results to differ from expectations and
non-historical information contained herein. In addition, the following
discussion should be read in conjunction with the audited consolidated financial
statements of Charter Communications, Inc. as of and for the years ended
December 31, 2000 and 1999 and for the period from December 24, 1998 through
December 31, 1998 and the audited consolidated financial statements of Charter
Communications Properties Holdings, LLC (CCPH) for the period from January 1,
1998 through December 23, 1998.
INTRODUCTION
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of certain
significant past events. Those events include numerous mergers, acquisitions,
and debt financing transactions over the last few years and our initial public
stock offering in November 1999.
ORGANIZATIONAL HISTORY
Prior to the acquisition of the Charter companies by Mr. Allen on December
23, 1998 and the merger of Marcus Holdings with and into Charter Holdings
effective April 7, 1999, the cable systems of the Charter and Marcus companies
were operated under four groups of companies. Three of these groups were
comprised of companies that were managed by Charter Investment and in which
Charter Investment had an ownership interest. The fourth group was comprised of
companies that were subsidiaries of Marcus Holdings which Charter Investment
began managing in October 1998.
THE CHARTER COMPANIES
Prior to the acquisition by Mr. Allen, the Charter companies were as
follows:
(1) CCPH
CCPH was a wholly owned subsidiary of Charter Investment. The primary
subsidiary of CCPH, which owned the cable systems, was Charter
Communications Properties, LLC. On May 20, 1998, CCPH acquired certain
cable systems from Sonic Communications, Inc. for a total purchase price,
net of cash acquired, of $228.4 million, including $60.9 million of assumed
debt. In connection with Mr. Allen's acquisition on December 23, 1998, CCPH
was merged out of existence, and Charter Communications Properties became a
direct, wholly owned subsidiary of Charter Investment.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates of
Kelso & Co., and Charter Investment had only a minority interest. Effective
December 23, 1998, prior to Mr. Allen's acquisition, Charter Investment
acquired from the Kelso affiliates the interests the Kelso affiliates held
in CCA Group. Later, the operating companies comprising CCA Group became
wholly owned subsidiaries of Charter Investment.
(3) CharterComm Holdings, LLC
The controlling interests in CharterComm Holdings were held by
affiliates of Charterhouse Group International Inc., and Charter Investment
had only a minority interest. Effective December 23, 1998, prior to Mr.
Allen's acquisition, Charter Investment acquired from the Charterhouse
Group affiliates the interests the Charterhouse Group affiliates held in
CharterComm Holdings. Consequently, CharterComm Holdings became a wholly
owned subsidiary of Charter Investment.
The cable systems were owned by the various subsidiaries of CharterComm
Holdings. In connection with Mr. Allen's acquisition of us on December 23, 1998,
some of the non-operating subsidiaries, including CharterComm Holdings were
merged out of existence.
B-5
47
The acquisition by Mr. Allen became effective on December 23, 1998, through
a series of transactions in which Mr. Allen acquired approximately 94% of the
equity interests of Charter Investment for an aggregate purchase price of $2.2
billion, excluding $2.0 billion in assumed debt. CCPH and the operating
companies that formerly comprised CCA Group and CharterComm Holdings were
contributed to Charter Operating subsequent to Mr. Allen's acquisition. CCPH is
deemed to be our predecessor. Consequently, the contribution of CCPH was
accounted for as a reorganization under common control. Accordingly, our results
of operations for periods prior to and including December 23, 1998 include the
accounts of CCPH. The contributions of the operating companies that formerly
comprised CCA Group and CharterComm Holdings were accounted for in accordance
with purchase accounting. Accordingly, our results of operations for periods
after December 23, 1998 include the accounts of CCPH, CCA Group and CharterComm
Holdings.
In February 1999, Charter Holdings was formed as a wholly owned subsidiary
of Charter Investment, and Charter Operating was formed as a wholly owned
subsidiary of Charter Holdings. All of Charter Investment's direct interests in
the entities described above were transferred to Charter Operating. All of the
prior management agreements were terminated, and a single new management
agreement was entered into between Charter Investment and Charter Operating to
cover all of the subsidiaries.
In May 1999, Charter Communications Holding Company was formed as a wholly
owned subsidiary of Charter Investment. All of Charter Investment's interests in
Charter Holdings were transferred to Charter Communications Holding Company.
In July 1999, Charter Communications, Inc. was formed as a wholly owned
subsidiary of Charter Investment.
In November 1999, Charter Communications, Inc. conducted its initial public
offering. In the initial public offering, substantially all of the equity
interests in Charter Communications, Inc. were sold to the public, and less than
1% of its equity interests were sold to Mr. Allen. Charter Communications, Inc.
contributed substantially all of the proceeds of its initial public offering to
Charter Communications Holding Company, which issued membership units to Charter
Communications, Inc. In November 1999, the management agreement between Charter
Investment and Charter Operating was amended and assigned from Charter
Investment to Charter Communications, Inc. Also in November 1999, Charter
Communications Holding Company sold membership units to Vulcan Cable III.
THE MARCUS COMPANIES
In April 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable, and agreed to acquire the remaining
interests. The owner of the remaining partnership interests retained voting
control of Marcus Cable. In October 1998, Marcus Cable entered into a management
consulting agreement with Charter Investment, pursuant to which Charter
Investment provided management and consulting services to Marcus Cable and its
subsidiaries which own cable systems. This agreement placed the Marcus cable
systems under common management with the cable systems of the Charter companies
acquired by Mr. Allen in December 1998.
In March 1999, all of Mr. Allen's interests in Marcus Cable were
transferred to Marcus Holdings, a then newly formed company. Later in March
1999, Mr. Allen acquired the remaining interests in Marcus Cable, including
voting control, which interests were transferred to Marcus Holdings. In April
1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating
subsidiaries of Marcus Holdings and all of the cable systems they owned came
under the ownership of Charter Holdings and, in turn, Charter Operating. For
financial reporting purposes, the merger of Marcus Holdings with and into
Charter Holdings was accounted for as an acquisition of Marcus Holdings
effective March 31, 1999, and accordingly, the results of operations of Marcus
Holdings have been included in our consolidated financial statements since that
date.
ACQUISITIONS
Since January 1, 1999, we completed sixteen acquisitions for an aggregate
purchase price of $14.3 billion including aggregate cash payments of $9.1
billion, $3.3 billion of assumed debt and $1.9 billion of equity
B-6
48
interests issued. These acquisitions were funded through the issuance of stock
and long-term debt, bank borrowings and internally generated funds. In 2000, we
transferred the cable systems we acquired in three of those acquisitions (Fanch,
Falcon and Avalon) to Charter Holdings. All acquisitions were accounted for
under the purchase method of accounting and results of operations were included
in our consolidated financial statements from their respective dates of
acquisition.
The following table sets forth information on our acquisitions in 1999 and
2000.
PURCHASE PRICE (IN MILLIONS) REVENUES SINCE
------------------------------------------ ACQUISITION DATE
ACQUISITION CASH ASSUMED SECURITIES TOTAL ACQUIRED ----------------------
DATE PAID DEBT ISSUED PRICE CUSTOMERS 1999 2000
----------- ------ ------- ---------- ------- --------- -------- ----------
(IN THOUSANDS)
Renaissance............. 4/99 $ 348 $ 111 -- $ 459 134,000 $ 42,032 $ 70,312
American Cable.......... 5/99 240 -- -- 240 69,000 24,904 42,151
Greater Media Systems... 6/99 500 -- -- 500 176,000 32,313 95,988
Helicon................. 7/99 410 115 25(a) 550 171,000 35,658 89,872
Vista................... 7/99 126 -- -- 126 26,000 5,751 14,253
Cable Satellite......... 8/99 22 -- -- 22 9,000 1,917 4,750
Rifkin.................. 9/99 1,200 128 133(b) 1,461 463,000 67,514 236,370
InterMedia.............. 10/99 873 -- -- 873(c) 278,000 54,850 229,489
Fanch................... 11/99 2,400 -- -- 2,400 535,600 32,281 266,031
Falcon.................. 11/99 1,250 1,700 550(d) 3,500 977,200 56,051 456,999
Avalon.................. 11/99 558 274 -- 832 270,800 13,929 124,068
------ ------ ------ ------- ---------
Total -- 1999
Acquisitions... $7,927 $2,328 $ 708 $10,963 3,109,600
Interlake............... 1/00 13 -- -- 13 6,000 -- 1,713
Bresnan................. 2/00 1,100 963 1,015(e) 3,078 695,800 -- 297,080(g)
Capital Cable........... 4/00 60 -- -- 60 23,200 -- 7,513
Farmington.............. 4/00 15 -- -- 15 5,700 -- 1,571
Kalamazoo............... 9/00 -- -- 171(f) 171 50,700 -- 7,360
------ ------ ------ ------- --------- -------- ----------
Total -- 2000
Acquisitions... $1,188 $ 963 $1,186 $ 3,337 781,400
Total -- 1999 &
2000
Acquisitions.. $9,115 $3,291 $1,894 $14,300 3,891,000 $367,200 $1,945,520
====== ====== ====== ======= ========= ======== ==========
---------------
(a) Purchase price component represents a preferred limited liability interest
of Charter-Helicon, LLC, a direct wholly owned subsidiary.
(b) Purchase price component relates to equity in Charter Communications Holding
Company.
(c) As part of this transaction, we agreed to "swap" some of our non-strategic
cable systems serving customers in Indiana, Montana, Utah and Northern
Kentucky. At the closing we retained a cable system located in Indiana for
which we were unable to timely obtain necessary regulatory approvals of the
system transfer. Such approval was subsequently obtained and the Indiana
system assets were transferred in March 2000. This transaction, including
the transfer of the retained Indiana system, resulted in a net increase of
273,300 customers.
(d) Purchase price component relates to common membership units in Charter
Communications Holding Company issued to certain of the Falcon sellers.
(e) Purchase price component is comprised of $385 million in equity in Charter
Communications Holding Company and $630 million of equity in CC VIII.
(f) In connection with this transaction, we acquired all of the outstanding
stock of Cablevision of Michigan in exchange for 11,173,376 shares of
Charter's Class A common stock.
(g) Includes revenues of approximately $.6 million related to the cable systems
acquired by Bresnan since December 31, 1999.
B-7
49
PENDING AT&T TRANSACTIONS
In February 2001, we entered into several agreements with AT&T Broadband,
LLC involving several strategic cable system transactions that will result in a
net addition of approximately 512,000 customers for the Charter cable systems.
In the pending AT&T transactions, we expect to acquire cable systems from AT&T
Broadband serving approximately 574,000 customers in Missouri, Alabama, Nevada
and California for a total of $1.79 billion. A portion of the purchase price
will consist of Charter cable systems valued at $249 million serving
approximately 62,000 customers in Florida. Of the balance of the purchase price,
up to $501.5 million will be paid in Class A common stock and the remainder will
be paid in cash. Charter Holdings and Charter Capital have a commitment for a
bridge loan from Morgan Stanley Senior Funding, Inc. and Goldman Sachs Credit
Partners LP for temporary financing of the cash portion of the purchase price.
See "-- Financing Activities." We expect to obtain permanent financing through
one or more debt or equity financing transactions or a combination thereof. The
acquisition transactions are expected to close in the second and/or third
quarters of 2001, subject to certain closing conditions and regulatory review.
OVERVIEW OF OPERATIONS
Approximately 87% of our revenues for the year ended December 31, 2000 are
attributable to monthly subscription fees charged to customers for our basic,
expanded basic, premium and digital cable television programming services,
Internet access through television-based service, dial-up telephone modems and
high-speed cable modem service, equipment rental and ancillary services provided
by our cable systems. The remaining 13% of revenues is derived from installation
and reconnection fees charged to customers to commence or reinstate service,
pay-per-view programming, where users are charged a fee for individual programs
requested, advertising revenues and commissions related to the sale of
merchandise by home shopping services and franchise revenues. We have generated
increased revenues in each of the past three years, primarily through customer
growth from acquisitions, internal customer growth, basic and expanded tier rate
increases and revenues from new services and products.
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and amortization expense, interest expense
and management fees/corporate expense charges. Operating costs primarily include
programming costs, cable service related expenses, marketing and advertising
costs, franchise fees and expenses related to customer billings.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include depreciation and amortization expenses associated
with our acquisitions and capital expenditures related to construction and
upgrading of our systems, and interest costs on borrowed money. We cannot
predict what impact, if any, continued losses will have on our ability to
finance our operations in the future.
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RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods (dollars in
thousands).
CHARTER
COMMUNICATIONS
PROPERTIES HOLDINGS CHARTER COMMUNICATIONS
--------------------- ------------------------------------------------------------------
PERIOD PERIOD
JANUARY 1, 1998 DECEMBER 24, 1998 YEAR ENDED YEAR ENDED
TO DECEMBER 23, 1998 TO DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
--------------------- -------------------- ------------------- -------------------
STATEMENTS OF
OPERATIONS:
Revenues............. $ 49,731 100.0% $13,713 100.0% $1,428,244 100.0% $3,249,222 100.0%
Operating expenses:
Operating, general
and
administrative
costs............ 25,952 52.2% 7,134 52.0% 737,957 51.7% 1,651,353 50.8%
Deprecation and
Amortization..... 16,864 33.9% 8,318 60.7% 745,315 52.2% 2,473,082 76.1%
Option compensation
expense.......... -- -- 845 6.2% 79,979 5.6% 40,978 1.3%
Management
fees/corporate
expense
charges.......... 6,176 12.4% 473 3.4% 51,428 3.6% 55,243 1.7%
-------- ----- ------- ----- ---------- ----- ---------- -----
Total operating
expenses........... 48,992 98.5% 16,770 122.3% 1,614,679 113.1% 4,220,656 129.9%
-------- ----- ------- ----- ---------- ----- ---------- -----
Income (loss) from
operations......... 739 1.5% (3,057) (22.3)% (186,435) (13.1)% (971,434) (29.9)%
Interest expense..... (17,277) (34.7)% (2,353) (17.2)% (477,799) (33.5)% (1,059,130) (32.6)%
Interest income...... 44 .1% 133 1.0% 34,467 2.4% 7,348 .2%
Loss on equity
investments........ -- -- -- -- -- -- (19,262) (.6)%
Other income
(expense).......... (728) (1.5)% -- -- (8,039) 0.6% (12,467) (.4)%
-------- ----- ------- ----- ---------- ----- ---------- -----
Loss before taxes and
minority
interest........... (17,222) (34.6)% (5,277) (38.5)% (637,806) (44.7)% (2,054,945) (63.2)%
-------- ----- ------- ----- ---------- ----- ---------- -----
Income Tax Expense... -- -- -- -- (1,030) -- -- --
Minority interest in
loss of
subsidiary......... -- -- 5,275 38.5% 572,607 40.1% 1,226,295 37.7%
-------- ----- ------- ----- ---------- ----- ---------- -----
Net Loss............. $(17,222) (34.6)% $ (2) 0.0% $ (66,229) (4.6)% $ (828,650) (25.5)%
======== ===== ======= ===== ========== ===== ========== =====
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FISCAL 2000 COMPARED TO FISCAL 1999
REVENUES. Revenues increased by $1,821.0 million or 127% from $1,428.2
million in 1999 to $3,249.2 million in 2000. System operations acquired after
January 1, 1999 accounted for $1,578.3 million or 87% of the increase in 2000,
while systems acquired before January 1, 1999 accounted for $242.7 million or
13%. Revenues by service offering are as follows (dollars in thousands):
2000 1999
--------------------- ---------------------
% OF % OF %
BALANCE REVENUES BALANCE REVENUES CHANGE CHANGE
---------- -------- ---------- -------- ---------- ------
Basic.............................. $2,249,339 69% $1,002,954 70% $1,246,385 124%
Premium............................ 226,598 7% 124,788 9% 101,810 82%
Pay-per-view....................... 28,590 1% 27,537 2% 1,053 4%
Digital............................ 91,115 3% 8,299 .5% 82,816 998%
Data services...................... 63,330 2% 10,107 .5% 53,223 527%
Advertising sales.................. 220,205 7% 71,997 5% 148,208 206%
Other.............................. 370,045 11% 182,562 13% 187,483 103%
---------- --- ---------- --- ----------
$3,249,222 100% $1,428,244 100% $1,820,978
========== === ========== === ==========
In 2000, we added 898,300 basic customers from 5,452,600 to 6,350,900, of
which approximately 741,100 was a result of acquisitions. The remaining 157,200
relates to internal growth, which is an increase of approximately 2.5% compared
to the prior year on a pro forma basis.
Premium units increased by 2,094,700 from 2,844,400 to 4,939,100, of which
approximately 300,100 was a result of acquisitions. The remaining increase of
1,794,600 is the result of aggressive marketing and pricing of premium products
related to upgrades.
In 2000, we added 943,300 digital customers from 126,200 to 1,069,500. Of
the total increase, approximately 29,200 was the result of acquisitions and
914,100 was the result of internal growth or upgrades. The pace of growth
increased throughout the year as we upgraded our systems. We surpassed our
expectations throughout the year, with an average of 17,500 digital
installations per week during 2000 which increased to 40,000 digital
installations per week in December 2000. Growth was a result of intense
marketing efforts and strong demand for this service.
Data customers increased by 180,400 from 72,000 to 252,400 of which 12,400
was the result of acquisitions and 168,000 was the result of internal growth.
Our system upgrades facilitated interactive capability necessary to offer
high-speed interactive service. Growth in data services was also the result of
strong marketing efforts coupled with increased demand for such services.
Advertising revenues increased $148.2 million from $72.0 million in 1999 to
$220.2 million in 2000 of which approximately $101.8 million was the result of
operations acquired after January 1, 1999. In addition, as a result of our
rebuild efforts, we experienced increased capacity due to expanded channel
line-ups and thus, increased advertising. The significant level of political
campaign advertising in 2000 also contributed to increased advertising revenues.
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OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $913.4 million from $738.0 million in 1999
to $1,651.4 million in 2000. System operations acquired after January 1, 1999
accounted for $813.8 million or 89% of the increase in 2000 while systems
acquired before January 1, 1999 accounted for $99.6 million or 11%. Key expense
components as a percentage of revenues are as follows (dollars in thousands):
2000 1999
--------------------- -------------------
% OF % OF %
BALANCE REVENUES BALANCE REVENUES CHANGE CHANGE
---------- -------- -------- -------- -------- ------
Programming........................... $ 736,043 23% $330,754 23% $405,289 123%
General and administrative............ 543,865 17% 237,480 17% 306,385 129%
Service............................... 192,603 6% 99,486 7% 93,117 94%
Marketing............................. 63,789 2% 23,447 2% 40,342 172%
Advertising sales..................... 56,499 2% 31,281 2% 25,218 81%
Other................................. 58,554 2% 15,509 1% 43,045 278%
---------- -------- --------
$1,651,353 $737,957 $913,396
========== ======== ========
Of the $405.3 million increase in programming, approximately $355.7 million
or 88% relates to operations acquired after January 1, 1999. The remaining $49.6
million increase is due to continued inflationary or negotiated increases,
particularly in sports programming, coupled with increased channel capacity. The
increase in general and administrative costs of $306.4 million reflects an
increase of $275.0 million or 90% related to operations acquired after January
1, 1999. The remaining increase of $31.4 million is due to increases in
corporate and regional resources to support our growth. Service expenses
increased $93.1 million, of which $87.0 million or 93% relates to operations
acquired after January 1, 1999 and $6.1 million or 7% is a result of internal
growth. Marketing expenses increased $40.3 million to $63.8 million in 2000, of
which approximately $20.1 million or 50% relates to operations acquired after
January 1, 1999. The remaining increase of $20.2 million relates to promotions
of advanced product offerings, including Charter Digital Cable and TV-based
high-speed Internet service. Advertising expenses increased $25.2 million, of
which the majority relates to operations acquired after January 1, 1999. Other
operating expenses increased by $43.0 million from $15.5 million in 1999 to
$58.6 million in 2000, of which the majority relates to operations acquired
after January 1, 1999.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $3.8 million from $51.4 million in 1999 to $55.2 million in 2000.
The increase was primarily a result of continued growth from acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1,727.8 million from $745.3 million in 1999 to $2,473.1 million in
2000. This increase was due to a full year of expense on the fixed assets and
franchises of our 1999 acquisitions, a partial year of expense on 2000
acquisitions and capital expenditures of $2.8 billion to rebuild and upgrade our
cable systems in 2000. Related to the rebuild and upgrade of our plant, the
useful lives of certain depreciable assets were shortened. As a result, an
additional $508.5 million of depreciation expense was recorded during 2000.
These increases were partially offset by the elimination of depreciation and
amortization expense related to dispositions of cable systems.
OPTION COMPENSATION EXPENSE. Option compensation expense decreased by
$39.0 million from $80.0 million in 1999 to $41.0 million in 2000. The expense
relates to option grants at the time of our initial public offering at prices
less than the estimated fair market value of our stock resulting in compensation
expense to be accrued over the vesting period of the options.
INTEREST EXPENSE. Interest expense increased by $581.3 million from $477.8
million in 1999 to $1,059.1 million in 2000. The increase in interest expense
was a result of increased average debt outstanding in 2000 of $12,281.2 million
compared to $7,108.5 million in 1999, coupled with an increase in our average
borrowing rate of .66% from 8.36% in 1999 to 9.02% in 2000. The increased debt
was used for acquisitions, capital expenditures and for other corporate
purposes.
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INTEREST INCOME. Interest income decreased by $27.1 million from $34.5
million in 1999 to $7.3 million in 2000. The decrease in interest income was a
result of lower cash on hand in 2000 due to required credit facility drawdowns
in 1999 which were not required in 2000.
LOSS ON EQUITY INVESTMENTS. The loss in 2000 was primarily due to losses
of $7.5 million on investments carried under the equity method of accounting and
other than temporary losses of $11.8 million on investments carried under the
cost method.
MINORITY INTEREST IN LOSS OF SUBSIDIARY. Minority interest in loss of
subsidiary represents the allocation of losses to the minority interest in loss
of subsidiary based on ownership of Charter Communications Holding Company and
the 2% accretion of the preferred membership units in an indirect subsidiary of
Charter Holdings issued to certain Bresnan sellers. These membership units are
exchangeable on a one-for-one basis for shares of Class A common stock of
Charter Communications, Inc.
NET LOSS. Net loss increased by $762.5 million from $66.2 million in 1999
to $828.7 million in 2000 as a result of the combination of factors discussed
above.
FISCAL 1999 COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998
REVENUES. Revenues increased by $1,378.5 million, from $49.7 million for
the period from January 1, 1998 through December 23, 1998 to $1,428.2 million in
1999. The increase in revenues primarily resulted from the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional revenues from these entities included for the year ended December 31,
1999 were $618.8 million, $386.7 million and $350.1 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and
administrative costs increased by $712.0 million, from $26.0 million for the
period from January 1, 1998 through December 23, 1998 to $738.0 million in 1999.
This increase was due primarily to the acquisition of the CCA Group and
CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional
operating, general and administrative expenses from these entities included for
the year ended December 31, 1999 were $338.5 million, $209.3 million and $158.8
million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $728.5 million, from $16.9 million, for the period from January 1,
1998 through December 23, 1998 to $745.3 million in 1999. There was a
significant increase in amortization expense resulting from the acquisitions of
the CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional depreciation and amortization expense from these entities included
for the year ended December 31, 1999 were $346.3 million, $203.5 million and
$195.1 million, respectively. The increases were offset by the elimination of
depreciation and amortization expense related to disposition of cable systems.
OPTION COMPENSATION EXPENSE. Option compensation expense in 1999 was $80.0
million due to the granting of options to employees in December 1998, February
1999 and April 1999. The exercise prices of the options on the date of grant
were less than the estimated fair values of the underlying membership units,
resulting in compensation expense accrued over the vesting period of each grant
that varies from four to five years.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $45.3 million, from $6.2 million, for the period
from January 1, 1998 through December 23, 1998 to $51.4 million in 1999. The
increase in 1998 compared to 1999 was the result of the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
INTEREST INCOME. Interest income increased by $34.4 million, from $.04
million for the period from January 1, 1998 through December 23, 1998 to $34.5
million in 1999. The increase was primarily due to investing excess cash that
resulted from required credit facilities drawdowns, our initial public offering
of Class A common stock and the sale of the March 1999 Charter Holdings notes.
INTEREST EXPENSE. Interest expense increased by $460.5 million, from $17.3
million for the period from January 1, 1998 through December 23, 1998 to $477.8
million in 1999. This increase resulted primarily from
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54
interest on the notes and credit facilities used to finance the acquisitions of
CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
MINORITY INTEREST. Minority interest is $5.3 million for the period from
December 24, 1998 through December 31, 1998 and $572.6 million for the year
ended December 31, 1999. The minority interest represents the ownership in
Charter Communications Holding Company by entities other than Charter
Communications, Inc. For financial reporting purposes, 50,000 of the membership
units Charter Communications Holding Company previously issued to companies
controlled by Mr. Allen are considered held by Charter Communications, Inc.
since December 24, 1998.
NET LOSS. Net loss increased by $49.0 million, from $17.2 million for the
period from January 1, 1998 through December 23, 1998 to $66.2 million in 1999.
The increase in revenues that resulted from the acquisitions of CCA Group,
CharterComm Holdings and Marcus Holdings was not sufficient to offset the
operating expenses associated with the acquired systems.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant cash to fund acquisitions, capital
expenditures, debt service costs and ongoing operations. We have historically
funded and expect to fund future liquidity and capital requirements through cash
flows from operations, borrowings under our credit facilities and debt and
equity transactions. Our cash flows from operating activities were $1.1 billion,
$479.9 million and $22.6 million in 2000, 1999 and 1998, respectively. As of
December 31, 2000, we have availability of $805.6 million under our bank credit
facilities. Since January 1, 1999, we have incurred significant additional debt
to fund our capital expenditures and growth through acquisition. Our significant
amount of debt may adversely affect our ability to obtain financing in the
future and react to changes in our business. We anticipate incurring substantial
additional debt in the future. Our credit facilities and other debt instruments
contain various financial and operating covenants that could adversely impact
our ability to operate our business, including restrictions on the ability of
our operating subsidiaries to distribute cash to their parents. See "-- Certain
Trends and Uncertainties -- Restrictive Covenants" for further information.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our cable systems,
as well as for system maintenance, the development of new products and services,
and set-top terminals.
Upgrading our cable systems will enable us to offer new products and
services, including digital television, additional channels and tiers, expanded
pay-per-view options, high-speed Internet access, video-on-demand, telephony and
interactive services.
We made capital expenditures, excluding acquisitions of cable systems, of
$2.83 billion and $741.5 million for the years ended December 31, 2000 and 1999,
respectively. The majority of these capital expenditures in 2000 relate to our
accelerated rebuild and upgrade program and purchases of converters and were
funded from cash flows from operations and borrowings under credit facilities.
Excluding the pending AT&T transactions, for 2001, 2002 and 2003, we expect
to spend a total of approximately $2.9 billion, $1.75 billion and $950,000,
respectively, to upgrade and rebuild our systems in order to offer advanced
services to our customers. In addition, we anticipate rebuild costs associated
with the AT&T systems we expect to acquire to total approximately $350 million.
In 2001, our capital expenditures will include extensions of systems,
development of new products and services, purchases of converters, system
improvements and the build out of six new advanced customer call centers in
2001. The amount that we spend on these types of capital expenditures will
depend on the level of our growth in digital cable customers and in the delivery
of other advanced services. Currently, a projected $500 million to $750 million
funding shortfall exists through late 2002 or early 2003 when we expect to
become cash flow positive. If we borrow the full amount available under the
Charter Holdings 2001 bridge loan commitment, our planned capital expenditures
are funded through the end of 2002 and our funding shortfall will be $300
million to $500 million through
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2003. We expect to fund our projected shortfall with additional bank debt, high
yield debt, or equity offerings or any combination thereof. The amount of this
projected shortfall could increase if there is accelerated growth in digital
cable customers or in the delivery of other advanced services.
We cannot be sure that our anticipated levels of capital expenditures will
be sufficient to accomplish our planned system upgrades, expansion and
maintenance and to roll out advanced services or that we will be able to acquire
necessary plant and equipment from vendors to complete our upgrade and rebuild
on schedule. If we are not able to obtain financing sufficient to fund our
planned upgrades and other capital expenditures, it could adversely affect our
ability to offer new products and services and compete effectively, and could
adversely affect our growth, financial condition and results of operations. See
"-- Certain Trends and Uncertainties" for further information.
RECENT INVESTING ACTIVITIES
HIGH SPEED ACCESS CORP. In December 2000, Vulcan Ventures, Inc., an entity
controlled by Mr. Allen, and Charter Communications Ventures, LLC invested $38.0
million and $37.0 million, respectively, in exchange for 38,000 shares and
37,000 shares, respectively, of senior convertible preferred stock of High Speed
Access. The preferred stock has a liquidation preference of $1,000 per share, in
general, shares in dividends on High Speed Access common stock on an "as
converted to common stock" basis and is convertible into common stock of High
Speed Access at a conversion rate of $5.01875 per share of High Speed Access
common stock, subject to certain adjustments. Vulcan Ventures and Charter
Ventures were granted certain preemptive, first refusal, registration and
significant board representation rights as part of the transaction.
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FINANCING ACTIVITIES
As of December 31, 2000, our total debt was approximately $13.1 billion.
Actual debt outstanding at December 31, 2000 and pro forma for the issuance of
the January 2001 Charter Holdings notes described herein is summarized below
(dollars in thousands):
ACTUAL PRO FORMA
BALANCE AT BALANCE AT
DECEMBER 31, DECEMBER 31,
2000 2000
------------ ------------
LONG TERM DEBT
Charter Communications, Inc.:
5.75% Convertible Senior Notes, due 2005.................. $ 750,000 $ 750,000
Charter Holdings:
8.250% Senior Notes, due 2007............................. 600,000 600,000
8.625% Senior Discount Notes, due 2009.................... 1,500,000 1,500,000
9.920% Senior Notes, due 2011............................. 1,475,000 1,475,000
10.0% Senior Notes, due 2009.............................. 675,000 675,000
10.25% Senior Notes, due 2010............................. 325,000 325,000
11.75% Senior Discount Notes, due 2010.................... 532,000 532,000
10.75% Senior Notes, due 2009............................. -- 900,000
11.125% Senior Notes, due 2011............................ -- 500,000
13.5% Senior Discount Notes, due 2011..................... -- 675,000
Senior Bridge Loan Facility................................. 272,500 --
Renaissance:
10.00% Senior Discount Notes, due 2008.................... 114,413 114,413
CC V Holdings -- Avalon:
11.875% Senior Discount Notes, due 2006................... 179,750 179,750
Other long-term debt........................................ 1,971 1,971
CREDIT FACILITIES
Charter Operating........................................... 4,432,000 3,555,000
CC V -- Avalon.............................................. 213,000 213,000
CC VI -- Fanch.............................................. 895,000 825,000
CC VII -- Falcon............................................ 1,050,000 565,000
CC VIII -- Bresnan.......................................... 712,000 712,000
----------- -----------
13,727,634 14,098,134
Unamortized discount........................................ (667,179) (992,338)
----------- -----------
$13,060,455 $13,105,796
=========== ===========
MARCH 1999 CHARTER HOLDINGS NOTES. In March 1999, Charter Holdings and
Charter Communications Holdings Capital Corporation issued $3.6 billion
principal amount of senior notes. The March 1999 Charter Holdings notes
consisted of $600.0 million in aggregate principal amount of 8.250% senior notes
due 2007, $1.5 billion in aggregate principal amount of 8.625% senior notes due
2009, and $1.475 billion in aggregate principal amount at maturity of 9.920%
senior discount notes due 2011. The net proceeds of approximately $2.9 billion,
combined with the borrowings under our credit facilities, were used to
consummate tender offers for publicly held debt of several of our subsidiaries,
as described below, to refinance borrowings under our previous credit
facilities, for working capital purposes and to finance a number of
acquisitions.
As of December 31, 2000, a total of $2.1 billion was outstanding under the
8.250% notes and the 8.625% notes, and the accreted value of the outstanding
9.920% notes was $1.08 billion.
JANUARY 2000 CHARTER HOLDINGS NOTES. In January 2000, Charter Holdings and
Charter Communications Holdings Capital Corporation issued $1.5 billion
principal amount of senior notes. The January 2000
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Charter Holdings notes consisted of $675.0 million in aggregate principal amount
of 10.00% senior notes due 2009, $325.0 million in aggregate principal amount of
10.25% senior notes due 2010, and $532.0 million in aggregate principal amount
at maturity of 11.75% senior discount notes due 2010. The net proceeds of
approximately $1.25 billion were used to consummate change of control offers for
certain of the Falcon, Avalon and Bresnan notes and debentures.
As of December 31, 2000, $1.0 billion of the January 2000 Charter Holdings
10.00% and 10.25% senior notes were outstanding, and the accreted value of the
11.75% senior discount notes was approximately $335.5 million.
CHARTER OPERATING CREDIT FACILITIES. The Charter Operating credit
facilities provide for two term facilities, one with a principal amount of $1.0
billion that matures in September 2007 (Term A), and the other with a principal
amount of $2.45 billion that matures in March 2008 (Term B). The Charter
Operating credit facilities also provide for a $1.25 billion revolving credit
facility with a maturity date in September 2007 and, at the option of the
lenders, supplemental credit facilities in the amount of $400.0 million
available until March 18, 2002. Amounts under the Charter Operating credit
facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 2.75% (8.39% to 9.27% as of December 31, 2000). A
quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of Term A and the revolving credit facility. As of December
31, 2000, outstanding borrowings were approximately $4.4 billion, and the unused
availability was $268.0 million.
RENAISSANCE NOTES. In connection with the acquisition of Renaissance in
April 1999, the Company assumed $163.2 million principal amount at maturity of
10% senior discount notes due 2008. The Renaissance notes do not require the
payment of interest until April 15, 2003. From and after April 15, 2003, the
Renaissance notes bear interest, payable semi-annually in cash, on April 15 and
October 15, commencing on October 15, 2003. The Renaissance notes are due on
April 15, 2008. In May 1999, $48.8 million aggregate face amount of the
Renaissance notes was repurchased at 101% of the accreted value plus accrued and
unpaid interest. As of December 31, 2000, the accreted value of the Renaissance
notes that remain outstanding was approximately $94.6 million.
FALCON DEBENTURES. We acquired Falcon in November 1999 and assumed
Falcon's outstanding $375.0 million in principal amount of 8.375% senior
debentures due 2010 and 9.285% senior discount debentures due 2010 with an
accreted value of approximately $319.1 million.
In February 2000, through change of control offers and purchases in the
open market, all of the Falcon 8.375% senior debentures with a principal amount
of $375.0 million were repurchased for $388.0 million, and all of the Falcon
9.285% senior discount debentures with an aggregate principal amount at maturity
of $435.3 million were repurchased for $328.1 million.
FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the
previous Falcon credit facilities were amended to provide for two term
facilities, one with a principal amount of $196.0 million that matures June 2007
(Term B), and the other with the principal amount of $294.0 million that matures
December 2007 (Term C). The Falcon credit facilities also provide for a $646.0
million revolving credit facility with a maturity date of December 2006 and, at
the option of the lenders, supplemental credit facilities in the amount of up to
$700.0 million with a maturity date in December 2007. Amounts under the Falcon
credit facilities bear interest at the Base Rate or the Eurodollar rate, as
defined, plus a margin of up to 2.5% (8.14% to 9.50% as of December 31, 2000). A
quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance. As of December 31, 2000, unused availability was $196.1
million.
AVALON CREDIT FACILITIES. In January 2001, two of our subsidiaries,
Bresnan and Avalon, were merged. Upon completion of the Bresnan/Avalon
combination, all amounts outstanding under the Avalon credit facilities were
repaid and the Avalon credit facilities were terminated. The Bresnan credit
facilities were amended and restated to among other things, increase borrowing
availability by $550.0 million.
AVALON NOTES. In connection with the acquisition of Avalon in November
1999, we assumed Avalon's outstanding 11.875% senior discount notes due 2008
with an accreted value of $123.3 million and $150.0 million in principal amount
of 9.375% senior subordinated notes due 2008. After December 1, 2003, cash
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interest on the Avalon 11.875% notes will be payable semi-annually on June 1 and
December 1 of each year, commencing June 1, 2004.
In January 2000, we completed change of control offers in which we
repurchased $16.3 million aggregate principal amount at maturity of the 11.875%
notes at a purchase price of 101% of accreted value as of January 28, 2000, for
$10.5 million. As of December 31, 2000, Avalon 11.875% notes with an aggregate
principal amount of $179.8 million at maturity remained outstanding with an
accreted value of $128.4 million.
At the same time, through change of control offers and purchases in the
open market, we repurchased all of the $150.0 million aggregate principal amount
of the Avalon 9.375% notes. The aggregate repurchase price was $153.7 million
and was funded with equity contributions from Charter Holdings, which made the
cash available from the proceeds of its sale of the January 2000 Charter
Holdings notes.
FANCH CREDIT FACILITIES. The Fanch credit facilities provide for two term
facilities, one with a principal amount of $450.0 million that matures May 2008
(Term A), and the other with a principal amount of $400.0 million that matures
November 2008 (Term B). The Fanch credit facilities also provide for a $350.0
million revolving credit facility with a maturity date in May 2008 and, at the
option of the lenders, supplemental credit facilities in the amount of $300.0
million available until December 31, 2004. Amounts under the Fanch credit
facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 3.0% (8.15% to 9.55% as of December 31, 2000). A
quarterly commitment fee of between 0.250% and 0.375% per annum is payable on
the unborrowed balance. We used $850.0 million of the credit facilities to fund
a portion of the Fanch purchase price. As of December 31, 2000, outstanding
borrowings were $895.0 million, and unused availability was $305.0 million.
However, debt covenants limit the amount that can be borrowed to $153.5 million
at December 31, 2000.
BRESNAN NOTES. We acquired Bresnan in February 2000 and assumed Bresnan's
outstanding $170.0 million in principal amount of 8% senior notes due 2009 and
$275.0 million in principal amount at maturity of 9.25% senior discount notes
due 2009 with an accreted value of $192.2 million. In March 2000, we repurchased
all of the outstanding Bresnan notes at purchase prices of 101% of the
outstanding principal amounts plus accrued and unpaid interest or accreted
value, as applicable, for a total of $369.7 million, using proceeds from the
sale of the January 2000 Charter Holdings notes.
BRESNAN CREDIT FACILITIES. Upon the closing of the Bresnan/Avalon
combination, the Bresnan credit facilities were amended and restated. As
amended, the Bresnan credit facilities provide for borrowings of up to $1.45
billion. The Bresnan credit facilities provide for two term facilities, one with
a principal amount of $500.0 million (Term A), and the other with a principal
amount of $500.0 million (Term B). The Bresnan credit facilities also provide
for a $450.0 million revolving credit facility with a maturity date in June 2007
and, at the option of lenders, supplemental facilities in the amount of $500.0
million. Amounts under the Bresnan credit facilities bear interest at the Base
Rate or the Eurodollar Rate, as defined, plus a margin of up to 2.75%. A
quarterly commitment fee of between 0.250% and 0.375% is payable on the
unborrowed balance of Term A and the revolving credit facility. At the closing
of the Bresnan acquisition, we borrowed approximately $599.9 million to replace
the borrowings outstanding under the previous credit facilities and an
additional $30.0 million to fund a portion of the Bresnan purchase price. As of
December 31, 2000, outstanding borrowings were $712.0 million and unused
availability was $188.0 million.
CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY. On August 4, 2000, Charter
Holdings and Charter Communications Holdings Capital Corporation entered into a
senior bridge loan agreement providing for senior increasing rate bridge loans
in an aggregate principal amount of up to $1.0 billion.
On August 14, 2000, Charter Holdings borrowed $1.0 billion under the senior
bridge loan facility and used substantially all of the proceeds to repay a
portion of the amounts outstanding under the Charter Operating and the Falcon
revolving credit facilities. The bridge loan initially bore interest at an
annual rate of 10.21%. For amounts not repaid by November 14, 2000, the interest
rate increased by 1.25% at such date.
The net proceeds from the sale of Charter Communications, Inc.'s
convertible senior notes were contributed as equity to Charter Holdings. Charter
Holdings used all of the net proceeds therefrom to repay $727.5 million of the
amount outstanding under the Charter Holdings 2000 senior bridge loan facility.
As of
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January 5, 2001, the remaining balance of $272.5 million on the Charter Holdings
2000 senior bridge loan facility was paid down with the proceeds from the sale
of the Charter Holdings January 2001 notes.
CONVERTIBLE SENIOR NOTES. On October 30, 2000, Charter Communications,
Inc. issued convertible senior notes due 2005 with a principal amount of $650.0
million. An additional $100.0 million pursuant to the initial purchasers'
over-allotment option were issued on November 3, 2000. The convertible senior
notes have an annual interest rate of 5.75%, payable semi-annually, and are
convertible into shares of Charter Communications, Inc.'s Class A common stock
at $21.56 per share. The issuance was made in a private placement pursuant to
Rule 144A under the Securities Act. The net proceeds were used to repay $727.5
million outstanding under the Charter Holdings 2000 senior bridge loan facility.
JANUARY 2001 CHARTER HOLDINGS NOTES. In January 2001, Charter Holdings and
Charter Communications Holdings Capital Corporation issued $900 million 10.75%
senior notes due 2009, $500 million 11.125% senior notes due 2011 and $350.6
million 13.5% senior discount notes due 2011 with a principal amount at maturity
of $675 million. The net proceeds were approximately $1.72 billion, after giving
effect to discounts, commissions and expenses. The net proceeds from the January
2001 Charter Holdings notes were used to repay all remaining amounts outstanding
under the Charter Holdings 2000 senior bridge loan facility and the Fanch
revolving credit facility, a portion of the amounts outstanding under the
Charter Operating and Falcon revolving credit facilities, and for general
corporate purposes.
The 10.75% senior notes are not redeemable prior to maturity. Interest is
payable semi-annually on April 1 and October 1, beginning October 1, 2001 until
maturity.
The 11.125% senior notes are redeemable at the option of the issuers at
amounts decreasing from 106.750% to 100% of par value beginning on January 15,
2006, plus accrued and unpaid interest, to the date of redemption. At any time
prior to January 15, 2004, the issuers may redeem up to 35% of the aggregate
principal amount of the 11.125% senior notes at a redemption price of 111.125%
of the principal amount under certain conditions. Interest is payable
semi-annually in arrears on January 15 and July 15, beginning on July 15, 2001,
until maturity.
The 13.5% senior discount notes are redeemable at the option of the issuers
at amounts decreasing from 105.563% to 100% of the accreted value beginning
January 15, 2006. At any time prior to January 15, 2004, the issuers may redeem
up to 35% of the aggregate principal amount of the 13.5% senior notes at a
redemption price of 113.5% of the accreted value under certain conditions.
Interest is payable in arrears on January 15 and July 15, beginning on July 15,
2006, until maturity. The discount on the 13.5% senior discount notes is being
accreted using the effective interest method.
These notes rank equally with the current and future unsecured and
unsubordinated indebtedness of Charter Holdings, including the existing senior
notes and senior discount notes and trade payables. The notes are structurally
subordinated to all existing and future liabilities, including trade payables of
the subsidiaries of Charter Holdings.
2001 SENIOR BRIDGE LOAN COMMITMENT. On February 26, 2001, Charter Holdings
and Charter Capital signed a commitment with Morgan Stanley Senior Funding, Inc.
and Goldman Sachs Credit Partners LP, to provide senior increasing rate bridge
loans of up to $2 billion for capital expenditures, general corporate purposes,
and to fund the cash portion of the pending AT&T transactions. If any of the
pending AT&T transactions is not completed, the commitment would be reduced by
the amount of the commitment allocated to such portion of the transaction, up to
$1 billion.
The bridge loans would bear interest initially at a rate equal to the
bid-side yield of the 11.125% senior notes, less 25 basis points. The rate would
increase by 125 basis points at the end of the first 90 days after funding, and
50 basis points for each 90-day period after the first 90 days.
The commitment expires on December 31, 2001 unless the bridge loan
agreement has been signed. The bridge loans would mature one year from the date
of first funding, but can, at the borrowers' election, be converted into senior
term loans that would be due nine years after such conversion. Interest on the
senior
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term loans would initially be the rate then in effect for the bridge loans, plus
50 basis points, and would increase by 50 basis points after every 90 days'
period after such conversion.
Following any conversion of the bridge loans into senior term loans, the
lenders would have the right to request that their notes be exchanged for notes
that would be issued under an indenture with covenants and events of default
similar to those in the 11.125% senior notes, but may not be redeemed until the
fifth anniversary of the first funding of the bridge loan. After the fifth
anniversary, the notes would be redeemable at a premium of one-half of the
coupon on the note, declining ratably annually to zero on the date that is two
years prior to the maturity date. The bridge loan agreement would require that
the borrowers file a shelf registration statement with respect to the exchange
notes and to use commercially reasonable efforts to have the statement become
effective and available to allow for unrestricted resales of the exchange notes.
The exchange notes would bear interest at the higher of the rate of interest
applicable to the senior term loans and the bid-side yield of the 11.125% senior
notes.
Interest on the bridge loans, senior term loans or exchange notes would not
be lower than 9% and may not exceed 15% annually.
The prospective lenders' commitments to us are subject to a number of
conditions. We cannot assure you that such conditions will be met. If these
conditions are not met, these funds will not be available to us and we will need
to obtain alternative financing. If we are unable to obtain replacement
financing, we could be unable to consummate the pending AT&T transactions.
OUTLOOK
We believe we are uniquely positioned in the forefront of our industry
going into 2001. In 2001, we will continue to aggressively roll out our advanced
services, focusing on digital cable and high-speed data. We expect to complete
the AT&T transactions in the second and/or third quarters of 2001. The effect of
these transactions is not included in this Outlook discussion.
With "same store" systems running smoothly and major 1999 and 2000
acquisitions successfully integrated, we expect 2001 revenue growth of 14-16%
and operating cash flow growth after corporate overhead expense of 12-14%. Basic
customer growth is expected to exceed 2% in 2001, consistent with 2000 growth.
Digital revenues are expected to increase dramatically from 1.07 million
customers at December 31, 2000 with 2 million customers by the end of 2001. In
addition, we expect VOD to be available to approximately 2.2 million homes
passed by the end of the year. Telephony initiatives will continue to be tested
and developed during 2001 with targeted market entry in 2002 or 2003.
Furthermore, we will continue our focus on interactive TV, with trials currently
in process and expected launches in several markets beginning in 2001. Our
advanced technology team is working on DVR capability in advanced digital
set-top terminals and wireless home networking. Set-top terminals with built-in
DVR functionality should be available to our digital customers in 2001.
Operating expenses are expected to increase 18%-19% in 2001, driven
primarily by increased digital and data sales, as well as higher programming and
general and administrative costs. Programming costs are expected to increase
approximately 25%. The year over year increase on a per channel basis is
approximately 12-13%. Sports programming is the largest portion of the expected
increase. The remainder of the increase is due to digital and basic customer
growth, new channel launches and higher premium rates. The primary drivers for
increased general and administrative costs are higher property taxes of
approximately $22 million, resulting from the network upgrades and approximately
$11 million of expenses associated with new customer call centers.
We will continue to evaluate strategic acquisitions and "swaps" of cable
systems in order to enlarge the coverage of our current areas of operations.
This approach will allow us to generate higher growth in revenues and operating
cash flow.
Customer care will remain a priority at Charter. We plan to build six new
customer contact centers in 2001 with capital expenditures of $66 million in
2001. These new centers will serve our customer base with
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state-of-the-art technology to further improve customer satisfaction.
Eventually, each of our twelve regions will have its own customer contact
center.
We will continue our system rebuilds and upgrades so that our customers
have access to the latest advanced service technology. We will aggressively
evaluate funding opportunities, including bank, equity or high-yield financing,
to meet the needs of our future growth plans, including future strategic
acquisitions.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties
that could materially impact our business, results of operations and financial
condition.
SUBSTANTIAL LEVERAGE. As of December 31, 2000, pro forma for the offering
of the January 2001 Charter Holdings notes and the application of the net
proceeds therefrom, our total debt was approximately $13.1 billion. We
anticipate incurring significant additional debt in the future, including the
Charter Holdings 2001 senior bridge loan commitment, to fund future acquisitions
and the expansion, maintenance and upgrade of our cable systems.
Our ability to make payments on our debt and to fund our planned capital
expenditures for upgrading our cable systems and our ongoing operations will
depend on our ability to generate cash and secure financing in the future. This,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. We cannot assure
you that our business will generate sufficient cash flow from operations, or
that future borrowings will be available to us under our existing credit
facilities, new facilities or from other sources of financing at acceptable
rates or in an amount sufficient to enable us to repay our debt, to grow our
business or to fund our other liquidity and capital needs.
VARIABLE INTEREST RATES. At December 31, 2000, approximately 53% of our
debt bears interest at variable rates that are linked to short-term interest
rates. In addition, a significant portion of our existing debt, assumed debt or
debt we might arrange in the future will bear interest at variable rates. If
interest rates rise, our costs relative to those obligations will also rise. At
December 31, 2000, our weighted-average rate on outstanding bank commitments is
approximately 8.33% and approximately 9.50% on high-yield debt, resulting in a
blended weighted-average rate of 8.94%. See "-- Interest Rate Risk."
RESTRICTIVE COVENANTS. Our credit facilities and the indentures governing
our outstanding debt contain a number of significant covenants that, among other
things, restrict our ability and the ability of our subsidiaries to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- pledge assets.
Furthermore, in accordance with our credit facilities we are required to
maintain specified financial ratios and meet financial tests. The ability to
comply with these provisions may be affected by events beyond our control. The
breach of any of these covenants will result in a default under the applicable
debt agreement or instrument, which could trigger acceleration of the debt. Any
default under our credit facilities or the indentures governing our outstanding
debt may adversely affect our growth, our financial condition, and our results
of operations and the ability to repay amounts due under the notes issued by
Charter Communications, Inc. or its subsidiaries.
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NEW SERVICES AND PRODUCTS GROWTH STRATEGY. We expect that a substantial
portion of any of our future growth will be achieved through revenues from
additional services. We cannot be assured that we will be able to offer new
advanced services successfully to our customers or that those new advanced
services will generate revenues. The amount of our capital expenditures and
related roll-out of advanced services may be limited by the availability of
certain equipment (in particular, digital set-top terminals and cable modems)
due to production capacity constraints of certain vendors and/or materials
shortages. We continue to work with our primary vendors to address such problems
and have been assured that we will have an adequate supply to meet our demand.
If we are unable to grow our cash flow sufficiently, we may be unable to fulfill
our obligations or obtain alternative financing.
MANAGEMENT OF GROWTH. We have experienced rapid growth that has placed and
is expected to continue to place a significant strain on our management,
operations and other resources. Our future success will depend in part on our
ability to successfully integrate the operations acquired and to be acquired and
to attract and retain qualified personnel. No significant severance cost was
incurred in conjunction with acquisitions in 1999 and 2000. The failure to
retain or obtain needed personnel or to implement management, operating or
financial systems necessary to successfully integrate acquired operations or
otherwise manage growth when and as needed could have a material adverse effect
on our business, results of operations and financial condition.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. Effective March 31, 1999, the scope of rate
regulation was reduced so that it continues to impact only the lowest level of
basic cable service and associated equipment. This change affords cable
operators much greater pricing flexibility, although Congress could revisit this
issue if confronted with substantial rate increases.
Cable operators also face significant regulation of their channel capacity.
They currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access users, and
unaffiliated commercial leased access programmers. This carriage burden could
increase in the future, particularly if the Federal Communications Commission
(FCC) were to require cable systems to carry both the analog and digital
versions of local broadcast signals. The FCC is currently conducting a
proceeding in which it is considering this channel usage possibility, although
it recently issued a tentative decision against such dual carriage.
There is also uncertainty whether local franchising authorities, state
regulators, the FCC, or the U.S. Congress will impose obligations on cable
operators to provide unaffiliated Internet service providers with access to
cable plant on non-discriminatory terms. If they were to do so, and the
obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. Recently, two federal district courts and a federal
circuit court in California struck down as unlawful open-access requirements
imposed by three different franchising authorities. The federal circuit court
ruling reversed an earlier district court decision that had upheld an
open-access requirement.
In response, the FCC has initiated a proceeding to categorize
cable-delivered Internet service and perhaps establish an appropriate regulatory
scheme. Company-specific open access requirements were imposed on Time Warner
cable systems in connection with the AOL merger.
Although cable system attachments to public utility poles historically have
been regulated at the federal or state level, the provision of non-traditional
cable services, like Internet access, may endanger that regulatory protection.
The Eleventh Circuit Court of Appeals recently ruled that such services left
cable attachments ineligible for regulatory protection, and certain utilities
already have proposed vastly higher pole attachment rates. The Eleventh Circuit
decision is now scheduled to be reviewed by the United States Supreme Court.
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INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements, is required under the terms of the credit facilities of our
subsidiaries. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to otherwise pay lower market rates. Collars
limit our exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
Our participation in interest rate hedging transactions involves
instruments that have a close correlation with our debt, thereby managing our
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
At December 31, 2000, we had outstanding $1.9 billion, $15.0 million and
$520 million in notional amounts of interest rate swaps, caps and collars,
respectively.
The notional amounts of interest rate instruments are used to measure
interest to be paid or received and do not represent the amount of exposure to
credit loss. While swaps, caps and collars represent an integral part of our
interest rate risk management program, their incremental effect on interest
expense for the years ended December 31, 2000 and 1999, was not significant.
The fair value of fixed-rate debt at December 31, 2000, was $5.5 billion.
The fair value of fixed-rate debt is based on quoted market prices. The fair
value of variable-rate debt approximates the carrying value of $7.3 billion at
December 31, 2000, since this debt bears interest at current market rates.
ACCOUNTING STANDARDS NOT YET IMPLEMENTED
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by SFAS 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, and SFAS
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, is effective for the Company as of January 1, 2001. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. Adoption of these
new accounting standards is expected to result in a cumulative effect of a
change in accounting principle that increases net loss by approximately $23.9
million.
SUPPLEMENTAL UNAUDITED PRO FORMA DATA
The following Supplemental Unaudited Pro Forma Data is based on the
historical financial data of Charter and does not include the effect of the
pending AT&T transactions or any borrowings under the Charter Holdings 2001
senior bridge loan commitment. Our financial data, on a consolidated basis, is
adjusted on a pro forma basis to illustrate the estimated effects of the
following transactions as if they had occurred on January 1, 2000:
- the acquisitions by Charter Communications, Inc. and its subsidiaries
completed since January 1, 2000, including the Bresnan and Kalamazoo
acquisitions;
- borrowings under the Charter Holdings 2000 senior bridge loan facility
and the application of a portion of such borrowings to repay a portion of
the amounts outstanding under the Charter Operating and Falcon revolving
credit facilities;
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- the repayment of a portion of the Charter Holdings 2000 senior bridge
loan facility with net proceeds from the issuance and sale of our
convertible senior notes; and
- the issuance and sale of the January 2001 Charter Holdings notes and the
application of the net proceeds to repay all remaining amounts
outstanding under the Charter Holdings 2000 senior bridge loan facility
and the Fanch revolving credit facility, and a portion of the amounts
outstanding under the Charter Operating and Falcon revolving credit
facilities.
The pro forma impact of the issuance and sale of the January 2000 Charter
Holdings notes is not significant and is therefore not taken into account below.
The Supplemental Unaudited Pro Forma Data reflects the application of the
principles of purchase accounting to the acquisitions completed since January 1,
2000. The purchase price allocations are based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information of intangible assets and is subject to post-closing purchase price
adjustments. We believe that finalization of the purchase price allocation will
not have a material impact on our results of operations or financial position.
The Supplemental Unaudited Pro Forma Data does not purport to be indicative
of what our results of operations would actually have been had the transactions
described above been completed on the dates indicated or to project our results
of operations for any future date.
SUPPLEMENTAL UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------
CHARTER PRO FORMA
COMMUNICATIONS, INC. ADJUSTMENTS(A) TOTAL
-------------------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
REVENUES:
Basic............................................ $ 2,249,339 $ 36,382 $ 2,285,721
Premium.......................................... 226,598 5,152 231,750
Pay-per-view..................................... 28,590 474 29,064
Digital.......................................... 91,115 736 91,851
Advertising sales................................ 220,205 2,519 222,724
Data services.................................... 63,330 1,643 64,973
Other............................................ 370,045 2,846 372,891
----------- -------- ------------
Total revenues......................... 3,249,222 49,752 3,298,974
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SUPPLEMENTAL UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------
CHARTER PRO FORMA
COMMUNICATIONS, INC. ADJUSTMENTS(A) TOTAL
-------------------- -------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING EXPENSES:
Programming...................................... 736,043 13,144 749,187
General and administrative....................... 543,865 2,300 546,165
Service.......................................... 192,603 6,766 199,369
Marketing........................................ 63,789 541 64,330
Advertising Sales................................ 56,499 5,222 61,721
Other............................................ 58,554 1,339 59,893
Depreciation..................................... 1,209,698 15,592 1,225,290
Amortization..................................... 1,263,384 31,253 1,294,637
Option compensation expense...................... 40,978 -- 40,978
Corporate expense charges........................ 55,243 707 55,950
----------- -------- ------------
Total operating expenses............... 4,220,656 76,864 4,297,520
Loss from operations............................. (971,434) (27,112) (998,546)
Interest expense................................. (1,059,130) (65,020) (1,124,150)
Interest income.................................. 7,348 (49) 7,299
Loss on equity investments....................... (19,262) -- (19,262)
Other income (expense)........................... (12,467) (77) (12,544)
----------- -------- ------------
Loss before minority interest.................... (2,054,945) (92,258) (2,147,203)
Minority interest in loss of subsidiary(b)....... 1,226,295 40,793 1,267,088
----------- -------- ------------
Net loss......................................... $ (828,650) $(51,465) $ (880,115)
=========== ======== ============
Loss per common share, basic and diluted(c)...... $ (3.77)
Weighted-average common shares outstanding, basic
and diluted(d)................................. 233,403,320
Converted loss per common share(e)............... $ (3.60)
Weighted-average common shares outstanding --
converted(f)................................... 596,715,543
OTHER FINANCIAL DATA:
EBITDA(g)........................................ 1,469,919 19,656 1,489,575
EBITDA margin(h)................................. 45.2% 39.5% 45.2%
Adjusted EBITDA(i)............................... 1,597,869 20,440 1,618,309
OPERATING DATA
(at end of period, except for average)
Homes passed(j).................................. 10,225,000
Basic customers(k)............................... 6,350,900
Basic penetration(l)............................. 62.1%
Premium units(m)................................. 4,939,100
Premium penetration(n)........................... 77.8%
Average monthly revenue per basic customer(o).... $ 43.29
---------------
(a) Comprised of: (1) Our acquisitions' results of operations from January 1,
2000 to their respective acquisition dates (Interlake -- January 31, 2000;
Bresnan -- February 14, 2000; Capital Cable and Farmington -- April 1,
2000; Kalamazoo -- September 7, 2000), as well as the sale of 4,715
customers in Dickinson, North Dakota, completed on December 31, 2000; (2)
borrowings under the Charter Holdings 2000 senior bridge loan facility and
the application of a portion of such borrowings to repay a portion of the
amounts outstanding under the Charter Operating and Falcon revolving credit
facilities; (3) repayment of a portion of the Charter Holdings 2000 senior
bridge loan facility with net proceeds from the issuance and sale of our
convertible senior notes; and (4) the issuance and sale of the January 2001
Charter Holdings notes and the application of the net proceeds to repay all
remaining amounts outstanding under the Charter Holdings 2000 senior bridge
loan facility and the Fanch revolving credit facility, and a portion of the
amounts outstanding under the Charter Operating and Falcon revolving credit
facilities.
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(b) Represents the allocation of losses to the minority interest in loss of
subsidiary based on ownership of Charter Communications Holding Company and
the accretion of the preferred membership units in an indirect subsidiary
of Charter Holdings issued to certain Bresnan sellers. These membership
units are exchangeable on a one-for-one basis for shares of Class A common
stock of Charter Communications, Inc.
(c) Basic and diluted loss per common share equals net loss divided by
weighted-average common shares outstanding. Basic and diluted loss per
common share assumes none of the membership units of Charter Communications
Holding Company or preferred membership units in a subsidiary of Charter
Holdings held by certain Bresnan sellers as of December 31, 2000, are
exchanged for shares of Charter Communications, Inc.'s Class A common
stock, none of the convertible senior notes are converted into shares of
Class A common stock and none of the outstanding options to purchase
membership units of Charter Communications Holding Company that are
automatically exchanged for shares of Class A common stock are exercised.
If the membership units were exchanged, notes converted or options
exercised, the effects would be antidilutive.
(d) Represents all shares outstanding as of January 1, 2000 (195,550,000
shares), plus shares issued to the Rifkin, Falcon and Kalamazoo sellers
through December 31, 2000 (37,713,122 shares), plus the weighted average of
all other shares issued in 2000.
(e) Converted loss per common share assumes all common membership units of
Charter Communications Holding Company and preferred membership units in a
subsidiary of Charter Holdings held by certain Bresnan sellers as of
December 31, 2000, are exchanged for shares of Charter Communications,
Inc.'s Class A common stock. If all these shares are converted, minority
interest would equal zero. Converted loss per common share is calculated by
dividing loss before minority interest by the weighted-average common
shares outstanding -- converted.
(f) Weighted-average common shares outstanding -- converted assumes the total
common membership units in Charter Communications Holding Company totaling
324,300,479 held by Charter Investment and Vulcan Cable III Inc., both
entities controlled by Mr. Allen, and 39,011,744 preferred membership units
in a subsidiary of Charter Holdings held by certain Bresnan sellers are
exchanged on a one-for-one basis for shares of Charter Communications,
Inc.'s Class A common stock. Converted loss per common share assumes no
conversion of the convertible senior notes and no exercise of any options.
(g) EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization, and minority interest. EBITDA is presented
because it is a widely accepted financial indicator of a cable company's
ability to service indebtedness. However, EBITDA should not be considered
as an alternative to income from operations or to cash flows from
operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because EBITDA is not calculated
identically by all companies, the presentation here may not be comparable
to other similarly titled measures of other companies. Management's
discretionary use of funds depicted by EBITDA may be limited by working
capital, debt service and capital expenditure requirements and by
restrictions related to legal requirements, commitments and uncertainties.
(h) EBITDA margin represents EBITDA as a percentage of revenues.
(i) Adjusted EBITDA means EBITDA before option compensation expense, corporate
expense charges, loss on equity investments and other income (expense).
Adjusted EBITDA is presented because it is a widely accepted financial
indicator of a cable company's ability to service indebtedness. However,
adjusted EBITDA should not be considered as an alternative to income from
operations or to cash flows from operating, investing or financing
activities, as determined in accordance with generally accepted accounting
principles. Adjusted EBITDA should also not be construed as an indication
of a company's operating performance or as a measure of liquidity. In
addition, because adjusted EBITDA is not calculated identically by all
companies, the presentation here may not be comparable to other similarly
titled measures of other companies. Management's discretionary use of funds
depicted by adjusted EBITDA may be limited by working capital, debt service
and capital expenditure requirements and by restrictions related to legal
requirements, commitments and uncertainties.
B-25
67
(j) Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable distribution
network in a given cable system service area.
(k) Basic customers are customers who receive basic cable service.
(l) Basic penetration represents basic customers as a percentage of homes
passed.
(m) Premium units represent the total number of subscriptions to premium
channels.
(n) Premium penetration represents premium units as a percentage of basic
customers.
(o) Average monthly revenue per basic customer represents revenues divided by
the number of months in the period divided by the number of basic customers
at period end.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements is required under the terms of the credit facilities of our
subsidiaries. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to otherwise pay lower market rates. Collars
limit our exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
Our participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
The following table summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 2000 (dollars in thousands):
FAIR VALUE AT
DECEMBER 31,
2001 2002 2003 2004 2005 THEREAFTER TOTAL 2000
-------- -------- -------- -------- -------- ---------- ---------- -------------
DEBT
Fixed Rate............... -- $ 495 $ 67,247 $ 279 $750,000 $5,607,613 $6,425,634 $5,496,923
Average Interest
Rate................. -- 7.5% 11.8% 7.5% 5.8% 9.7% 9.3% --
Variable Rate............ $ -- $129,645 $286,170 $418,593 $590,332 $5,877,260 $7,302,000 $7,302,000
Average Interest
Rate................. -- 7.6% 7.7% 7.7% 7.7% 8.3% 8.2% --
INTEREST RATE INSTRUMENTS
Variable to Fixed
Swaps................ $720,000 $330,000 $ 80,000 $140,000 $300,000 $ 372,713 $1,942,713 $ 5,236
Average Pay Rate....... 7.8% 7.5% 6.8% 6.8% 7.8% 7.7% 7.6% --
Average Receive Rate... 7.8% 7.7% 7.7% 7.8% 7.8% 7.9% 7.8% --
Cap...................... -- $ 15,000 -- -- -- -- $ 15,000 --
Average Cap Rate....... -- 9.0% -- -- -- -- 9.0% --
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. 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 Rate (LIBOR) rates for the year of maturity based on the
yield curve in effect at December 31, 2000. While swaps, caps and collars
represent an integral part of our interest rate risk management program, their
incremental effect on interest expense for the years ended December 31, 2000,
1999 and 1998 was not significant.
In addition to the interest rate instruments listed in the table above, we
maintain collars with an aggregate $520 million notional amount maturing in
2004. The collar agreements are structured so that if LIBOR falls below 5.3%,
the Company pays 6.7%. If the LIBOR rate is between 5.3% and 8.0%, the Company
pays
B-26
68
LIBOR. The LIBOR rate is capped at 8.0% if LIBOR falls between 8.0% and 9.9%. If
rates go above 9.9%, the cap is removed. As of December 31, 2000, the fair value
of the collars was a liability of $10.8 million.
In January 2001, Charter Holdings and Charter Communications Holdings
Capital Corporation issued $900 million 10.75% senior notes due 2009, $500
million 11.125% senior notes due 2011 and $675 million 13.5% senior discount
notes due 2011. The net proceeds from the selling of these notes, approximately
$1.72 billion, were used, in part, to repay all remaining amounts outstanding
under the Charter Holdings 2000 senior bridge loan facility and the Fanch
revolving credit facility, and a portion of the amounts outstanding under the
Charter Operating and Falcon revolving credit facilities.
B-27
69
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants.................... F-1
Report of Independent Auditors.............................. F-2
Report of Independent Auditors.............................. F-3
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2000 and 1999, and for the Period from
December 24, 1998, through December 31, 1998.............. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2000 and 1999 and for the
Period from December 24, 1998, through December 31,
1998...................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000 and 1999, and for the Period from
December 24, 1998, through December 31, 1998.............. F-7
Notes to Consolidated Financial Statements.................. F-8
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND
SUBSIDIARIES:
Report of Independent Public Accountants.................... F-32
Consolidated Statement of Operations for the Period from
January 1, 1998, through December 23, 1998................ F-33
Consolidated Statement of Changes in Shareholder's
Investment for the Period from January 1, 1998 through
December 23, 1998......................................... F-34
Consolidated Statement of Cash Flows for the Period from
January 1, 1998, through December 23, 1998................ F-35
Notes to Consolidated Financial Statements.................. F-36
70
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Charter
Communications, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years then ended and for the period from December 24,
1998, through December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Charter Communications VI Operating Company, LLC and
subsidiaries, and CC VII Holdings, LLC -- Falcon Systems, as of December 31,
1999, and for the periods from the dates of acquisition through December 31,
1999, which statements on a combined basis reflect total assets and total
revenues of 31 percent and 6 percent, respectively, of the related consolidated
totals of the Company. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Charter Communications, Inc. and subsidiaries as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for the years then ended, and for the period from December 24, 1998,
through December 31, 1998, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 8, 2001
F-1
71
REPORT OF INDEPENDENT AUDITORS
Charter Communications VI
Operating Company, LLC
We have audited the consolidated balance sheet of Charter Communications VI
Operating Company, LLC and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, member's equity and cash flows for the
period from inception (November 9, 1999) to December 31, 1999 (not presented
separately herein). These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charter
Communications VI Operating Company, LLC and subsidiaries at December 31, 1999,
and the consolidated results of its operations and its cash flows for the period
from November 9, 1999 to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 11, 2000
F-2
72
REPORT OF INDEPENDENT AUDITORS
Sole Member
CC VII Holdings, LLC
We have audited the combined balance sheet of the CC VII Holdings,
LLC -- Falcon Systems as of December 31, 1999, and the related combined
statements of operations and parent's investment and cash flows for the period
from November 13, 1999 (commencement date) to December 31, 1999 (not presented
separately herein). These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the CC VII
Holdings, LLC -- Falcon Systems at December 31, 1999 and the results of its
operations and its cash flows for the period from November 13, 1999
(commencement date) to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 2, 2000
F-3
73
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 130,702 $ 133,706
Accounts receivable, less allowance for doubtful accounts
of $12,421 and $11,471, respectively................... 217,667 93,743
Receivables from related party............................ 6,480 --
Prepaid expenses and other................................ 77,719 35,142
----------- -----------
Total current assets.............................. 432,568 262,591
----------- -----------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net........................ 5,267,519 3,490,573
Franchises, net........................................... 17,068,702 14,985,793
----------- -----------
22,336,221 18,476,366
----------- -----------
OTHER ASSETS................................................ 274,777 227,550
----------- -----------
$23,043,566 $18,966,507
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 1,367,234 $ 706,775
Payables to related party................................. -- 13,183
----------- -----------
Total current liabilities......................... 1,367,234 719,958
----------- -----------
LONG-TERM DEBT.............................................. 13,060,455 8,936,455
----------- -----------
DEFERRED MANAGEMENT FEES -- RELATED PARTY................... 13,751 21,623
----------- -----------
OTHER LONG-TERM LIABILITIES................................. 285,266 145,124
----------- -----------
MINORITY INTEREST........................................... 4,089,329 5,381,331
----------- -----------
REDEEMABLE SECURITIES....................................... 1,104,327 750,937
----------- -----------
SHAREHOLDERS' EQUITY:
Class A common stock...................................... 234 195
Class B common stock...................................... -- --
Preferred stock........................................... -- --
Additional paid-in capital................................ 4,018,444 3,075,694
Accumulated deficit....................................... (894,881) (66,231)
Accumulated other comprehensive income (loss)............. (593) 1,421
----------- -----------
Total shareholders' equity........................ 3,123,204 3,011,079
----------- -----------
$23,043,566 $18,966,507
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
74
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
--------------------------- DECEMBER 31,
2000 1999 1998
------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
REVENUES........................................... $ 3,249,222 $ 1,428,244 $13,713
------------ ----------- -------
OPERATING EXPENSES:
Operating, general and administrative............ 1,651,353 737,957 7,134
Depreciation and amortization.................... 2,473,082 745,315 8,318
Option compensation expense...................... 40,978 79,979 845
Corporate expense charge -- related party........ 55,243 51,428 473
------------ ----------- -------
4,220,656 1,614,679 16,770
------------ ----------- -------
Loss from operations.......................... (971,434) (186,435) (3,057)
OTHER INCOME (EXPENSE):
Interest expense................................. (1,059,130) (477,799) (2,353)
Interest income.................................. 7,348 34,467 133
Loss on equity investments....................... (19,262) -- --
Other, net....................................... (12,467) (8,039) --
------------ ----------- -------
Loss before income tax expense and minority
interest in loss of subsidiary.............. (2,054,945) (637,806) (5,277)
INCOME TAX EXPENSE................................. -- (1,030) --
------------ ----------- -------
Loss before minority interest in loss of
subsidiary.................................. (2,054,945) (638,836) (5,277)
MINORITY INTEREST IN LOSS OF SUBSIDIARY............ 1,226,295 572,607 5,275
------------ ----------- -------
Net loss...................................... $ (828,650) $ (66,229) $ (2)
============ =========== =======
LOSS PER COMMON SHARE, basic and diluted........... $ (3.67) $ (2.22) $ (0.04)
============ =========== =======
Weighted-average common shares outstanding......... 225,697,775 29,811,202 50,000
============ =========== =======
The accompanying notes are an integral part of these consolidated statements.
F-5
75
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
CLASS A CLASS B ADDITIONAL COMPREHENSIVE TOTAL
COMMON COMMON PAID-IN ACCUMULATED INCOME SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT (LOSS) EQUITY
------- ------- ---------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
BALANCE, December 24, 1998..... $ -- $ 832 $ -- $ -- $ 832
Net loss..................... -- -- -- (2) -- (2)
---- -- ---------- --------- ------- ----------
BALANCE, December 31, 1998..... -- -- 832 (2) -- 830
Issuance of Class B common
stock to Mr. Allen........ -- -- 950 -- -- 950
Net proceeds from initial
public offering of Class A
common stock.............. 196 -- 3,547,724 -- -- 3,547,920
Issuance of common stock in
exchange for additional
equity of subsidiary...... 26 -- 638,535 -- -- 638,561
Distributions to Charter
Investment................ -- -- (2,233) -- -- (2,233)
Equity classified as
redeemable securities..... (27) -- (700,759) -- -- (700,786)
Option compensation
expense................... -- -- 4,493 -- -- 4,493
Loss on issuance of equity by
subsidiary................ -- -- (413,848) -- -- (413,848)
Net loss..................... -- -- -- (66,229) -- (66,229)
Unrealized gain on marketable
securities available for
sale...................... -- -- -- -- 1,421 1,421
---- -- ---------- --------- ------- ----------
BALANCE, December 31, 1999..... 195 -- 3,075,694 (66,231) 1,421 3,011,079
Issuance of common stock
related to acquisitions... 11 -- 177,976 -- -- 177,987
Redeemable securities
reclassified as equity.... 28 -- 692,505 -- -- 692,533
Option compensation
expense................... -- -- 16,405 -- -- 16,405
Gain on issuance of equity by
subsidiary................ -- -- 55,534 -- -- 55,534
Stock options exercised...... -- -- 330 -- -- 330
Net loss..................... -- -- -- (828,650) -- (828,650)
Unrealized loss on marketable
securities available for
sale...................... -- -- -- -- (2,014) (2,014)
---- -- ---------- --------- ------- ----------
BALANCE, December 31, 2000..... $234 $4,018,444 $(894,881) $ (593) $3,123,204
==== == ========== ========= ======= ==========
The accompanying notes are an integral part of these consolidated statements.
F-6
76
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
-------------------------- DECEMBER 31,
2000 1999 1998
----------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (828,650) $ (66,229) $ (2)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Minority interest in loss of subsidiary................. (1,226,295) (572,607) (5,275)
Depreciation and amortization........................... 2,473,082 745,315 8,318
Option compensation expense............................. 40,978 79,979 845
Noncash interest expense................................ 181,436 100,674 --
Loss on equity investments.............................. 19,262 -- --
Changes in assets and liabilities, net of effects from
acquisitions --
Accounts receivable..................................... (138,453) (32,366) (8,753)
Prepaid expenses and other.............................. (45,203) 13,627 (211)
Accounts payable and accrued expenses................... 699,602 177,321 10,227
Receivables from and payables to related party,
including deferred management fees.................... (49,138) 27,653 473
Other operating activities................................ 4,589 6,549 2,022
----------- ------------ --------
Net cash provided by operating activities.......... 1,131,210 479,916 7,644
----------- ------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (2,825,126) (741,508) (13,672)
Payments for acquisitions, net of cash acquired........... (1,188,000) (7,629,564) --
Loan to Marcus Cable Holdings............................. -- (1,680,142) --
Purchases of investments.................................. (59,149) -- --
Other investing activities................................ 18,307 (26,755) --
----------- ------------ --------
Net cash used in investing activities.............. (4,053,968) (10,077,969) (13,672)
----------- ------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 7,504,565 10,114,188 14,200
Repayments of long-term debt.............................. (4,499,793) (5,694,375) --
Payments for debt issuance costs.......................... (85,348) (113,481) --
Net proceeds from initial public offering of Class A
common stock............................................ -- 3,547,920 --
Proceeds from issuance of Class B common stock............ -- 950 --
Capital contributions to Charter Holdco by Vulcan Cable... -- 1,894,290 --
Distributions to Charter Investment....................... -- (10,931) --
Other financing activities................................ 330 (16,375) --
----------- ------------ --------
Net cash provided by financing activities.......... 2,919,754 9,722,186 14,200
----------- ------------ --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (3,004) 124,133 8,172
CASH AND CASH EQUIVALENTS, beginning of period.............. 133,706 9,573 1,401
----------- ------------ --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 130,702 $ 133,706 $ 9,573
=========== ============ ========
CASH PAID FOR INTEREST...................................... $ 750,606 $ 314,606 $ 5,538
=========== ============ ========
NONCASH TRANSACTIONS:
Transfer of operating subsidiaries to the Company......... $ -- $ 1,252,370 $ --
Transfer of equity interests to the Company............... -- 180,710 --
Issuance of equity as partial payments for acquisitions... 1,192,097 683,312 --
The accompanying notes are an integral part of these consolidated statements.
F-7
77
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Charter Communications, Inc.
On July 22, 1999, Charter Investment, Inc. (Charter Investment), a company
controlled by Paul G. Allen, formed a wholly owned subsidiary, Charter
Communications, Inc. (Charter), a Delaware corporation, with a nominal initial
investment.
On November 12, 1999, Charter sold 195.5 million shares of Class A common
stock in an initial public offering and 50,000 shares of high vote Class B
common stock to Mr. Allen. The net proceeds from the offerings of approximately
$3.55 billion were used to purchase membership units of Charter Communications
Holding Company, LLC (Charter Holdco), except for a portion of the proceeds that
were retained by Charter to acquire a portion of the equity interests of Avalon
Cable of Michigan Holdings, Inc. (Avalon). In exchange for the contribution of
the net proceeds from the offerings and equity interests of Avalon, Charter
received 195.55 million membership units of Charter Holdco on November 12, 1999,
representing a 100% voting interest and an approximate 40.6% economic interest.
As of December 31, 2000, Charter owns a 40.8% economic interest in Charter
Holdco.
Prior to November 12, 1999, Charter Holdco was owned 100% by Charter
Investment and Vulcan Cable III Inc. (Vulcan Cable), both entities controlled by
Mr. Allen. Subsequent to November 12, 1999, Mr. Allen controls Charter through
his ownership of all of the high vote Class B common stock and Charter controls
Charter Holdco through its ownership of all the voting interests. Charter's
purchase of 50,000 membership units of Charter Holdco was accounted for as a
reorganization of entities under common control similar to a pooling of
interests. Accordingly, beginning December 23, 1998, the date Mr. Allen first
controlled Charter Holdco, the assets and liabilities of Charter Holdco are
reflected in the consolidated financial statements of Charter at Mr. Allen's
basis and minority interest is recorded representing that portion of the
economic interests not owned by Charter. For financial reporting purposes,
50,000 of the membership units previously issued by Charter Holdco to companies
controlled by Mr. Allen are considered held by Charter effective December 23,
1998, representing an economic interest of less than 1%.
Charter is a holding company whose sole asset is a controlling equity
interest in Charter Holdco, an indirect owner of cable systems. Charter and
Charter Holdco and its subsidiaries are collectively referred to as the Company.
The consolidated financial statements of Charter include the accounts of Charter
Holdco and all of its direct and indirect subsidiaries. All material
intercompany transactions and balances have been eliminated.
As of December 31, 2000, the Company owns and operates cable systems
serving approximately 6.4 million (unaudited) customers. The Company currently
offers a full array of traditional analog cable television services and advanced
bandwidth services such as digital television, interactive video programming,
Internet access through television-based service, dial-up telephone modems and
high speed cable modems, and video-on-demand.
Charter Communications Holding Company, LLC
Charter Holdco, a Delaware limited liability company, was formed in
February 1999 as a wholly owned subsidiary of Charter Investment. Charter
Investment through its wholly owned subsidiary, Charter Communications
Properties Holdings, LLC (CCPH), commenced operations with the acquisition of a
cable system on September 30, 1995.
Effective December 23, 1998, through a series of transactions, Mr. Allen
acquired approximately 94% of Charter Investment for an aggregate purchase price
of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter
Investment acquired, for
F-8
78
fair value from unrelated third parties, all of the interests it did not already
own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised
of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach,
Inc.), all cable television operating companies, for $2.0 billion, excluding
$1.8 billion in debt assumed. Charter Investment previously managed and owned
minority interests in these companies. These acquisitions were accounted for
using the purchase method of accounting and accordingly, results of operations
of CharterComm Holdings and CCA Group are included in the financial statements
from the date of acquisition. In February 1999, Charter Investment transferred
all of its cable television operating subsidiaries to a wholly owned subsidiary
of Charter Communications Holdings, LLC (Charter Holdings). Charter Holdings is
a wholly owned subsidiary of Charter Holdco. This transfer was accounted for as
a reorganization of entities under common control similar to a pooling of
interests.
As a result of the change in ownership of CCPH, CharterComm Holdings and
CCA Group, Charter Holdco applied push-down accounting in the preparation of its
consolidated financial statements. Accordingly, on December 23, 1998, Charter
Holdco increased its members' equity by $2.2 billion to reflect the amounts paid
by Mr. Allen and Charter Investment. The purchase price was allocated to assets
acquired and liabilities assumed based on their relative fair values, including
amounts assigned to franchises of $3.6 billion.
On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen,
(collectively, the "Mr. Allen Companies") purchased substantially all of the
outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable)
for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of
the remaining partnership interest retained voting control of Marcus Cable. In
February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed, and Mr.
Allen's interests in Marcus Cable were transferred to Marcus Holdings on March
15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership
interests in Marcus Cable, including voting control. On April 7, 1999, Marcus
Holdings was merged into Charter Holdings and Marcus Cable was transferred to
Charter Holdings. For financial reporting purposes, the merger was accounted for
as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen
obtained voting control of Marcus Cable. Accordingly, the results of operations
of Marcus Cable have been included in the consolidated financial statements from
April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in
the consolidated financial statements using historical carrying values reflected
in the accounts of the Mr. Allen Companies. Total members' equity of Charter
Holdco increased by $1.3 billion as a result of the Marcus Cable acquisition.
Previously, on April 23, 1998, the Mr. Allen Companies recorded the assets
acquired and liabilities assumed of Marcus Cable based on their relative fair
values.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installations. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred,
while equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
F-9
79
Franchises
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company. Accumulated
amortization related to franchises was $1.9 billion and $650.5 million, as of
December 31, 2000 and 1999, respectively. Amortization expense related to
franchises for the years ended December 31, 2000 and 1999, and for the period
from December 24, 1998, through December 31, 1998, was $1.2 billion, $520.0
million and $5.3 million, respectively.
Other Assets
Other assets include deferred financing costs, costs capitalized related to
customer acquisition and investments in equity securities. The accounting
policies for each are discussed below.
Costs related to borrowings are deferred and amortized to interest expense
using the effective interest method over the terms of the related borrowings. As
of December 31, 2000 and 1999, other assets include $180.5 million and $120.7
million of deferred financing costs, net of accumulated amortization of $35.9
million and $10.3 million, respectively.
The Company capitalizes incremental and direct contract acquisition and
origination costs associated with obtaining new customers by analogy to
Statement of Financial Accounting Standards (SFAS) No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Costs of Leases as permitted by Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. Costs capitalized are only those
that are realizable from future revenues. The Company capitalizes third party
incremental costs associated with obtaining new customers as well as internal
salaries and benefits for personnel directly involved in customer origination
and set up. Costs related to unsuccessful efforts and indirect costs are
expensed as incurred. Capitalized costs are charged to expense generally over
periods from one to twelve months. As of December 31, 2000 and 1999, the
unamortized portion of the deferred costs was $3.0 million and $2.4 million,
respectively.
Investments in equity securities are accounted for at cost, under the
equity method of accounting or in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Charter recognizes losses for
any decline in value considered to be other than temporary. Certain marketable
equity securities are classified as "available for sale" and reported at market
value with unrealized gains and losses recorded as accumulated other
comprehensive income (loss). Comprehensive loss for the years ended December 31,
2000 and 1999, and for the period from December 24, 1998, through December 31,
1998, was $830.7 million, $64.8 million and $2.0, respectively. The following
summarizes information as of December 31, 2000, and for the year ended December
31, 2000:
LOSS FOR THE
CARRYING VALUE AT YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 2000
----------------- ------------
Equity investments, under the cost method....... $14,091 $(11,759)
Equity investments, under the equity method..... 49,031 (7,503)
Marketable securities, at market value.......... 3,767 --
------- --------
$66,889 $(19,262)
======= ========
Impairment of Assets
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted
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net cash flows related to the asset over its remaining life, the carrying value
of such asset is reduced to its estimated fair value.
Revenues
Revenues from basic, premium, pay-per-view, digital and data services are
recognized when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 31, 2000 and 1999, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Advertising sales are recognized in the period that the advertisements are
exhibited.
Local governmental authorities impose franchise fees on the Company ranging
up to a federally mandated maximum of 5.0% of gross revenues. Such fees are
collected on a monthly basis, from the Company's customers and are periodically
remitted to local franchise authorities. Franchise fees collected and paid are
reported as revenues and expenses.
Other Long-term Liabilities
The Company receives upfront payments from certain programmers to launch
and promote new cable television channels. Revenue is recognized to the extent
of the fair value of the advertising services provided to promote the new
channel. Such revenue is classified as advertising revenue and totaled $51.5
million for the year ended December 31, 2000. The remaining portion is deferred
and amortized as an offset to programming expense over the respective terms of
the program agreements, which range from one to 20 years. For the years ended
December 31, 2000 and 1999, and for the period from December 24, 1998, through
December 31, 1998, the Company amortized and recorded as a reduction of
programming costs $6.9 million, $3.4 million and $12, respectively. As of
December 31, 2000 and 1999, the unamortized portion of the deferred launch
payments totaled $104.2 million and $13.4 million, respectively, and is included
in other long-term liabilities.
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
Income Taxes
Substantially all of the taxable income, gains, losses, deductions and
credits of Charter Holdco are passed through to its members, Charter, Charter
Investment, Vulcan Cable, and the former owners of an acquired company. Prior to
November 12, 1999, income taxes were the responsibility of the owners of Charter
Investment and Vulcan Cable and are not provided for in the accompanying
consolidated financial statements. Beginning November 12, 1999, Charter is
responsible for its share of taxable income (loss) of Charter Holdco allocated
to Charter in accordance with partnership tax rules and regulations. The tax
basis of Charter's
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investment in Charter Holdco is not materially different than the carrying value
of the investment for financial reporting purposes as of December 31, 2000.
Charter Holdco's limited liability company agreement provides that through
the end of 2003, tax losses of Charter Holdco that would otherwise have been
allocated to Charter will instead be allocated to the membership units held by
Vulcan Cable and Charter Investment. At the time Charter Holdco first becomes
profitable (as determined under the applicable federal income tax rules), the
profits that would otherwise have been allocated to Charter will instead be
allocated to the membership units held by Vulcan Cable and Charter Investment
until the tax benefits are fully restored. Management does not expect Charter
Holdco to generate taxable income in the foreseeable future.
Segments
In accordance with SFAS No. 131, Disclosure about Segments of an Enterprise
and Related Information, segments have been identified based upon management
responsibility. The individual segments have been aggregated into one reportable
segment, cable services.
Loss per Common Share
Basic loss per common share is computed by dividing the net loss by
225,697,775 shares, and 29,811,202 shares and 50,000 shares for 2000, 1999 and
for the period from December 24, 1998, through December 31, 1998, representing
the weighted-average common shares outstanding during the respective periods.
For purposes of the loss per common share calculation for the period from
December 24, 1998, through December 31, 1998, Mr. Allen's 50,000 shares of high
vote Class B common stock are considered to be outstanding for the entire
period. Diluted loss per common share equals basic loss per common share for the
periods presented, as the effect of stock options is anti-dilutive because the
Company generated net losses. All membership units of Charter Holdco are
exchangeable on a one-for-one basis into common stock of Charter at the option
of the holders. Should the holders exchange units for shares, the effect would
not be dilutive.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United Sates requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS:
During 2000, the Company acquired cable systems in five separate
transactions for an aggregate purchase price of $1.2 billion, net of cash
acquired, excluding debt assumed of $963.3 million. In connection with the
acquisitions, Charter issued shares of Class A common stock valued at
approximately $178.0 million, and Charter Holdco and an indirect subsidiary of
Charter Holdco issued equity interests totaling $384.6 million and $629.5
million, respectively. The purchase prices were allocated to assets and
liabilities assumed based on relative fair values, including amounts assigned to
franchises of $3.0 billion.
During 1999, the Company acquired cable systems in 11 separate transactions
for an aggregate purchase price, of $7.6 billion, net of cash acquired,
excluding debt assumed of $2.5 billion. In connection with two of the
acquisitions, Charter Holdco issued equity interests totaling $683.3 million.
The purchase prices were allocated to assets acquired and liabilities assumed
based on their relative fair values, including amounts assigned to franchises of
$9.7 billion.
All of the above acquisitions were accounted for using the purchase method
of accounting, and accordingly, results of operations of the acquired assets
have been included in the financial statements from their respective dates of
acquisition. The allocation of the purchase price for the acquisitions acquired
during 2000 are based, in part, on preliminary information, which is subject to
adjustment upon obtaining complete
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valuation information. Management believes that finalization of the purchase
prices and allocation will not have a material impact on the consolidated
results of operations or financial position of the Company.
Summarized pro forma operating results of the Company as though all
acquisitions and dispositions closed since January 1, 1999, the initial public
offering of common stock, the issuance and sale of the January 2000 Charter
Holdings Notes and the Charter Convertible Notes, and the drawdown of the
Charter Holdings Senior Bridge Loan Facility (see Note 7) had occurred on
January 1, 1999, with adjustments to give effect to amortization of franchises,
interest expense, minority interest, and certain other adjustments, follows.
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999
----------- -----------
(UNAUDITED)
Revenues.................................................. $ 3,298,974 $ 2,949,147
Loss from operations...................................... (998,546) (464,627)
Loss before minority interest............................. (2,098,357) (1,480,458)
Net loss.................................................. (860,210) (609,944)
Loss per common share, basic and diluted.................. (3.69) (2.61)
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the consolidated
results of operations had these transactions been completed as of the assumed
date or which may be obtained in the future.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows
for the years ended December 31:
2000 1999
-------- --------
Balance, beginning of year.................................. $ 11,471 $ 1,728
Acquisitions of cable systems............................... 780 5,860
Charged to expense.......................................... 46,151 20,872
Uncollected balances written off, net of recoveries......... (45,981) (16,989)
-------- --------
Balance, end of year........................................ $ 12,421 $ 11,471
======== ========
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31:
2000 1999
---------- ----------
Cable distribution systems.................................. $5,619,227 $3,523,217
Land, buildings and leasehold improvements.................. 282,661 108,214
Vehicles and equipment...................................... 426,847 176,221
---------- ----------
6,328,735 3,807,652
Less -- Accumulated depreciation............................ (1,061,216) (317,079)
---------- ----------
$5,267,519 $3,490,573
========== ==========
For the years ended December 31, 2000 and 1999, and for the period from
December 24, 1998, through December 31, 1998, depreciation expense was $1.2
billion, $225.0 million, and $2.8 million, respectively.
During the year ended December 31, 2000, the Company reduced the estimated
useful lives of certain depreciable assets expected to have reduced lives as a
result of the rebuild and upgrade of the Company's cable distribution systems.
As a result, an additional $508.5 million of depreciation expense was recorded
during the year ended December 31, 2000.
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6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31:
2000 1999
---------- --------
Accounts payable............................................ $ 365,140 $112,233
Capital expenditures........................................ 281,142 66,713
Accrued interest............................................ 212,958 85,870
Programming costs........................................... 120,035 72,245
Accrued general and administrative.......................... 75,421 39,648
Franchise fees.............................................. 53,494 46,524
Liability for pending transfer of cable system.............. -- 88,200
Other accrued expenses...................................... 259,044 195,342
---------- --------
$1,367,234 $706,775
========== ========
The liability for pending transfer of cable system represents the fair
value of a cable system to be transferred upon obtaining necessary regulatory
approvals in connection with the transaction with InterMedia Capital Partners IV
L. P., InterMedia Partners and their affiliates. Such approvals were obtained
and the system's assets were transferred in March 2000.
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
2000 1999
----------- ----------
Charter Communications, Inc.:
5.75% Convertible Senior Notes........................... $ 750,000 $ --
Charter Holdings:
8.250% Senior Notes...................................... 600,000 600,000
8.625% Senior Notes...................................... 1,500,000 1,500,000
9.920% Senior Discount Notes............................. 1,475,000 1,475,000
10.00% Senior Notes...................................... 675,000 --
10.25% Senior Notes...................................... 325,000 --
11.75% Senior Discount Notes............................. 532,000 --
Senior Bridge Loan Facility.............................. 272,500 --
Renaissance:
10.00% Senior Discount Notes............................. 114,413 114,413
CC V Holdings, LLC (Avalon):
9.375% Senior Subordinated Notes......................... -- 150,000
11.875% Senior Discount Notes............................ 179,750 196,000
CC VII Holdings, LLC (Falcon):
8.375% Senior Debentures................................. -- 375,000
9.285% Senior Discount Debentures........................ -- 435,250
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2000 1999
----------- ----------
Credit Facilities:
Charter Operating........................................ 4,432,000 2,906,000
CC Michigan, LLC and CC New England, LLC (Avalon)........ 213,000 170,000
CC VI Operating Company, LLC (Fanch)..................... 895,000 850,000
Falcon Cable Communications, LLC......................... 1,050,000 865,500
CC VIII Operating, LLC (Bresnan)......................... 712,000 --
Other debt................................................. 1,971 1,400
----------- ----------
13,727,634 9,638,563
Unamortized net discount................................... (667,179) (702,108)
----------- ----------
$13,060,455 $8,936,455
=========== ==========
Charter Convertible Notes
In October and November 2000, Charter issued $750.0 million 5.75%
Convertible Senior Notes maturing on October 15, 2005 (the "Charter Convertible
Notes") for net proceeds of $727.5 million.
The Charter Convertible Notes are convertible at the option of the holder
into shares of Class A common stock at a conversion rate of 46.3822 shares per
$1,000 principal amount of notes, which is equivalent to a price of $21.56 per
share, subject to certain adjustments. These notes are redeemable at the option
of Charter at amounts decreasing from 102.3% to 100% of the principal amount
plus accrued and unpaid interest beginning on October 15, 2003, to the date of
redemption. Interest is payable semiannually on April 15 and October 15,
beginning April 15, 2001, until maturity.
The Charter Convertible Notes rank equally with any future unsubordinated
and unsecured indebtedness of Charter, but are structurally subordinated to all
existing and future indebtedness and other liabilities of our subsidiaries. Upon
a change of control, subject to certain conditions and restrictions, Charter may
be required to repurchase the notes, in whole or in part, at 100% of their
principal amount plus accrued interest at the repurchase date.
Charter Holdings Notes
In January 2000, the Charter Holdings and Charter Communications Holdings
Capital Corporation (Charter Holdings Capital), a wholly owned subsidiary of
Charter Holdings (collectively, the "Issuers"), issued $675.0 million 10.000%
Senior Notes due 2009 (the "10.000% Senior Notes"), $325.0 million 10.250%
Senior Notes due 2010 (the "10.25% Senior Notes"), and $532.0 million 11.75%
Senior Discount Notes due 2010 (the "11.75% Senior Discount Notes"),
collectively referred to as the "January 2000 Charter Holdings Notes". The net
proceeds were $1.25 billion, after giving effect to discounts, commissions and
expenses.
The 10.00% Senior Notes are not redeemable prior to maturity. Interest is
payable semiannually on April 1 and October 1, beginning April 1, 2000 until
maturity.
The 10.25% Senior Notes are redeemable at the option of the Issuers at
amounts decreasing from 105.125% to 100% of par value plus accrued and unpaid
interest, beginning on January 15, 2005, to the date of redemption. At any time
prior to January 15, 2003, the Company may redeem up to 35% of the aggregate
principal amount of the 10.25% Senior Notes at a redemption price of 110.25% of
the principal amount under certain conditions. Interest is payable semiannually
in arrears on January 15 and July 15, beginning on July 15, 2000, until
maturity.
The 11.75% Senior Discount Notes are redeemable at the option of the
Issuers at amounts decreasing from 105.875% to 100% of accreted value beginning
January 15, 2005. At any time prior to January 15, 2003, the Company may redeem
up to 35% of the aggregate principal amount of the 11.75% Senior Notes at a
redemption price of 111.75% of the accreted value under certain conditions.
Interest is payable semiannually in arrears on January 15 and July 15, beginning
on July 15, 2005, until maturity. The discount on the 11.75%
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Senior Discount Notes is being accreted using the effective interest method. The
unamortized discount was $196.5 million at December 31, 2000.
In March 1999, Issuers issued $600.0 million 8.250% Senior Notes due 2007
(the "8.250% Senior Notes"), $1.5 billion 8.625% Senior Notes due 2009 (the
"8.625% Senior Notes"), and $1,475.0 million 9.920% Senior Discount Notes due
2011 (the "9.920% Senior Discount Notes"), collectively referred to as the
"Charter Holdings Notes". The net proceeds were $2.9 billion, after giving
effect to discounts, commissions and expenses.
The 8.250% Senior Notes are not redeemable prior to maturity. Interest is
payable semiannually in arrears on April 1 and October 1, beginning October 1,
1999, until maturity.
The 8.625% Senior Notes are redeemable at the option of the Issuers at
amounts decreasing from 104.313% to 100% of par value plus accrued and unpaid
interest beginning on April 1, 2004, to the date of redemption. At any time
prior to April 1, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of
the principal amount under certain conditions. Interest is payable semiannually
in arrears on April 1 and October 1, beginning October 1, 1999, until maturity.
The 9.920% Senior Discount Notes are redeemable at the option of the
Issuers at amounts decreasing from 104.960% to 100% of accreted value beginning
April 1, 2004. At any time prior to April 1, 2002, the Issuers may redeem up to
35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a
redemption price of 109.920% of the accreted value under certain conditions.
Thereafter, cash interest is payable semiannually in arrears on April 1 and
October 1 beginning April 1, 2004, until maturity. The discount on the 9.920%
Senior Discount Notes is being accreted using the effective interest method. The
unamortized discount was $397.8 million at December 31, 2000, and $497.2 million
at December 31, 1999.
The Charter Holdings Notes and the January 2000 Charter Holdings Notes rank
equally with current and future unsecured and unsubordinated indebtedness
(including accounts payables of the Company). The Issuers are required to make
an offer to repurchase all of the Charter Holdings Notes, at a price equal to
101% of the aggregate principal or 101% of the accreted value, together with
accrued and unpaid interest, upon a change of control of the Company.
Charter Holdings Senior Bridge Loan Facility
On August 4, 2000, Charter Holdings and Charter Holdings Capital entered
into a senior bridge loan agreement providing for senior increasing rate bridge
loans in an aggregate principal amount of up to $1.0 billion.
On August 14, 2000, Charter Holdings borrowed $1.0 billion under the senior
bridge loan facility and used substantially all of the proceeds to repay a
portion of the amounts outstanding under the Charter Operating and the Falcon
revolving credit facilities. The bridge loan initially bore interest at an
annual rate of 10.21%.
The net proceeds from the sale of the Charter Convertible Notes were
contributed as equity to Charter Holdings. Charter Holdings used substantially
all of the net proceeds to repay a portion of the amounts outstanding under the
Charter Holdings senior bridge loan facility. In January 2001, the bridge loan
was repaid (see Note 21).
Renaissance Notes
In connection with the acquisition of Renaissance Media Group LLC
(Renaissance) in 1999, the Company assumed $163.2 million principal amount at
maturity of senior discount notes due April 2008 (the "Renaissance Notes"). As a
result of the change in control of Renaissance, the Company was required to make
an offer to repurchase the Renaissance Notes at 101% of their accreted value. In
May 1999, the Company made an offer to repurchase the Renaissance Notes pursuant
to this requirement, and the holders of the Renaissance Notes tendered an amount
representing 30% of the total outstanding principal amount at
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maturity for repurchase. These notes were repurchased using a portion of the
proceeds from the Charter Holdings Notes.
As of December 31, 2000 and 1999, $114.4 million aggregate principal amount
at maturity of Renaissance Notes with an accreted value of $94.6 million and
$83.0 million, respectively, was outstanding. Interest on the Renaissance Notes
shall be paid semiannually at a rate of 10% per annum beginning on October 15,
2003.
The Renaissance Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after April 15, 2003, initially at 105% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100% of the principal amount at maturity, plus accrued and unpaid interest, on
or after April 15, 2006. In addition, at any time prior to April 15, 2001, the
Company may redeem up to 35% of the original principal amount at maturity with
the proceeds of one or more sales of membership units at 110% of their accreted
value, plus accrued and unpaid interest on the redemption date, provided that
after any such redemption, at least $106 million aggregate principal amount at
maturity remains outstanding.
Avalon Notes
The Company acquired CC V Holdings, LLC (Avalon) (formerly known as Avalon
Cable LLC) in November 1999 and assumed Avalon's 11.875% Senior Discount Notes
due 2008 (the "Avalon 11.875% Notes") and 9.375% Subordinated Notes due 2008
(the "Avalon 9.375% Notes"). After December 1, 2003, cash interest on the Avalon
11.875% Notes will be payable semiannually on June 1 and December 1 of each
year, commencing June 1, 2004.
In January 2000, the Company, through change of control offers and
purchases in the open market, completed the repurchase of the Avalon 9.375%
Notes with a total outstanding principal amount of $150.0 million for a total of
$153.7 million. Also in January 2000, the Company repurchased a portion of the
Avalon 11.875% Notes with a total outstanding principal amount of $16.3 million
for a total of $10.5 million. The repurchase of the Avalon 9.375% Notes and the
Avalon 11.875% Notes was funded by a portion of the cash proceeds from the
issuance of the January 2000 Charter Holdings Notes. The unamortized discount
related to the Avalon 11.875% Notes was $48.1 million as of December 31, 2000,
and $66.8 million as of December 31, 1999.
Falcon Debentures
The Company acquired CC VII Holdings, LLC (Falcon) (formerly known as
Falcon Communications, L.P.) in November 1999 and assumed Falcon's 8.375% Senior
Debentures Due 2010 (the "Falcon 8.375% Debentures") and 9.285% Senior Discount
Debentures Due 2010 (the "Falcon 9.285% Debentures"), collectively referred to
as the "Falcon Debentures".
In February 2000, the Company, through change of control offers and
purchases in the open market, completed the repurchase of the Falcon 8.375%
Debentures with a total outstanding principal amount of $375.0 million for a
total of $388.0 million. Also, in February 2000, the Company, through change of
control offers and purchases in the open market, repurchased the Falcon 9.285%
Debentures with an aggregate principal amount of $435.3 million for a total of
$328.1 million. The repurchase of all the Falcon Debentures was funded by a
portion of the proceeds from the January 2000 Charter Holdings Notes.
Charter Operating Credit Facilities
As of December 31, 2000, the Charter Operating Credit Facilities provide
for two term facilities, one with a principal amount of $1.0 billion that
matures in 2007 (Term A), and the other with the principal amount of $2.45
billion that matures in 2008 (Term B). The Charter Operating Credit Facilities
also provide for a $1.25 billion revolving credit facility with a maturity date
of September 2007 and at the options of the lenders, supplemental credit
facilities, in the amount of $400.0 million available until March 18, 2002.
Amounts under the Charter Operating Credit Facilities bear interest at the Base
Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (8.39% to
9.27% as of December 31, 2000 and 8.22% to 8.97% as of Decem-
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ber 31,1999). A quarterly commitment fee of between 0.25% and 0.375% per annum
is payable on the unborrowed balance of Term A and the revolving credit
facility. As of December 31, 2000, the unused availability on the Charter
Operating Credit Facilities was $268.0 million.
Avalon Credit Facilities
In connection with the Avalon acquisition, the Company entered into a new
credit agreement (the "Avalon Credit Facilities"). The Avalon Credit Facilities
have maximum borrowings of $300.0 million, consisting of a revolving facility in
the amount of $175.0 million that matures May 15, 2008, and a Term B loan in the
amount of $125.0 million that matures on November 15, 2008. The Avalon Credit
Facilities also provide for, at the options of the lenders, supplemental credit
facilities in the amounts of $75 million available until December 31, 2003.
Amounts under the Avalon Credit Facilities bear interest at the Base Rate or the
Eurodollar rate, as defined, plus a margin up to 2.75% (8.19% to 9.5% as of
December 31, 2000 and 7.995% to 8.870% as of December 31, 1999). A quarterly
commitment fee of between 0.250% and 0.375% per annum is payable on the
unborrowed balance.
On January 2, 2001, Charter Holdings contributed all of its equity
interests in CC VIII Holdings, LLC to CC V Holdings, combining the cable systems
acquired in the Avalon and Bresnan acquisitions. In connection with this
combination, all amounts due under the Avalon credit facilities were repaid and
the credit facilities were terminated.
Fanch Credit Facilities
In connection with the acquisition of cable systems of Fanch Cablevision
L.P. and affiliates (Fanch), the Company entered into a new credit agreement
(the "Fanch Credit Facilities"). The Fanch Credit Facilities provide for two
term facilities, one with a principal amount of $450.0 million that matures May
2008 (Term A), and the other with the principal amount of $400.0 million that
matures November 2008 (Term B). The Fanch Credit Facilities also provide for a
$350.0 million revolving credit facility with a maturity date of May 2008 and at
the options of the lenders, supplemental credit facilities, in the amount of
$300.0 million available until December 31, 2004. Amounts under the Fanch Credit
Facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 3.00% (8.15% to 9.55% as of December 31, 2000 and 8.12%
to 8.87% as of December 31, 1999). A quarterly commitment fee of between 0.250%
and 0.375% per annum is payable on the unborrowed balance. As of December 31,
2000, unused availability was $305.0 million. However, debt covenants limit the
additional amounts that can be borrowed to $153.5 million at December 31, 2000.
Falcon Credit Facilities
In connection with the Falcon acquisition, the existing Falcon credit
agreement (the "Falcon Credit Facilities") was amended to provide for two term
facilities, one with a principal amount of $196.0 million that matures June 2007
(Term B), and the other with a principal amount of $294.0 million that matures
December 2007 (Term C). The Falcon Credit Facilities also provide for a $646.0
million revolving credit facility with a maturity date of December 2006 and at
the option of the lenders, supplemental credit facilities in the amounts of
$700.0 million with a maturity date of December 2007. Amounts under the Falcon
Credit Facilities bear interest at the Base Rate or the Eurodollar rate, as
defined, plus a margin of up to 2.5% (8.14% to 9.50% as of December 31, 2000 and
7.57% to 8.73% as of December 31, 1999). A quarterly commitment fee of between
0.25% and 0.375% per annum is payable on the unborrowed balance. As of December
31, 2000, unused availability was $196.1 million.
Bresnan Credit Facilities
In connection with the Bresnan acquisition, the existing Bresnan credit
agreement (the "Bresnan Credit Facilities") was amended and restated to provide
for borrowings of up to $900.0 million, consisting of three term facilities, one
with a principal amount of $403.0 million that matures June 30, 2007 (Term A),
and one with a principal amount of $297.0 million that matures February 2, 2008
(Term B). The Bresnan Credit
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Facilities also provide for a $200.0 million revolving credit facility that may
not have a maturity date earlier than six calendar months after the maturity
date of the Term B loan facility. Amounts under the Bresnan Credit Facilities
bear interest at the Base Rate or Eurodollar rate, as defined, plus a margin of
up to 2.5% (8.44% to 9.30% as of December 31, 2000). A quarterly commitment fee
of between 0.25% and 0.375% per annum is payable on the unborrowed balance. As
of December 31, 2000, unused availability was $188.0 million.
On January 2, 2001, Charter Holdings contributed all of its equity
interests in CC VIII Holdings, LLC to CC V Holdings, combining the cable systems
acquired in the Avalon and Bresnan acquisitions. The Bresnan credit facilities
were amended and restated to, among other things, increase borrowing
availability by $550.0 million.
The indentures governing the debt agreements require issuers of the debt
and/or its subsidiaries to comply with various financial and other covenants,
including the maintenance of certain operating and financial ratios. These debt
instruments also contain substantial limitations on, or prohibitions of
distributions, additional indebtedness, liens, asset sales and certain other
items. As a result of limitations and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, Charter Holdco and Charter.
Based upon outstanding indebtedness at December 31, 2000, the amortization
of term loans, scheduled reductions in available borrowings of the revolving
credit facilities, and the maturity dates for all senior and subordinated notes
and debentures, aggregate future principal payments on the total borrowings
under all debt agreements at December 31, 2000, are as follows:
YEAR AMOUNT
---- -----------
2001........................................................ $ --
2002........................................................ 130,140
2003........................................................ 353,417
2004........................................................ 418,872
2005........................................................ 1,340,332
Thereafter.................................................. 11,484,873
-----------
$13,727,634
===========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements as of
December 31 follows:
2000 1999
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
DEBT
Charter Convertible Notes............... $ 750,000 $ 876,563 $ -- $ --
Charter Holdings Debt................... 4,780,212 4,425,631 3,072,151 2,834,313
Credit Facilities....................... 7,302,000 7,302,000 4,791,500 4,791,500
Other................................... 228,243 194,729 1,072,804 1,065,850
2000 1999
------------------------------ --------------------------------
CARRYING NOTIONAL FAIR CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE VALUE AMOUNT VALUE
-------- ---------- ------ -------- ---------- --------
INTEREST RATE HEDGE
AGREEMENTS
Swaps....................... $(1,306) $1,942,713 $5,236 $(6,827) $4,542,713 $(47,220)
Caps........................ -- 15,000 -- -- 15,000 16
Collars..................... -- 520,000 10,807 1,361 240,000 (199)
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As the long-term debt under the credit agreements bears interest at current
market rates, their carrying amount approximates market value at December 31,
2000 and 1999. The fair values of the notes and the debentures are based on
quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.61% and 8.06% at December 31, 2000 and 1999, respectively. The
weighted average interest rate for the Company's interest rate cap agreements
was 9.0% at December 31, 2000 and 1999. The Company's interest rate collar
agreements are structured so that if LIBOR falls below 5.3%, the Company pays
6.7%. If the LIBOR rate is between 5.3% and 8.0%, the Company pays LIBOR. The
LIBOR rate is capped at 8.0% if LIBOR falls between 8.0% and 9.9%. If rates rise
above 9.9%, the cap is removed.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would (receive) or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's credit facilities, thereby reducing the exposure to
credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
9. SHAREHOLDERS' EQUITY:
At December 31, 2000 and 1999, 1.75 billion and 1.5 billion shares,
respectively, of $.001 par value Class A common stock, 750 million shares of
$.001 par value Class B common stock, and 250 million shares of $.001 par value
preferred stock are authorized. At December 31, 2000, 233.8 million shares of
Class A common stock, 50,000 of Class B common stock and zero shares of
preferred stock, were issued and outstanding. At December 31, 1999, 221.7
million of Class A common stock, 50,000 shares of Class B common stock and zero
shares of preferred stock, were issued and outstanding. The Class A common stock
includes 0.3 million shares and 26.8 million shares classified as redeemable
securities at December 31, 2000 and 1999, respectively (see Note 16).
10. INCOME TAXES:
Certain indirect subsidiaries of Charter Holdings are corporations and file
separate federal and state income tax returns. Results of operations from these
subsidiaries are not material to the consolidated results of operations of the
Company. Income tax expense for the year ended December 31, 1999, represents
taxes assessed by certain state jurisdictions. Deferred income tax assets and
liabilities are not material.
Charter files separate federal and state income tax returns and is
responsible for its share of taxable income (loss) of Charter Holdco as
determined by partnership tax rules and regulations and Charter Holdco's limited
liability company agreement (see Note 2). Management does not expect Charter to
pay any income taxes in the foreseeable future. Any net deferred income tax
assets are offset entirely by a valuation allowance because of current and
expected future losses.
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11. REVENUES:
Revenues consist of the following for the years and period ended:
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
2000 1999 1998
---------- ---------- ------------
Basic......................................... $2,249,339 $1,002,954 $ 9,347
Premium....................................... 226,598 124,788 1,415
Pay-per-view.................................. 28,590 27,537 260
Digital....................................... 91,115 8,299 10
Advertising sales............................. 220,205 71,997 493
Data services................................. 63,330 10,107 55
Other......................................... 370,045 182,562 2,133
---------- ---------- -------
$3,249,222 $1,428,244 $13,713
========== ========== =======
12. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating, general and administrative expenses consist of the following for
the years and period ended:
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
2000 1999 1998
----------- --------- ------------
Programming..................................... $ 736,043 $330,754 $3,137
General and administrative...................... 543,865 237,480 2,377
Service......................................... 192,603 99,486 847
Marketing....................................... 63,789 23,447 225
Advertising sales............................... 56,499 31,281 344
Other........................................... 58,554 15,509 204
---------- -------- ------
$1,651,353 $737,957 $7,134
========== ======== ======
13. RELATED PARTY TRANSACTIONS:
Charter Investment provides management services to the Company including
centralized customer billing services, data processing and related support,
benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These billings are
allocated based on the number of basic customers. Such costs totaled $50.8
million, $18.8 million and $128 for the years ended December 31, 2000 and 1999,
and for the period from December 24, 1998, through December 31, 1998,
respectively. All other costs incurred by Charter Investment on behalf of the
Company are recorded as expenses in the accompanying consolidated financial
statements and are included in corporate expense charge -- related party.
Management believes that costs incurred by Charter Investment on the Company's
behalf and included in the accompanying financial statements are not materially
different than costs the Company would have incurred as a stand-alone entity.
The Company is charged a management fee as stipulated in the management
agreement between Charter Investment and Charter. To the extent management fees
charged to the Company are greater (less) than the corporate expenses incurred
by Charter Investment, the Company records distributions to (capital
contributions from) Charter Investment. For the year ended December 31, 1999,
the Company recorded distributions of $10.9 million, a portion of which have
been allocated to minority interest. For the year ended December 31,
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91
2000, and for the period from December 24, 1998, through December 31, 1998, the
management fee charged to the Company approximated the corporate expenses
incurred by Charter Investment on behalf of the Company. The credit facilities
and indebtedness prohibit payments of management fees in excess of 3.5% of
revenues until repayment of such indebtedness. Any amount in excess of 3.5% of
revenues owed to Charter Investment based on the management agreement is
recorded as deferred management fees -- related party.
In December 2000, Charter Communications Ventures, LLC (Charter Ventures),
a subsidiary of Charter Holdings, and Vulcan Ventures, Inc. (Vulcan), an
affiliate of Mr. Allen, invested $37.0 million and $38.0 million, respectively,
in High Speed Access Corp. (HSA) which provides high speed Internet access to
certain of the Company's cable customers. The investments took the form of
convertible preferred stock, that may be converted into HSA common stock. In
addition, Charter and Vulcan own equity interests or warrants to purchase equity
interests in HSA. As of December 31, 2000, Charter earned 1,932,931 warrants
under certain agreements. Additional warrants may be earned by Charter based
upon the number of homes passed. Under the terms of a network services
agreement, Charter splits revenue with HSA based on set percentages of gross
revenues in each category of service. Certain officers and directors of Charter
serve as directors of HSA. For the years ended December 31, 2000 and 1999,
revenues earned from HSA were $7.8 million and $461, respectively. Charter paid
HSA $3.6 million, and $0.7 million, for the years ended December 31, 2000 and
1999, respectively, relating to monthly subscriber fees and equipment purchases.
Charter Venture's investment is accounted for under the equity method, with a
carrying value of $36.0 million as of December 31, 2000.
Charter Ventures is a party to a joint venture with General Instrument
Corporation (doing business as Broadband Communications Sector of Motorola,
Inc), Replay TV Inc. and Interval Research Corporation, an entity controlled by
Mr. Allen, to develop and integrate digital video recording capabilities in
advanced digital set-top boxes. The joint venture will focus on creating a
set-top based digital recording platform that will be designed for storing
video, audio and Internet content. In connection with the formation of the joint
venture, Charter Ventures contributed $3.2 million in October 2000. Charter
received management fees of $9.0 million for the year ended December 31, 2000.
ZDTV, L.L.C. (operating as techtv) operates a cable television channel,
which broadcasts shows about technology and the Internet. Vulcan and its
affiliates own a 97% interest in techtv, and certain directors and officers of
Charter serve as directors or officers of techtv. Through December 31, 2000,
techtv has agreed to provide Charter no cost programming for broadcast over
Charter systems. Effective January 1, 2001, Charter will pay a monthly per
customer fee to techtv for cable systems that distribute techtv on a level of
service received by fewer than 80% of the total system's customers. In addition,
Mr. Allen is the 100% owner of the Portland Trailblazers, a National Basketball
Association Team, and Trail Blazers, Inc. Expenses in connection with the cable
broadcast of Portland Trail Blazers Basketball games were $993 and $727 for the
years ended December 31, 2000 and 1999, respectively.
Mr. Allen and certain affiliates of Mr. Allen own equity in and are
directors of USA Networks, Inc. (USA Networks). USA Networks operates USA
Network and the Sci-Fi Channel, which are cable television networks. USA
Networks also operates Home Shopping Network, which is a retail sales program
available via cable television systems. The Company pays USA Networks a monthly
fee for programming services based on the number of subscribers. For the years
ended December 31, 2000 and 1999, the Company paid USA Networks approximately
$25.0 million and $16.7 million, respectively. In addition, the Company receives
commissions from USA Networks for home shopping sales generated by its customers
and for promotion of the Home Shopping Network. Such revenues for the years
ended December 31, 2000 and 1999, were $26.5 million, and $1.8 million,
respectively.
Charter, Mr. Allen and certain affiliates of Mr. Allen also own equity
interests or warrants to purchase equity interests in various entities that
provide services, programming or equipment to the Company, including WorldGate
Communications, Inc. (WorldGate), Wink Communications, Inc. (Wink), Oxygen Media
Inc. (Oxygen Media), digeo, inc., RCN Corporation, TV Gateway LLC, Vulcan and
Interval Research Company. In addition, certain officers or directors of the
Company also serve as directors of Oxygen Media, RCN Corporation and InfoSpace,
Inc. The Company and its affiliates do not hold controlling interests in any of
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92
these companies. The Company has paid less than 1% of operating costs for the
year ended December 31, 2000 and 1999, and for the period from December 24,
1998, through December 31, 1998, for these services and equipment purchases. In
addition, the Company receives revenues from WorldGate related to TV-based
Internet access. Such revenues for the years ended December 31, 2000 and 1999,
and for the period from December 24, 1998, through December 31, 1998, were less
than 1% of total revenues.
14. MINORITY INTEREST AND EQUITY INTERESTS OF CHARTER HOLDCO:
Minority interest represents total members' equity of Charter Holdco
multiplied by 59.2% as of December 31, 2000, and 59.4% as of December 31, 1999,
the ownership percentages of Charter Holdco not owned by Charter, plus preferred
equity in an indirect subsidiary of Charter held by certain Bresnan sellers,
less a portion of redeemable securities. Members' equity of Charter Holdco was
$7.7 billion as of December 31, 2000, and $9.1 billion as of December 31, 1999.
Gains (losses) arising from issuances by Charter Holdco of its membership units
are recorded as capital transactions thereby increasing (decreasing)
shareholders' equity and (decreasing) increasing minority interest on the
consolidated balance sheets.
Changes to minority interest consist of the following:
MINORITY
INTEREST
----------
Balance, December 31, 1998.................................. $2,146,549
Distributions to Charter Investment....................... (8,698)
Transfer of Marcus Holdings' operating subsidiaries to
Charter Holdco......................................... 1,252,370
Transfer of Rifkin equity interests to Charter Holdco..... 180,710
Equity of a subsidiary issued to Falcon and Rifkin
sellers................................................ 683,312
Equity of a subsidiary issued to Vulcan Cable for cash.... 1,894,290
Exchange of Charter Holdco units for Charter common
stock.................................................. (638,561)
Equity classified as redeemable securities................ (50,151)
Minority interest in loss of a subsidiary................. (572,607)
Option compensation expense............................... 75,486
Gain on issuance of equity by Charter Holdco.............. 413,848
Other..................................................... 4,783
----------
Balance, December 31, 1999.................................. 5,381,331
Equity of subsidiaries issued to Bresnan sellers.......... 1,014,110
Equity of subsidiaries classified as redeemable
securities............................................. (1,095,239)
Minority interest in loss of a subsidiary................. (1,226,295)
Option compensation expense............................... 24,573
Loss on issuance of equity by Charter Holdco.............. (55,534)
Redeemable securities reclassified as minority interest... 49,316
Other..................................................... (2,933)
----------
Balance, December 31, 2000.................................. $4,089,329
==========
The preferred equity interests in Charter Holdco held by the Rifkin sellers
were exchangeable into Class A common stock of Charter at the option of the
Rifkin sellers only at the time of the initial public offering. In November
1999, preferred equity interests of $1.3 million were exchanged into common
stock of Charter. The membership units of Charter Holdco held by the Falcon
sellers were exchangeable into Class A common stock of Charter. The units are
also puttable to Mr. Allen for cash. In November 1999, membership units of $43.4
million were put to Mr. Allen and $506.6 million were exchanged into the Class A
common stock of Charter. For a two-year period from acquisition date, equity
held by the Rifkin and Falcon sellers may be put to Mr. Allen for cash.
Pursuant to a membership interests purchase agreement, as amended, Vulcan
Cable contributed $500.0 million in cash on August 10, 1999, to Charter Holdco,
contributed an additional $180.7 million in certain
F-23
93
equity interests acquired in connection with the acquisition of Rifkin in
September 1999, to Charter Holdco, and contributed $644.3 million in September
1999 to Charter Holdco. All funds and equity interests were contributed to
Charter Holdings. Concurrently with closing of the initial public offering,
Vulcan Cable contributed $750 million in cash to Charter Holdco.
In February 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan. The Bresnan sellers obtained equity interests in Charter
Holdco and preferred equity interest in a subsidiary of Charter Holdings. The
holders of the preferred equity interests are entitled to a 2% annual return.
All of the membership units received by the sellers are exchangeable on a
one-for-one basis into shares of Class A common stock of Charter. Equity held by
the Bresnan sellers may be put to Mr. Allen for cash during a 60-day period
commencing on February 14, 2002.
15. OPTION PLAN:
In accordance with an employment agreement between Charter Investment and
the President and Chief Executive Officer of Charter and a related option
agreement with the President and Chief Executive Officer, an option to purchase
7,044,127 Charter Holdco membership interests, was issued to the President and
Chief Executive Officer. The option vests over a four-year period from the date
of grant and expires ten years from the date of grant.
In February 1999, Charter Holdings adopted an option plan providing for the
grant of options. The plan was assumed by Charter Holdco. The option plan
provides for grants of options to employees, officers and directors of Charter
Holdco and its affiliates and consultants who provide services to Charter
Holdco. Options granted vest over five years from the grant date, commencing 15
months after the date of grant. Options not exercised accumulate and are
exercisable, in whole or in part, in any subsequent period, but not later than
ten years from the date of grant.
Membership units received upon exercise of the options are automatically
exchanged into Class A common stock of Charter on a one-for-one basis.
A summary of the activity for the Company's option plan for the years ended
December 31, 2000 and 1999, and for the period from December 24, 1998, through
December 31, 1998, is as follows:
2000 1999 1998
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- ----------- -------- ----------- --------
Options outstanding, beginning of
period............................... 20,757,608 $19.79 7,044,127 $20.00 -- $ --
Granted
Pre IPO Grants....................... -- -- 9,584,681 20.04 7,044,127 20.00
Post IPO Grants...................... 10,247,200 18.06 4,741,400 19.00 -- --
Exercised.............................. (16,514) 20.00 -- -- -- --
Cancelled.............................. (2,505,937) 18.98 (612,600) 19.95 -- --
----------- ------ ----------- ------ ----------- ------
Options outstanding, end of period..... 28,482,357 $19.24 20,757,608 $19.79 7,044,127 $20.00
=========== ====== =========== ====== =========== ======
Weighted Average Remaining Contractual
Life................................. 8.6 years 9.2 years 10.0 years
=========== =========== ===========
Options Exercisable, end of period..... 7,026,346 $19.98 2,091,032 $19.90 1,761,032 $20.00
=========== ====== =========== ====== =========== ======
Weighted average fair value of options
granted.............................. $ 12.34 $ 12.59 $ 12.50
=========== =========== ===========
The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to
account for the option plans. Option compensation expense of $41.0 million,
$80.0 million, and $845 for the years ended December 31, 2000 and 1999, and for
the period from December 24, 1998, through December 31, 1998, respectively, was
recorded in the consolidated
F-24
94
financial statements since the exercise prices were less than the estimated fair
values of the underlying membership interests on the date of grant. Estimated
fair values were determined by the Company using the valuation inherent in the
Paul Allen Transaction and valuations of public companies in the cable
television industry adjusted for factors specific to the Company. Compensation
expense is being recorded over the vesting period of each grant that varies from
four to five years. As of December 31, 2000, deferred compensation remaining to
be recognized in future periods totaled $31.6 million. No stock option
compensation expense was recorded for the options granted after November 8, 1999
(Post IPO), since the exercise price was equal to the estimated fair value of
the underlying membership interests on the date of grant. Since the membership
units are exchangeable into Class A common stock of Charter on a one-for-one
basis, the estimated fair value was equal to the quoted market values of Class A
common stock.
SFAS 123, Accounting for Stock-Based Compensation, requires pro forma
disclosure of the impact on earnings as if the compensation costs for these
plans had been determined consistent with the fair value methodology of this
statement. The Company's net loss would have been increased to the following pro
forma amounts under SFAS 123 for the years and period ended:
PERIOD FROM
DECEMBER 24,
YEAR ENDED DECEMBER 31, THROUGH
----------------------- DECEMBER 31,
2000 1999 1998
---------- --------- ------------
Net loss:
As reported................................... $(828,650) $(66,229) $ (2)
Pro forma..................................... (883,096) (68,923) (2)
Loss per common share, basic and diluted:
As reported................................... (3.67) (2.22) (0.04)
Pro forma..................................... (3.91) (2.31) (0.04)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants during the years ended December 31, 2000 and
1999, and the period from December 24, 1998, through December 31, 1998,
respectively: risk-free interest rates of 6.5%, 5.5%, and 4.8%; expected
volatility of 46.9%, 43.8% and 43.7%; and expected lives of 10 years. The
valuations assume no dividends are paid.
16. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases certain facilities and equipment under noncancellable
operating leases. Leases and rental costs charged to expense for the years ended
December 31, 2000 and 1999, and for the period from December 24, 1998, through
December 31, 1998, were $14.2 million, $11.2 million and $70, respectively. As
of December 31, 2000, future minimum lease payments are as follows:
YEAR AMOUNT
---- -------
2001........................................................ $11,077
2002........................................................ 7,557
2003........................................................ 5,242
2004........................................................ 4,101
2005........................................................ 3,173
Thereafter.................................................. 10,364
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
years ended December 31, 2000 and 1999, and for the period from December 24,
1998, through December 31, 1998, was $31.6 million, $14.3 million and $137,
respectively.
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95
Litigation
The Company is a party to lawsuits and claims that arose in the ordinary
course of conducting its business. In the opinion of management, after
consulting with legal counsel, and taking into account recorded liabilities, the
outcome of these lawsuits and claims will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
Redeemable Securities
In connection with the acquisitions of Rifkin, Falcon, and Bresnan, sellers
who acquired Charter Holdco membership units or, in the case of Bresnan,
additional equity interests in a subsidiary of Charter Holdings, and the Helicon
sellers who acquired shares of Class A common stock in Charter's initial public
offering may have rescission rights against Charter and Charter Holdco arising
out of possible violations of Section 5 of the Securities Act of 1933, as
amended, in connection with the offers and sales of these equity interests.
Accordingly, the maximum potential cash obligation related to the rescission
rights, estimated at $1.1 billion as of December 31, 2000 (see Note 21), has
been excluded from shareholders' equity or minority interest and classified as
"redeemable securities" on the consolidated balance sheet. One year after the
dates of issuance of these equity interests (when these possible rescission
rights will have expired), the Company will reclassify the respective amounts to
shareholders' equity or minority interest, as applicable. Certain of these
rescission rights expired during the year ended December 31, 2000, and were
reclassified to minority interest and equity, as applicable.
Regulation in the Cable Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. During 2000 and 1999,
the amounts refunded by the Company have been insignificant. The Company may be
required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. As of
December 31, 2000, approximately 17% of the Company's local franchising
authorities are certified to regulate basic tier rates. The Company is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999,
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96
deregulated rates on the cable programming service tier (CPST). The FCC has
taken the position that it will still adjudicate pending CPST complaints but
will strictly limit its review, and possible refund orders, to the time period
predating the sunset date, March 31, 1999. The Company does not believe any
adjudications regarding their pre-sunset complaints will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
17. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in 401(k) plans (the "401(k)
Plans"). Employees that qualify for participation can contribute up to 15% of
their salary, on a pre-tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches 50% of the first
5% of participant contributions. The Company made contributions to the 401(k)
Plans totaling $6.1 million, $2.9 million and $20 for the years ended December
31, 2000 and 1999, and for the period from December 24, 1998, through December
31, 1998, respectively.
18. RECENTLY ISSUED ACCOUNTING STANDARDS:
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by SFAS 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, and SFAS
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, is effective for the Company as of January 1, 2001. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. Adoption of these
new accounting standards is expected to result in a cumulative effect of a
change in accounting principle that increases net loss by approximately $23.9
million.
19. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
As the result of limitations on and prohibition of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter, the parent company. The following
parent-only financial statements of Charter account for the investment in
Charter Holdco under the equity method of accounting. The financial statements
should be read in conjunction with the consolidated financial statements of the
Company and notes thereto.
F-27
97
CHARTER COMMUNICATIONS, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents................................... $ 465 $ 19,369
Other current assets........................................ 464 694
Investment in Charter Holdco................................ 4,227,531 3,762,016
Notes receivable from Charter Holdco........................ 750,000 --
---------- ----------
$4,978,460 $3,782,079
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................................... $ -- $ 9,175
Payables to related party................................... 929 10,888
Convertible Notes........................................... 750,000 --
Redeemable securities....................................... 1,104,327 750,937
Shareholders' equity........................................ 3,123,204 3,011,079
---------- ----------
Total liabilities and shareholders' equity........ $4,978,460 $3,782,079
========== ==========
F-28
98
CHARTER COMMUNICATIONS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31, THROUGH
----------------------- DECEMBER 31,
2000 1999 1998
---------- --------- ------------
(DOLLARS IN THOUSANDS)
REVENUES
Interest income......................................... $ 9,222 $ 570
Management fees......................................... 4,957 716 --
--------- -------- ---
Total revenues................................ 14,179 1,286 --
EXPENSES
Equity in losses of Charter Holdco...................... (828,650) (66,229) (2)
General and administrative expenses..................... (4,957) (716) --
Interest expense........................................ (9,222) (570) --
--------- -------- ---
Total expenses................................ (842,829) (67,515) (2)
--------- -------- ---
Net loss.............................................. $(828,650) $(66,229) $(2)
========= ======== ===
F-29
99
CHARTER COMMUNICATIONS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
PERIOD FROM
DECEMBER 24,
1998,
YEAR ENDED DECEMBER 31,} THROUGH
------------------------- DECEMBER 31,
2000 1999 1998
---------- ------------ ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(828,650) $ (66,229) $(2)
Equity in losses of Charter Holdco...................... 828,650 66,229 2
Change in assets and liabilities........................ (18,904) 19,369
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in and receivables from Charter Holdco....... (750,000) (3,290,436) --
Payment for acquisition................................. -- (258,434) --
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Class B common stock to Mr. Allen........... -- 950
Net proceeds from initial public offering of common
stock................................................ -- 3,547,920 --
Borrowing from convertible notes.......................... 750,000 -- --
--------- ----------- ---
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (18,904) 19,369 --
CASH AND CASH EQUIVALENTS, beginning of period............ 19,369 -- --
--------- ----------- ---
CASH AND CASH EQUIVALENTS, end of period.................. $ 465 $ 19,369 $--
========= =========== ===
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
YEAR ENDED DECEMBER 31, 2000: FIRST SECOND THIRD FOURTH
----------------------------- ------------ ------------ ------------ ------------
Revenues........................ $ 721,604 $ 794,780 $ 838,961 $ 893,877
Loss from operations............ (224,273) (241,047) (237,337) (268,777)
Loss before minority interest... (449,620) (494,136) (523,464) (587,725)
Net loss........................ (180,714) (196,821) (210,018) (241,097)
Basic and diluted loss per
common share................. (0.81) (0.89) (0.93) (1.03)
Weighted-average shares
outstanding.................. 221,917,083 222,089,746 224,965,289 233,738,668
YEAR ENDED DECEMBER 31, 1999: FIRST SECOND THIRD FOURTH
----------------------------- ------------ ------------ ------------ ------------
Revenues........................ $ 160,955 $ 308,038 $ 376,189 $ 583,062
Loss from operations............ (31,792) (39,775) (38,296) (76,572)
Loss before minority interest... (83,175) (140,930) (164,153) (250,578)
Net loss........................ (33) (57) (35) (66,104)
Basic and diluted loss per
common share................. (0.67) (1.13) (0.70) (0.56)
Weighted-average shares
outstanding.................. 50,000 50,000 50,000 118,124,333
F-30
100
21. SUBSEQUENT EVENTS:
In January 2001, Issuers issued the January 2001 Charter Holdings Notes
with an aggregate principal amount at maturity of $2.075 billion. The January
2001 Charter Holdings Notes are comprised of $900.0 million 10.75% Senior Notes
due 2009, $500.0 million 11.125% Senior Notes due 2011, and $350.6 million of
13.5% Senior Discount Notes due 2011 with a principal amount at maturity of
$675.0 million. The net proceeds were approximately $1.72 billion, after giving
effect to discounts, commissions and expenses. Charter Holdings used all the net
proceeds to repay all remaining amounts outstanding under the Charter Holdings
senior bridge loan facility and the Fanch revolving credit facility, a portion
of the amounts outstanding under the Charter Operating and Falcon revolving
credit facilities, and for general corporate purposes.
In February 2001, all of the remaining possible rescission rights with a
maximum potential obligation of $1.1 billion expired without these parties
requesting repurchase of their securities (see Note 16).
In February 2001, the Company entered into several agreements with AT&T
Broadband, LLC involving several strategic cable system transactions that will
result in a net addition of approximately 512,000 customers (unaudited) for the
Charter cable systems. In the pending AT&T transactions, the Company expects to
acquire cable systems from AT&T Broadband serving approximately 574,000
customers (unaudited) in Missouri, Alabama, Nevada and California for a total of
$1.79 billion. A portion of the purchase price will consist of Charter cable
systems valued at $249.0 million serving approximately 62,000 customers
(unaudited) in Florida. Of the balance of the purchase price, up to $501.5
million will be paid in Class A common stock and the remainder will be paid in
cash. Charter Holdings and Charter Communications Holdings Capital Corporation
have a commitment for a bridge loan from Morgan Stanley Senior Funding, Inc. and
Goldman Sachs Credit Partners LP for temporary financing of the cash portion of
the purchase price. The Company expects to obtain permanent financing through
one or more debt or equity financing transactions or a combination thereof. The
acquisition transactions are expected to close in the second and/or third
quarters of 2001, subject to certain closing conditions and regulatory review.
F-31
101
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Properties Holdings, LLC:
We have audited the accompanying consolidated statements of operations,
changes in shareholder's investment and cash flows of Charter Communications
Properties Holdings, LLC and subsidiaries for the period from January 1, 1998,
through December 23, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the operations and the cash flows of
Charter Communications Properties Holdings, LLC and subsidiaries for the period
from January 1, 1998, through December 23, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-32
102
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM
JANUARY 1,
1998,
THROUGH
DECEMBER 23,
1998
------------
(DOLLARS IN
THOUSANDS)
REVENUES.................................................... $ 49,731
---------
OPERATING EXPENSES:
Operating, general and administrative..................... 25,952
Depreciation and amortization............................. 16,864
Corporate expense allocation -- related party............. 6,176
---------
48,992
---------
Income from operations.................................... 739
---------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (17,277)
Interest income........................................... 44
Other, net................................................ (728)
---------
(17,961)
---------
Net loss............................................... $ (17,222)
=========
The accompanying notes are an integral part of this consolidated statement.
F-33
103
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S INVESTMENT
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
--------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
BALANCE, January 1, 1998....................... $ 5,900 $ (7,875) $ (1,975)
Capital contributions........................ -- 10,800 -- 10,800
Net loss..................................... -- -- (17,222) (17,222)
--------- ------- -------- --------
BALANCE, December 23, 1998..................... $16,700 $(25,097) $ (8,397)
========= ======= ======== ========
The accompanying notes are an integral part of this consolidated statement.
F-34
104
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM
JANUARY 1, 1998,
THROUGH
DECEMBER 23, 1998
-----------------
(DOLLARS IN
THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (17,222)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 16,864
Noncash interest expense............................... 267
Gain on disposal of property, plant and equipment...... (14)
Changes in assets and liabilities, net of effects from
acquisition --
Receivables............................................ 10
Prepaid expenses and other............................. (125)
Accounts payable and accrued expenses.................. 16,927
Payables to manager of cable systems -- related
party................................................. 5,288
Other operating activities............................. 569
---------
Net cash provided by operating activities......... 22,564
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (15,364)
Payment for acquisition, net of cash acquired............. (167,484)
Other investing activities................................ (486)
---------
Net cash used in investing activities............. (183,334)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 217,500
Repayments of long-term debt.............................. (60,200)
Capital contributions..................................... 7,000
Payments for debt issuance costs.......................... (3,487)
---------
Net cash provided by financing activities......... 160,813
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 43
CASH AND CASH EQUIVALENTS, beginning of period.............. 626
---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 669
=========
CASH PAID FOR INTEREST...................................... $ 7,679
=========
The accompanying notes are an integral part of this consolidated statement.
F-35
105
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Charter Communications Properties Holdings, LLC (CCPH), a Delaware limited
liability company, formerly Charter Communications Properties Holdings, Inc.,
through its wholly owned cable television operating subsidiary, Charter
Communications Properties, LLC (CCP), commenced operations with the acquisition
of a cable television system on September 30, 1995. Prior to February 19, 1999,
CCPH was wholly owned by Charter Investment, Inc. (Charter Investment).
Effective December 23, 1998, as part of a series of transactions, through
which Paul G. Allen acquired Charter Investment, Mr. Allen acquired CCPH for an
aggregate purchase price of $211 million, excluding $214 million in debt assumed
(the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction,
CCPH was converted from a corporation to a limited liability company. Also, in
conjunction with the Paul Allen Transaction, Charter Investment for fair value
acquired from unrelated third parties all of the interest it did not already own
in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of
CCA Holdings, Corp., CCT Holdings Corp. and Charter Communications Long Beach,
Inc.), all cable television operating companies, for $2.0 billion, excluding
$1.8 billion in debt assumed. Charter Investment previously managed and owned
minority interests in these companies. In February 1999, Charter Investment
transferred all of its cable television operating subsidiaries to a wholly owned
subsidiary of Charter Communications Holdings, LLC (Charter Holdings), Charter
Communications Operating, LLC (Charter Operating). Charter Holdings was a wholly
owned subsidiary of Charter Investment. The transfer was accounted for as a
reorganization of entities under common control similar to a pooling of
interests.
The accompanying consolidated financial statements include the accounts of
CCPH and CCP, its wholly owned cable operating subsidiary (collectively, the
"Company"). The accounts of CharterComm Holdings and CCA Group are not included
since these companies were not owned and controlled by Charter Investment prior
to December 23, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installations. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred,
while equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
For the period from January 1, 1998, through December 23, 1998,
depreciation expense was $6.2 million.
F-36
106
Franchises
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises.
Costs relating to unsuccessful franchise applications are charged to
expense when it is determined that the efforts to obtain the franchise will not
be successful. Franchise rights acquired through the purchase of cable systems
represent management's estimate of fair value and are generally amortized using
the straight-line method over a period of 15 years. The period of 15 years is
management's best estimate of the useful lives of the franchises and assumes
substantially all of those franchises that expire during the period will be
renewed by the Company.
Other Assets
Debt issuance costs are being amortized to interest expense using the
effective interest method over the term of the related debt. The interest rate
cap costs are being amortized over the terms of the agreement, which
approximates three years.
Impairment of Assets
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted net cash flows
related to the asset over its remaining life, the carrying value of such asset
is reduced to its estimated fair value.
Revenues
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 23, 1998, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly
basis from the Company's customers and are periodically remitted to local
franchise authorities. Franchise fees collected and paid are reported as
revenues and expenses.
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
F-37
107
Income Taxes
The Company filed a consolidated income tax return with Charter Investment.
Income taxes were allocated to the Company in accordance with the tax-sharing
agreement between the Company and Charter Investment.
Use of Estimates
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. Actual results could differ from those estimates.
3. ACQUISITION:
In 1998, the Company acquired a cable system for an aggregate purchase
price, net of cash acquired, of $228.4 million, comprised of $167.5 million in
cash and $60.9 million in a note payable to the seller. The excess of the cost
of properties acquired over the amounts assigned to net tangible assets at the
date of acquisition was $207.6 million and is included in franchises.
The above acquisition was accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition. The
purchase price was allocated to tangible and intangible assets based on
estimated fair values at the acquisition date.
Unaudited pro forma operating results as though the acquisition discussed
above, excluding the Paul Allen Transaction, had occurred on January 1, 1998,
with adjustments to give effect to amortization of franchises, interest expense
and certain other adjustments are as follows:
PERIOD FROM
JANUARY 1, 1998,
THROUGH
DECEMBER 23, 1998
-----------------
(UNAUDITED)
Revenues.................................................... $ 67,007
Loss from operations........................................ (7,097)
Net loss.................................................... (24,058)
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the results of operations had
the transaction been completed as of the assumed date or which may be obtained
in the future.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows:
PERIOD FROM
JANUARY 1, 1998,
THROUGH
DECEMBER 23, 1998
-----------------
Balance, beginning of period................................ $ 52
Acquisition of system..................................... 96
Charged to expense........................................ 1,122
Uncollected balances written off, net of recoveries....... (778)
------
Balance, end of period...................................... $ 492
======
F-38
108
5. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future
tax consequence attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred income tax assets and liabilities are measured using the enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Deferred income tax expense or benefit is
the result of changes in the liability or asset recorded for deferred taxes. A
valuation allowance must be established for any portion of a deferred tax asset
for which it is more likely than not that a tax benefit will not be realized.
No current provision (benefit) for income taxes was recorded. The effective
income tax rate is less than the federal rate of 35% primarily due to providing
a valuation allowance on deferred income tax assets.
6. RELATED-PARTY TRANSACTIONS:
Charter Investment provides management services to the Company including
centralized customer billing services, data processing and related support,
benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These billings are
determined based on the number of basic customers. Such costs totaled $437 for
the period from January 1, 1998, through December 23, 1998. All other costs
incurred by Charter Investment on behalf of the Company are expensed in the
accompanying consolidated financial statements and are included in corporate
expense allocations related party. The cost of these services is allocated based
on the number of basic customers. Management considers these allocations to be
reasonable for the operations of the Company.
Charter Investment utilized a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to the Company as determined by independent actuaries,
at the present value of the actuarially computed present and future liabilities
for such benefits. Medical coverage provides for $2.4 million aggregate stop
loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $800 aggregate stop loss protection and a
loss limitation of $150 per person per year.
The Company is charged a management fee based on percentages of revenues as
stipulated in the management agreement between Charter Investment and the
Company. For the period from January 1, 1998, through December 23, 1998, the
management fee charged to the Company approximated the corporate expenses
incurred by Charter Investment on behalf of the Company.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases certain facilities and equipment under noncancellable
operating leases. Leases and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, was $278.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
period from January 1, 1998, through December 23, 1998, was $421.
Litigation
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television
F-39
109
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and
together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications
Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the
development and regulation of cable systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable systems and have
resulted in additional regulatory oversight by the FCC and local or state
franchise authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. State governmental agencies are required to
follow FCC rules when prescribing rate regulation, and thus, state regulation of
cable television rates is not allowed to be more restrictive than the federal or
local regulation. The Company is subject to state regulation in Connecticut.
8. EMPLOYEE BENEFIT PLANS:
401(k) Plan
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on or before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. The Company contributed $74.0 for the period from January 1,
1998, through December 23, 1998.
Appreciation Rights Plan
Certain employees of Charter participated in the 1995 Charter
Communications, Inc. Appreciation Rights Plan (the "Plan"). The Plan permitted
Charter Investment to grant 1,500,000 units to certain key employees, of which
1,251,500 were outstanding at December 31, 1997. Units received by an employee
vest at a rate of 20% per year, unless otherwise provided in the participant's
Appreciation Rights Unit Agreement.
F-40
110
The appreciation rights entitled the participants to receive payment, upon
termination or change in control of Charter Investment, of the excess of the
unit value over the base value (defined as the appreciation value) for each
vested unit. The unit value was based on adjusted equity, as defined in the
Plan. Deferred compensation expense was based on the appreciation value since
the grant date and was being amortized over the vesting period.
As a result of the acquisition of Charter Investment by Mr. Allen, the Plan
was terminated, all outstanding units became 100% vested and all amounts were
paid by Charter Investment in 1999. The cost of this plan was allocated to the
Company based on the number of basic customers. The Company considers this
allocation to be reasonable for the operations of the Company. For the period
January 1, 1998, through December 23, 1998, the Company expensed $3,800,
included in corporate expense allocation-related party and increased
shareholder's investment for the cost of this plan.
9. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No.
133, has delayed the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company has not yet quantified the impact of adopting
SFAS No. 133 on the consolidated financial statements nor has determined the
timing of its adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings (loss).
F-41
111
MANAGEMENT RECOMMENDS A VOTE FOR THE FOLLOWING:
Please mark -- your votes as indicated in this example, using dark ink only [X]
1. ELECTION OF DIRECTOR:
NOMINEE: Ronald L. Nelson
FOR NOMINEE WITHHOLD AUTHORITY TO VOTE FOR NOMINEE
[ ] [ ]
2. APPROVAL OF CHARTER COMMUNICATIONS, INC. 2001 STOCK INCENTIVE PLAN
FOR APPROVAL WITHHOLD AUTHORITY TO VOTE FOR APPROVAL
[ ] [ ]
3. RATIFICATION OF CHARTER COMMUNICATIONS 1999 OPTION PLAN
FOR RATIFICATION WITHHOLD AUTHORITY TO VOTE FOR RATIFICATION
[ ] [ ]
4. Check here if you consent to have the Annual Report, Proxy Statement and
Notice of Meeting delivered to you via the Internet rather than through the
mail for all future meetings. [ ]
5. Check here if you plan to attend the ANNUAL MEETING. [ ]
THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY
WILL BE VOTED FOR THE DIRECTOR NOMINEE, FOR APPROVAL OF THE CHARTER
COMMUNICATIONS, INC. 2001 STOCK INCENTIVE PLAN AND FOR RATIFICATION OF THE
CHARTER COMMUNICATIONS 1999 OPTION PLAN.
The undersigned hereby acknowledges receipt of Notice of the Annual Meeting and
accompanying Proxy Statement and 2000 Financial Report dated May 1, 2001.
Signature(s): Date:
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NOTE: Please sign exactly as your name appears hereon. When shares are held
jointly, each holder must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. When signing
on behalf of a corporation or partnership, the person signing must be an
authorized signer and must state the capacity in which he or she is signing on
behalf of the corporation or partnership.
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* FOLD AND DETACH HERE *
ADMISSION TICKET
This is your ticket of admission to the Annual Meeting of Shareholders of
Charter Communications, Inc., to be held at The Meydenbauer Center, 11100 NE
Sixth Street, Bellevue, Washington, on Wednesday, June 6, 2001, at 10:00 A.M.,
Pacific Daylight Time.
If you plan to attend the meeting, check box number 5 on the proxy form. Please
detach this card and bring it with you to the meeting for presentation at the
door. You will not be admitted if you do not have a ticket.
PLEASE NOTE: -- Cameras and recording devices are not permitted at the Annual
Meeting.
-- You may be asked to present valid picture identification, such
as a driver's license, in addition to your admission ticket, in
order to be admitted to the meeting.
This ticket will admit the shareholder(s) whose name(s) appear(s) below, and is
non-transferable.
PLEASE ADMIT:
112
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CHARTER COMMUNICATIONS LOGO
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned does hereby appoint Jerald L. Kent, with power of
substitution, as the true and lawful attorney in fact, agent and proxy of the
undersigned at the Annual Meeting of Shareholders of Charter Communications,
Inc. to be held on June 6, 2001, commencing at 10:00 A.M., Pacific Daylight
Time, at The Meydenbauer Center, 11100 NE Sixth Street, Bellevue, Washington and
at any and all adjournments of said meeting, to vote all the shares of the Class
A Common Stock of the company held of record by the undersigned at the close of
business on April 10, 2001.
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY
THE UNDERSIGNED, OR IF NO DIRECTION IS GIVEN WILL BE VOTED FOR THE NAMED
DIRECTOR NOMINEE, FOR RATIFICATION OF THE CHARTER COMMUNICATIONS 1999 OPTION
PLAN AND FOR APPROVAL OF THE CHARTER COMMUNICATIONS, INC. 2001 STOCK INCENTIVE
PLAN AND WILL BE VOTED IN THE DISCRETION OF THE PROXYHOLDER ON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
PLEASE SIGN AND DATE THE REVERSE SIDE OF THIS FORM AND RETURN IT IN THE
ENCLOSED ENVELOPE.
(Continued, and to be marked, dated and signed, on the other side)
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*FOLD AND DETACH HERE*
CHARTER COMMUNICATIONS LOGO
ADMISSION TICKET
CHARTER COMMUNICATIONS, INC.
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, JUNE 6, 2001
10:00 A.M. PACIFIC DAYLIGHT TIME
THE MEYDENBAUER CENTER, 11100 NE SIXTH STREET, BELLEVUE, WASHINGTON
YOU WILL NEED TO PRESENT THIS TICKET
AT THE REGISTRATION DESK TO BE
ADMITTED TO THE ANNUAL MEETING.
NON-TRANSFERABLE